UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): September 23, 2014
SYSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 1-06544 | 74-1648137 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
1390 Enclave Parkway, Houston, TX | 77077-2099 | |
(Address of principal executive office) | (Zip Code) |
Registrants telephone number, including area code: (281) 584-1390
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
x Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
SECTION 8 OTHER EVENTS
Item 8.01 | Other Events. |
On December 10, 2013, Sysco Corporation, a Delaware corporation (Sysco), filed a Current Report on Form 8-K (the Initial Report) to report, among other things, that it had entered into an Agreement and Plan of Merger (the Merger Agreement) with USF Holding Corp. (USF), a Delaware corporation and the parent of US Foods, Inc., Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco, and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, pursuant to which Sysco will acquire USF (the Merger), on the terms and subject to the conditions set forth in the Merger Agreement.
Sysco is providing in this Current Report on Form 8-K (1) audited financial statements of USF as of December 28, 2013 and December 29, 2012 and for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, in accordance with Rule 3-05 of Regulation S-X; (2) unaudited financial statements of USF as of June 28, 2014 and for the 26 weeks ended June 28, 2014 and June 29, 2013, in accordance with Rule 3-05 of Regulation S-X; and (3) Managements Discussion and Analysis of Financial Condition and Results of Operations of USF with respect to the periods included in the aforementioned financial statements (the MD&A). The aforementioned financial statements and MD&A are filed as exhibits to this Current Report on Form 8-K and are incorporated by reference into this Item 8.01. This Current Report on Form 8-K should be read in conjunction with the Initial Report, which provides a more complete description of the Merger.
Additional Information for USF Stockholders
In connection with the proposed transaction, Sysco filed with the Securities and Exchange Commission (SEC), and the SEC declared effective on August 8, 2014, a Registration Statement on Form S-4 that includes a consent solicitation statement of USF that also constitutes a prospectus of Sysco. STOCKHOLDERS OF USF ARE URGED TO READ THE CONSENT SOLICITATION STATEMENT/PROSPECTUS CONTAINED IN THE REGISTRATION STATEMENT AND OTHER RELEVANT MATERIALS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY, BECAUSE THESE MATERIALS CONTAIN IMPORTANT INFORMATION. The consent solicitation statement/prospectus, Registration Statement and other relevant materials, including any documents incorporated by reference therein, may be obtained free of charge at the SECs website at www.sec.gov or for free from Sysco at www.sysco.com/investors or by emailing investor_relations@corp.sysco.com. You may also read and copy any reports, statements and other information filed by Sysco with the SEC at the SEC public reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at (800) 732-0330 or visit the SECs website for further information on its public reference room.
This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
- 2 -
SECTION 9 FINANCIAL STATEMENTS AND EXHIBITS
Item 9.01 | Financial Statement and Exhibits. |
(a) | Financial Statements of Businesses Acquired. |
Audited consolidated financial statements of USF Holding Corp. as of December 28, 2013 and December 29, 2012 and for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, filed as Exhibit 99.1 to this Current Report.
Unaudited consolidated financial statements of USF Holding Corp. as of June 28, 2014 and for the 26-weeks ended June 28, 2014 and June 29, 2013, filed as Exhibit 99.2 to this Current Report.
(d) | Exhibits. |
Exhibit Number |
Description | |
23.1 | Consent of Deloitte & Touche LLP | |
99.1 | Audited consolidated financial statements of USF Holding Corp. | |
99.2 | Unaudited consolidated financial statements of USF Holding Corp. | |
99.3 | Managements Discussion and Analysis of Financial Condition and Results of Operations of USF Holding Corp. for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 | |
99.4 | Managements Discussion and Analysis of Financial Condition and Results of Operations of USF Holding Corp. for the 26-weeks ended June 28, 2014 and June 29, 2013 |
- 3 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Sysco Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Sysco Corporation | ||||||
Date: September 23, 2014 | By: | /s/ Russell T. Libby | ||||
Russell T. Libby | ||||||
Executive Vice President-Corporate Affairs, Chief Legal Officer and Corporate Secretary |
EXHIBIT INDEX
Exhibit Number |
Description | |
23.1 | Consent of Deloitte & Touche LLP | |
99.1 | Audited consolidated financial statements of USF Holding Corp. | |
99.2 | Unaudited consolidated financial statements of USF Holding Corp. | |
99.3 | Managements Discussion and Analysis of Financial Condition and Results of Operations of USF Holding Corp. for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 | |
99.4 | Managements Discussion and Analysis of Financial Condition and Results of Operations of USF Holding Corp. for the 26-weeks ended June 28, 2014 and June 29, 2013 |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-179582 and 333-126199 on Form S-3; Registration Statement Nos. 333-196585 and 333-50842 on Form S-4; and Registration Statement Nos. 333-192353, 333-147338, 33-45820, 333-58276, 333-163189, 333-163188 and 333-170660 on Form S-8 of Sysco Corporation of our report dated April 15, 2014, relating to the consolidated financial statements of USF Holding Corp. and subsidiaries as of December 28, 2013 and December 29, 2012 and for each of the three fiscal years in the period ended December 28, 2013, appearing in this Current Report on Form 8-K of Sysco Corporation.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
September 23, 2014
Exhibit 99.1
USF Holding Corp.
Consolidated Financial Statements for the Fiscal Years ended December 28, 2013,
December 29, 2012 and December 31, 2011
1
USF Holding Corp.
Consolidated Financial Statements
TABLE OF CONTENTS
Page No. | ||||
Audited Consolidated Financial Statements |
||||
Report of Independent Registered Public Accounting Firm |
3 | |||
Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012 |
4 | |||
Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended December 28, 2013, December 29, 2012 and December 31, 2011 |
5 | |||
Consolidated Statements of Shareholders Equity for the Fiscal Years Ended December 28, 2013, December 29, 2012 and December 31, 2011 |
6 | |||
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 28, 2013, December 29, 2012 and December 31, 2011 |
7 | |||
Notes to Consolidated Financial Statements |
8 |
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
USF Holding Corp.
Rosemont, Illinois
We have audited the accompanying consolidated balance sheets of USF Holding Corp. and subsidiaries (the Company) as of December 28, 2013 and December 29, 2012, and the related consolidated statements of comprehensive income (loss), shareholders equity, and cash flows for each of the three fiscal years in the period ended December 28, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of USF Holding Corp. and subsidiaries as of December 28, 2013 and December 29, 2012 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
April 15, 2014
3
USF HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 2013 AND DECEMBER 29, 2012
(in thousands)
2013 | 2012 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 179,744 | $ | 242,457 | ||||
Accounts receivable, less allowances of $25,151 and $25,606 |
1,225,719 | 1,216,612 | ||||||
Vendor receivables, less allowances of $2,661 and $3,669 |
97,361 | 93,025 | ||||||
Inventoriesnet |
1,161,558 | 1,092,492 | ||||||
Prepaid expenses |
75,604 | 74,499 | ||||||
Deferred taxes |
13,557 | 8,034 | ||||||
Assets held for sale |
14,554 | 23,193 | ||||||
Other current assets |
6,644 | 10,194 | ||||||
|
|
|
|
|||||
Total current assets |
2,774,741 | 2,760,506 | ||||||
PROPERTY AND EQUIPMENTNet |
1,748,495 | 1,706,388 | ||||||
GOODWILL |
3,835,477 | 3,833,301 | ||||||
OTHER INTANGIBLESNet |
753,840 | 889,453 | ||||||
DEFERRED FINANCING COSTS |
39,282 | 49,038 | ||||||
OTHER ASSETS |
33,742 | 24,720 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 9,185,577 | $ | 9,263,406 | ||||
|
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|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Bank checks outstanding |
$ | 185,369 | $ | 161,791 | ||||
Accounts payable |
1,181,452 | 1,239,790 | ||||||
Accrued expenses and other current liabilities |
423,635 | 388,306 | ||||||
Current portion of long-term debt |
35,225 | 48,926 | ||||||
|
|
|
|
|||||
Total current liabilities |
1,825,681 | 1,838,813 | ||||||
LONG-TERM DEBT |
4,735,248 | 4,764,899 | ||||||
DEFERRED TAX LIABILITIES |
408,153 | 365,496 | ||||||
OTHER LONG-TERM LIABILITIES |
334,808 | 479,642 | ||||||
|
|
|
|
|||||
Total liabilities |
7,303,890 | 7,448,850 | ||||||
|
|
|
|
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COMMITMENTS AND CONTINGENCIES (See Note 21) |
||||||||
TEMPORARY EQUITY (See Note 15) |
37,923 | 38,190 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Common stock, $.01 par value600,000 shares authorized |
4,500 | 4,500 | ||||||
Additional paid-in capital |
2,282,801 | 2,281,702 | ||||||
Accumulated deficit |
(440,858 | ) | (383,652 | ) | ||||
Accumulated other comprehensive loss |
(2,679 | ) | (126,184 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
1,843,764 | 1,776,366 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 9,185,577 | $ | 9,263,406 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements.
4
USF HOLDING CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands)
2013 | 2012 | 2011 | ||||||||||
NET SALES |
$ | 22,297,178 | $ | 21,664,921 | $ | 20,344,869 | ||||||
COST OF GOODS SOLD |
18,474,039 | 17,971,949 | 16,839,850 | |||||||||
|
|
|
|
|
|
|||||||
Gross profit |
3,823,139 | 3,692,972 | 3,505,019 | |||||||||
|
|
|
|
|
|
|||||||
OPERATING EXPENSES: |
||||||||||||
Distribution, selling and administrative costs |
3,494,254 | 3,349,539 | 3,193,747 | |||||||||
Restructuring and tangible asset impairment charges |
8,386 | 8,923 | 71,892 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
3,502,640 | 3,358,462 | 3,265,639 | |||||||||
|
|
|
|
|
|
|||||||
OPERATING INCOME |
320,499 | 334,510 | 239,380 | |||||||||
INTEREST EXPENSENet |
306,087 | 311,812 | 307,614 | |||||||||
LOSS ON EXTINGUISHMENT OF DEBT |
41,796 | 31,423 | 76,011 | |||||||||
|
|
|
|
|
|
|||||||
Loss before income taxes |
(27,384 | ) | (8,725 | ) | (144,245 | ) | ||||||
INCOME TAX (PROVISION) BENEFIT |
(29,822 | ) | (42,448 | ) | 42,074 | |||||||
|
|
|
|
|
|
|||||||
NET LOSS |
(57,206 | ) | (51,173 | ) | (102,171 | ) | ||||||
OTHER COMPREHENSIVE INCOME (LOSS): |
||||||||||||
Changes in retirement benefit obligations, net of income tax |
122,963 | (14,160 | ) | (17,629 | ) | |||||||
Changes in interest rate swap derivative, net of income tax |
542 | 17,570 | 17,506 | |||||||||
|
|
|
|
|
|
|||||||
COMPREHENSIVE INCOME (LOSS) |
$ | 66,299 | $ | (47,763 | ) | $ | (102,294 | ) | ||||
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
USF HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands)
Accumulated Other Comprehensive Income (Loss) |
||||||||||||||||||||||||||||||||
Number of Common Shares |
Common Shares at Par Value |
Additional Paid-In Capital |
Accumulated Deficit |
Retirement Benefit Obligation |
Interest Rate Swap Derivative |
Total | Total Shareholders Equity |
|||||||||||||||||||||||||
BALANCEJanuary 1, 2011 |
450,000 | $ | 4,500 | $ | 2,267,709 | $ | (230,308 | ) | $ | (93,853 | ) | $ | (35,618 | ) | $ | (129,471 | ) | $ | 1,912,430 | |||||||||||||
Remeasurement charge for temporary equity redemption value |
| | (272 | ) | | | | | (272 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | 13,416 | | | | | 13,416 | ||||||||||||||||||||||||
Changes in retirement benefit obligations, net of income tax |
| | | | (17,629 | ) | | (17,629 | ) | (17,629 | ) | |||||||||||||||||||||
Changes in interest rate swap derivative, net of income tax |
| | | | | 17,506 | 17,506 | 17,506 | ||||||||||||||||||||||||
Other |
| | (55 | ) | | | | | (55 | ) | ||||||||||||||||||||||
Net loss |
| | | (102,171 | ) | | | | (102,171 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
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|
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|
|||||||||||||||||
BALANCEDecember 31, 2011 |
450,000 | 4,500 | 2,280,798 | (332,479 | ) | (111,482 | ) | (18,112 | ) | (129,594 | ) | 1,823,225 | ||||||||||||||||||||
Remeasurement charge for temporary equity redemption value |
| | (1,438 | ) | | | | | (1,438 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | 2,342 | | | | | 2,342 | ||||||||||||||||||||||||
Changes in retirement benefit obligations, net of income tax |
| | | | (14,160 | ) | | (14,160 | ) | (14,160 | ) | |||||||||||||||||||||
Changes in interest rate swap derivative, net of income tax |
| | | | | 17,570 | 17,570 | 17,570 | ||||||||||||||||||||||||
Net loss |
| | | (51,173 | ) | | | | (51,173 | ) | ||||||||||||||||||||||
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|||||||||||||||||
BALANCEDecember 29, 2012 |
450,000 | 4,500 | 2,281,702 | (383,652 | ) | (125,642 | ) | (542 | ) | (126,184 | ) | 1,776,366 | ||||||||||||||||||||
Remeasurement charge for temporary equity redemption value |
| | (3,481 | ) | | | | | (3,481 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | 4,580 | | | | | 4,580 | ||||||||||||||||||||||||
Changes in retirement benefit obligations, net of income tax |
| | | | 122,963 | | 122,963 | 122,963 | ||||||||||||||||||||||||
Changes in interest rate swap derivative, net of income tax |
| | | | | 542 | 542 | 542 | ||||||||||||||||||||||||
Net loss |
| | | (57,206 | ) | | | | (57,206 | ) | ||||||||||||||||||||||
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BALANCEDecember 28, 2013 |
450,000 | $ | 4,500 | $ | 2,282,801 | $ | (440,858 | ) | $ | (2,679 | ) | $ | | $ | (2,679 | ) | $ | 1,843,764 | ||||||||||||||
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See Notes to Consolidated Financial Statements.
6
USF HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
(in thousands)
2013 | 2012 | 2011 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net loss |
$ | (57,206 | ) | $ | (51,173 | ) | $ | (102,171 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
388,188 | 355,892 | 342,732 | |||||||||
Gain on disposal of property and equipment, net |
(1,909 | ) | (1,493 | ) | (308 | ) | ||||||
Loss on extinguishment of debt |
41,796 | 31,423 | 76,011 | |||||||||
Tangible asset impairment charges |
1,860 | 7,530 | 9,260 | |||||||||
Amortization of deferred financing costs |
18,071 | 18,052 | 18,913 | |||||||||
Amortization of Senior Notes original issue premium |
(3,330 | ) | | | ||||||||
Deferred tax provision (benefit) |
29,603 | 42,142 | (41,600 | ) | ||||||||
Share-based compensation expense |
8,406 | 4,312 | 14,677 | |||||||||
Provision for doubtful accounts |
19,481 | 10,701 | 17,567 | |||||||||
Changes in operating assets and liabilities, net of acquisitions of businesses: |
||||||||||||
Increase in receivables |
(26,581 | ) | (56,639 | ) | (116,229 | ) | ||||||
(Increase) decrease in inventories |
(65,427 | ) | (214,998 | ) | 23,989 | |||||||
Increase in prepaid expenses and other assets |
(16,486 | ) | (758 | ) | (6,281 | ) | ||||||
(Decrease) increase in accounts payable and bank checks outstanding |
(32,411 | ) | 198,227 | 109,086 | ||||||||
Increase (decrease) in accrued expenses and other current liabilities |
18,197 | (27,299 | ) | 59,557 | ||||||||
Decrease in securitization restricted cash |
| | 13,964 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
322,252 | 315,919 | 419,167 | |||||||||
|
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|
|||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Acquisition of businesses, net |
(11,369 | ) | (106,041 | ) | (41,385 | ) | ||||||
Proceeds from sales of property and equipment |
14,608 | 19,685 | 7,487 | |||||||||
Purchases of property and equipment |
(191,131 | ) | (293,456 | ) | (304,414 | ) | ||||||
|
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|
|
|
|
|||||||
Net cash used in investing activities |
(187,892 | ) | (379,812 | ) | (338,312 | ) | ||||||
|
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|
|
|||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from debt refinancing |
854,485 | 1,269,625 | 900,000 | |||||||||
Proceeds from other borrowings |
1,644,000 | 2,031,000 | 225,000 | |||||||||
Redemption of senior notes |
| | (1,064,159 | ) | ||||||||
Payment for debt financing costs and fees |
(29,376 | ) | (35,088 | ) | (29,569 | ) | ||||||
Principal payments on debt and capital leases |
(2,278,311 | ) | (2,983,567 | ) | (339,287 | ) | ||||||
Repurchase of senior subordinated notes |
(375,144 | ) | (175,338 | ) | | |||||||
Contingent consideration paid for acquisitions of businesses |
(6,159 | ) | | | ||||||||
Proceeds from common stock sales |
1,850 | 761 | 9,960 | |||||||||
Common stock repurchased |
(8,418 | ) | (3,734 | ) | (3,222 | ) | ||||||
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|
|||||||
Net cash (used in) provided by financing activities |
(197,073 | ) | 103,659 | (301,277 | ) | |||||||
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|||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(62,713 | ) | 39,766 | (220,422 | ) | |||||||
CASH AND CASH EQUIVALENTSBeginning of year |
242,457 | 202,691 | 423,113 | |||||||||
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CASH AND CASH EQUIVALENTSEnd of year |
$ | 179,744 | $ | 242,457 | $ | 202,691 | ||||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest (net of amounts capitalized) |
$ | 298,915 | $ | 286,420 | $ | 229,553 | ||||||
Income taxes paidnet |
209 | 369 | 418 | |||||||||
Property and equipment purchases included in accounts payable |
19,719 | 25,137 | 48,389 | |||||||||
Capital lease additions |
100,804 | 21,810 | | |||||||||
Contingent consideration payable for acquisitions of businesses |
1,800 | 5,500 | 3,570 | |||||||||
Payable for repurchase of common stock |
1,006 | | |
See Notes to Consolidated Financial Statements.
7
USF HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 28, 2013 AND DECEMBER 29, 2012 AND FOR THE FISCAL YEARS ENDED
DECEMBER 28, 2013, DECEMBER 29, 2012 AND DECEMBER 31, 2011
1. | OVERVIEW AND BASIS OF PRESENTATION |
USF Holding Corp., a Delaware corporation, and its consolidated subsidiaries is referred to here as we, our, us, the Company, or USF. USF conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (US Foods). All of the indebtedness, as further described in Note 11 Debt is an obligation of US Foods, and its subsidiaries. US Foods Senior Notes due in 2019 as described below in Public Filer Status are traded over the counter and are not listed on any exchange.
OwnershipOn July 3, 2007 (the Closing Date), USF, through a wholly owned subsidiary, and through a series of transactions, acquired all of our predecessor companys common stock and certain related assets from Koninklijke Ahold N.V. (Ahold) for approximately $7.2 billion. USF is a corporation formed and controlled by investment funds associated with or designated by Clayton, Dubilier & Rice, Inc. (CD&R), and Kohlberg Kravis Roberts & Co. (KKR), (collectively the Sponsors).
Proposed Acquisition by SyscoOn December 8, 2013, USF , entered into an Agreement and Plan of Merger (the Merger Agreement) with Sysco Corporation, a Delaware corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, through which Sysco will acquire USF (the Acquisition) on the terms and subject to the conditions set forth in the Merger Agreement. The aggregate purchase price will consist of $500 million in cash and approximately $3 billion in Syscos common stock, subject to possible downward adjustment pursuant to the Merger Agreement. The Acquisition is expected to close in the third quarter of 2014. It is subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, or if the Acquisition does not close by a specified date as specified in the Merger Agreement, in certain circumstances Sysco will be required to pay USF a termination fee of $300 million.
Business DescriptionThe Company through its subsidiary, US Foods, markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. These include independently owned single and multi-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations.
Basis of PresentationThe Company operates on a 52-53 week fiscal year, with all periods ending on a Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter. The fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, are also referred to herein as fiscal years 2013, 2012 and 2011, respectively. The consolidated financial statements representing the 52-week fiscal year 2013 are for the period of December 30, 2012 through December 28, 2013. The consolidated financial statements representing the 52-week fiscal year 2012 are for the period of January 1, 2012 through December 29, 2012. The consolidated financial statements representing the 52-week fiscal year 2011 are for the period of January 2, 2011 through December 31, 2011.
Public Filer StatusDuring the fiscal second quarter 2013, our wholly owned subsidiary, US Foods completed the registration of $1,350 million aggregate principal amount of outstanding 8.5% Senior Notes due 2019 (Senior Notes) and became subject to rules and regulations of the Securities and Exchange Commission, including periodic and current reporting requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under. The Company did not receive any proceeds from the registration of the Senior Notes. USF is not a public filer and its common stock is not publicly traded.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of ConsolidationConsolidated financial statements include the accounts of USF and its 100% owned subsidiary, US Foods, and its subsidiaries. All intercompany transactions have been eliminated in consolidation.
Use of EstimatesConsolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). This requires management to make estimates and assumptions that affect the amounts reported in the Companys consolidated financial statements and the related notes. Actual
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results could differ from these estimates. The most critical estimates used in the preparation of the Companys consolidated financial statements pertain to the valuation of goodwill, other intangible assets, property and equipment, accounts receivable-related allowance, vendor consideration, self-insurance programs, and income taxes.
Cash and Cash EquivalentsThe Company considers all highly liquid investments purchased with a maturity of three or fewer months to be cash equivalents.
Accounts ReceivableAccounts receivable primarily represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying Consolidated Balance Sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate reserve for doubtful accounts based on a combination of factors. When we are aware of a customers inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount we reasonably expect to collect. In addition, allowances are recorded for all other receivables based on analyzing historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods. If the financial condition of the Companys customers were to deteriorate, additional allowances may be required.
Vendor Consideration and ReceivablesThe Company participates in various rebate and promotional incentives with its suppliers, primarily through purchase-based programs. Consideration earned under these incentives is recorded as a reduction of inventory cost, as the Companys obligations under the programs are fulfilled primarily when products are purchased. Consideration is typically received in the form of invoice deductions, or less often in the form of cash payments. Changes in the estimated amount of incentives earned are treated as changes in estimates and are recognized in the period of change.
Vendor consideration is typically deducted from invoices or collected in cash within 30 days of being earned, if not sooner. Vendor receivables primarily represent the uncollected balance of the vendor consideration. Due to the process of primarily collecting the consideration by deducting it from the amounts due to the vendor, the Company does not experience significant collectability issues. The Company evaluates the collectability of its vendor receivables based on specific vendor information and vendor collection history.
Inventories The Companys inventoriesconsisting mainly of food and other foodservice-related productsare considered finished goods. Inventory costs include the purchase price of the product and freight charges to deliver it to the Companys warehouses, and are net of certain cash or non-cash consideration received from vendors (see Vendor Consideration and Receivables). 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. At December 28, 2013 and December 29, 2012, the LIFO balance sheet reserves were $148 million and $136 million, respectively. As a result of changes in LIFO reserves, cost of goods sold increased $12 million, $13 million and $59 million for fiscal years 2013, 2012 and 2011, respectively.
Property and EquipmentProperty 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 leases or the estimated useful lives of the assets.
Routine maintenance and repairs are charged to expense as incurred. Applicable interest charges incurred during the construction of new facilities or development of software for internal use are capitalized as one of the elements of cost and are amortized over the useful life of the respective assets.
Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, the Company compares the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows included in a long-lived asset recoverability test do not exceed the carrying value, the carrying value is compared to the fair value of such asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess.
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The Company also assesses the recoverability of its closed facilities actively marketed for sale. If a facilitys carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the difference. Assets held for sale are not depreciated.
Impairments are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as in a reduction of the assets carrying value in the Consolidated Balance Sheets. See Note 13 Restructuring and Tangible Asset Impairment Charges for a discussion of our long-lived asset impairment charges.
Goodwill and Other Intangible AssetsGoodwill and Other intangible assets include the cost of the acquired business in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess 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, our policy is to assess for impairment at the beginning of each fiscal third quarter. For other intangible assets with finite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Self-Insurance ProgramsThe Company accrues estimated liability amounts for claims covering general liability, fleet liability, workers compensation, and group medical insurance programs. The amounts in excess of certain levels are fully insured. The Company accrues its estimated liability for the self-insured medical insurance program, including an estimate for incurred but not reported claims, based on known claims and past claims history. The Company accrues an estimated liability for the general liability, fleet liability and workers compensation programs. This is based on an assessment of exposure related to known claims and incurred but not reported claims, as applicable. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates. These accruals are included in Accrued expenses and Other long-term liabilities in the Consolidated Balance Sheets.
Share-Based CompensationCertain employees participate in the 2007 Stock Incentive Plan for Key Employees of USF Holding Corp. and its Affiliates, as amended (Stock Incentive Plan), which allows purchases of shares of USF common stock, grants of restricted stock and restricted stock units of USF, and grants of options exercisable in USF common stock. The Company measures compensation expense for stock-based option awards at fair value at the date of grant, and it recognizes compensation expense over the service period for stock-based awards expected to vest. USF contributes shares to its subsidiary, US Foods for employee purchases and upon exercise of options or grants of restricted stock and restricted stock units.
Common Stock Common stock is held primarily by our Sponsors and also members of management and key employees. Total common shares issued and outstanding were 457,023,499, and 457,482,158 at December 28, 2013 and December 29, 2012 respectively.
Temporary Equity Temporary equity is a security with redemption features that are outside the control of the issuer, is not classified as an asset or liability in conformity with GAAP, and is not mandatorily redeemable. In contrast to common stock owned by the Sponsors, common stock owned by management and certain employees give the holder, via the management stockholders agreement, the right to require the Company to repurchase all of his or her restricted common stock in the event of a termination of employment due to death or disability. Since this redemption feature, or put option, is outside of the control of the Company, the value of the shares is shown outside of permanent equity as temporary equity. In addition to the value of the common stock held, stock-based awards with similar underlying common stock are also recorded in temporary equity. Temporary equity includes values for common stock issuances to management and certain employees, vested restricted shares, vested restricted stock units (RSUs) and vested stock option awards. Until the redemption feature becomes probable, the amount shown in temporary equity is the intrinsic value of the applicable common stock at issuance and the intrinsic value of stock-based awards at grant date. Because the Company grants stock option awards at fair value, the intrinsic value related to vested stock option awards is zero. Once redemption is deemed probable, if the intrinsic value is different than the current redemption value, the amount shown in temporary equity is adjusted to the current redemption value through a reclassification from/to additional paid-in capital. As of the balance sheet dates presented, there is no value from vested stock option awards recorded in temporary equity since the intrinsic value at the date of grant was zero and redemption is not probable.
Management LoansUnder the management stockholders agreement, employees can finance common stock purchases with full recourse notes due to the Company. The balance of these notes is recorded as a reduction to temporary equity. Generally, the notes are short-term in nature and are paid back in cash; however, certain employees have repaid balances due on their notes by selling back common stock to the Company.
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Business AcquisitionsThe Company accounts for business acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Companys consolidated financial statements from the date of acquisition.
Revenue RecognitionThe Company recognizes revenue from the sale of product when the title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company grants certain customers sales incentivessuch as rebates or discountsand treats these as a reduction of sales at the time the sale is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales.
Cost of Goods SoldCost of goods sold includes amounts paid to manufacturers for products sold, net of vendor consideration, plus the cost of transportation to bring the products to the Companys distribution facilities. Cost of goods sold excludes depreciation and amortizationas the Company acquires its inventories generally in a complete and salable stateand includes warehousing related costs in distribution, selling and administrative costs. The amounts presented for Cost of goods sold may not be comparable to similar measures disclosed by other companies, because not all companies calculate Cost of goods sold in the same manner.
Shipping and Handling CostsShipping and handling costswhich include costs related to the selection of products and their delivery to customersare recorded as a component of Distribution, selling and administrative costs. Shipping and handling costs were $1.5 billion, $1.5 billion and $1.4 billion for fiscal years 2013, 2012 and 2011, respectively.
Income TaxesThe Company accounts for income taxes under the asset and liability method. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period that includes the enactment date. Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized.
An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely than not to be sustained. The Company adjusts the amounts recorded for uncertain tax positions when its judgment changes, as a result of evaluating new information not previously available. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
Derivative Financial InstrumentsThe Company has used interest rate swap agreements from time to time to manage its exposure to interest rate movements on its variable-rate term loan obligation. The Company does not use financial instruments or derivatives for trading or other speculative purposes. The interest rate swap derivatives at December 29, 2012 were recorded in its Consolidated Balance Sheets at fair value. The interest rate swap derivatives expired in January 2013.
In the normal course of business, the Company enters into forward purchase agreements to procure fuel, electricity and product commodities related to its business. These agreements often meet the definition of a derivative. However, in these cases, the Company has elected to apply the normal purchase and sale exemption available under derivatives accounting literature, and these agreements are not recorded at fair value.
Concentration RisksFinancial instruments that subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. The Companys cash equivalents are invested primarily in money market funds at major financial institutions. Credit risk related to accounts receivable is dispersed across a larger number of customers located throughout the United States. The Company attempts to reduce credit risk through initial and ongoing credit evaluations of its customers financial condition. There were no receivables from any one customer representing more than 5% of our consolidated gross accounts receivable at December 28, 2013 and December 29, 2012.
3. | RECENT ACCOUNTING PRONOUNCEMENTS |
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a
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deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required because the ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance in fiscal year 2014 is not expected to affect the Companys financial statements and related disclosures as it currently presents unrecognized tax benefits in its financial statements as a reduction of deferred tax assets.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to presenteither on the face of the financial statements or in the notessignificant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The update does not change the items reported in other comprehensive income, or when an item of other comprehensive income is reclassified to net income. As this guidance only revises the presentation and disclosures related to the reclassification of items out of accumulated other comprehensive income, the Companys adoption of this guidance in the first quarter of 2013 did not affect its financial position, results of operations or cash flows. See Note 18Reclassifications Out of Accumulated Other Comprehensive Loss, which presents the disclosures required by this update.
4. | FAIR VALUE MEASUREMENTS |
The Company follows the accounting standards for fair value, whereas fair value is a market-based measurement, not an entity-specific measurement. The Companys fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
| Level 1observable inputs, such as quoted prices in active markets |
| Level 2observable inputs other than those included in Level 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 3unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized as of the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below. |
The Companys assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 28, 2013 and December 29, 2012 aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):
Description |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Recurring fair value measurements: |
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Money market funds |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
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Balance at December 28, 2013 |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
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Interest rate swap derivative liability |
$ | | $ | (2,034 | ) | $ | | $ | (2,034 | ) | ||||||
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Balance at December 29, 2012 |
$ | | $ | (2,034 | ) | $ | | $ | (2,034 | ) | ||||||
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Nonrecurring fair value measurements: |
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Assets held for sale |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
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Balance at December 28, 2013 |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
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Assets held for sale |
$ | | $ | | $ | 23,400 | $ | 23,400 | ||||||||
Property and equipment |
| | 3,361 | 3,361 | ||||||||||||
Contingent consideration payable for business acquisitions |
| | 5,500 | 5,500 | ||||||||||||
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Balance at December 29, 2012 |
$ | | $ | | $ | 32,261 | $ | 32,261 | ||||||||
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Recurring Fair Value Measurements
Derivative Instruments
The Companys objective in using interest rate swap agreements from time-to-time was to manage its exposure to interest rate movements on its variable-rate term loan obligation. In 2008, the Company entered into three interest rate swaps to hedge the variable cash flows associated with a former variable-rate term loan (the Amended 2007 Term Loan). The interest rate swaps, designated as cash flow hedges of interest rate risk, expired in January 2013.
At December 29, 2012, the Company recorded its interest rate swap derivatives in its Consolidated Balance Sheet at fair value. Fair value was estimated based on projections of cash flows and future interest rates. The determination of fair value included the consideration of any credit valuation adjustments necessary, giving consideration to the creditworthiness of the respective counterparties or the Company, as appropriate. The fair value of the interest rate swap derivative financial instruments, classified under Level 2 of the fair value hierarchy at December 29, 2012 was $2 million. The interest rate swap derivative financial instruments were included in the Companys Consolidated Balance Sheets in Accrued expenses and other current liabilities.
The Company reclassified $1 million from Accumulated other comprehensive loss as an increase to Interest expense when the 2008 interest rate swaps expired in January 2013, and it recognized interest income of $1 million related to the ineffective portion of the interest rate swap derivatives.
The effect of the Companys interest rate swap derivative financial instruments in the Consolidated Statements of Comprehensive Income (Loss) for fiscal years 2013 and 2012 is as follows (in thousands):
Effect of Interest Rate Swap Derivative Instruments in the Consolidated Statements of Comprehensive Income (Loss) |
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Derivatives in Cash Flow Hedging Relationships |
Amount of Loss Recognized in Other Comprehensive Income (Loss) on Derivative (Effective Portion), net of tax |
Location of Loss Reclassified From Accumulated Other Comprehensive Loss |
Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective portion), net of tax |
Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount of Income (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
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For fiscal year 2013: |
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Interest rate swap derivative |
$ | (255 | ) | Interest expensenet |
$ | (797 | ) | Interest expensenet |
$ | 645 | ||||||
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For fiscal year 2012: |
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Interest rate swap derivative |
$ | (1,479 | ) | Interest expensenet |
$ | (19,049 | ) | Interest expensenet |
$ | (645 | ) | |||||
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Money Market Funds
Money market funds include highly liquid investments with an original 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. The Company had money market funds of $64 million and $0 at December 28, 2013 and December 29, 2012, respectively.
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Nonrecurring Fair Value Measurements
Property and Equipment
Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company estimates the fair value of various property and equipment assets for purposes of recording necessary impairment charges. Fair value is estimated by the Company based on information received from real estate brokers. No impairments to the Companys property, plant and equipment were recognized during 2013. During 2012, the Company recorded $5 million of tangible asset impairment charges for property and equipment not classified as Assets held for sale, which reduced the carrying value of these assets to estimated fair value.
The Company is required to record Assets held for sale at the lesser of the depreciated carrying amount or estimated fair value less costs to sell. During 2013 and 2012, certain Assets held for sale were adjusted to equal their estimated fair value, less costs to sell, resulting in a $2 million intangible asset impairment charge in each of these years. Fair value was estimated by the Company based on information received from real estate brokers. The amounts included in the tables above, classified under Level 3 within the fair value hierarchy, represent the estimated fair values of those property and equipment that became the new carrying amounts at the time the impairments were recorded.
Other Fair Value Measurements
The carrying value of cash, restricted cash, accounts receivable, bank checks outstanding, trade accounts payable, and accrued expenses approximate their fair values, due to their short-term maturities.
The fair value of total debt approximated $4.9 billion compared to its aggregate carrying value of $4.8 billion as of December 28, 2013 and as of December 29, 2012. Fair value of the Companys debt is primarily classified under Level 3 of the fair value hierarchy, with fair value estimated based upon a combination of the cash flows expected to be generated under these debt facilities, interest rates that are currently available to the Company for debt with similar terms, and estimates of the Companys overall credit risk. The fair value of the Companys 8.5% Senior Notes is classified under Level 2 of the fair value hierarchy, with fair value based on the closing market price at the end of the reporting period, and estimated at $1.5 billion as of December 28, 2013.
5. | ALLOWANCE FOR DOUBTFUL ACCOUNTS |
A summary of the activity in the allowance for doubtful accounts for the last three fiscal years is as follows (in thousands):
2013 | 2012 | 2011 | ||||||||||
Balance at beginning of year |
$ | 25,606 | $ | 35,100 | $ | 36,904 | ||||||
Charged to costs and expenses |
19,481 | 10,701 | 17,156 | |||||||||
Customer accounts written offnet of recoveries |
(19,936 | ) | (20,195 | ) | (18,960 | ) | ||||||
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Balance at end of year |
$ | 25,151 | $ | 25,606 | $ | 35,100 | ||||||
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This table does not include the vendor receivable related allowance for doubtful accounts of $3 million, $4 million and $5 million at December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
6. | ACCOUNTS RECEIVABLE FINANCING PROGRAM |
Under its accounts receivable financing program (2012 ABS Facility)- which replaced the Companys prior accounts receivable securitization program-, our subsidiary, US Foods and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The Company consolidates the Receivables Company and, consequently, the transfer of the receivables is a transaction internal to the Company and the receivables have not been derecognized from the Companys Consolidated Balance Sheets. On a daily basis, cash from accounts receivable collections is remitted to the Company as additional eligible receivables are sold to the Receivables Company. If, on a weekly settlement basis, there are not sufficient eligible receivables available as collateral, the Company is required to either provide cash collateral to cover the shortfall or, in lieu of providing cash collateral to cover the shortfall, it can pay down its borrowings on the 2012 ABS Facility. Due to sufficient eligible receivables available as collateral, no cash collateral was held at December 28, 2013 or December 29, 2012.
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The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million as of December 28, 2013 and December 29, 2012. Included in the Companys accounts receivable balance as of December 28, 2013 and December 29, 2012, was $930 million and $918 million, respectively, of receivables held as collateral in support of the 2012 ABS Facility. See Note 11Debt for a further description of the 2012 ABS Facility.
7. | RESTRICTED CASH |
At December 28, 2013 and December 29, 2012, the Company had $7 million of restricted cash included in its Consolidated Balance Sheets in Other assets. This restricted cash primarily represented security deposits and escrow amounts related to certain properties collateralizing the commercial mortgage-backed securities loan facility (CMBS Fixed Facility). See Note 11Debt.
8. | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following (in thousands):
December 28, 2013 |
December 29, 2012 |
Range of Useful Lives | ||||||||
Land |
$ | 287,385 | $ | 286,758 | ||||||
Buildings and building improvements |
1,052,355 | 1,013,792 | 1040 years | |||||||
Transportation equipment |
586,376 | 487,858 | 510 years | |||||||
Warehouse equipment |
278,732 | 263,388 | 512 years | |||||||
Office equipment, furniture and software |
532,389 | 446,875 | 37 years | |||||||
Construction in process |
104,717 | 97,556 | ||||||||
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2,841,954 | 2,596,227 | |||||||||
Less accumulated depreciation and amortization |
(1,093,459 | ) | (889,839 | ) | ||||||
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Property and equipmentnet |
$ | 1,748,495 | $ | 1,706,388 | ||||||
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Transportation equipment included $94 million of capital lease assets at December 28, 2013, and zero at December 29, 2012. Buildings and building improvements included $33 million and $32 million of capital lease assets at December 28, 2013 and December 29, 2012, respectively. Accumulated amortization of capital lease assets was $14 million and $4 million at December 28, 2013 and December 29, 2012, respectively. Interest capitalized was $2 million in 2013 and $1 million in 2012.
Depreciation and amortization expense of property and equipmentincluding amortization of capital lease assetswas $240 million, $217 million and $208 million for the fiscal years 2013, 2012 and 2011, respectively.
9. | 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 recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization.
Customer relationship intangible assets have definite lives, so they are carried at the acquired fair value less accumulated amortization. Customer relationship intangible assets are amortized on a straight-line basis over the estimated useful lives (four to 10 years) and amortization expense was $147 million, $139 million and $135 million for the fiscal years ended 2013, 2012 and 2011, respectively. The 2013 business acquisition customer relationship intangible asset is being amortized on a straight-line basis over four years. The weighted-average remaining useful life of all customer relationship intangibles was approximately three years at December 28, 2013. Amortization of these customer relationship assets is estimated to be $150 million in 2014, $147 million in 2015, $140 million in 2016, and $63 million in 2017. The 2013 business acquisition noncompete agreement intangible asset is being amortized on a straight-line basis over five years. Amortization of this intangible asset is estimated to be $0.2 million annually through 2017 and $0.1 million in 2018.
15
Goodwill and other intangibles, net, consisted of the following (in thousands):
December 28, 2013 |
December 29, 2012 |
|||||||
Goodwill |
$ | 3,835,477 | $ | 3,833,301 | ||||
|
|
|
|
|||||
Customer relationshipsamortizable: |
||||||||
Gross carrying amount |
$ | 1,377,663 | $ | 1,366,056 | ||||
Accumulated amortization |
(877,396 | ) | (729,403 | ) | ||||
|
|
|
|
|||||
Net carrying value |
500,267 | 636,653 | ||||||
|
|
|
|
|||||
Noncompete agreementamortizable: |
||||||||
Gross carrying amount |
800 | | ||||||
Accumulated amortization |
(27 | ) | | |||||
|
|
|
|
|||||
Net carrying value |
773 | | ||||||
|
|
|
|
|||||
Brand names and trademarksnot amortizing |
252,800 | 252,800 | ||||||
|
|
|
|
|||||
Total other intangiblesnet |
$ | 753,840 | $ | 889,453 | ||||
|
|
|
|
The 2013 increase in goodwill is attributable to the finalization of the purchase price of a 2012 business acquisition. The net increase in customer relationships during 2013 is attributable to the 2013 business acquisition. The noncompete agreement is related to the 2013 business acquisition.
We completed the annual impairment assessment for goodwill, and our portfolio of brand names and trademarks, the indefinite-lived intangible assets, on June 30, 2013, the first day of our fiscal third quarter, with no impairments noted. Our assessment used a discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we 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 our 2013 annual impairment analysis, we believe the fair value of the Companys single reporting unit exceeded its carrying value. Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis.
10. | 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 and it is unlikely the plan will be changed, 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. For all properties held for sale, the Company has exited operations from the facilities and, thus, the properties are no longer productive assets. Further, the Company has no history of changing its plan to dispose of a facility once the decision has been made. At December 28, 2013 and at December 29, 2012, $10 million and $12 million, respectively, of closed facilities were included in Assets held for sale for more than one year.
The changes in Assets held for sale for fiscal years 2013 and 2012 were as follows (in thousands):
2013 | 2012 | |||||||
Balance at beginning of year |
$ | 23,193 | $ | 30,405 | ||||
Transfers in |
4,193 | 11,804 | ||||||
Assets sold |
(10,972 | ) | (16,526 | ) | ||||
Tangible asset impairment charges |
(1,860 | ) | (2,490 | ) | ||||
|
|
|
|
|||||
Balance at end of the year |
$ | 14,554 | $ | 23,193 | ||||
|
|
|
|
During 2013, the Company reclassified an idle facility to Assets held for sale. Additionally, it sold four facilities previously classified as Assets held for sale for net proceeds of $11 million, which approximated their carrying values.
16
During 2012, the Company reclassified $12 million of property and equipment from three facilities closed in 2012 and one facility closed in 2011 to Assets held for sale, and sold four facilities previously classified as Assets held for sale for net proceeds of $17 million. The Company recognized a net gain on sold facilities of $1 million in 2012.
As discussed in Note 4Fair Value Measurements, during 2013 and 2012, certain Assets held for sale were adjusted to equal their estimated fair value, less costs to sell. This resulted in tangible asset impairment charges of $2 million in fiscal 2013 and 2012.
11. | DEBT |
The Companys debt consisted of the following (in thousands):
Debt Description |
Contractual Maturity |
Interest Rate at December 28, 2013 |
December 28, 2013 |
December 29, 2012 |
||||||||
ABL Facility |
May 11, 2016 | 3.66% | $ | 20,000 | $ | 170,000 | ||||||
2012 ABS Facility |
August 27, 2015 | 1.46 | 686,000 | 686,000 | ||||||||
Amended 2011 Term Loan |
March 31, 2019 | 4.50 | 2,094,750 | | ||||||||
2011 Term Loan |
| | | 418,625 | ||||||||
Amended 2007 Term Loan |
| | | 1,684,086 | ||||||||
CMBS Fixed Facility |
August 1, 2017 | 6.38 | 472,391 | 472,391 | ||||||||
CMBS Floating Facility |
| | | | ||||||||
Senior Notes |
June 30, 2019 | 8.50 | 1,350,000 | 975,000 | ||||||||
Senior Subordinated Notes |
| | | 355,166 | ||||||||
Obligations under capital leases |
2019-2025 | 4.396.25 | 116,662 | 31,075 | ||||||||
Other debt |
2018-2031 | 5.759.00 | 12,359 | 12,966 | ||||||||
|
|
|
|
|||||||||
Total debt |
4,752,162 | 4,805,309 | ||||||||||
Add unamortized premium |
18,311 | 8,516 | ||||||||||
Less current portion of long-term debt |
(35,225 | ) | (48,926 | ) | ||||||||
|
|
|
|
|||||||||
Long-term debt |
$ | 4,735,248 | $ | 4,764,899 | ||||||||
|
|
|
|
As of December 28, 2013, $1,951 million of the total debt was at a fixed rate and $2,801 million was at a floating rate.
Principal payments to be made on outstanding debt as of December 28, 2013, were as follows (in thousands):
2014 |
$ | 35,225 | ||
2015 |
727,265 | |||
2016 |
56,857 | |||
2017 |
510,139 | |||
2018 |
38,684 | |||
Thereafter |
3,383,992 | |||
|
|
|||
$ | 4,752,162 | |||
|
|
Revolving Credit Agreement
The Companys asset backed senior secured revolving loan facility (ABL Facility) provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of December 28, 2013, the Company had $20 million of outstanding borrowings and had issued Letters of Credit totaling $293 million under the ABL Facility. Outstanding Letters of Credit included 1) $93 million issued in favor of Ahold to secure their contingent exposure under guarantees of our obligations with respect to certain leases, 2) $183 million issued in favor of certain commercial insurers securing our obligations with respect to our self-insurance program, and 3) letters of credit of $17 million for other obligations. There was available capacity on the ABL Facility of $787 million at December 28, 2013, according to the borrowing base calculation. As of December 28, 2013, on borrowings up to $75 million, the Company can periodically elect to pay interest at Prime plus 2.5% or LIBOR plus 3.5%. On borrowings in excess of $75 million, the Company can periodically elect to pay interest at Prime plus 1.25% or LIBOR plus 2.25%. The ABL facility also
17
carries letter of credit fees of 2.25% and an unused commitment fee of 0.38%. The Company anticipates repaying all or substantially all of the outstanding ABL borrowings at times during the next 12 months, and re-borrowing funds under the facility, as needed. The Company expects its borrowing base capacity will exceed its ABL facility borrowing needs at all times during the next 12 months and, accordingly, it has included these borrowings in long-term debt in its Consolidated Balance Sheets at December 28, 2013. The weighted-average interest rate for the ABL Facility was 3.50% for 2013 and 3.15% for 2012.
Accounts Receivable Financing Program
Under the 2012 ABS Facility,which replaced the Companys prior accounts receivable securitizationour subsidiary, US Foods and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of the Company (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million at December 28, 2013 and December 29, 2012. The Company, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. The portion of the loan held by the lenders who fund the loan with commercial paper bears interest at the lenders commercial paper rate, plus any other costs associated with the issuance of commercial paper, plus 1.25% and an unused commitment fee of 0.35%. The portion of the loan held by lenders that do not fund the loan with commercial paper bears interest at LIBOR plus 1.25% and an unused commitment fee of 0.35%. See Note 6Accounts Receivable Financing Program for a further description of the Companys Accounts Receivable Financing Program. The weighted-average interest rate for the 2012 ABS Facility was 1.55% for 2013 and 1.57% for 2012.
The 2012 ABS Facility replaced the Companys former ABS facility. See Debt Refinancing Transactions discussed below.
Term Loan Agreement
The Companys senior secured term loan (Amended 2011 Term Loan) consisted of a senior secured term loan with outstanding borrowings of $2,095 million at December 28, 2013. The Amended 2011 Term Loan bears interest equal to Prime plus 2.5%, or LIBOR plus 3.5%, with a LIBOR floor of 1.0%, based on a periodic election of the interest rate by the Company. Principal repayments of $5 million are payable quarterly with the balance at maturity. The Amended 2011 Term Loan may require mandatory repayments if certain assets are sold, or based on excess cash flow generated by the Company, as defined in the agreement. At December 28, 2013, entities affiliated with KKR held $287 million of the Companys Amended 2011 Term Loan debt. The interest rate for all borrowings on the Amended 2011 Term Loan was 4.5%the LIBOR floor of 1.0% plus 3.5%for all periods in 2013.
The term loan agreement was amended during 2013 and 2012. See Debt Refinancing Transactions discussed below.
Other Debt
The CMBS Fixed Facility provides financing of $472 million and is secured by mortgages on 38 properties, consisting primarily of distribution centers. The CMBS Fixed Facility bears interest at 6.38%.
The unsecured Senior Notes with outstanding principal of $1,350 million and $975 million at December 28, 2013 and December 29, 2012, respectively, bear interest at 8.5%. There was unamortized original issue premium associated with the Senior Notes issuances of $18 million and $9 million at December 28, 2013 and December 29, 2012, respectively. This is amortized as a decrease to Interest expense over the remaining life of the debt facility. As of December 28, 2013, entities affiliated with KKR held $2 million of the Companys Senior Notes.
Effective December 19, 2013, upon consent of the note holders, the Senior Notes Indenture was amended so that the proposed Acquisition will not constitute a Change of Control, as defined in the Indenture. In the event of a Change of Control, the holders of the Senior Notes would have the right to require the Company to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under terms of the agreementor not completed by September 8, 2015the Senior Notes Indenture will revert to its original terms. See Note 14Related Party Transactions for a discussion of Senior Notes Indenture amendment fees paid by Sysco, and Note 1Proposed Acquisition by Sysco.
Obligations under capital leases consist of amounts due for transportation equipment and building leases.
18
Debt Refinancing Transactions
Since 2011, we have entered into a series of transactions to refinance our debt facilities and extend debt maturity dates, including the following transactions:
2013 Refinancing
| In June 2013, the Company refinanced its term loan agreements. The aggregate principal outstanding of the 2011 Term Loan was increased to $2,100 million, and the maturity date of the loan facility was extended from March 31, 2017 to March 31, 2019. The Amended 2011 Term Loan facility refinanced an aggregate of $2,091 million in principal under the Companys Amended 2007 Term Loan and 2011 Term Loan facilities. Continuing lenders refinanced an aggregate of $1,634 million in principal of Term Loan debt. They also purchased $371 million in principal of Term Loan debt from lenders electing not to participate in, or electing to decrease their holdings in, the Amended 2011 Term Loan facility. Additionally, the Company sold $95 million in principal of the Amended 2011 Term Loan to new lenders. |
The Company performed an analysis by creditor to determine if the terms of the Amended 2011 Term Loan were substantially different from the previous term loan facilities. Based upon the analysis, it was determined that continuing lenders holding a significant portion of the Amended 2011 Term Loan had terms that were substantially different from their original loan agreements. As a result, this portion of the transaction was accounted for as an extinguishment of debt and the contemporaneous acquisition of new debt. Lenders holding the remaining portion of the Amended 2011 Term Loan had terms that were not substantially different from their original loan agreements and, as a consequence, this portion of the transaction was accounted for as a debt modification as opposed to an extinguishment of debt.
| In January 2013, the Company redeemed the remaining $355 million in aggregate principal amount of its 11.25% Senior Subordinated Notes (Senior Subordinated Notes) due June 30, 2017. This was done at a price equal to 105.625% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest to the redemption date. An entity affiliated with CD&R held all of the redeemed Senior Subordinated Notes. To fund the redemption of these notes, the Company issued $375 million in principal amount of its Senior Notes at a price equal to 103.5% of the principal amount, for gross proceeds of $388 million. |
The 2013 refinancing resulted in a loss on extinguishment of debt of $42 million. That consisted of a $20 million Senior Subordinated Notes early redemption premium, a write-off of $13 million of unamortized debt issuance costs related to the old debt facilities, and $9 million of lender fees and third party costs related to these transactions. Unamortized debt issuance costs of $6 million related to the portion of the Term Loan refinancing accounted for as a debt modification will be carried forward and amortized through March 31, 2019the maturity date of the Amended 2011 Term Loan.
2012 Refinancing
| In 2012, the Company entered into two transactions to amend its 2007 Term Loan, originally scheduled to mature on July 3, 2014. Holders of $1,691 million in principal of the 2007 Term Loan consented to extend the maturity date from July 3, 2014, to March 31, 2017. The Company repaid $249 million in principal of the 2007 Term Loan to lenders not consenting to extend their term loan holdings. The transactions did not require repayment and the receipt of new proceeds for the $1,691 million of extended 2007 Term Loan principal. |
We performed an analysis by creditor to determine if the terms of the Amended 2007 Term Loan were substantially different from the previous facility. Continuing lenders holding a significant portion of the Amended 2007 Term Loan had terms that were substantially different from their original loan agreements. As a result, this portion of the transaction was accounted for as an extinguishment of debt and the contemporaneous acquisition of new debt. Lenders holding the remaining portion of the Amended 2007 Term Loan had terms that were not substantially different from their original loan agreements. As a consequence, this portion of the transaction was accounted for as a debt modification as opposed to an extinguishment of debt.
19
| In December 2012, the Company redeemed $166 million in principal of its Senior Subordinated Notes with proceeds from the issuance of $175 million in principal of Senior Notes. The Senior Notes were issued at 101.5% for gross proceeds of $178 million. An entity affiliated with CD&R held all of the redeemed Senior Subordinated Notes. |
| In August 2012, the Company entered into a new ABS loan facility: the 2012 ABS Facility. The Company borrowed $686 million under the 2012 ABS Facility and used the proceeds to repay all amounts due on its previous ABS Facility. A portion of the lenders under the 2012 ABS Facility were also lenders under the previous ABS Facility. Since the terms of the 2012 ABS Facility were not substantially different from the previous facility, the portion of the 2012 ABS Facility pertaining to those continuing lenders was accounted for as a debt modification versus an extinguishment of debt. |
The 2012 refinancing resulted in a loss on extinguishment of debt of $31 million. This consisted of $12 million of lender fees and third party costs related to the transactions, a write-off of $10 million of unamortized debt issuance costs related to the old debt facilities, and a $9 million Senior Subordinated Notes early redemption premium.
2011 Refinancing
In May 2011, the Company entered into a series of transactions resulting in the redemption of $1 billion in principal of its 10.25% Senior Notes due June 30, 2015 (Old Senior Notes). The refinancing redeemed all of the Old Senior Notes outstanding. It was funded primarily by the issuance of $400 million in principal of Senior Notes, and proceeds from the $425 million in principal issued under the 2011 Term Loan.
The redemption of the Old Senior Notes resulted in a loss on extinguishment of debt of $76 million. That included an early redemption premium of $64 million and a write-off of $12 million of unamortized debt issuance costs related to the Old Senior Notes.
Refinancing Transaction Costs
The Company incurred transaction costs of $29 million, $35 million and $30 million related to the 2013, 2012 and 2011 debt refinancing transactions, respectively. Transaction costs primarily consisted of loan fees, arrangement fees, rating agency fees and legal fees.
Security Interests
Substantially all of our 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, inventory and tractors and trailers owned by the Company. The CMBS Fixed Facility is collateralized by mortgages on the 38 related properties. Our obligations under the Amended 2011 Term Loan are guaranteed by security in all of the capital stock of our subsidiaries, each of the direct and indirect 100% owned domestic subsidiaries (as defined in the agreements), and are secured by substantially all assets of the Company and its subsidiaries not pledged under the 2012 ABS Facility and the CMBS Facilities. More specifically, the Amended 2011 Term Loan has priority over certain collateral securing the ABL Facility, and it has second priority for other collateral securing the ABL Facility. The former CMBS Floating Facility was collateralized by mortgages on 15 related properties until July 9, 2012, when its outstanding borrowings were repaid. Currently, 14 properties remain in the special purpose, bankruptcy remote subsidiary and are not pledged as collateral under any of the Companys debt agreements.
Restrictive Covenants
Our credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. Certain debt agreements also contain various and customary events of default with respect to the loans. 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 outstandingtogether with all accrued unpaid interest and other amounts owedmay be declared immediately due and payable by the lenders. Were such an event to occur, the Company would be forced to seek new financing that may not be on as favorable terms as its current facilities. The Companys ability to refinance its indebtedness on favorable
20
termsor at allis directly affected by the current economic and financial conditions. In addition, the Companys 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.
12. | ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES |
Accrued expenses and other long-term liabilities consisted of the following (in thousands):
December 28, 2013 |
December 29, 2012 |
|||||||
Accrued expenses and other current liabilities: |
||||||||
Salary, wages and bonus expenses |
$ | 110,427 | $ | 60,855 | ||||
Operating expenses |
61,500 | 66,795 | ||||||
Workers compensation, general liability and fleet liability |
42,204 | 44,868 | ||||||
Group medical liability |
20,379 | 21,701 | ||||||
Customer rebates and other selling expenses |
63,038 | 60,598 | ||||||
Restructuring |
13,184 | 11,696 | ||||||
Property and sales tax |
22,526 | 20,790 | ||||||
Interest payable |
70,702 | 79,951 | ||||||
Interest rate swap derivative |
| 2,034 | ||||||
Other |
19,675 | 19,018 | ||||||
|
|
|
|
|||||
Total accrued expenses and other current liabilities |
$ | 423,635 | $ | 388,306 | ||||
|
|
|
|
|||||
Other long-term liabilities: |
||||||||
Workers compensation, general liability and fleet liability |
$ | 111,364 | $ | 114,601 | ||||
Accrued pension and other postretirement benefit obligations |
100,393 | 239,549 | ||||||
Restructuring |
58,034 | 65,602 | ||||||
Unfunded lease obligation |
33,404 | 28,371 | ||||||
Other |
31,613 | 31,519 | ||||||
|
|
|
|
|||||
Total Other long-term liabilities |
$ | 334,808 | $ | 479,642 | ||||
|
|
|
|
Self-Insured LiabilitiesThe Company has a self-insurance program for general liability, fleet liability and workers compensation claims. Claims in excess of certain levels are fully insured. The self-insurance liabilities, included in the table above under Workers compensation, general liability and fleet liability, are recorded at discounted present value. This table summarizes self-insurance liability activity for the last three fiscal years (in thousands):
2013 | 2012 | 2011 | ||||||||||
Balance at beginning of the year |
$ | 159,469 | $ | 175,891 | $ | 187,694 | ||||||
Charged to costs and expenses |
56,526 | 37,763 | 46,127 | |||||||||
Payments |
(62,427 | ) | (54,185 | ) | (57,930 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at end of the year |
$ | 153,568 | $ | 159,469 | $ | 175,891 | ||||||
|
|
|
|
|
|
13. | RESTRUCTURING AND TANGIBLE ASSET IMPAIRMENT CHARGES |
The Company periodically closes distribution facilities, because it has built new ones or consolidated operations. Additionally, as part of its ongoing efforts to reduce costs and improve operating efficiencies, the Company continues to implement its plan to migrate from a decentralized to a functionalized organization, with more processes and technologies standardized and centralized across the Company. During all periods presented, the Company incurred restructuring costs as a result of these activities.
2013 ActivitiesDuring 2013, the Company recognized Restructuring and tangible asset impairment charges of $8 million. The Company announced the closing of three distribution facilities that ceased operations in 2014. These actions resulted in $4 million of severance and related costs. Also during 2013, certain Assets held for sale were adjusted to equal their estimated fair value, less costs to sell, resulting in tangible asset impairment charges of $2 million. In addition, the Company incurred $2 million of other severance costs, including $1 million for a multiemployer pension withdrawal liability.
21
2012 ActivitiesDuring 2012, the Company recognized Restructuring and tangible asset impairment charges of $9 million. The Company announced the closing of four facilities, including three distribution facilities and one administrative support facility. The closed facilities ceased operations in 2012 and were consolidated into other Company locations. The closing of the four facilities resulted in $5 million of tangible asset impairment charges to property and equipment, and minimal severance and related costs.
During 2012, the Company recognized $3 million of net severance and related costs for initiatives to reorganize our business along functional lines and optimize processes and systems. Also, certain Assets held for sale were adjusted to equal their estimated fair value, less costs to sell, resulting in tangible asset impairment charges of $2 million. Additionally, the Company reversed $2 million of liabilities for unused leased facilities.
2011 ActivitiesDuring 2011, the Company announced the closing of four distribution facilities and recognized Restructuring and tangible asset impairment charges of $72 million. Three of the facilities ceased operations in 2011 and the other facility ceased operating in 2012. One facility was closed due to construction of a new facility, and the operations of the remaining three closed facilities were consolidated into other Company facilities. These actions resulted in $45 million of severance and related costs, including a $40 million multiemployer pension withdrawal charge, and $7 million of tangible asset impairment charges. The Company also recognized $17 million of severance and related costs, primarily for the reorganization and centralization of various functional areasincluding finance, human resources, replenishment and category managementplus $1 million of facility closing costs. Additionally, certain other Assets held for sale were adjusted to equal their estimated fair value, less costs to sell, which resulted in tangible asset impairment charges of $2 million.
Changes in the restructuring liabilities for the last three fiscal years were as follows (in thousands):
Severance and Related Costs |
Facility Closing Costs |
Total | ||||||||||
Balance at January 1, 2011 |
$ | 42,365 | $ | 6,505 | $ | 48,870 | ||||||
Current period charges |
64,302 | 1,135 | 65,437 | |||||||||
Change in estimate |
(2,445 | ) | (360 | ) | (2,805 | ) | ||||||
Payments and usagenet of accretion |
(18,822 | ) | (1,687 | ) | (20,509 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2011 |
85,400 | 5,593 | 90,993 | |||||||||
Current period charges |
4,703 | 51 | 4,754 | |||||||||
Change in estimate |
(1,575 | ) | (1,786 | ) | (3,361 | ) | ||||||
Payments and usagenet of accretion |
(14,407 | ) | (681 | ) | (15,088 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at December 29, 2012 |
74,121 | 3,177 | 77,298 | |||||||||
Current period charges |
7,308 | 328 | 7,636 | |||||||||
Change in estimate |
(480 | ) | (630 | ) | (1,110 | ) | ||||||
Payments and usagenet of accretion |
(11,877 | ) | (729 | ) | (12,606 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at December 28, 2013 |
$ | 69,072 | $ | 2,146 | $ | 71,218 | ||||||
|
|
|
|
|
|
This is a summary of the restructuring and tangible asset impairment charges for the last three fiscal years (in thousands):
2013 | 2012 | 2011 | ||||||||||
Severance and related costs |
$ | 6,828 | $ | 3,128 | $ | 61,857 | ||||||
Facility closing costs |
(302 | ) | (1,735 | ) | 775 | |||||||
Tangible asset impairment charges |
1,860 | 7,530 | 9,260 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 8,386 | $ | 8,923 | $ | 71,892 | ||||||
|
|
|
|
|
|
The $69 million of restructuring liabilities as of December 28, 2013, for severance and related costs included $60 million of multiemployer pension withdrawal liabilities related to closed facilities. This is payable in monthly installments through 2031 at effective interest rates of 5.9% to 6.7%.
22
14. | RELATED PARTY TRANSACTIONS |
The Company pays a monthly management fee of $0.8 million to investment funds associated with or designated by the Sponsors. For each of the fiscal years 2013, 2012 and 2011, the Company recorded $10 million in management fees and related expenses reported as Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income (Loss). Entities affiliated with KKR received transaction fees of $2 million and $3 million, respectively, for services related to the 2013 and the 2012 debt refinancing transactions. During the fiscal years 2013, 2012 and 2011, the Company purchased $12 million, $19 million and $2 million of food products, respectively, from an affiliate of one of its Sponsors. At December 28, 2013 and December 29, 2012, $0.2 million and $1 million, respectively, were due to this affiliate.
As discussed in Note 11Debt, entities affiliated with the Sponsors hold various positions in some of our debt facilities and participated in our 2013 and 2012 refinancing transactions. At December 28, 2013 and December 29, 2012, entities affiliated with KKR held $289 million and $381 million, respectively in aggregate principal of the Companys debt facilities. At December 29, 2012, entities affiliated with CD&R held $355 million, respectively, in aggregate principal of the Companys Senior Subordinated Notes, which were redeemed in January 2013. At December 28, 2013, entities affiliated with CD&R had no holdings of the Companys debt facilities.
Also as discussed in Note 11Debt, upon consent of the noteholders, the Senior Note Indenture was amended so that the proposed Acquisition by Sysco will not constitute a Change of Control, that would have granted the holders of the Senior Notes the right to require the Company to repurchase all or any part of their notes at a premium equal to 101% of the principal amount, plus accrued and unpaid interest. Sysco paid $3.4 million in consent fees to the holders of the Senior Notes in December 2013 on behalf of the Company and agreed to pay related transaction costs and fees incurred by the Company. At December 28, 2013, the Company had accrued a $0.3 million liability for transaction costs and fees and a related receivable of $0.3 million from Sysco.
15. | SHARE-BASED COMPENSATION, COMMON STOCK ISSUANCES AND TEMPORARY EQUITY |
The Stock Incentive Plan, as amended (Stock Incentive Plan) provides for the sale of common stock to named executive officers and other key employees and directors of our wholly owned subsidiary, US Foods. It also grants 1) stock options to purchase shares of common stock, 2) stock appreciation rights, and 3) restricted stock and restricted stock units to certain individuals. The Board of Directors or the Compensation Committee of the Board is authorized to select the officers, employees and directors eligible to participate in the Stock Incentive Plan. Either the Board of Directors or the Compensation Committee may determine the specific number of shares to be offered, or options, stock appreciation rights or restricted stock to be granted to an employee or director.
In May 2013, the Stock Incentive Plan was amended to, among other things, increase the number of shares of common stock available for grantfrom approximately 31.5 million shares to approximately 53.2 million shares.
The Company measures compensation expense for share-based equity awards at fair value at the date of grant, and it recognizes compensation expense over the service period for share-based awards expected to vest. Total compensation expense related to share-based payment arrangements was $8 million, $4 million and $15 million for fiscal years 2013, 2012 and 2011, respectively. No share-based compensation cost was capitalized as part of the cost of an asset during those years. The total income tax benefit recorded in the Consolidated Statement of Comprehensive Income (Loss) was $3 million, $1 million, and $6 million during fiscal years 2013, 2012 and 2011, respectively.
Each participant in the Stock Incentive Plan has the right to require the Company to repurchase all of his or her restricted shares or shares issued or issuable pursuant to their awards in the event of a termination of employment due to death or disability. The Company also has the rightbut not the obligationto require employees to sell purchased shares back to the Company when they leave employment.
Generally, instruments with put rights upon death or disability are classified as temporary or permanent equity awards until such puttable conditions become probable (i.e. upon termination due to death or disability). Once an award meets the puttable conditions, it is accounted for as an award modification and is required to be liability-classified. The Company records an incremental expense measured as the excess, if any, of the fair value of the modified award over the amount previously recognized when the award retained equity classification. These liability awards are remeasured at their fair market value as of each reporting period through the date of settlement, which is generally the first fiscal quarter following termination. Management concluded that the modifications during the current fiscal year did not have a material impact to compensation costs.
23
As discussed in Note 1Proposed Acquisition by Sysco, the Acquisition will constitute a Change of Control under the Stock Incentive Plan, which will accelerate vesting of all stock options, equity appreciation rights, restricted stock, and restricted stock units.
Common Stock IssuancesCertain employees have purchased shares of common stock, pursuant to a management stockholders agreement associated with the Stock Incentive Plan. These shares are subject to the terms and conditions (including certain restrictions) of each management stockholders agreement, other documents signed at the time of purchase, as well as transfer limitations under the applicable law. The Company measures fair value of the shares on a quarterly basis, using the combination of a market approach and an income approach. The share price determined for a particular quarter end is the price at which employee purchases and company repurchases are made for the following quarter. In 2013, employees bought stock at $6.00 per share. The shares were purchased by employees in 2012 at prices of $5.00 to $6.00 per share. In 2011, employees bought stock at $5.00 and $5.50 per share.
Common stock purchased by employees is contingently redeemable and as a result are accounted for as Temporary Equity. The amount of Temporary Equity ascribed to such common stock, net of any shareholder loans, was $31 million, $34 million and $36 million at December 28, 2013, December 29, 2012 and December 31, 2011, respectively. See Note 2Temporary Equity for further discussion.
Stock Option AwardsThe Company granted to certain employees Time Options and Performance Options (collectively the Options) to purchase common shares. These Options are subject to the restrictions set forth in the Stock Option Agreements. Shares purchased pursuant to option exercises would be governed by the restrictions in the Stock Incentive Plan and management stockholders agreements.
Vested stock option awards are accounted for as Temporary Equity as a result of the underlying common stock being contingently redeemable. The amount of Temporary Equity ascribed to stock option awards was $0 for all periods reported because the strike price of the stock option awards was equal to the fair value at date of grant. See Note 2Temporary Equity for further discussion.
The Time Options vest and become exercisable ratably over periods of four to five years. This happens either on the anniversary date of the grant or the last day of each fiscal year, beginning with the fiscal year issued.
The Performance Options also vest and become exercisable ratably over four to five years, on the last day of each fiscal year (beginning with the fiscal year issued) provided that the Company achieves an annual operating performance target as defined in the applicable stock option agreements (Stock Option Agreements). The Stock Option Agreements also provide for catch-up vesting of the Performance Options, if an annual operating performance target is not achieved, but a cumulative operating performance target is achieved. During 2012, the Company changed its policy for granting Performance Options. The award agreements no longer included performance targets for all years covered by the agreement. Instead, the Company established annual and cumulative targets for each year at the beginning of each respective fiscal year. In this case, the grant date under GAAP is not determined until the performance target for the related options is known. The Company did not achieve either the annual or the cumulative operating performance target for 2013, and accordingly, did not record a compensation charge for the 2013 Performance Options. The 2012 performance target was modified in 2013, and the Company recorded a compensation charge of $2 million in 2013 for 2012. The Company achieved the annual operating performance target in 2011 and recorded a compensation charge for the 2011 Performance Options.
The Options are nonqualified options, with exercise prices equal to the estimated value of a share of USF Holding Corp. stock at the date of the grant. The Options have exercise prices of $4.50 to $6.00 per share and generally have a 10-year life. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option-pricing model.
The weighted-average assumptions for options granted for the last three fiscal years are included in the following table:
2013 | 2012 | 2011 | ||||||||||
Expected volatility |
35.0 | % | 35.0 | % | 30.0 | % | ||||||
Expected dividends |
0.0 | % | 0.0 | % | 0.0 | % | ||||||
Risk-free rate |
1.0 | % | 0.9 | % | 1.2 | % | ||||||
Expected term (in years) 10-year options |
6.3 | 6.7 | 6.5 |
24
Expected volatility is calculated based on the historical volatility of public companies similar to USF Holding Corp. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury securities having a maturity approximately equal to the expected term, as of the grant dates. The assumed dividend yield is zero, because we have not historically paid dividends and do not have any current plans to pay dividends. Due to a lack of relevant historical data, the simplified approach was used to determine the expected term of the options.
The summary of options outstanding and changes during fiscal year 2013 presented below is based on the Companys determination of legally outstanding option awards.
Time Options |
Performance Options |
Total Options |
Weighted- Average Fair Value |
Weighted- Average Exercise Price |
Weighted - Average Remaining Contractual Years |
|||||||||||||||||||
Outstanding at December 29, 2012 |
10,600,578 | 10,600,578 | 21,201,156 | $ | 2.03 | $ | 4.93 | |||||||||||||||||
Granted |
3,488,216 | 3,488,216 | 6,976,432 | $ | 2.22 | $ | 6.00 | |||||||||||||||||
Exercised |
(1,233,972 | ) | (1,233,972 | ) | (2,467,944 | ) | $ | 2.14 | $ | 4.98 | ||||||||||||||
Forfeited |
(455,267 | ) | (455,267 | ) | (910,534 | ) | $ | 1.98 | $ | 5.60 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at December 28, 2013 |
12,399,555 | 12,399,555 | 24,799,110 | $ | 2.04 | $ | 5.20 | 7 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Vested and exercisable at December 28, 2013 |
8,099,665 | 6,645,413 | 14,745,078 | $ | 2.04 | $ | 4.93 | 7 | ||||||||||||||||
|
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|
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|
|
As described earlier, under GAAP, the performance target for Performance Options must be set for a grant date to have occurred and for the Performance Options to be considered for accounting recognition. In the above table, only 1.9 million of Performance Options issued, only 0.1 million Performance Options forfeited in 2013, and 8.4 million of Performance Options outstanding at December 28, 2013 have had performance targets set. Only 7.7 million of outstanding Performance Options had performance targets set as of December 29, 2012. Exercised Performance Options during 2013 would have been unchanged. If a change in control were to occur and specified returns achieved by our Sponsors, or at the discretion of the Sponsors, all options shown in the table above, including options for which performance targets were not yet set, would immediately vest.
The weighted-average grant date fair value of options granted in 2013, 2012 and 2011 was $2.22, $2.05 and $1.75, respectively. In fiscal years 2013, 2012 and 2011, the Company recorded $4 million, $2 million and $14 million, respectively, in compensation expense related to the Options. The stock compensation expenserepresenting the fair value of stock options vested during the yearis reflected in our Consolidated Statements of Comprehensive Income (Loss) in Distribution, selling and administrative costs. During 2013, 1,233,972 Time Options and 1,233,972 Performance Options were exercised by terminating employees for a cash outflow of $2 million, representing the excess of fair value over exercise price. During 2012, 425,550 Time Options and 425,550 Performance Options were exercised by terminating employees for a cash outflow of $0.9 million, representing the excess of fair value over exercise price. During 2011, 131,000 Time Options and 131,000 Performance Options were exercised by terminating employees for a cash outflow of $0.1 million, representing the excess of fair value over exercise price.
Based on the table above, as of December 28, 2013, there was $21 million of total unrecognized compensation costs related to 10 million nonvested options expected to vest under the Stock Option Agreements. That cost is expected to be recognized over a weighted-average period of three years. As of December 28, 2013, there was $12 million of total unrecognized compensation costs related to 6.5 million nonvested options expected to vest under the Stock Option Agreements for which performance targets were set. That cost is expected to be recognized over a weighted-average period of three years.
Restricted SharesCertain employees of the Company received 375,001, 481,702 and 251,111 Restricted Shares in 2013, 2012 and 2011, respectively, (Restricted Shares). These shares were granted under the Stock Incentive Plan. Restricted Shares vest and become exercisable ratably over periods of primarily two to five years.
Vesting or vested Restricted Shares are accounted for as Temporary Equity as a result of the underlying common stock being contingently redeemable. The amount of Temporary Equity ascribed to Restricted Shares was $6 million, $4 million and $2 million at December 28, 2013, December 29, 2012 and December 31, 2011, respectively. See Note 2Temporary Equity for further discussion.
25
The summary of nonvested Restricted Shares outstanding and changes during fiscal year 2013 is presented below:
Restricted Shares |
Weighted- Average Fair Value |
|||||||
Nonvested at December 29, 2012 |
592,843 | $ | 6.00 | |||||
Granted |
375,001 | 6.00 | ||||||
Vested |
(459,010 | ) | 6.00 | |||||
Forfeited |
(136,070 | ) | 6.00 | |||||
|
|
|||||||
Nonvested at December 28, 2013 |
372,764 | $ | 6.00 | |||||
|
|
The weighted-average grant date fair values for Restricted Shares granted in 2013, 2012 and 2011 were $6.00, $6.00 and $5.50, respectively. Expense of $3 million, $2 million and $1 million related to the Restricted Shares was recorded in Distribution, selling and administrative costs during fiscal 2013, 2012 and 2011, respectively. At December 28, 2013, there was $2 million of unrecognized compensation cost related to the Restricted Shares that we expect to recognize over a weighted-average period of three years.
Restricted Stock UnitsIn 2013, certain employees of the Company received Time Restricted Stock Units and Performance Restricted Stock Units (collectively the RSUs) granted pursuant to the Stock Incentive Plan. Time RSUs vest and become exercisable ratably over four years, starting on the anniversary date of grant. Performance RSUs vest and become exercisable over four years on the last day of each fiscal year, beginning with the fiscal year issued, provided that the Company achieves an annual operating performance target as defined in the applicable restricted stock unit agreements (Restricted Stock Unit Agreements). The Restricted Stock Unit Agreements also provide for catch-up vesting of the Performance RSUs if an annual operating performance target is not achieved, but a cumulative operating performance target is achieved. Similar to options, the RSU award agreements do not include performance targets for all years covered by the agreement. Instead, the Company established annual targets for each year at the beginning of each fiscal year. In this case, the grant date under GAAP is not determined until the performance target for the related Performance RSU is known. The Company did not achieve the annual operating performance target for 2013 and, accordingly, did not record a compensation charge for the Performance RSUs in 2013. Prior to 2013, there were no RSUs issued or outstanding under the Stock Incentive Plan.
Vesting or vested RSUs are accounted for as temporary equity of USF Holding Corp. as a result of the underlying common shares being contingently redeemable. The amount of temporary equity ascribed to RSUs was $1 million at December 28, 2013. See Note 2Temporary Equity for further discussion.
The summary of nonvested Restricted Stock Units as of December 28, 2013, and changes during the fiscal year then ended presented below is based on the Companys determination of legally outstanding RSUs.
Time Restricted Stock Units |
Performance Restricted Stock Units |
Total Restricted Stock Units |
Weighted- Average Fair Value |
|||||||||||||
Nonvested at December 29, 2012 |
| | | $ | | |||||||||||
Granted |
1,330,311 | 1,163,644 | 2,493,955 | 6.00 | ||||||||||||
Vested |
| | | | ||||||||||||
Forfeited |
(65,728 | ) | (65,728 | ) | (131,456 | ) | 6.00 | |||||||||
|
|
|
|
|
|
|||||||||||
Nonvested at December 28, 2013 |
1,264,583 | 1,097,916 | 2,362,499 | $ | 6.00 | |||||||||||
|
|
|
|
|
|
As described above, for accounting purposes, the performance targets for Performance RSUs must be set for a grant to have occurred and for Performance Options to be considered for accounting recognition. In the above table, only 0.3 million of performance RSUs issued during 2013 and only 0.2 million of nonvested Performance RSUs outstanding at December 28, 2013 have had a performance target set. All of the Performance RSUs forfeited in 2013 had performance targets set. These differences have no impact on the stock compensation expense recorded. If a change in control were to occur, and specified returns were achieved by our Sponsors or at the discretion of our Sponsors, all options shown in the table above, including Performance RSUs for which targets have not yet been set, would immediately vest.
26
The weighted-average grant date fair values for Restricted Stock Units granted in 2013 was $6.00. Expense of $1 million related to the Time Restricted Stock Units was recorded in Distribution, selling and administrative costs during 2013. Based on the table above, at December 28, 2013, there was $14 million of unrecognized compensation cost related to 2.4 million Restricted Stock Units that we expect to recognize over a weighted-average period of three years. As of December 28, 2013, there was $2 million of total unrecognized compensation cost related to 0.3 million nonvested RSUs for which performance targets were set. That cost is expected to be recognized over a weighted-average period of three years.
Equity Appreciation RightsThe Company has an Equity Appreciation Rights (EAR) Plan for certain employees. Each EAR represents one phantom share of common stock. The EARs become vested and payable, primarily, at the time of a qualified public offering of equity shares or a change in control. EARs are forfeited upon termination of the participants employment with the Company. The EARs will be settled in cash upon vesting and, accordingly, are considered liability instruments. No EARs were granted during 2013. As of December 28, 2013, there were a total of 1,723,600 EARs outstanding with a weighted average exercise price of $4.99 per share.
As the EARs are liability instruments, the fair value of the awards is re-measured each reporting period until the award is settled. Since vesting is contingent upon performance conditions currently not considered probable, no compensation costs have been recorded to date for the EARs.
Temporary EquityThe summary of changes in temporary equity during fiscal years 2013, 2012 and 2011 is presented below (dollars in thousands).
Number of Shares |
Dollars | Management Loans |
Total Temporary Equity |
|||||||||||||
BALANCEJanuary 1, 2011 |
5,919,501 | $ | 29,558 | $ | (75 | ) | $ | 29,483 | ||||||||
Issuance of common stock |
2,830,139 | 12,108 | (840 | ) | 11,268 | |||||||||||
Common stock repurchased |
(1,075,506 | ) | (4,333 | ) | | (4,333 | ) | |||||||||
Payments on management loans |
| | 75 | 75 | ||||||||||||
Share-based compensation expense for temporary equity awards |
| 1,262 | | 1,262 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCEDecember 31, 2011 |
7,674,134 | 38,595 | (840 | ) | 37,755 | |||||||||||
Issuance of common stock |
1,563,512 | 5,201 | | 5,201 | ||||||||||||
Common stock repurchased |
(1,755,488 | ) | (7,218 | ) | | (7,218 | ) | |||||||||
Payments on management loans |
| | 482 | 482 | ||||||||||||
Share-based compensation expense for temporary equity awards |
| 1,970 | | 1,970 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCEDecember 29, 2012 |
7,482,158 | 38,548 | (358 | ) | 38,190 | |||||||||||
Issuance of common stock |
2,870,530 | 14,092 | | 14,092 | ||||||||||||
Common stock repurchased |
(3,329,189 | ) | (18,377 | ) | 123 | (18,254 | ) | |||||||||
Payments on management loans |
| | 68 | 68 | ||||||||||||
Share-based compensation expense for temporary equity awards |
| 3,827 | | 3,827 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCEDecember 28, 2013 |
7,023,499 | $ | 38,090 | $ | (167 | ) | $ | 37,923 | ||||||||
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16. | LEASES |
The Company leases various warehouse and office facilities and certain equipment under operating and capital lease agreements that expire at various dates and in some instances contain renewal provisions. The Company expenses operating lease costs, including any scheduled rent increases, rent holidays or landlord concessionson a straight-line basis over the lease term. The Company also has an unfunded lease obligation on its Perth Amboy, New Jersey distribution facility through 2023.
27
Future minimum lease payments under the above mentioned noncancelable lease agreements, together with contractual sublease income, as of December 28, 2013, are as follows (in thousands):
Unfunded Lease Obligation |
Capital Leases |
Operating Leases |
Sublease Income |
Net | ||||||||||||||||
2014 |
$ | 4,172 | $ | 23,561 | $ | 34,690 | $ | (2,136 | ) | $ | 60,287 | |||||||||
2015 |
4,172 | 24,339 | 30,155 | (2,044 | ) | 56,622 | ||||||||||||||
2016 |
4,269 | 25,186 | 26,310 | (1,351 | ) | 54,414 | ||||||||||||||
2017 |
4,269 | 26,075 | 21,769 | (720 | ) | 51,393 | ||||||||||||||
2018 |
4,269 | 27,008 | 19,245 | (5 | ) | 50,517 | ||||||||||||||
Thereafter |
23,900 | 58,620 | 68,901 | | 151,421 | |||||||||||||||
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|
|
|
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|
|
|
|||||||||||
Total minimum lease payments (receipts) |
45,051 | 184,789 | $ | 201,070 | $ | (6,256 | ) | $ | 424,654 | |||||||||||
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|
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|
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Less amount representing interest |
(14,234 | ) | (68,127 | ) | ||||||||||||||||
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|
|
|
|||||||||||||||||
Present value of minimum lease payments |
$ | 30,817 | $ | 116,662 | ||||||||||||||||
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|
Total lease expense, included in Distribution, selling and administrative costs in the Companys Consolidated Statements of Comprehensive Income (Loss), for operating leases for fiscal 2013, 2012 and 2011, was $44 million, $50 million and $54 million, respectively.
17. | RETIREMENT PLANS |
The Company has defined benefit and defined contribution retirement plans for its employees. We also contribute to various multiemployer plans under collective bargaining agreements, and provide certain health care benefits to eligible retirees and their dependents.
Company Sponsored Defined Benefit PlansThe Company maintains several qualified retirement plans and a nonqualified retirement plan (Retirement Plans) that pay benefits to certain employees at retirement, using formulas based on a participants years of service and compensation. In addition, the Company maintains a postemployment health and welfare plan for certain employees, of which components are included in the tables below under Other postretirement plans. Amounts related to defined benefit plans recognized in the consolidated financial statements are determined on an actuarial basis.
The components of net pension and other postretirement benefit costs for the last three fiscal years were as follows (in thousands):
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Components of net periodic pension cost: |
||||||||||||
Service cost |
$ | 32,773 | $ | 25,819 | $ | 22,405 | ||||||
Interest cost |
33,707 | 38,404 | 36,013 | |||||||||
Expected return on plan assets |
(42,036 | ) | (41,621 | ) | (38,295 | ) | ||||||
Amortization of prior service cost |
198 | 102 | 102 | |||||||||
Amortization of net loss |
13,288 | 14,572 | 11,541 | |||||||||
Settlements |
1,778 | 17,840 | | |||||||||
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|
|
|
|
|
|||||||
Net periodic pension costs |
$ | 39,708 | $ | 55,116 | $ | 31,766 | ||||||
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|
|
|
|
|
|||||||
Other Postretirement Plans | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Components of net periodic postretirement benefit costs: |
||||||||||||
Service cost |
$ | 153 | $ | 140 | $ | 138 | ||||||
Interest cost |
431 | 512 | 546 | |||||||||
Amortization of net loss |
112 | 34 | 44 | |||||||||
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|
|
|
|
|||||||
Net periodic other post-retirement benefit costs |
$ | 696 | $ | 686 | $ | 728 | ||||||
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|
|
Net period pension expense for fiscal years 2013, 2012, and 2011 includes $2 million, $18 million, and zero, respectively, of settlement charges resulting from lump-sum payments to former employees participating in several Company sponsored pension plans. There were no settlements in fiscal 2011.
28
Changes in plan assets and benefit obligations recorded in Other comprehensive income (loss) for pension and Other postretirement benefits for the last three fiscal years were as follows (in thousands):
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Changes recognized in other comprehensive loss: |
||||||||||||
Actuarial gain (loss) |
$ | 112,816 | $ | (54,059 | ) | $ | (41,101 | ) | ||||
Prior service cost |
| (620 | ) | | ||||||||
Amortization of prior service cost |
198 | 102 | 102 | |||||||||
Amortization of net loss |
13,288 | 14,572 | 11,541 | |||||||||
Settlements |
1,778 | 17,840 | | |||||||||
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|
|
|
|
|
|||||||
Net amount recognized |
$ | 128,080 | $ | (22,165 | ) | $ | (29,458 | ) | ||||
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|
|
|||||||
Other Postretirement Plans | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Changes recognized in other comprehensive loss: |
||||||||||||
Actuarial gain (loss) |
$ | 2,198 | $ | (661 | ) | $ | 449 | |||||
Amortization of net loss |
112 | 34 | 44 | |||||||||
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|
|
|
|
|||||||
Net amount recognized |
$ | 2,310 | $ | (627 | ) | $ | 493 | |||||
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|
|
The funded status of the defined benefit plans for the last three fiscal years was as follows (in thousands):
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Change in benefit obligation: |
||||||||||||
Benefit obligation at beginning of period |
$ | 795,989 | $ | 762,771 | $ | 676,048 | ||||||
Service cost |
32,773 | 25,819 | 22,405 | |||||||||
Interest cost |
33,707 | 38,404 | 36,013 | |||||||||
Actuarial (gain) loss |
(98,962 | ) | 82,840 | 52,900 | ||||||||
Plan amendments |
| 620 | | |||||||||
Settlements |
(13,186 | ) | (68,627 | ) | (225 | ) | ||||||
Benefit disbursements |
(16,569 | ) | (45,838 | ) | (24,370 | ) | ||||||
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|
|
|
|
|
|||||||
Benefit obligation at end of period |
733,752 | 795,989 | 762,771 | |||||||||
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|
|
|
|
|
|||||||
Change in plan assets: |
||||||||||||
Fair value of plan assets at beginning of period |
566,768 | 564,651 | 502,947 | |||||||||
Return on plan assets |
55,890 | 70,403 | 50,094 | |||||||||
Employer contribution |
48,846 | 46,179 | 36,205 | |||||||||
Settlements |
(13,186 | ) | (68,627 | ) | (225 | ) | ||||||
Benefit disbursements |
(16,569 | ) | (45,838 | ) | (24,370 | ) | ||||||
|
|
|
|
|
|
|||||||
Fair value of plan assets at end of period |
641,749 | 566,768 | 564,651 | |||||||||
|
|
|
|
|
|
|||||||
Net amount recognized |
$ | (92,003 | ) | $ | (229,221 | ) | $ | (198,120 | ) | |||
|
|
|
|
|
|
|||||||
Other Postretirement Plans | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Change in benefit obligation: |
||||||||||||
Benefit obligation at beginning of period |
$ | 11,357 | $ | 10,653 | $ | 11,065 | ||||||
Service cost |
153 | 140 | 138 | |||||||||
Interest cost |
431 | 512 | 546 | |||||||||
Employee contributions |
219 | 297 | 411 | |||||||||
Actuarial (gain) loss |
(2,198 | ) | 661 | (449 | ) | |||||||
Benefit disbursements |
(587 | ) | (906 | ) | (1,058 | ) | ||||||
|
|
|
|
|
|
|||||||
Benefit obligation at end of period |
9,375 | 11,357 | 10,653 | |||||||||
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|
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|
|
|
29
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Change in plan assets: |
||||||||||||
Fair value of plan assets at beginning of period |
| | | |||||||||
Employer contribution |
368 | 609 | 647 | |||||||||
Employee contributions |
219 | 297 | 411 | |||||||||
Benefit disbursements |
(587 | ) | (906 | ) | (1,058 | ) | ||||||
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|
|
|
|
|
|||||||
Fair value of plan assets at end of period |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net amount recognized |
$ | (9,375 | ) | $ | (11,357 | ) | $ | (10,653 | ) | |||
|
|
|
|
|
|
|||||||
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Amounts recognized in the consolidated balance sheets consist of the following: |
||||||||||||
Accrued benefit obligationcurrent |
$ | (401 | ) | $ | (401 | ) | $ | (332 | ) | |||
Accrued benefit obligationnoncurrent |
(91,602 | ) | (228,820 | ) | (197,788 | ) | ||||||
|
|
|
|
|
|
|||||||
Net amount recognized in the consolidated balance sheets |
$ | (92,003 | ) | $ | (229,221 | ) | $ | (198,120 | ) | |||
|
|
|
|
|
|
|||||||
Amounts recognized in accumulated other comprehensive income (loss) consist of the following: |
||||||||||||
Prior service cost |
$ | (832 | ) | $ | (1,030 | ) | $ | (513 | ) | |||
Net loss |
(75,765 | ) | (203,647 | ) | (181,999 | ) | ||||||
|
|
|
|
|
|
|||||||
Net gain (loss) recognized in accumulated other comprehensive loss |
$ | (76,597 | ) | $ | (204,677 | ) | $ | (182,512 | ) | |||
|
|
|
|
|
|
|||||||
Additional information: |
||||||||||||
Accumulated benefit obligation |
$ | 679,225 | $ | 733,626 | $ | 721,874 | ||||||
Unfunded accrued pension cost |
(15,406 | ) | (24,544 | ) | (15,608 | ) | ||||||
Other Postretirement Plans | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Amounts recognized in the consolidated balance sheets consist of the following: |
||||||||||||
Accrued benefit obligationcurrent |
$ | (583 | ) | $ | (628 | ) | $ | (630 | ) | |||
Accrued benefit obligationnoncurrent |
(8,792 | ) | (10,729 | ) | (10,023 | ) | ||||||
|
|
|
|
|
|
|||||||
Net amount recognized in the consolidated balance sheets |
$ | (9,375 | ) | $ | (11,357 | ) | $ | (10,653 | ) | |||
|
|
|
|
|
|
|||||||
Amounts recognized in accumulated other comprehensive income (loss) consist of the following: |
||||||||||||
Net gain (loss) |
$ | 1,247 | $ | (1,063 | ) | $ | (436 | ) | ||||
|
|
|
|
|
|
|||||||
Net gain (loss) recognized in accumulated other comprehensive income (loss) |
$ | 1,247 | $ | (1,063 | ) | $ | (436 | ) | ||||
|
|
|
|
|
|
|||||||
Additional informationunfunded accrued benefit cost |
$ | (10,622 | ) | $ | (10,294 | ) | $ | (10,217 | ) | |||
|
|
|
|
|
|
Pension Benefits |
Other Postretirement Benefits |
|||||||
Amounts expected to be amortized from accumulated other comprehensive loss in the next fiscal year: |
||||||||
Net loss |
$ | 2,148 | $ | 71 | ||||
Prior service cost |
198 | | ||||||
|
|
|
|
|||||
Net expected to be amortized |
$ | 2,346 | $ | 71 | ||||
|
|
|
|
30
Weighted average assumptions used to determine benefit obligations at period-end and net pension costs for the last three fiscal years were as follows:
Pension Benefits | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Benefit obligation: |
||||||||||||
Discount rate |
5.19 | % | 4.29 | % | 5.08 | % | ||||||
Annual compensation increase |
3.60 | % | 3.60 | % | 4.00 | % | ||||||
Net cost: |
||||||||||||
Discount rate |
4.29 | % | 5.08 | % | 5.38 | % | ||||||
Expected return on plan assets |
7.25 | % | 7.25 | % | 7.50 | % | ||||||
Annual compensation increase |
3.60 | % | 4.00 | % | 4.00 | % | ||||||
Other Postretirement Plans | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Benefit obligationdiscount rate |
4.80 | % | 3.90 | % | 4.95 | % | ||||||
Net costdiscount rate |
3.90 | % | 4.95 | % | 5.10 | % |
The measurement dates for the pension and other postretirement benefit plans were December 28, 2013, December 29, 2012 and December 31, 2011.
A health care cost trend rate is used in the calculations of postretirement medical benefit plan obligations. The assumed healthcare trend rates for the last three fiscal years were as follows:
2013 | 2012 | 2011 | ||||||||||
Immediate rate |
7.30 | % | 7.50 | % | 7.80 | % | ||||||
Ultimate trend rate |
4.50 | % | 4.50 | % | 4.50 | % | ||||||
Year the rate reaches the ultimate trend rate |
2028 | 2028 | 2028 |
A 1% change in the rate would result in a change to the postretirement medical plan obligation of less than $1 million. Retirees covered under these plans are responsible for the cost of coverage in excess of the subsidy, including all future cost increases.
For guidance in determining the discount rate, the Company determines the implied rate of return on a hypothetical portfolio of high-quality fixed-income investments, for which the timing and amount of cash outflows approximates the estimated pension plan payouts. The discount rate assumption is reviewed annually and revised as appropriate.
The expected long-term rate of return on plan assets is derived from a mathematical asset model. This model incorporates assumptions on the various asset class returns, reflecting a combination of historical performance analysis and the forward-looking views of the financial markets regarding the yield on long-term bonds and the historical returns of the major stock markets. The rate of return assumption is reviewed annually and revised as deemed appropriate.
The investment objective for our Company sponsored plans is to provide a common investment platform. Investment managersoverseen by our Retirement Administration Committeeare expected to adopt and maintain an asset allocation strategy for the plans assets designed to address the Retirement Plans liability structure. The Company has developed an asset allocation policy and rebalancing policy. We review the major asset classes, through consultation with investment consultants, at least quarterly to determine if the plan assets are performing as expected. The Companys 2013 strategy targeted a mix of 50% equity securities and 50% long-term debt securities and cash equivalents. The actual mix of investments at December 28, 2013, was 52% equity securities and 48% long-term debt securities and cash equivalents. The Company plans to manage the actual mix of investments to achieve its target mix.
The following table (in thousands) sets forth the fair value of our defined benefit plans assets by asset fair value hierarchy level. See Note 4Fair Value Measurements for a detailed description of the three-tier fair value hierarchy.
31
Asset Fair Value as of December 28, 2013 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents |
$ | 14,624 | $ | | $ | | $ | 14,624 | ||||||||
Common collective trust funds: |
||||||||||||||||
Cash equivalents |
| 3,407 | | 3,407 | ||||||||||||
Domestic equities |
| 228,638 | | 228,638 | ||||||||||||
International equities |
| 48,112 | | 48,112 | ||||||||||||
Mutual funds: |
||||||||||||||||
Domestic equities |
31,368 | | | 31,368 | ||||||||||||
International equities |
23,926 | | | 23,926 | ||||||||||||
Long-term debt securities: |
||||||||||||||||
Corporate debt securities: |
||||||||||||||||
Domestic |
| 163,831 | | 163,831 | ||||||||||||
International |
| 20,916 | | 20,916 | ||||||||||||
U.S. government securities |
| 94,891 | | 94,891 | ||||||||||||
Government agencies securities |
| 8,306 | | 8,306 | ||||||||||||
Other |
| 3,730 | | 3,730 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 69,918 | $ | 571,831 | $ | | $ | 641,749 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Asset Fair Value as of December 29, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash and cash equivalents |
$ | 2,079 | $ | | $ | | $ | 2,079 | ||||||||
Common collective trust funds: |
||||||||||||||||
Cash equivalents |
| 8,178 | | 8,178 | ||||||||||||
Domestic equities |
| 189,872 | | 189,872 | ||||||||||||
International equities |
| 28,529 | | 28,529 | ||||||||||||
Mutual funds: |
||||||||||||||||
Domestic equities |
24,060 | | | 24,060 | ||||||||||||
International equities |
31,346 | | | 31,346 | ||||||||||||
Long-term debt securities: |
||||||||||||||||
Corporate debt securities: |
||||||||||||||||
Domestic |
| 137,457 | | 137,457 | ||||||||||||
International |
| 20,341 | | 20,341 | ||||||||||||
U.S. government securities |
| 112,681 | | 112,681 | ||||||||||||
Government agencies securities |
| 9,343 | | 9,343 | ||||||||||||
Other |
| 2,882 | | 2,882 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 57,485 | $ | 509,283 | $ | | $ | 566,768 | |||||||||
|
|
|
|
|
|
|
|
A description of the valuation methodologies used for assets measured at fair value is as follows:
| Cash and cash equivalents are valued at original cost plus accrued interest. |
| Common collective trust funds are valued at the net asset value of the shares held at the end of the reporting period. This class represents investments in actively managed, common collective trust funds that invest primarily in equity securities, which may include common stocks, options and futures. Investments are valued at the net asset value per share, multiplied by the number of shares held as of the measurement date. |
| Mutual funds are valued at the closing price reported on the active market on which individual funds are traded. |
| Long-term debt securities are valued at the estimated price a dealer will pay for the individual securities. |
32
Estimated future benefit payments, under Company sponsored plans as of December 28, 2013, were as follows (in thousands):
Pension Benefits |
Postretirement Plans |
|||||||
2014 |
$ | 31,416 | $ | 583 | ||||
2015 |
33,644 | 663 | ||||||
2016 |
35,007 | 737 | ||||||
2017 |
37,454 | 773 | ||||||
2018 |
37,881 | 802 | ||||||
Subsequent five years |
215,453 | 4,037 |
Estimated required and discretionary contributions expected to be contributed by the Company to the Retirement Plans in 2014 total $49 million.
Other Company Sponsored Benefit PlansEmployees are eligible to participate in a defined contribution 401(k) plan which provides that under certain circumstances the Company may make matching contributions of up to 50% of the first 6% of a participants compensation. The Companys contributions to this plan were $25 million, $25 million and $23 million in fiscal years 2013, 2012 and 2011, respectively. The Company, at its discretion, may make additional contributions to the 401(k) Plan. In 2011, we made a $2 million discretionary contribution, primarily for the benefit of eligible non-exempt employees. The Company made no discretionary contributions under the 401(k) plan in fiscal years 2013 and 2012.
Multiemployer Pension PlansThe Company contributes to numerous multiemployer pension plans under the terms of collective bargaining agreements that cover certain of its union-represented employees. The Company does not administer these multiemployer pension plans.
The risks of participating in multiemployer pension plans differ from traditional single-employer defined benefit plans as follows:
| Assets contributed to a multiemployer pension plan by one employer may be used to provide benefits to the employees of other participating employers |
| If a participating employer stops contributing to a multiemployer pension plan, the unfunded obligations of the plan may be borne by the remaining participating employers |
| If the Company elects to stop participation in a multiemployer pension plan, it may be required to pay a withdrawal liability based upon the underfunded status of the plan |
The Companys participation in multiemployer pension plans for the year ended December 28, 2013, is outlined in the tables below. The Company considers significant plans to be those plans to which the Company contributed more than 5% of total contributions to the plan in a given plan year, or for which the Company believes its estimated withdrawal liabilityshould it decide to voluntarily withdraw from the planmay be material to the Company. For each plan that is considered individually significant to the Company, the following information is provided:
| The EIN/Plan Number column provides the Employee Identification Number (EIN) and the three-digit plan number (PN) assigned to a plan by the Internal Revenue Service. |
| The most recent Pension Protection Act (PPA) zone status available for 2013 and 2012 is for the plan years beginning in 2013 and 2012, respectively. The zone status is based on information provided to participating employers by each plan and is certified by the plans actuary. A plan in the red zone has been determined to be in critical status, based on criteria established under the Internal Revenue Code (the Code), and is generally less than 65% funded. A plan in the yellow zone has been determined to be in endangered status, based on criteria established under the Code, and is generally less than 80% but more than 65% funded. A plan in the green zone has been determined to be neither in critical status nor in endangered status, and is generally at least 80% funded. |
| The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. In addition to regular plan contributions, participating employers may be subject to a surcharge if the plan is in the red zone. |
| The Surcharge Imposed column indicates whether a surcharge has been imposed on participating employers contributing to the plan. |
33
| The Expiration Dates column indicates the expiration dates of the collective-bargaining agreements to which the plans are subject. |
PPA | FIP/RP Status | |||||||||||
Pension Fund |
EIN/ | Zone Status | Pending/ Implemented |
Surcharge Imposed |
Expiration Dates | |||||||
Plan Number | 2013 | 2012 | ||||||||||
Central States, Southeast and Southwest Areas Pension Fund |
36-6044243/001 | Red | Red | Implemented | No | 5/10/14 to 4/30/16 | ||||||
Western Conference of Teamsters Pension Trust Fund(1) |
91-6145047/001 | Green | Green | N/A | No | 3/31/2012(2) to 11/16/17 | ||||||
Minneapolis Food Distributing Industry Pension Plan(1) |
41-6047047/001 | Green | Yellow | Implemented | No | 3/31/14 | ||||||
Teamster Pension Trust Fund of Philadelphia and Vicinity(1) |
23-1511735/001 | Yellow | Yellow | Implemented | No | 2/10/18 | ||||||
Truck Drivers & Helpers Local 355 Pension Fund(1) |
52-0951433/001 | Yellow | Yellow | Pending | No | 3/15/15 | ||||||
Local 703 I.B. of T. Grocery and Food Employees Pension Plan |
36-6491473/001 | Green | Green | N/A | No | 6/30/2013(2) | ||||||
United Teamsters Trust Fund A |
13-5660513/001 | Red | Red | Implemented | No | 5/30/15 | ||||||
Warehouse Employees Local 169 and Employers Joint Pension Fund(1) |
23-6230368/001 | Red | Red | Implemented | No | 2/10/18 | ||||||
Warehouse Employees Local No. 570 Pension Fund(1) |
52-6048848/001 | Green | Green | N/A | No | 3/15/15 | ||||||
Local 705 I.B. of T. Pension Trust Fund(1) |
36-6492502/001 | Red | Red | Implemented | Yes | 12/31/2012(2) |
(1) | The plan has elected to utilize special amortization provisions provided under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010. |
(2) | The collective bargaining agreement for this pension fund is operating under an extension. |
The following table provides information about the Companys contributions to its multiemployer pension plans. For plans that are not individually significant to the Company, the total amount of USF contributions is aggregated.
Pension Fund |
USF Contribution(1)(2) (in thousands) |
USF Contributions Exceed 5% of Total Plan Contributions(3) |
||||||||||||||||||
2013 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||
Central States, Southeast and Southwest Areas Pension Fund |
$ | 3,908 | $ | 3,389 | $ | 3,059 | No | No | ||||||||||||
Western Conference of Teamsters Pension Trust Fund |
9,249 | 8,309 | 7,965 | No | No | |||||||||||||||
Minneapolis Food Distributing Industry Pension Plan |
4,565 | 4,235 | 3,985 | Yes | Yes | |||||||||||||||
Teamster Pension Trust Fund of Philadelphia and Vicinity |
2,939 | 2,808 | 2,685 | No | No | |||||||||||||||
Truck Drivers and Helpers Local 355 Pension Fund |
1,428 | 1,491 | 1,338 | Yes | Yes | |||||||||||||||
Local 703 I.B. of T. Grocery and Food Employees Pension Plan |
1,036 | 1,017 | 885 | Yes | Yes | |||||||||||||||
United Teamsters Trust Fund A |
1,816 | 1,144 | 930 | Yes | Yes | |||||||||||||||
Warehouse Employees Local 169 and Employers Joint Pension Fund |
981 | 961 | 948 | Yes | Yes | |||||||||||||||
Warehouse Employees Local No. 570 Pension Fund |
929 | 969 | 878 | Yes | Yes | |||||||||||||||
Local 705 I.B. of T. Pension Trust Fund |
2,189 | 2,077 | 1,878 | No | No | |||||||||||||||
Other Funds |
1,818 | 1,858 | 1,890 | | | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
$ | 30,858 | $ | 28,258 | $ | 26,441 | |||||||||||||||
|
|
|
|
|
|
(1) | Contributions made to these plans during the Companys fiscal year, which may not coincide with the plans fiscal years. |
(2) | Contributions do not include payments related to multiemployer pension withdrawals as described in Note 13Restructuring and Tangible Asset Impairment Charges. |
34
(3) | Indicates whether the Company was listed in the respective multiemployer plan Form 5500 for the applicable plan year as having made more than 5% of total contributions to the plan. |
If the Company elected to voluntarily withdraw from a multiemployer pension plan, it would be responsible for its proportionate share of the plans unfunded vested liability. Based on the latest information available from plan administrators, the Company estimates its aggregate withdrawal liability from the multiemployer pension plans in which it participates to be approximately $280 million as of December 28, 2013. This estimate excludes $60 million of multiemployer pension plan withdrawal liabilities recorded in the Companys Consolidated Balance Sheet related to closed facilities as of December 28, 2013, and as further described in Note 13Restructuring and Tangible Asset Impairment Charges. Actual withdrawal liabilities incurred by the Companyif it were to withdraw from one or more planscould be materially different from the estimates noted here, based on better or more timely information from plan administrators or other changes affecting the respective plans funded status.
18. | RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE LOSS |
The following table presents amounts reclassified out of Accumulated Other Comprehensive Income (Loss) by component for the last three fiscal years, (in thousands):
Accumulated Other Comprehensive Loss Components |
2013 | 2012 | 2011 | |||||||||
Defined benefit retirement plans: |
||||||||||||
Balance at beginning of period(1) |
$ | (125,642 | ) | $ | (111,482 | ) | $ | (93,853 | ) | |||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) before reclassifications |
115,014 | (55,340 | ) | (40,652 | ) | |||||||
Amortization of prior service cost(2) |
198 | 102 | 102 | |||||||||
Amortization of net loss(2) |
13,400 | 14,606 | 11,585 | |||||||||
Settlements(2) |
1,778 | 17,840 | | |||||||||
|
|
|
|
|
|
|||||||
Total before income tax(3) |
130,390 | (22,792 | ) | (28,965 | ) | |||||||
Income tax provision (benefit) |
7,427 | (8,632 | ) | (11,336 | ) | |||||||
|
|
|
|
|
|
|||||||
Current period comprehensive income (loss), net of tax |
122,963 | (14,160 | ) | (17,629 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at end of period(1) |
$ | (2,679 | ) | $ | (125,642 | ) | $ | (111,482 | ) | |||
|
|
|
|
|
|
|||||||
Interest rate swap derivative cash flow hedge(4): |
||||||||||||
Balance at beginning of period(1) |
$ | (542 | ) | $ | (18,112 | ) | $ | (35,618 | ) | |||
|
|
|
|
|
|
|||||||
Other comprehensive loss before reclassifications |
(653 | ) | (2,387 | ) | (9,715 | ) | ||||||
Amounts reclassified from other comprehensive income(5) |
2,042 | 30,683 | 38,477 | |||||||||
|
|
|
|
|
|
|||||||
Total before income tax |
1,389 | 28,296 | 28,762 | |||||||||
Income tax provision |
847 | 10,726 | 11,256 | |||||||||
|
|
|
|
|
|
|||||||
Current period comprehensive income, net of tax |
542 | 17,570 | 17,506 | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of period(1) |
$ | | $ | (542 | ) | $ | (18,112 | ) | ||||
|
|
|
|
|
|
|||||||
Accumulated Other Comprehensive Loss end of period(1) |
$ | (2,679 | ) | $ | (126,184 | ) | $ | (129,594 | ) | |||
|
|
|
|
|
|
(1) | Amounts are presented net of tax. |
(2) | Included in the computation of net periodic benefit costs. See Note17 Retirement Plans for additional information. |
(3) | Included in Distribution, selling and administration expenses in the Consolidated Statements of Comprehensive Income (Loss). |
(4) | The interest rate swap derivative expired in January 2013. |
(5) | Included in Interest Expense-Net in the Consolidated Statements of Comprehensive Income (Loss). |
35
19. | INCOME TAXES |
The Income tax (provision) benefit for the last three fiscal years consisted of the following (in thousands):
2013 | 2012 | 2011 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 64 | $ | (7 | ) | $ | 42 | |||||
State |
(283 | ) | (299 | ) | 432 | |||||||
|
|
|
|
|
|
|||||||
Current Income tax (provision) benefit |
(219 | ) | (306 | ) | 474 | |||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
(28,824 | ) | (37,635 | ) | 43,551 | |||||||
State |
(779 | ) | (4,507 | ) | (1,951 | ) | ||||||
|
|
|
|
|
|
|||||||
Deferred Income tax (provision) benefit |
(29,603 | ) | (42,142 | ) | 41,600 | |||||||
|
|
|
|
|
|
|||||||
Total Income tax (provision) benefit |
$ | (29,822 | ) | $ | (42,448 | ) | $ | 42,074 | ||||
|
|
|
|
|
|
The Companys effective income tax rates for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 were 109%, 487% and 29%, respectively. The determination of the Companys overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions. Tax law changes, increases and decreases in permanent differences between book and tax items, changes in valuation allowances, tax credits and the Companys change in income from each jurisdiction all affect the overall effective tax rate.
The reconciliation of the provisions for income taxes from continuing operations at the U.S. federal statutory income tax rate of 35% to the Companys income taxes for the last three fiscal is as follows (in thousands):
2013 | 2012 | 2011 | ||||||||||
Federal income tax benefit computed at statutory rate |
$ | 9,585 | $ | 3,054 | $ | 50,486 | ||||||
State income taxesnet of federal income tax benefit |
2,415 | 24 | 4,983 | |||||||||
Statutory rate and apportionment change |
(406 | ) | 1,000 | 74 | ||||||||
Stock-based compensation |
(5,342 | ) | | | ||||||||
Non-deductible expenses |
(2,153 | ) | (2,215 | ) | (1,964 | ) | ||||||
Return to accrual reconciliation |
335 | (29 | ) | (494 | ) | |||||||
Change in the valuation allowance for deferred tax assets |
(32,445 | ) | (43,748 | ) | (10,769 | ) | ||||||
Net operating loss expirations |
(1,653 | ) | (634 | ) | (772 | ) | ||||||
Other |
(158 | ) | 100 | 530 | ||||||||
|
|
|
|
|
|
|||||||
Total Income tax (provision) benefit |
$ | (29,822 | ) | $ | (42,448 | ) | $ | 42,074 | ||||
|
|
|
|
|
|
36
Temporary differences and carryforwards that created significant deferred tax assets and liabilities were as follows (in thousands):
December 28, 2013 |
December 29, 2012 |
|||||||
Deferred tax assets: |
||||||||
Allowance for doubtful accounts |
$ | 10,838 | $ | 10,204 | ||||
Accrued employee benefits |
28,931 | 32,211 | ||||||
Restructuring reserves |
36,649 | 39,131 | ||||||
Workers compensation, general liability and auto liabilities |
59,845 | 62,353 | ||||||
Deferred income |
1,287 | 1,506 | ||||||
Deferred financing costs |
9,362 | 11,234 | ||||||
Pension liability |
22,616 | 75,233 | ||||||
Interest rate derivative liability |
| 795 | ||||||
Net operating loss carryforwards |
215,177 | 215,443 | ||||||
Other accrued expenses |
16,447 | 15,241 | ||||||
|
|
|
|
|||||
Total gross deferred tax assets |
401,152 | 463,351 | ||||||
Less valuation allowance |
(117,227 | ) | (128,844 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets |
283,925 | 334,507 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Property and equipment |
(148,976 | ) | (139,365 | ) | ||||
Inventories |
(13,657 | ) | (20,263 | ) | ||||
Intangibles |
(515,888 | ) | (532,341 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(678,521 | ) | (691,969 | ) | ||||
|
|
|
|
|||||
Net deferred tax liability |
$ | (394,596 | ) | $ | (357,462 | ) | ||
|
|
|
|
The net deferred tax liability presented in the Consolidated Balance Sheets was as follows (in thousands):
December 28, 2013 |
December 29, 2012 |
|||||||
Current deferred tax asset |
$ | 13,557 | $ | 8,034 | ||||
Noncurrent deferred tax liability |
(408,153 | ) | (365,496 | ) | ||||
|
|
|
|
|||||
Net deferred tax liability |
$ | (394,596 | ) | $ | (357,462 | ) | ||
|
|
|
|
As of December 28, 2013, the Company had tax affected federal and state net operating loss carryforwards of $127 million and $88 million, respectively, which will expire at various dates from 2014 to 2033.
The Companys net operating loss carryforwards expire as follows (in millions):
Federal | State | Total | ||||||||||
2014-2018 |
$ | | $ | 12 | $ | 12 | ||||||
2019-2023 |
8 | 41 | 49 | |||||||||
2024-2028 |
93 | 27 | 120 | |||||||||
2029-2033 |
26 | 8 | 34 | |||||||||
|
|
|
|
|
|
|||||||
$ | 127 | $ | 88 | $ | 215 | |||||||
|
|
|
|
|
|
The Company also has a federal minimum tax credit carryforward of approximately $1 million.
The federal and state net operating loss carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. The net operating losses for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740 are presented net of these unrecognized tax benefits.
Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of the Companys domestic net operating losses and tax credit carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.
The Company believes that it is more likely than not that the benefit from certain federal and state net operating loss carryforwards will not be realized. In recognition of this risk, as of December 28, 2013, the Company has provided a valuation allowance of $36 million and $81 million for federal and state net operating loss carryforwards, respectively, based upon expected future utilization relating to these federal and state net operating loss carryforwards. If the Companys assumptions change and the Company determines it will be able to realize these net operating losses, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of December 28, 2013, will be accounted for as follows: approximately $88 million will be recognized as a reduction of income tax expense and $29 million will be recorded as an increase in equity.
37
A summary of the activity in the valuation allowance for the last three fiscal years is as follows (in thousands):
2013 | 2012 | 2011 | ||||||||||
Balance at beginning of period |
$ | 128,844 | $ | 85,685 | $ | 74,916 | ||||||
Charged to expense |
32,445 | 43,748 | 10,769 | |||||||||
Other comprehensive income |
(43,079 | ) | | | ||||||||
Other |
(983 | ) | (589 | ) | | |||||||
|
|
|
|
|
|
|||||||
Balance at end of period |
$ | 117,227 | $ | 128,844 | $ | 85,685 | ||||||
|
|
|
|
|
|
Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Companys effective tax rate in the future.
The calculation of the Companys tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in federal and state jurisdictions. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
The Company 1) records unrecognized tax benefits as liabilities in accordance with ASC 740, and 2) adjusts these liabilities when the Companys judgment changes because of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
The Company recognizes an uncertain tax position when it is more likely than not that the position will be sustained upon examinationincluding resolutions of any related appeals or litigation processesbased on the technical merits.
Reconciliation of the beginning and ending amount of unrecognized tax benefits as of fiscal years 2013, 2012, and 2011, was as follows (in thousands):
Balance at January 1, 2011 |
$ | 61,607 | ||
Gross increases due to positions taken in prior years |
70 | |||
Gross decreases due to positions taken in prior years |
(802 | ) | ||
Decreases due to lapses of statute of limitations |
(92 | ) | ||
Decreases due to changes in tax rates |
(385 | ) | ||
|
|
|||
Balance at December 31, 2011 |
60,398 | |||
Gross decreases due to positions taken in prior years |
(333 | ) | ||
Gross increases due to positions taken in current year |
71 | |||
Decreases due to lapses of statute of limitations |
(73 | ) | ||
Decreases due to changes in tax rates |
(436 | ) | ||
|
|
|||
Balance at December 29, 2012 |
59,627 | |||
Gross increases due to positions taken in prior years |
46 | |||
Gross increases due to positions taken in current year |
76 | |||
Decreases due to lapses of statute of limitations |
(207 | ) | ||
Decreases due to changes in tax rates |
(251 | ) | ||
|
|
|||
Balance at December 28, 2013 |
$ | 59,291 | ||
|
|
We do not believe it is reasonably possible that a significant increase in unrecognized tax benefits related to state exposures may be necessary in the coming year. In addition, the Company believes that it is reasonably possible that an insignificant amount of its currently remaining unrecognized tax benefits may be recognized by the end of 2014 as a result of a lapse of the statute of limitations. As of December 29, 2012, the Company did not believe that it was reasonably possible that a significant decrease in unrecognized tax benefits related to state tax exposures would have occurred during fiscal 2013. During the year ended December 28, 2013, unrecognized tax benefits related to those state exposures actually decreased by $0.2 million, as illustrated in the table above.
Included in the balance of unrecognized tax benefits at the ends of fiscal 2013, 2012 and 2011 was $53 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of those periods was $51 million, $51 million, and $52 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accountsprimarily deferred taxes.
38
The Company recognizes interest and penalties related to uncertain tax positions in Interest expensenet in the Consolidated Statements of Comprehensive Income (Loss). As of December 28, 2013, the Company had approximately $2 million of accrued interest and penalties related to uncertain tax positions.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Our 2007 through 2012 U.S. federal tax years, and various state tax years from 2000 through 2012, remain subject to income tax examinations by the relevant taxing authorities. Ahold has indemnified the Company for 2007 Transaction pre-closing consolidated federal and certain combined state income taxes, and the Company is responsible for all other taxes, and interest and penalties.
On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the tangible property regulations). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014, and may be adopted in earlier years. The Company does not expect the adoption in fiscal 2014 of the tangible property regulations to have a material impact on its consolidated financial position or results of operations.
20. | BUSINESS ACQUISITIONS |
During 2013, the Company purchased a foodservice distributor for cash of $14 million, plus contingent consideration of $2 million. During 2012, the Company purchased five foodservice distributors for cash of $106 million, plus contingent consideration of $6 million that was paid in 2013. The Company also received a $2 million purchase price adjustment in 2013 related to two 2012 acquisitions. The acquisitions, made in order to expand the Companys presence in certain geographic areas, were purchases which have been or are being integrated into our foodservice distribution network. The following table summarizes the initial purchase price allocations for the business acquisitions as follows (in thousands):
2013 | 2012 | |||||||
Accounts receivable |
$ | 3,894 | $ | 24,261 | ||||
Inventories |
3,638 | 26,076 | ||||||
Property and equipment |
125 | 21,107 | ||||||
Goodwill |
| 17,389 | ||||||
Other intangible assets |
8,348 | 44,755 | ||||||
Accounts payable |
(2,120 | ) | (17,584 | ) | ||||
Accrued expenses and other current liabilities |
(130 | ) | (8,930 | ) | ||||
Other long-term liabilities |
| (3,419 | ) | |||||
|
|
|
|
|||||
Cash used in acquisitions |
$ | 13,755 | $ | 103,655 | ||||
|
|
|
|
The 2013 and 2012 acquisitions, individually and in the aggregate, did not materially affect the Companys results of operations or financial position. Actual net sales and operating earnings of the businesses acquired in all periods were less than 2% of the Companys consolidated results and, therefore, pro forma information has not been provided.
Certain acquisitions involve contingent consideration in the event certain operating results are achieved over periods up to two years subsequent to the acquisition. As of December 28, 2013 and December 29, 2012, the Company accrued $2 million and $6 million, respectively, of contingent consideration related to acquisitions.
21. | COMMITMENTS AND CONTINGENCIES |
Purchase CommitmentsThe Company enters into purchase orders with vendors and other parties in the ordinary course of business. Additionally, the Company has a limited number of purchase contracts with certain vendors that require the Company to buy a predetermined volume of products, which are not recorded in the Consolidated Balance Sheets. As of December 28, 2013, the Companys purchase orders and purchase contracts with vendors, all to be delivered in 2014, were $590 million.
To minimize the Companys fuel cost risk, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As of December 28, 2013, the Company had diesel fuel forward purchase commitments totaling $37 million through December 2014. The Company also enters into forward purchase agreements for procuring electricity. As of December 28, 2013, the Company had electricity forward purchase commitments totaling $4 million through December 2016.
39
Indemnification by Ahold for Certain MattersIn connection with the sale of US Foods to USF Holding Corp., a corporation formed and controlled by investment funds associated with or managed by CD&R and KKR, by Ahold in 2007 (the 2007 Transaction), Ahold committed to indemnify and hold harmless the Company from and against damages (which includes losses, liabilities, obligations, and claims of any kind) and litigation costs (including attorneys fees and expenses) suffered, incurred or paid after the 2007 Transaction closing date related to certain matters. The Company was responsible for the first $40 million of damages and litigation expenses incurred after the closing of the 2007 Transaction. Aholds indemnification obligations apply to any such damages and litigation expenses as may be incurred after the 2007 Transaction closing date in excess of $40 million. As of the end of its 2009 fiscal year, the Company had incurred $40 million in costs related to these matters; therefore, any future litigation expenses related to the aforementioned matters are subject to the rights of indemnification from Ahold. As of December 28, 2013, no material amounts are due to the Company from Ahold under the indemnification agreement.
California 2010 Labor Code ClaimIn April 2010, a putative class action complaint was filed against the Company in California. The suit alleged the Company failed to meet its obligations under the California Labor Code related to providing meals and breaks for certain drivers. The case has been removed to federal court. In December 2011, the parties reached a tentative settlement of all claims, subject to court approval. The Company recorded a liability of $3 million to reflect the settlement. In September 2012, the court entered final approval of the settlement, which the Company paid into the courts escrow account in October 2012. Distribution of the settlement funds to all of the identified class members in accordance with the court-approved settlement was completed during 2013.
Eagan Multiemployer Pension Withdrawal LiabilityIn 2008, the Company completed the closure of its Eagan, Minnesota and Fairfield, Ohio divisions and recorded a liability of approximately $40 million for the related multiemployer pension withdrawal liability. In 2010, the Company received formal notice and demand for payment of a $40 million withdrawal liability, which is payable in monthly installments through November 2023. During the 2011 fiscal third quarter, the Company was assessed an additional $17 million multiemployer pension withdrawal liability for the Eagan facility. The parties agreed to arbitrate this matter, and discovery began during the fiscal third quarter of 2012. The Company believes it has meritorious defenses against the assessment for the additional pension withdrawal liability and intends to vigorously defend itself against the claim. The Company does not believe, at this time, that a loss from such obligation is probable and, accordingly, no liability has been recorded. However, it is reasonably possible the Company may ultimately be required to pay an amount up to $17 million.
Pricing LitigationIn October 2006, two customers filed a putative class action against the Company and Ahold. In December 2006, an amended complaint was filed naming a third plaintiff. The complaint focuses on certain pricing practices of the Company in contracts with some of its customers. In February 2007, the Company filed a motion to dismiss the complaint. In August 2007, two additional customers filed putative class action complaints. These two additional lawsuits are based upon the pricing practices at issue in the October 2006 case. In November 2007, the Judicial Panel on Multidistrict Litigation ordered the transfer of the two additional lawsuits to the jurisdiction in which the first lawsuit was filedthe U.S. District Court for the District of Connecticutfor consolidated or coordinated proceedings. In June 2008, the Plaintiffs filed their consolidated and amended class action complaint. The Company moved to dismiss this complaint. In August 2009, the Plaintiffs filed a motion for class certification. In December 2009, the court issued a ruling on the Companys motion to dismiss. It dismissed Ahold from the case and also dismissed certain of the plaintiffs claims. On November 30, 2011, the court issued its ruling granting the plaintiffs motion to certify the class. On April 4, 2012, the U.S. Court of Appeals for the Second Circuit granted the Companys request to appeal the district courts decision which granted class certification. Oral argument was held and the court upheld the grant of class certification. The Company has filed a writ of certiorari to the U.S. Supreme Court. In the meantime, the case continues through the discovery stage. The Company believes it has meritorious defenses to the remaining claims and continues to vigorously defend against the lawsuit. The Company does not believe at this time that an unfavorable outcome from this matter is probable and, accordingly, no liability has been recorded. Due to the inherent uncertainty of legal proceedings, it is reasonably possible the Company could suffer a loss as a result of this matter. An estimate of a possible loss or range of loss from this matter cannot be made. However, any potential liability is subject to the Companys rights of indemnification from Ahold to the extent and as described above.
Other Legal ProceedingsIn addition to the matters described above, the Company and its subsidiaries are parties to a number of other legal proceedings arising out of their business operations. The legal proceedingswhether pending, threatened or unassertedif decided adversely to or settled by the Company, may result in liabilities material to the Companys financial condition or results of operations. The Company has recognized provisions with respect to its proceedings, where appropriate. These are reflected in the Companys Consolidated Balance Sheets. It is possible that the Company could be required to make expenditures, in excess of established provisions, in amounts that cannot reasonably be estimated. However, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows. The Companys policy is to expense attorney fees as incurred, except for those fees that are reimbursable under the above noted Indemnification by Ahold.
40
22. | USF HOLDING CORP. CONDENSED FINANCIAL INFORMATION |
These condensed parent company financial statements should be read in conjunction with the Consolidated Financial Statements. The net assets of US Foods, our wholly owned subsidiary are restricted for the use and benefit of US Foods and its subsidiaries and -with the exception of income taxes payments, share-based compensation payments and minor administrative costsare restricted from being transferred to USF in the form of loans, advances or dividends. The Company has no cash accounts as all cash transactions are recorded at US Foods. Accordingly, the condensed statement of cash flows has been omitted. See Note 15Share-Based Compensation, Common Stock Issuances and Temporary Equity for a discussion of the Companys shareholders equity related transactions. In the condensed parent company financial statements below, the investment in subsidiary (US Foods, Inc. and subsidiaries) is accounted for using the equity method.
Condensed Parent Company Balance Sheets
As of December 28, 2013 and December 29, 2012
(in thousands)
2013 | 2012 | |||||||
Assets |
||||||||
Investment in subsidiary |
$ | 1,881,687 | $ | 1,814,556 | ||||
|
|
|
|
|||||
Total Assets |
$ | 1,881,687 | $ | 1,814,556 | ||||
|
|
|
|
|||||
Liabilities and Shareholders Equity |
||||||||
Commitments and contingencies |
||||||||
Temporary equity |
$ | 37,923 | $ | 38,190 | ||||
|
|
|
|
|||||
Shareholders Equity |
||||||||
Common stock, $.01 par value600,000 shares authorized |
4,500 | 4,500 | ||||||
Additional paid-in capital |
2,282,801 | 2,281,702 | ||||||
Accumulated deficit |
(440,858 | ) | (383,652 | ) | ||||
Accumulated other comprehensive loss |
(2,679 | ) | (126,184 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
1,843,764 | 1,776,366 | ||||||
|
|
|
|
|||||
Total Liabilities and Shareholders Equity |
$ | 1,881,687 | $ | 1,814,556 | ||||
|
|
|
|
Condensed Parent Company Statements of Comprehensive Income (Loss)
For the Fiscal Years Ended December 28, 2013, December 29, 2012 and December 31, 2011
(in thousands)
2013 | 2012 | 2011 | ||||||||||
Equity in net loss of subsidiary |
$ | (57,206 | ) | $ | (51,173 | ) | $ | (102,171 | ) | |||
|
|
|
|
|
|
|||||||
Net loss |
(57,206 | ) | (51,173 | ) | (102,171 | ) | ||||||
|
|
|
|
|
|
|||||||
Other comprehensive income (loss) |
||||||||||||
Changes in retirement benefit obligations, net of income tax |
122,963 | (14,160 | ) | (17,629 | ) | |||||||
Changes in interest rate swap derivative, net of income tax |
542 | 17,570 | 17,506 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
$ | 66,299 | $ | (47,763 | ) | $ | (102,294 | ) | ||||
|
|
|
|
|
|
41
23. | QUARTERLY FINANCIAL INFORMATION (Unaudited) |
Financial information for each quarter in the fiscal years ended December 28, 2013 and December 29, 2012, is set forth below (in thousands):
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Fiscal year ended December 28, 2013 |
||||||||||||||||||||
Net sales |
$ | 5,404,922 | $ | 5,658,748 | $ | 5,686,712 | $ | 5,546,796 | $ | 22,297,178 | ||||||||||
Cost of goods sold(1) |
4,495,783 | 4,686,933 | 4,716,253 | 4,575,070 | 18,474,039 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
909,139 | 971,815 | 970,459 | 971,726 | 3,823,139 | |||||||||||||||
Operating expenses(2) |
885,762 | 871,623 | 881,600 | 863,655 | 3,502,640 | |||||||||||||||
Interest expensenet |
81,826 | 78,522 | 72,778 | 72,961 | 306,087 | |||||||||||||||
Loss on extinguishment of debt(3) |
23,967 | 17,829 | | | 41,796 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income taxes |
(82,416 | ) | 3,841 | 16,081 | 35,110 | (27,384 | ) | |||||||||||||
Income tax (provision) benefit |
(12,292 | ) | 12,167 | 6,358 | (36,055 | ) | (29,822 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
$ | (94,708 | ) | $ | 16,008 | $ | 22,439 | $ | (945 | ) | $ | (57,206 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Fiscal year ended December 29, 2012 |
||||||||||||||||||||
Net sales |
$ | 5,259,726 | $ | 5,462,991 | $ | 5,507,531 | $ | 5,434,673 | $ | 21,664,921 | ||||||||||
Cost of goods sold(1) |
4,383,285 | 4,519,594 | 4,582,084 | 4,486,986 | 17,971,949 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
876,441 | 943,397 | 925,447 | 947,687 | 3,692,972 | |||||||||||||||
Operating expenses(2) |
810,148 | 850,260 | 847,631 | 850,423 | 3,358,462 | |||||||||||||||
Interest expensenet |
71,594 | 74,843 | 80,859 | 84,516 | 311,812 | |||||||||||||||
Loss on extinguishment of debt(3) |
| 9,600 | 796 | 21,027 | 31,423 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income taxes |
(5,301 | ) | 8,694 | (3,839 | ) | (8,279 | ) | (8,725 | ) | |||||||||||
Income tax benefit (provision) |
1,812 | (2,992 | ) | 1,284 | (42,552 | ) | (42,448 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
$ | (3,489 | ) | $ | 5,702 | $ | (2,555 | ) | $ | (50,831 | ) | $ | (51,173 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
(1) | Cost of goods sold is net of related vendor considerations, and excludes depreciation and amortization expense. |
(2) | Operating expenses include depreciation and amortization expense, restructuring and tangible asset impairment charges. |
(3) | Loss on extinguishment of debt includes fees paid to debt holders, third party costs, early redemption premiums and the write off of old debt facility unamortized debt issuance costs. See Note 11Debt for a further description of the Companys debt refinancing transactions. |
24. | BUSINESS SEGMENT INFORMATION |
The Company operates in one business segment based on how the Chief Operating Decision Maker (CODM), the Chief Executive Officer, views the business for purposes of evaluating performance and making operating decisions. The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States.
We use a centralized management structure, and Company strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. We use shared resources for sales, procurement, and general and administrative costs across each of our distribution centers. Our distribution centers form a single network to reach our 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).
42
The measure used by the CODM to assess operating performance is Adjusted EBITDA. Adjusted EBITDA is defined as Net income (loss), plus Interest expense, net, Income tax (provision) benefit, and depreciation and amortization adjusted for 1) Sponsor fees; 2) Restructuring and tangible and Intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses or charges as permitted under the Companys debt agreements; and 5) the non-cash impact of LIFO adjustments. Costs to optimize and transform our business are noted as business transformation costs in the table below and are added to EBITDA in arriving at Adjusted EBITDA as permitted under the Companys debt agreements. Business transformation costs include costs related to functionalization and significant process and systems redesign in the Companys replenishment, finance, category management and human resources functions; company rebranding; cash & carry retail store strategy; and implementation and process and system redesign related to the Companys sales model.
The aforementioned items are specified as items to add to EBITDA in arriving at Adjusted EBITDA per the Companys debt agreements and, accordingly, our management includes such adjustments when assessing the operating performance of the business.
The following is reconciliation for the last three fiscal years of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net loss:
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Adjusted EBITDA |
$ | 845,393 | $ | 840,750 | $ | 812,118 | ||||||
Adjustments: |
||||||||||||
Sponsor fees(1) |
(10,302 | ) | (10,242 | ) | (10,206 | ) | ||||||
Restructuring and tangible asset impairment(2) |
(8,386 | ) | (8,923 | ) | (71,892 | ) | ||||||
Share-based compensation expense(3) |
(8,406 | ) | (4,312 | ) | (14,677 | ) | ||||||
LIFO reserve change(4) |
(11,925 | ) | (13,213 | ) | (59,300 | ) | ||||||
Legal(5) |
| | (3,000 | ) | ||||||||
Loss on extinguishment of debt(6) |
(41,796 | ) | (31,423 | ) | (76,011 | ) | ||||||
Pension settlement(7) |
(1,778 | ) | (17,840 | ) | | |||||||
Business transformation costs(8) |
(60,800 | ) | (74,900 | ) | (44,700 | ) | ||||||
Other(9) |
(35,109 | ) | (20,918 | ) | (26,231 | ) | ||||||
|
|
|
|
|
|
|||||||
EBITDA |
666,891 | 658,979 | 506,101 | |||||||||
Interest expense, net |
(306,087 | ) | (311,812 | ) | (307,614 | ) | ||||||
Income tax (provision) benefit |
(29,822 | ) | (42,448 | ) | 42,074 | |||||||
Depreciation and amortization expense |
(388,188 | ) | (355,892 | ) | (342,732 | ) | ||||||
|
|
|
|
|
|
|||||||
Net loss |
$ | (57,206 | ) | $ | (51,173 | ) | $ | (102,171 | ) | |||
|
|
|
|
|
|
(1) | Consists of management fees paid to the Sponsors. |
(2) | Consists of facility closing, severance and related costs, and tangible asset impairment charges. |
(3) | Represents costs recorded for stock option awards and restricted stock and restricted stock units vested. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes settlement costs accrued in 2011 for a class action matter. |
(6) | Includes fees paid to debt holders, third party costs, early redemption premiums and the write off of old debt facility unamortized debt issuance costs. See Note 11Debt for a further description of Companys debt refinancing transactions. |
(7) | Consists of charges resulting from lump-sum payment settlements to retirees and former employees participating in several Company sponsored pension plans. |
(8) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(9) | Other includes gains, losses or charges, including $3.5 million of 2013 direct and incremental costs related to the Merger Agreement, as specified under the Companys debt agreements. |
43
The following table presents the sales mix for the Companys principal product categories for the last three fiscal years:
2013 | 2012 | 2011 | ||||||||||
(in thousands) | ||||||||||||
Meats and seafood |
$ | 7,684,396 | $ | 7,445,636 | $ | 6,851,675 | ||||||
Dry grocery products |
4,275,669 | 4,214,890 | 3,939,459 | |||||||||
Refrigerated and frozen grocery products |
3,446,308 | 3,373,764 | 3,170,696 | |||||||||
Dairy |
2,332,346 | 2,221,986 | 2,135,695 | |||||||||
Equipment, disposables and supplies |
2,133,899 | 2,075,323 | 1,952,317 | |||||||||
Beverage products |
1,309,303 | 1,322,961 | 1,267,969 | |||||||||
Produce |
1,115,257 | 1,010,361 | 1,027,058 | |||||||||
|
|
|
|
|
|
|||||||
$ | 22,297,178 | $ | 21,664,921 | $ | 20,344,869 | |||||||
|
|
|
|
|
|
No single customer accounted for more than 4% of the Companys consolidated net sales for 2013, 2012 or 2011. However, customers purchasing through one group purchasing organization accounted for approximately 12%, 11% and 11% of consolidated Net sales in 2013, 2012 or 2011, respectively.
44
Exhibit 99.2
USF Holding Corp.
Consolidated Balance Sheets as of June 28, 2014 and December 28, 2013 and the related Consolidated Statements of Comprehensive Income (Loss) for the 26-Weeks ended June 28, 2014 and June 29, 2013, and Cash Flows for the 26-weeks ended June 28, 2014 and June 29, 2013 (Unaudited)
USF Holding Corp.
TABLE OF CONTENTS
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CONSOLIDATED FINANCIAL STATEMENTS (Unaudited): |
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Consolidated Balance Sheets as of June 28, 2014 and December 28, 2013 |
2 | |||
Consolidated Statements of Comprehensive Income (Loss) for the 26-weeks ended June 28, 2014 and June 29, 2013 |
3 | |||
Consolidated Statements of Cash Flows for the 26-weeks ended June 28, 2014 and June 29, 2013 |
4 | |||
Notes to Unaudited Consolidated Financial Statements |
5 |
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USF HOLDING CORP.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except for share data)
June 28, 2014 |
December 28, 2013 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 317,366 | $ | 179,744 | ||||
Accounts receivable, less allowances of $25,058 and $25,151 |
1,303,702 | 1,225,719 | ||||||
Vendor receivables, less allowances of $3,278 and $2,661 |
128,996 | 97,361 | ||||||
Inventories net |
1,079,738 | 1,161,558 | ||||||
Legal settlement indemnification receivable |
297,000 | | ||||||
Prepaid expenses |
76,268 | 75,604 | ||||||
Deferred taxes |
12,327 | 13,557 | ||||||
Assets held for sale |
15,682 | 14,554 | ||||||
Other current assets |
17,099 | 6,644 | ||||||
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Total current assets |
3,248,178 | 2,774,741 | ||||||
PROPERTY AND EQUIPMENT Net |
1,764,234 | 1,748,495 | ||||||
GOODWILL |
3,835,477 | 3,835,477 | ||||||
OTHER INTANGIBLES Net |
678,673 | 753,840 | ||||||
DEFERRED FINANCING COSTS |
30,476 | 39,282 | ||||||
OTHER ASSETS |
36,904 | 33,742 | ||||||
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TOTAL ASSETS |
$ | 9,593,942 | $ | 9,185,577 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Bank checks outstanding |
$ | 188,899 | $ | 185,369 | ||||
Accounts payable |
1,343,002 | 1,181,452 | ||||||
Accrued expenses and other current liabilities |
405,896 | 423,635 | ||||||
Accrued legal settlement |
297,000 | | ||||||
Current portion of long-term debt |
45,499 | 35,225 | ||||||
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Total current liabilities |
2,280,296 | 1,825,681 | ||||||
LONG-TERM DEBT |
4,770,611 | 4,735,248 | ||||||
DEFERRED TAX LIABILITIES |
425,031 | 408,153 | ||||||
OTHER LONG-TERM LIABILITIES |
312,367 | 334,808 | ||||||
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Total liabilities |
7,788,305 | 7,303,890 | ||||||
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COMMITMENTS AND CONTINGENCIES (See Note 15) |
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TEMPORARY EQUITY |
40,745 | 37,923 | ||||||
SHAREHOLDERS EQUITY: |
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Common stock, $.01 par value600,000 shares authorized |
4,500 | 4,500 | ||||||
Additional paid-in capital |
2,285,777 | 2,282,801 | ||||||
Accumulated deficit |
(524,747 | ) | (440,858 | ) | ||||
Accumulated other comprehensive loss |
(638 | ) | (2,679 | ) | ||||
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Total shareholders equity |
1,764,892 | 1,843,764 | ||||||
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 9,593,942 | $ | 9,185,577 | ||||
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See Notes to Unaudited Consolidated Financial Statements.
2
USF HOLDING CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in thousands)
26-Weeks Ended | ||||||||
June 28, 2014 |
June 29, 2013 |
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NET SALES |
$ | 11,354,579 | $ | 11,063,670 | ||||
COST OF GOODS SOLD |
9,495,645 | 9,182,716 | ||||||
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Gross profit |
1,858,934 | 1,880,954 | ||||||
OPERATING EXPENSES: |
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Distribution, selling and administrative costs |
1,777,598 | 1,753,817 | ||||||
Restructuring and tangible asset impairment charges |
(102 | ) | 3,568 | |||||
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Total operating expenses |
1,777,496 | 1,757,385 | ||||||
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OPERATING INCOME |
81,438 | 123,569 | ||||||
INTEREST EXPENSE Net |
146,804 | 160,348 | ||||||
LOSS ON EXTINGUISHMENT OF DEBT |
| 41,796 | ||||||
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Income (loss) before income taxes |
(65,366 | ) | (78,575 | ) | ||||
INCOME TAX PROVISION (BENEFIT) |
18,523 | 125 | ||||||
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NET INCOME (LOSS) |
(83,889 | ) | (78,700 | ) | ||||
OTHER COMPREHENSIVE INCOME (LOSS) Net of tax: |
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Changes in retirement benefit obligations, net of income tax |
2,041 | 7,517 | ||||||
Changes in interest rate swap derivative, net of income tax |
| 542 | ||||||
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COMPREHENSIVE INCOME (LOSS) |
$ | (81,848 | ) | $ | (70,641 | ) | ||
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See Notes to Unaudited Consolidated Financial Statements.
3
USF HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
26-Weeks Ended | ||||||||
June 28, | June 29, | |||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ | (83,889 | ) | $ | (78,700 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
205,049 | 191,012 | ||||||
Gain on disposal of property and equipment |
(2,675 | ) | (1,636 | ) | ||||
Loss on extinguishment of debt |
| 41,796 | ||||||
Tangible asset impairment charges |
1,580 | 1,860 | ||||||
Amortization of deferred financing costs |
9,057 | 8,990 | ||||||
Amortization of Senior Notes original issue premium |
(1,664 | ) | (1,665 | ) | ||||
Deferred tax provision (benefit) |
18,112 | (131 | ) | |||||
Share-based compensation expense |
6,198 | 5,897 | ||||||
Provision for doubtful accounts |
9,173 | 11,167 | ||||||
Changes in operating assets and liabilities: |
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Increase in receivables |
(117,988 | ) | (81,599 | ) | ||||
Decrease in inventories |
71,279 | 27,081 | ||||||
Increase in prepaid expenses and other assets |
(4,455 | ) | (5,037 | ) | ||||
Increase (decrease) in accounts payable and bank checks outstanding |
174,626 | (18,181 | ) | |||||
(Decrease) increase in accrued expenses and other liabilities |
(37,018 | ) | 8,640 | |||||
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Net cash provided by (used in) operating activities |
247,385 | 109,494 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from sales of property and equipment |
7,340 | 11,466 | ||||||
Purchases of property and equipment |
(74,900 | ) | (97,198 | ) | ||||
Insurance recoveries related to property and equipment |
2,000 | | ||||||
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Net cash provided by (used in) investing activities |
(65,560 | ) | (85,732 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from debt refinancing |
| 854,485 | ||||||
Proceeds from debt borrowings |
770,450 | 888,088 | ||||||
Payment for debt financing costs and fees |
| (29,135 | ) | |||||
Principal payments on debt and capital leases |
(814,252 | ) | (1,400,063 | ) | ||||
Repurchase of senior subordinated notes |
| (375,144 | ) | |||||
Proceeds from common stock sales |
197 | 475 | ||||||
Common stock repurchased |
(598 | ) | (2,030 | ) | ||||
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Net cash provided by (used in) financing activities |
(44,203 | ) | (63,324 | ) | ||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
137,622 | (39,562 | ) | |||||
CASH AND CASH EQUIVALENTS Beginning of period |
179,744 | 242,457 | ||||||
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CASH AND CASH EQUIVALENTS End of period |
$ | 317,366 | $ | 202,895 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : |
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Cash paid (received) during the period for: |
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Interest (net of amounts capitalized) |
$ | 141,108 | $ | 167,342 | ||||
Income taxes paid (refunded) net |
(37 | ) | 243 | |||||
Property and equipment purchases included in accounts payable |
10,173 | 11,975 | ||||||
Capital lease additions |
90,204 | 51,945 | ||||||
Receivable for insurance recoveries related to property and equipment |
893 | |
See Notes to Unaudited Consolidated Financial Statements.
4
USF HOLDING, CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | OVERVIEW AND BASIS OF PRESENTATION |
USF Holding Corp., a Delaware corporation, and its consolidated subsidiaries is referred to here as we, our, us, the Company, or USF. USF conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (US Foods). All of the indebtedness, as further described in Note 9Debtis an obligation of US Foods and its subsidiaries. US Foods Senior Notes due in 2019 as described below in Public Filer Status are traded over the counter and are not listed on any stock exchange.
OwnershipOn July 3, 2007 (the Closing Date), USF, through a wholly owned subsidiary, and through a series of transactions, acquired all of our predecessor companys common stock and certain related assets from Koninklijke Ahold N.V. (Ahold) for approximately $7.2 billion. USF is a corporation formed and controlled by investment funds associated with or designated by Clayton, Dubilier & Rice, Inc. (CD&R), and Kohlberg Kravis Roberts & Co. (KKR), (collectively the Sponsors).
Proposed Acquisition by Sysco On December 8, 2013, USF., entered into an Agreement and Plan of Merger (the Merger Agreement) with Sysco Corporation, a Delaware corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, through which Sysco will acquire USF (the Acquisition) on the terms and subject to the conditions set forth in the Merger Agreement. The aggregate purchase price will consist of $500 million in cash and approximately $3 billion in Syscos common stock, subject to possible downward adjustment pursuant to the Merger Agreement. It is anticipated the transaction will close either late in the third quarter or during the fourth quarter of this calendar year. The closing is subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). On February 18, 2014, US Foods and Sysco received a request for additional information and documentary materials from the Federal Trade Commission (the FTC) in connection with the Acquisition and the companies continue to work closely and cooperatively with the FTC as it conducts its review of the proposed merger. If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, or if the Acquisition does not close by a date as specified in the Merger Agreement, in certain circumstances Sysco will be required to pay USF, a termination fee of $300 million.
Business DescriptionThe Company through its subsidiary, US Foods, markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. These include independently owned single and multi-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations.
Basis of PresentationThe Company operates on a 52-53 week fiscal year with all periods ending on a Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter. The accompanying unaudited consolidated financial statements include the accounts of USF and its 100% owned subsidiary, US Foods, and its subsidiaries. All intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared by the Company 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 (SEC). Accordingly, they do not include all the information and disclosures required by GAAP for annual financial statements. These unaudited consolidated financial statements and related notes should be read in conjunction with the Companys audited consolidated financial statements for the fiscal year ended December 28, 2013. Certain footnote disclosures included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements. The consolidated financial statements reflect all adjustments which are of a normal and recurring nature that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for the full year.
Public Filer StatusDuring the second quarter 2013, our wholly owned subsidiary, US Foods completed the registration of $1,350 million aggregate principal amount of 8.5% Senior Notes due 2019 (Senior Notes) in exchange offers for a like principal amount of its outstanding 8.5% Senior Notes due 2019 and became subject to rules and regulations of the SEC, including periodic and current reporting requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. The Company did not receive any proceeds from the registration of these exchange offers. USF is not a public filer and its common stock is not publicly traded.
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Companys significant accounting policies are presented in Note 2 to the Companys consolidated financial statements for the fiscal year ended December 28, 2013. The following selected accounting policies should be read in conjunction with those discussed in those consolidated financial statements.
Use of Estimates The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Companys consolidated financial statements and notes thereto. Actual results could differ from these estimates. The most critical estimates used in the preparation of the Companys consolidated financial statements pertain to the valuation of goodwill and other intangible assets, property and equipment, vendor consideration, self-insurance programs, and income taxes.
Inventories The Companys inventoriesconsisting mainly of food and other foodservice-related productsare considered finished goods. Inventory costs include the purchase price of the product and freight charges to deliver it to the Companys warehouses, 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 method links current costs to original costs in the base year when the Company adopted LIFO. At June 28, 2014, and December 28, 2013, the LIFO balance sheet reserves were $197 million and $148 million, respectively. As a result of changes in LIFO reserves, Cost of goods sold increased $49 million and $8 million in the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
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 leases or the estimated useful lives of the assets. At June 28, 2014 and December 28, 2013, Property and equipment-net included accumulated depreciation of $1,202 million and $1,093 million, respectively. Depreciation expense was $130 million and $117 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, the Company compares the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows included in a long-lived asset recoverability test do not exceed the carrying value, the carrying value is compared to the fair value of such asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess.
The Company also assesses the recoverability of its closed facilities actively marketed for sale. If a facilitys carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the excess. Assets held for sale are not depreciated.
Impairments are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as in a reduction of the assets carrying value in the Consolidated Balance Sheets. See Note 10Restructuring and Tangible Asset Impairment Charges for a discussion of our long-lived asset impairment charges.
Goodwill and Other Intangible Assets Goodwill and Other intangible assets include the cost of the acquired business in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess 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, our policy is to assess for impairment at the beginning of each years third quarter. For other intangible assets with finite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Business Acquisitions The Company accounts for business acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Companys consolidated financial statements from the date of acquisition. Acquisitionsindividually and in the aggregatedid not materially affect the Companys results of operations or financial position for any period presented. The fourth quarter 2013 acquisition has been integrated into the Companys foodservice distribution network. There were no business acquisitions in 2014.
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Certain prior year acquisitions involve contingent consideration in the event certain operating results are achieved over periods of up to two years. As of June 28, 2014 and December 28, 2013, the Company has accrued $2 million of contingent consideration relating to acquisitions.
Variable Interest Entity In April 2014, the Company entered into a sublease and subsequent purchase of a distribution facility. Under the agreement, the facility will be purchased in May 2018, commensurate with the sublease termination date. The distribution facility is the only asset owned by an investment trust, the landlord to the original lease. The Company has determined the trust is a variable interest entity (VIE) for which it is the primary beneficiary.
However, after exhaustive efforts, the Company was unable to obtain the information necessary to include the accounts and activities of the trust in its consolidated financial statements. As such, the Company has opted to invoke the scope exception available under VIE accounting guidance and will not consolidate the VIE in its financial statements. Since the Company will not be able to consolidate the trust under VIE guidance, applicable lease guidance has been applied to the transaction itself. The Company has concluded that the sublease and purchase agreements, together, qualify for capital lease treatment. Accordingly, the Company recorded a capital asset and related lease and purchase obligation totaling $27 million. This amount approximates the net present value of the purchase price and sublease commitment. In addition, the Company will depreciate the asset balance over its estimated useful life and reduce the capital lease and purchase obligation as payments are made.
Share-Based CompensationCertain employees participate in the 2007 Stock Incentive Plan for Key Employees of USF Holding Corp. and its Affiliates, as amended (Stock Incentive Plan), which allows purchases of shares of USF common stock, grants of restricted stock and restricted stock units of USF, and grants of options exercisable in USF common stock. The Company measures compensation expense for stock-based option awards at fair value at the date of grant, and recognizes compensation expense over the service period for stock-based awards expected to vest. USF contributes shares to its subsidiary, US Foods for employee stock purchases and upon exercise of options or grants of restricted stock and restricted stock units.
Temporary EquityTemporary equity is a security with redemption features that are outside the control of the issuer, is not classified as an asset or liability in conformity with GAAP, and is not mandatorily redeemable. In contrast to common stock owned by the Sponsors, common stock owned by management and certain employees give the holder, via the management stockholders agreement, the right to require the Company to repurchase all of his or her restricted common stock in the event of a termination of employment due to death or disability. Since this redemption feature, or put option, is outside of the control of the Company, the value of the shares is shown outside of permanent equity as temporary equity. In addition to the value of the common stock held, stock-based awards with similar underlying common stock are also recorded in temporary equity. Temporary equity includes values for common stock issuances to management and certain employees, vested restricted shares, vested restricted stock units and vested stock option awards. Until the redemption feature becomes probable, the amount shown in temporary equity is the intrinsic value of the applicable common stock at issuance and the intrinsic value of stock-based awards at grant date. Because the Company grants stock option awards at fair value, the intrinsic value related to vested stock option awards is zero. Once redemption is deemed probable, if the intrinsic value is different than the current redemption value, the amount shown in temporary equity is adjusted to the current redemption value through a reclassification from/to additional paid-in capital. As of the balance sheet dates presented, there is no value from vested stock option awards recorded in temporary equity since the intrinsic value at the date of grant was zero and redemption is not probable.
Management LoansUnder the management stockholders agreement, employees can finance common stock purchases with full recourse notes due to the Company. The balance of these notes is recorded as a reduction to temporary equity. Generally, the notes are short-term in nature and are paid back in cash; however, certain employees have repaid balances due on their notes by selling back common stock to the Company.
Revenue Recognition The Company recognizes revenue from the sale of product when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company grants certain customers sales incentives such as rebates or discountsand treats these as a reduction of sales at the time the sale is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales.
Cost of Goods Sold Cost of goods sold includes amounts paid to manufacturers for products soldnet of vendor considerationplus the cost of transportation necessary to bring the products to the Companys distribution facilities. Cost of goods sold excludes depreciation and amortization as the Company acquires its inventories generally in a complete and salable state and excludes warehousing related costs which are presented in distribution, selling and administrative costs. The amounts presented for Cost of goods sold may not be comparable to similar measures disclosed by other companies because not all companies calculate Cost of goods sold in the same manner. See Inventories section above for discussion of LIFO impact on Cost of goods sold.
Income Taxes The Company accounts for income taxes under the asset and liability method. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the
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differences between the consolidated financial statements and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized.
An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely than not to be sustained. The Company adjusts the amounts recorded for uncertain tax positions when its judgment changes, as a result of the evaluation of new information not previously available. These differences are reflected as increases or decreases to Income tax provision (benefit) in the period in which they are determined.
Subsequent EventsThe Company evaluated subsequent events through August 12, 2014, the date its financial statements were issued.
3. | RECENT ACCOUNTING PRONOUNCEMENTS |
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers, which will be introduced into the FASBs Accounting Standards Codification as Topic 606. Topic 606 replaces the previous guidance on revenue recognition in Topic 605. The core principle of the new standard 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 us in the first quarter of 2017, with early adoption not permitted. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact of this ASU and has not yet selected an implementation approach.
In April 2014, the FASB issued ASU No. 2014-8, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the criteria for reporting discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. The update states that a strategic shift could include a disposal of 1) a major geographical area of operations, 2) a major line of business, or 3) a major equity method investment. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends, with early adoption permitted. The Companys adoption of this guidance in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; and 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required, because this ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2013. The Companys adoption of this guidance in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
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4. | FAIR VALUE MEASUREMENTS |
The Company follows the accounting standards for fair value, whereas fair value is a market-based measurement, not an entity-specific measurement. The Companys fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
| Level 1observable inputs, such as quoted prices in active markets |
| Level 2observable inputs other than those included in Level 1such as quoted prices for similar assets and liabilities in active or inactive marketswhich are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data |
| Level 3unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions |
Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized at the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below.
The Companys assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 28, 2014 and December 28, 2013, 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: |
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Money market funds |
$ | 118,900 | $ | | $ | | $ | 118,900 | ||||||||
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|
|
|
|
|
|
|||||||||
Balance at June 28, 2014 |
$ | 118,900 | $ | | $ | | $ | 118,900 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Recurring fair value measurements: |
||||||||||||||||
Money market funds |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 28, 2013 |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonrecurring fair value measurements: |
||||||||||||||||
Assets held for sale |
$ | | $ | | $ | 7,400 | $ | 7,400 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at June 28, 2014 |
$ | | $ | | $ | 7,400 | $ | 7,400 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonrecurring fair value measurements: |
||||||||||||||||
Assets held for sale |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 28, 2013 |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with an original 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. The Company had money market funds of $119 million and $64 million at June 28, 2014 and December 28, 2013, respectively.
Nonrecurring Fair Value Measurements
Property and Equipment
Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company estimates the fair value of various property and equipment assets for purposes of recording necessary impairment charges. We estimate fair value based on information received from real estate brokers. During the second quarter of 2014, the Company recorded a tangible asset impairment charge of $3 million, offset by insurance recoveries, as a result of tornado damage to a distribution facility. See Note 15 Commitments and Contingencies. No material impairments to the Companys property and equipment were recognized during 2013.
The Company is required to record Assets held for sale at the lesser of the depreciated carrying amount or estimated fair value less cost to sell. Certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million in each of the 26-week periods ended June 28, 2014 and June 29, 2013. Fair value was estimated by the Company based on information received from real estate brokers.
The amounts included in the tables above, classified under Level 3 within the fair value hierarchy, represent the estimated fair values of those property and equipment that became the new carrying amounts at the time the impairments were recorded.
9
Other Fair Value Measurements
The carrying value of cash, restricted cash, accounts receivable, bank checks outstanding, accounts payable, accrued expenses and contingent consideration payable for business acquisitions approximate their fair values due to their short-term maturities.
The fair value of total debt approximated $4.9 billion, as compared to its aggregate carrying value of $4.8 billion as of June 28, 2014 and December 28, 2013. Fair value of the Companys 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 Companys overall credit risk. The fair value of the Companys 8.5% Senior Notes, classified under Level 2 of the fair value hierarchy, was $1.4 billion and $1.5 billion at June 28, 2014 and December 28, 2013, respectively. Fair value was based upon the closing market price at the end of the reporting period.
5. | ACCOUNTS RECEIVABLE FINANCING PROGRAM |
Under its accounts receivable financing program (2012 ABS Facility), the Company and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The Company consolidates the Receivables Company and, consequently, the transfer of the receivables is a transaction internal to the Company and the receivables have not been derecognized from the Companys Consolidated Balance Sheets. On a daily basis, cash from accounts receivable collections is remitted to the Company as additional eligible receivables are sold to the Receivables Company. If, on a weekly settlement basis, there are not sufficient eligible receivables available as collateral, the Company is required to either provide cash collateral to cover the shortfall or, in lieu of providing cash collateral to cover the shortfall, it can pay down its borrowings on the 2012 ABS Facility. Due to sufficient eligible receivables available as collateral, no cash collateral was held at June 28, 2014 or December 28, 2013.
The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014 and December 28, 2013, respectively. Included in the Companys accounts receivable balance as of June 28, 2014 and December 28, 2013 was $993 million and $930 million, respectively, of receivables held as collateral in support of the 2012 ABS Facility. See Note 9Debt for a further description of the 2012 ABS Facility.
6. | RESTRICTED CASH |
At June 28, 2014 and December 28, 2013, the Company had $7 million of restricted cash included in the Companys Consolidated Balance Sheets in Other assets. This restricted cash primarily represented security deposits and escrow amounts related to certain properties collateralizing the commercial mortgage-backed securities loan facility (CMBS Fixed Facility). See Note 9Debt for a further description of the CMBS Fixed Facility.
7. | 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 recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization.
Customer relationship intangible assets have definite lives, so they are carried at the acquired fair value less accumulated amortization. Customer relationship intangible assets are amortized over the estimated useful lives (four to ten years). Amortization expense was $75 million and $74 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
10
Goodwill and Other intangibles, net, consisted of the following (in thousands):
June 28, | December 28, | |||||||
2014 | 2013 | |||||||
Goodwill |
$ | 3,835,477 | $ | 3,835,477 | ||||
|
|
|
|
|||||
Other intangibles net |
||||||||
Customer relationships amortizable: |
||||||||
Gross carrying amount |
$ | 1,377,663 | $ | 1,377,663 | ||||
Accumulated amortization |
(952,483 | ) | (877,396 | ) | ||||
|
|
|
|
|||||
Net carrying value |
425,180 | 500,267 | ||||||
|
|
|
|
|||||
Noncompete agreement amortizable: |
||||||||
Gross carrying amount |
800 | 800 | ||||||
Accumulated amortization |
(107 | ) | (27 | ) | ||||
|
|
|
|
|||||
Net carrying value |
693 | 773 | ||||||
|
|
|
|
|||||
Brand names and trademarks not amortizing |
252,800 | 252,800 | ||||||
|
|
|
|
|||||
Total Other intangibles net |
$ | 678,673 | $ | 753,840 | ||||
|
|
|
|
As required, we assess 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, our policy is to assess for impairment at the beginning of each fiscal third quarter. For Other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
The Company completed its most recent annual impairment assessment for goodwill and its portfolio of brand names and trademarks, the indefinite-lived intangible assets on June 30, 2013the first day of fiscal 2013 third quarterwith no impairments noted. Our assessment for impairment of goodwill utilized a discounted cash flow analysis, comparative market multiples and comparative market transaction multiples to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we 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 our fiscal 2013 annual impairment analysis, we believe the fair value of the Companys reporting unit exceeded its carrying value. Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis. There have been no events that would indicate the need for impairment testing of the Goodwill or Other intangible assets as of June 28, 2014, although Goodwill and Other Intangible assets will be tested in connection with the Companys financial reporting for the third quarter of 2014 as the Companys selected annual impairment evaluation date falls within that reporting period.
8. | 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 and it is unlikely the plan will be changed, 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. For all properties held for sale, the Company has exited operations from the facilities and, thus, the properties are no longer productive assets. Further, the Company has no history of changing its plan to dispose of a facility once the decision has been made. At June 28, 2014 and December 28, 2013, $6 million and $10 million, respectively, of closed facilities were included in Assets held for sale for more than one year.
The change in Assets held for sale for the 26-weeks ended June 28, 2014 was as follows (in thousands):
Balance at beginning of period |
$ | 14,554 | ||
Transfers in |
6,133 | |||
Assets sold |
(3,425 | ) | ||
Tangible asset impairment charges |
(1,580 | ) | ||
|
|
|||
Balance at end of the period |
$ | 15,682 | ||
|
|
11
During 2014, three distribution facilities were closed and reclassified to Assets held for sale and two facilities classified as Assets held for sale were sold for proceeds of $5 million. The Company recognized a net gain of $1 million on sold facilities in 2014.
As discussed in Note 4Fair Value Measurements, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million in each of the 26-week periods ended June 28, 2014 and June 29, 2013.
9. | DEBT |
The Companys debt consisted of the following (dollars in thousands):
Debt Description |
Contractual |
Interest Rate at June 28, 2014 |
June 28, 2014 |
December 28, 2013 |
||||||||
ABL Facility |
May 11, 2016 | | $ | | $ | 20,000 | ||||||
2012 ABS Facility |
August 27, 2015 | 1.45% | 686,000 | 686,000 | ||||||||
Amended 2011 Term Loan |
March 31, 2019 | 4.50 | 2,084,250 | 2,094,750 | ||||||||
CMBS Fixed Facility |
August 1, 2017 | 6.38 | 472,391 | 472,391 | ||||||||
Senior Notes |
June 30, 2019 | 8.50 | 1,350,000 | 1,350,000 | ||||||||
Obligations under capital leases |
20182025 | 3.41 - 6.25 | 194,624 | 116,662 | ||||||||
Other debt |
20182031 | 5.75 - 9.00 | 12,198 | 12,359 | ||||||||
|
|
|
|
|||||||||
Total debt |
4,799,463 | 4,752,162 | ||||||||||
Add unamortized premium |
16,647 | 18,311 | ||||||||||
Less current portion of long-term debt |
(45,499 | ) | (35,225 | ) | ||||||||
|
|
|
|
|||||||||
Long-term debt |
$ | 4,770,611 | $ | 4,735,248 | ||||||||
|
|
|
|
At June 28, 2014, $2,029 million of the total debt was at a fixed rate and $2,770 million was at a floating rate.
Revolving Credit Agreement
The Companys asset backed senior secured revolving loan facility (ABL Facility) provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of June 28, 2014, the Company had no outstanding borrowings, but had issued Letters of Credit totaling $287 million under the ABL Facility. Outstanding Letters of Credit included 1) $89 million issued in favor of Ahold to secure their contingent exposure under guarantees of our obligations with respect to certain leases, 2) $183 million issued in favor of certain commercial insurers securing our obligations with respect to our self-insurance program, and 3) letters of credit of $15 million for other obligations. There was available capacity on the ABL Facility of $813 million at June 28, 2014, according to the borrowing base calculation. As of June 28, 2014, on borrowings up to $75 million, the Company can periodically elect to pay interest at Prime plus 2.25% or LIBOR plus 3.25%. On borrowings in excess of $75 million, the Company can periodically elect to pay interest at Prime plus 1.00% or LIBOR plus 2.00%. The ABL facility also carries letter of credit fees of 2.00% and an unused commitment fee of 0.25%.
Accounts Receivable Financing Program
Under the 2012 ABS Facilitywhich replaced the Companys prior accounts receivable securitizationthe Company and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of the Company (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014. The Company, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of $62 million at June 28, 2014 based on eligible receivables as collateral. The portion of the loan held by the lenders who fund the loan with commercial paper bears interest at the lenders commercial paper rate, plus any other costs associated with the issuance of commercial paper, plus 1.25% and an unused commitment fee of 0.35%. The portion of the loan held by lenders that do not fund the loan with commercial paper bears interest at LIBOR plus 1.25% and an unused commitment fee of 0.35%. See Note 5Accounts Receivable Financing Program for a further description of the Companys Accounts Receivable Financing Program.
12
Term Loan Agreement
The Companys senior secured term loan (Amended 2011 Term Loan) consisted of a senior secured term loan with outstanding borrowings of $2,084 million at June 28, 2014. The Amended 2011 Term Loan bears interest equal to Prime plus 2.5%, or LIBOR plus 3.5%, with a LIBOR floor of 1.0%, based on a periodic election of the interest rate by the Company. Principal repayments of $5 million are payable quarterly with the balance due at maturity. The Amended 2011 Term Loan may require mandatory repayments if certain assets are sold, or based on excess cash flow generated by the Company, as defined in the agreement. The interest rate on the Amended 2011 Term Loan was 4.5%the LIBOR floor of 1.0% plus 3.5% at June 28, 2014. At June 28, 2014, entities affiliated with KKR held $286 million of the Companys Amended 2011 Term Loan debt.
The term loan agreement was amended in June 2013. See 2013 Debt Refinancing Transactions discussed below.
Other Debt
The CMBS Fixed Facility provides financing of $472 million and is currently secured by mortgages on 34 properties, consisting of distribution centers. The CMBS Fixed Facility bears interest at 6.38%. On May 15, 2014, the CMBS Fixed Facility was modified to permit a substitution of collateral for facilities included in Assets held for sale as further discussed below in Security Interests.
The unsecured Senior Notes, with outstanding principal of $1,350 million at June 28, 2014, bear interest at 8.5%. There was unamortized issue premium associated with the Senior Notes issuances of $17 million at June 28, 2014. This is amortized as a decrease to Interest expense over the remaining life of the debt facility. At June 28, 2014, entities affiliated with KKR held $2 million of the Companys Senior Notes.
Effective December 19, 2013, upon consent of the note holders, the Senior Notes Indenture was amended so that the proposed Acquisition will not constitute a Change of Control, as defined in the Indenture. In the event of a Change of Control, the holders of the Senior Notes would have the right to require the Company to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under terms of the Merger Agreementor not completed by September 8, 2015the Senior Notes Indenture will revert to its original terms. See Note 11Related Party Transactions for a discussion of Senior Notes Indenture amendment fees paid by Sysco, and Note 1Overview and Basis of Presentation for a description of the proposed acquisition by Sysco.
Obligations under capital leases consist of amounts due for transportation equipment and building leases.
2013 Debt Refinancing Transactions
During 2013, we entered into a series of transactions to refinance our debt facilities and extend debt maturity dates, including the following transactions:
| In June 2013, the Company refinanced its term loan agreements. The aggregate principal outstanding of the 2011 Term Loan was increased to $2,100 million, and the maturity date of the loan facility was extended from March 31, 2017 to March 31, 2019. The Amended 2011 Term Loan facility refinanced an aggregate of $2,091 million in principal under the Companys Amended 2007 Term Loan and 2011 Term Loan facilities. Continuing lenders refinanced an aggregate of $1,634 million in principal of Term Loan debt. They also purchased $371 million in principal of Term Loan debt from lenders electing not to participate in, or electing to decrease their holdings in, the Amended 2011 Term Loan facility. Additionally, the Company sold $95 million in principal of the Amended 2011 Term Loan to new lenders. |
The Company performed an analysis by creditor to determine if the terms of the Amended 2011 Term Loan were substantially different from the previous term loan facilities. Based upon the analysis, it was determined that continuing lenders holding a significant portion of the Amended 2011 Term Loan had terms that were substantially different from their original loan agreements. As a result, this portion of the transaction was accounted for as an extinguishment of debt and the contemporaneous acquisition of new debt. Lenders holding the remaining portion of the Amended 2011 Term Loan had terms that were not substantially different from their original loan agreements and, as a consequence, this portion of the transaction was accounted for as a debt modification as opposed to an extinguishment of debt.
| In January 2013, the Company redeemed the remaining $355 million in aggregate principal amount of its 11.25% Senior Subordinated Notes (Senior Subordinated Notes) due June 30, 2017. This was done at a price equal to 105.625% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest to the redemption date. An entity affiliated with CD&R held all of the redeemed Senior Subordinated Notes. To fund the redemption of these notes, the Company issued $375 million in principal amount of its Senior Notes at a price equal to 103.5% of the principal amount, for gross proceeds of $388 million. |
13
The 2013 refinancing transactions resulted in a loss on extinguishment of debt of $42 million. That consisted of a $20 million Senior Subordinated Notes early redemption premium, a write-off of $13 million of unamortized debt issuance costs related to the old debt facilities, and $9 million of lender fees and third party costs related to these transactions. Unamortized debt issuance costs of $6 million related to the portion of the Term Loan refinancing accounted for as a debt modification were carried forward and will be amortized through March 31, 2019the maturity date of the Amended 2011 Term Loan.
Refinancing Transaction Costs
The Company incurred transaction costs of $29 million related to the 2013 debt refinancing transactions costs, consisting of loan fees, arrangement fees, rating agency fees and legal fees.
Security Interests
Substantially all of our 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, inventory and tractors and trailers owned by the Company. The CMBS Fixed Facility is currently collateralized by mortgages on 34 related properties. Our obligations under the Amended 2011 Term Loan are secured by all of the capital stock of our subsidiaries, each of the direct and indirect 100% owned domestic subsidiaries (as defined in the agreements), and are secured by substantially all assets of the Company and its subsidiaries not pledged under the 2012 ABS Facility, the CMBS Fixed Facility or the former CMBS Floating Facility. More specifically, the Amended 2011 Term Loan has priority over certain collateral securing the ABL Facility, and it has second priority for other collateral securing the ABL Facility. The former CMBS Floating Facility was collateralized by mortgages on related properties until July 2012, when all outstanding borrowings were repaid. As of June 28, 2014, 11 properties remain in this special purpose, bankruptcy remote subsidiary and are not pledged as collateral under any of the Companys debt agreements.
On May 15, 2014, the CMBS Fixed Loan Facility was modified to permit the substitution of collateral pledged under the CMBS Fixed Loan Facility primarily to allow the sale of certain of facilities that are classified as Assets held for sale. The collateral substitution consisted of an exchange of two properties formerly pledged as collateral for the former CMBS Floating Facility for six properties that collateralized the CMBS Fixed Facility. One of the substituted properties was concurrently sold to an unrelated party and the other five properties are collateral securing the Amended 2011 Term Loan. The Company incurred $1 million of costs and fees related to the CMBS Fixed Loan Facility substitution transaction.
Restrictive Covenants
Our credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. Certain debt agreements also contain various and customary events of default with respect to the loans. 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 outstandingtogether with all accrued unpaid interest and other amounts owedmay be declared immediately due and payable by the lenders. Were such an event to occur, the Company would be forced to seek new financing that may not be on as favorable terms as its current facilities. The Companys ability to refinance its indebtedness on favorable termsor at allis directly affected by the current economic and financial conditions. In addition, the Companys 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.
10. | RESTRUCTURING AND TANGIBLE ASSET IMPAIRMENT CHARGES |
During 2014, the Company reversed a total of $2 million of excess liabilities for an unused facility lease settlement and closed facility severance costs. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
During 2013, the Company incurred $2 million of severance costs, including $1 million for a multiemployer pension withdrawal liability and tangible asset impairment charges. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
14
A summary of the restructuring charges during the 26-weeks ended June 28, 2014 and June 29, 2013 was as follows (in thousands):
26-Weeks Ended | ||||||||
June 28, | June 29, | |||||||
2014 | 2013 | |||||||
Severance and related costs |
$ | (502 | ) | $ | 2,159 | |||
Facility closing costs |
(1,180 | ) | (451 | ) | ||||
Tangible asset impairment charges |
1,580 | 1,860 | ||||||
|
|
|
|
|||||
Total |
$ | (102 | ) | $ | 3,568 | |||
|
|
|
|
The following table summarizes the changes in the restructuring liabilities for the 26-weeks ended June 28, 2014 (in thousands):
Severance | Facility | |||||||||||
and Related | Closing | |||||||||||
Costs | Costs | Total | ||||||||||
Balance at December 28, 2013 |
$ | 69,072 | $ | 2,146 | $ | 71,218 | ||||||
Current period charges |
82 | | 82 | |||||||||
Change in estimate |
(584 | ) | (1,180 | ) | (1,764 | ) | ||||||
Payments and usage net of accretion |
(7,474 | ) | (342 | ) | (7,816 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at June 28, 2014 |
$ | 61,096 | $ | 624 | $ | 61,720 | ||||||
|
|
|
|
|
|
The $61 million of restructuring liabilities as of June 28, 2014 for severance and related costs includes $56 million of multiemployer pension withdrawal liabilities relating to closed facilities, payable in monthly installments through 2031 at effective interest rates ranging from 5.9% to 6.7%.
11. | RELATED PARTY TRANSACTIONS |
The Company pays a monthly management fee of $0.8 million to investment funds associated with or designated by the Sponsors. For each of the 26-weeks ended June 28, 2014 and June 29, 2013, the Company recorded management fees and related expenses of $5 million. These were reported as Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income (Loss).
As discussed in Note 9Debt, entities affiliated with the Sponsors hold various positions in some of our debt facilities and participated in our 2013 refinancing transactions. At June 28, 2014, entities affiliated with KKR held $288 million in aggregate principal of the Companys debt facilities. At June 28, 2014, entities affiliated with CD&R had no holdings of the Companys debt facilities. Entities affiliated with KKR received transaction fees of $1 million for services related to the 2013 debt refinancing transactions.
Also as discussed in Note 9Debt, the Senior Note Indenture was amended in the fourth quarter of 2013 so that the proposed Acquisition by Sysco will not constitute a Change of Control. Sysco paid $3.4 million in consent fees to the holders of the Senior Notes in December 2013 on behalf of the Company in connection with this amendment.
12. | RETIREMENT PLANS |
The Company has defined benefit and defined contribution retirement plans for its employees. Also, the Company contributes to various multiemployer plans under collective bargaining agreements and provides certain health care benefits to eligible retirees and their dependents.
15
The components of net pension and other post retirement benefit costs for Company sponsored defined benefit plans for the 26-weeks ended June 28, 2014 and June 29, 2013 were as follows (in thousands):
26-Weeks Ended | ||||||||||||||||
Pension Benefits | Other Postretirement Plans |
|||||||||||||||
June 28, 2014 |
June 29, 2013 |
June 28, 2014 |
June 29, 2013 |
|||||||||||||
Service cost |
$ | 13,660 | $ | 16,060 | $ | 40 | $ | 77 | ||||||||
Interest cost |
18,650 | 16,736 | 159 | 216 | ||||||||||||
Expected return on plan assets |
(23,698 | ) | (20,963 | ) | | | ||||||||||
Amortization of prior service cost (credit) |
99 | 99 | (167 | )(1) | | |||||||||||
Amortization of net loss (gain) |
1,147 | 6,515 | (38 | )(1) | 56 | |||||||||||
Settlements |
1,000 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 10,858 | $ | 18,447 | $ | (6 | ) | $ | 349 | |||||||
|
|
|
|
|
|
|
|
(1) | The Amortization of prior service cost (credit) and Amortization of net loss (gain) reflect prospective participant eligibility changes pursuant to a renegotiated agreement for a post retirement medical plan finalized in the first quarter of 2014. |
The Company reclassified $2 million and $7 million out of Accumulated other comprehensive income (loss) to Distribution, selling and administrative costs relating to retirement benefit obligations during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
The Company contributed $24 million and $19 million to its defined benefit and other postretirement plans during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
16
13. | CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table presents changes in Accumulated other comprehensive income (loss) by component for the 26-weeks ended June 28, 2014 and June 29, 2013 as follows (in thousands):
26-Weeks Ended | ||||||||
Accumulated Other Comprehensive Income (Loss) Components |
June 28, 2014 |
June 29, 2013 |
||||||
Defined benefit retirement plans: |
||||||||
Balance at beginning of period (1) |
$ | (2,679 | ) | $ | (125,642 | ) | ||
|
|
|
|
|||||
Other comprehensive income (loss) before reclassifications |
| | ||||||
Amortization of prior service (credit) cost (2) |
(68 | ) | 99 | |||||
Amortization of net loss (2) |
1,109 | 6,571 | ||||||
Settlements(2) |
1,000 | | ||||||
|
|
|
|
|||||
Total before income tax (3) |
2,041 | 6,670 | ||||||
Income tax provision (benefit) |
| (847 | ) | |||||
|
|
|
|
|||||
Current period comprehensive income (loss), net of tax |
2,041 | 7,517 | ||||||
|
|
|
|
|||||
Balance at end of period (1) |
$ | (638 | ) | $ | (118,125 | ) | ||
|
|
|
|
|||||
Interest rate swap derivative cash flow hedge (4): |
||||||||
Balance at beginning of period (1) |
$ | | $ | (542 | ) | |||
|
|
|
|
|||||
Other comprehensive income (loss) before reclassifications |
| (653 | ) | |||||
Amounts reclassified from Other comprehensive income (loss) (5) |
| 2,042 | ||||||
|
|
|
|
|||||
Total before income tax |
| 1,389 | ||||||
Income tax provision (benefit) |
| 847 | ||||||
|
|
|
|
|||||
Current period comprehensive income (loss), net of tax |
| 542 | ||||||
|
|
|
|
|||||
Balance at end of period (1) |
$ | | $ | | ||||
|
|
|
|
|||||
Accumulated Other Comprehensive Income (Loss) end of period (1) |
$ | (638 | ) | $ | (118,125 | ) | ||
|
|
|
|
(1) | Amounts are presented net of tax, which had no impact due to the Companys full valuation allowance. See Note 14Income Taxes. |
(2) | Included in the computation of Net periodic benefit costs. See Note12 Retirement Plans for additional information. |
(3) | Included in Distribution, selling and administration expenses in the Consolidated Statements of Comprehensive Income (Loss). |
(4) | The interest rate swap derivative expired in January 2013. |
(5) | Included in Interest expensenet in the Consolidated Statements of Comprehensive Income (Loss). |
14. | INCOME TAXES |
The determination of the Companys overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in various United States federal and state jurisdictions. Tax law changes, increases and decreases in temporary and permanent differences between book and tax items, tax credits and the Companys change in income in each jurisdiction all affect the overall effective tax rate.
The Company estimated its annual effective tax rate to be applied to the results of the 26-weeks ended June 28, 2014 and June 29, 2013. In estimating its annual effective tax rate, the Company excluded the effects of the valuation allowance necessary as a result of the tax amortization of its goodwill and trademarks. The valuation allowance impact of the tax amortization of goodwill and trademarks has been measured discretely for the quarter to calculate the income taxes. Given the Companys cumulative tax loss position, the impact of the projected current year book income and non-deductible items is being offset by a commensurate valuation allowance adjustment within the annual effective tax rate. The Company concluded that to use the forecasted annual effective tax rate, unadjusted for the effects of the valuation allowance related to the tax amortization of the goodwill and trademarks as described above, would not be reliable for use in quarterly reporting of income taxes due to such rates significant sensitivity to minimal changes in forecasted annual pre-tax income. The impact of including the tax goodwill and trademarks amortization in the annual effective tax rate computation, as applied to the year-to-date pre-tax loss for the period, would be distortive to the financial statements. As a result of these considerations, management concluded that the readers of the financial statements would best benefit from a tax provision for the quarter that reflects the accretion of the valuation allowance on a discrete, ratable basis.
17
The valuation allowance against the net deferred tax assets was $117 million at December 28, 2013. The deferred tax assets related to federal and state net operating losses, increased $48 million during the 26-weeks ended June 28, 2014, which resulted in a $165 million total valuation allowance at June 28, 2014. A full valuation allowance on the net deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance.
The effective tax rate for the 26-weeks ended June 28, 2014 and June 29, 2013 of 28% and 0%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 26-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $48 million and $20 million, respectively; as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
On September 13, 2013 the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the tangible property regulations). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014. The Companys adoption of the tangible property regulations in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
15. | COMMITMENTS AND CONTINGENCIES |
Purchase Commitments The Company enters into purchase orders with vendors and other parties in the ordinary course of business. Additionally, we have a limited number of purchase contracts with certain vendors that require us to buy a predetermined volume of products, which are not recorded in the Consolidated Balance Sheets. As of June 28, 2014, the Companys purchase orders and purchase contracts with vendors, all to be delivered in 2014, were $662 million.
To minimize the Companys fuel cost risk, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. At June 28, 2014, the Company had diesel fuel forward purchase commitments totaling $66 million through June 2015. The Company also enters into forward purchase agreements for procuring electricity. At June 28, 2014, the Company had electricity forward purchase commitments totaling $12 million through December 2016. The Company does not measure its forward purchase commitments for fuel and electricity at fair value as the amounts contracted for are used in its operations.
Retention and Transaction Bonuses As part of the Merger Agreement described in Note 1Overview and Basis of Presentation, Proposed Acquisition by Sysco, the Company was given rights to offer retention and transaction bonuses to certain current employees that are integral to the successful completion of the transaction. The Company was approved to offer a maximum of $31.5 million and $10 million of retention bonuses and transaction bonuses, respectively. Additionally, the Companys Chief Executive Officer (CEO) has agreed to reduce his continuation of base salary payments and bonus amounts by $3 million to be allocated at his discretion as bonuses to current employees (other than himself). The retention, transaction and other bonus payments are subject to consummation of the Acquisition and are payable on or after the transaction date. As of June 28, 2014, the Company has not and is not required to record a liability for these bonuses until the Acquisition is consummated.
Indemnification by Ahold for Certain MattersIn connection with the sale of US Foods to USF Holding Corp., a corporation formed and controlled by investment funds associated with or managed by CD&R and KKR, by Ahold in 2007 (the 2007 Transaction), Ahold committed to indemnify and hold harmless the Company from and against damages (which includes losses, liabilities, obligations, and claims of any kind) and litigation costs (including attorneys fees and expenses) suffered, incurred or paid after the 2007 Transaction closing date related to certain matters (See discussion of Pricing Litigation). The Company was responsible for the first $40 million of damages and litigation expenses incurred after the closing of the 2007 Transaction. Aholds indemnification obligations apply to any such damages and litigation expenses as may be incurred after the 2007 Transaction closing date in excess of $40 million. As of the end of its 2009 fiscal year, the Company had surpassed the threshold of $40 million in costs related to these matters; therefore, any future litigation expenses related to the aforementioned matters are subject to the rights of indemnification from Ahold.
Pricing LitigationIn October 2006, two customers filed a putative class action against the Company and Ahold. In December 2006, an amended complaint was filed naming a third plaintiff. The complaint focuses on certain pricing practices of the Company in contracts with some of its customers. In February 2007, the Company filed a motion to dismiss the complaint. In August 2007, two additional customers filed putative class action complaints. These two additional lawsuits are based upon the pricing practices at issue in the October 2006 case. In November 2007, the Judicial Panel on Multidistrict Litigation ordered the transfer of the two additional lawsuits to the jurisdiction in which the first lawsuit was filedthe U.S. District Court for the District of Connecticutfor consolidated or coordinated proceedings. In June 2008, the Plaintiffs filed their consolidated and amended class action complaint. The Company moved to dismiss this complaint. In August 2009, the Plaintiffs filed a motion for class certification. In December 2009, the court issued a ruling on the Companys motion to dismiss. It dismissed Ahold from the case and also dismissed certain of the plaintiffs claims. On November 30, 2011, the court issued its ruling granting the plaintiffs motion to certify the class. On April 4, 2012, the U.S. Court of Appeals for the Second Circuit granted the Companys request to appeal the district courts decision which granted class certification. Oral argument was held and the court upheld the grant of class certification. The Company filed a writ of certiorari to the U.S. Supreme Court which was denied on April 29, 2014.
18
On May 20, 2014, an agreement in principle was reached to settle the matter for $297 million which would release the Company from all claims from all participating class members in relation to these pricing practices. Also as described above, Ahold has indemnified the Company in regards to this matter and, as a consequence, payment of the settlement will be made by Ahold and will not impact the Companys results of operations or cash flows. The settlement was preliminarily approved by the United States District Court of Connecticut on July 14, 2014 and is subject to final approval in late 2014 or early 2015. The settlement is also subject to potential reduction and/or termination based on the compensable sales volume attributable to class members that elect to opt out of the settlement. The Company has recorded a $297 million current liability and a corresponding $297 million indemnification receivable from Ahold in its June 28, 2014 Consolidated Balance Sheet to reflect the probable settlement of this matter. Based on the language in the proposed settlement agreement, public written statements of Ahold and the financial condition of Ahold, management believes that Ahold will satisfy its obligation under the indemnification agreement.
Eagan Multiemployer Pension Withdrawal LiabilityIn 2008, the Company completed the closure of its Eagan, Minnesota and Fairfield, Ohio divisions and recorded a liability of approximately $40 million for the related multiemployer pension withdrawal liability. In 2010, the Company received formal notice and demand for payment of a $40 million withdrawal liability, which is payable in monthly installments through November 2023. During the 2011 fiscal third quarter, the Company was assessed an additional $17 million multiemployer pension withdrawal liability for the Eagan facility. The parties agreed to arbitrate this matter, and discovery began during the fiscal third quarter of 2012. The parties engaged in good faith settlement negotiations during the fiscal third and fourth quarters of 2013. The negotiations reached an unexpected impasse and ceased in December 2013. The arbitration and related discovery were stayed pending settlement negotiations. The arbitrator ruled that the only contested issue is a legal question and has ordered the parties to submit cross motions for summary judgment. The parties must submit briefs by October 8, 2014. Thereafter, the arbitrator will issue an interim award. Discovery is stayed pending the arbitrators ruling. The Company believes it has meritorious defenses against the assessment for the additional pension withdrawal liability. The Company does not believe, at this time, that a loss from such obligation is probable and, accordingly, no liability has been recorded. However, it is reasonably possible the Company may ultimately be required to pay an amount up to $17 million.
Other Legal ProceedingsIn addition to the matters described above, the Company and its subsidiaries are parties to a number of other legal proceedings arising from business operations. The legal proceedingswhether pending, threatened or unassertedif decided adversely to or settled by the Company, may result in liabilities material to our financial condition or results of operations. We have recognized provisions with respect to the proceedings, where appropriate. These are reflected in the Consolidated Balance Sheets. It is possible that the Company could be required to make expenditures in excess of established provisions, in amounts that cannot reasonably be 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. Our policy is to expense attorney fees as incurred, except for those fees that are reimbursable under the above noted indemnification by Ahold.
Insurance Recoveries - Tornado LossOn April 28, 2014, a tornado damaged a distribution facility and its contents, including building improvements, equipment and inventory. In order to service customers, business from the damaged facility was reassigned to other Company distribution facilities. The Company has insurance coverage on the distribution facility and its contents, as well as business interruption insurance. The Companys insurance policies provide for recoveries of the damaged property at replacement value and the damaged inventory at the greater of 1) expected selling price less unincurred selling costs or 2) cost plus 10%. Discussions are underway with the insurance carrier regarding the Companys claims on the loss of the building and its contents, and the loss related to the business interruption. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. The timing of and amounts of ultimate insurance recoveries is not known at this time.
As a result of the tornado damage, the Company recorded a tangible asset impairment charge of $3 million and a net charge to cost of goods sold of $14 million for damaged inventory. In addition, the Company has incurred costs of $3 million in the second quarter of 2014, including debris removal and clean-up costs, subject to coverage under its insurance policies. At June 28, 2014, these charges are offset by $8 million of initial advance payments received from insurance carriers and a receivable for insurance recoveries of $11 million that the Company has deemed as probable of recovery. The Company has classified the $2 million of insurance recoveries related to the damaged distribution facility assets as cash flows from investing activities and the $6 million of insurance recoveries related to damaged inventory and other costs incurred as cash flows from operating activities in its consolidated statement of cash flows.
16. | BUSINESS SEGMENT INFORMATION |
The Company operates in one business segment based on how the Chief Operating Decision Maker (CODM)the CEOviews the business for purposes of evaluating performance and making operating decisions. The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States.
19
We use a centralized management structure, and Company strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. We use shared resources for sales, procurement, and general and administrative activities across each of our distribution centers. Our distribution centers form a single network to reach our customers; it is common for a single customer to make purchases from several different distribution centers. Capital projectswhether for cost savings or generating incremental revenueare evaluated based on estimated economic returns to the organization as a whole (e.g., net present value, return on investment).
The measure used by the CODM to assess operating performance is Adjusted EBITDA. Adjusted EBITDA is defined as Net income (loss), plus Interest expense net, Income tax provision (benefit), and depreciation and amortization adjusted for 1) Sponsor fees; 2) Restructuring and tangible and intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses or charges as permitted under the Companys debt agreements; and 5) the non-cash impact of LIFO adjustments. Costs to optimize and transform our business are noted as business transformation costs in the table below and are added to EBITDA in arriving at Adjusted EBITDA as permitted under the Companys debt agreements. Business transformation costs include costs related to functionalization and significant process and systems redesign in the Companys replenishment, finance, category management and human resources functions; company rebranding; cash & carry retail store strategy; and implementation and process and system redesign related to the Companys sales model.
The aforementioned items are specified as items to add to EBITDA in arriving at Adjusted EBITDA per the Companys debt agreements and, accordingly, our management includes such adjustments when assessing the operating performance of the business.
The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net income (loss) for the periods indicated (in thousands):
26-Weeks Ended | ||||||||
June 28, | June 29, | |||||||
2014 | 2013 | |||||||
Adjusted EBITDA |
$ | 406,594 | $ | 382,582 | ||||
Adjustments: |
||||||||
Sponsor fees (1) |
(5,397 | ) | (5,165 | ) | ||||
Restructuring and tangible asset impairment charges (2) |
102 | (3,568 | ) | |||||
Share-based compensation expense (3) |
(6,198 | ) | (5,897 | ) | ||||
LIFO reserve change (4) |
(48,678 | ) | (7,363 | ) | ||||
Loss on extinguishment of debt (5) |
| (41,796 | ) | |||||
Business transformation costs (6) |
(26,663 | ) | (28,544 | ) | ||||
Sysco merger costs (7) |
(19,722 | ) | | |||||
Other (8) |
(13,551 | ) | (17,464 | ) | ||||
|
|
|
|
|||||
EBITDA |
286,487 | 272,785 | ||||||
Interest expense, net |
(146,804 | ) | (160,348 | ) | ||||
Income tax benefit (provision) |
(18,523 | ) | (125 | ) | ||||
Depreciation and amortization expense |
(205,049 | ) | (191,012 | ) | ||||
|
|
|
|
|||||
Net income (loss) |
$ | (83,889 | ) | $ | (78,700 | ) | ||
|
|
|
|
(1) | Consists of management fees paid to the Sponsors. |
(2) | Primarily consists of facility closing, severance and related costs and tangible asset impairment charges. |
(3) | Represents costs recorded for stock option awards, restricted stock and, restricted stock units vested. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of old debt facility unamortized debt issuance costs. See Note 9Debt for a further description of debt refinancing transactions. |
(6) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(7) | Consists of direct and incremental costs related to the Acquisition. |
(8) | Other includes gains, losses or charges as specified under the Companys debt agreements. |
17. | SUBSEQUENT EVENT |
On August 8, 2014, the 2012 ABS Facility was amended whereby the maturity date was extended from August 27, 2015 to August 5, 2016 (or the termination date of the ABL Facility, if earlier), and the interest rate on outstanding borrowings was reduced 25 basis points. The Company incurred $1 million of costs and fees related to the 2012 ABS Facility amendment.
20
Exhibit 99.3
Managements Discussion and Analysis of Financial Condition and Results of Operations
This managements discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and the notes thereto as of December 28, 2013 and December 29, 2012 and for the fiscal years ended December 28, 2013, December 29, and December 31, 2011. The following discussion of our results includes certain non-GAAP financial measures. We believe these provide meaningful supplemental information about our operating performance, because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing our performance and underlying trends. More information on the rationale for these measures is discussed in Non-GAAP Reconciliations below.
Overview
USF Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to here as we, our, us, the Company, or USF. USF conducts all of its operations through its wholly owned subsidiary, US Foods, Inc. (US Foods). All of the indebtedness, as further described in Note 11-Debt in the Notes to the Audited Consolidated Financial Statements, is an obligation of US Foods, and its subsidiaries. Through our wholly owned operating subsidiary, US Foods, we are a leading foodservice distributor in the United States, with about $22 billion in net sales for fiscal 2013. The Company provides an important link between over 5,000 suppliers and our 200,000 foodservice customers nationwide. We offer an innovative array of fresh, frozen and dry food, and non-food products, with approximately 350,000 stock-keeping units (SKUs). US Foods provides value-added services that meet specific customer needs. We believe US Foods has one of the most extensive private label product portfolios in foodservice distribution. For the latest fiscal year, this represented about 30,000 SKUs, and approximately $7 billion in net sales. Many customers benefit from our support services, such as product selection, menu preparation and costing strategies.
A sales force of approximately 5,000 associates market our food products to a diverse customer base. Our principal customers include independently owned single-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations. We support our business with one of the largest private refrigerated fleets in the U.S., with roughly 6,000 trucks traveling an average of 200 million miles each year. We have standardized our operations across the country. That allows us to manage the business as a single operating segment with 61 divisions nationwide.
Strategic Transformation
In 2011, our subsidiary, US Foods, defined a new long-term vision: To create a great American food company focused solely on foodservice. This statement serves as a guide for our corporate strategy, summarized in four words: food, food people, and easy.
Food: To be a great American food company, our strategy focuses on offering customers great brands and innovative products, supported by an industry-leading category management capability. We strive to be the first to market with meaningful advances in product taste, quality, affordability or ease of use. We are building a cost-competitive, differentiated and efficient product assortment in every market, which corresponds to the needs of each individual customer category.
Food People: Our business model emphasizes local relationships with customers. To support this, our selling and marketing approach enables salespeople to easily share our wide assortment, and to help customers select the products that fit their needs. They also are able to present value-added services that allow customers to better operate their businesses.
Easy: We offer customers a variety of tools and services so they can succeed in a competitive and challenging market. For example, our mobile and Internet-enabled ordering tools allow customers to place orders, track shipments, and quickly and efficiently see product details.
We also have focused on making US Foods more efficient and effective. This involved centralizing certain operations, including most non-customer-facing activities such as finance and human resources. At the same time, we organized other operations along functional lines, in areas such as category management, where key decisions are made as close to the customer as possible.
Our investments in the business reflect these strategic priorities. In 2014, we continue to look for opportunities to provide our customers with new and innovative products and services. We also plan to enhance our category management and merchandising initiatives, and to optimize supply chain operations.
Outlook
The foodservice market is affected by general economic conditions, consumer confidence, and continued pressure on consumer disposable income. While we dont anticipate inflationary pressures in the coming year, it can cause shifts in certain categories, such as commodities, and have an impact on our sales and profitability.
The foodservice market is highly competitive and fragmented, with intense competition and modest demand growth.
In 2014, we expect to face pressures on consumer spending and competition. Because we do not anticipate any material improvement in the demand for foodservice, we will likely see modest demand growth. We will remain focused on executing our growth strategies, adding value for and differentiating ourselves with our customers, and driving continued operational improvement in the business.
Proposed Acquisition by Sysco
Merger Agreement
On December 8, 2013, USF entered into a merger agreement (the Merger Agreement) with Sysco Corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco (Merger Sub Two), pursuant to which Sysco will acquire USF (the Acquisition) on the terms and subject to the conditions set forth in the Merger Agreement.
The Merger Agreement provides that the Acquisition will take place in two steps. First, Merger Sub One will merge with and into USF, which will make USF a wholly owned subsidiary of Sysco. Second, immediately following the initial merger, USF will merge with and into Merger Sub Two. Then Merger Sub Two will survive as a wholly owned subsidiary of Sysco. Following the Acquisition, USF will be a wholly owned subsidiary of Merger Sub Two, making it an indirect, wholly owned subsidiary of Sysco.
The Merger Agreement generally requires each party to take all actions necessary to resolve objections to the Acquisition under any antitrust law. However, Sysco is not required to take any action to obtain antitrust approvals that would require it to divest assets of 1) Sysco, 2) USF, or 3) any of their subsidiaries representingin the aggregaterevenues in excess of $2 billion during the 2013 calendar year. If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, in certain circumstances Sysco will be required to pay USF a termination fee of $300 million.
The Merger Agreement contains customary representations, warranties and covenants. The Acquisition is expected to close in the third quarter of 2014. However, it is subject to the customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act). There can be no assurance that the Acquisition will close in the third quarter, or before March 8, 2015 (the Termination Date). The Merger Agreement may be terminated by either party if the Acquisition has not closed prior to the Termination Date. However, if all of the conditions for closing of the Acquisitionother than receiving clearance under the HSR Actare satisfied or able to be satisfied by that time, the Termination Date may be extended by either party for 60 days, up to a date not beyond September 8, 2015 (the Outside Date).
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Impact of the Acquisition on Holders of Senior Notes
In connection with the Merger Agreement, on December 10, 2013, we solicited the consents (the Consent Solicitation) of holders of our Senior Notes to amend the indenture with respect to the Senior Notes to modify certain definitions contained in the indenture for the Senior Notes, so that the Acquisition would not constitute a Change of Control under the indenture, and US Foods, our wholly owned subsidiary, will not be required to make a Change of Control Offer to holders of the Senior Notes in connection with the Acquisition. On December 19, 2013, we received the required consents in connection with the consent solicitation and entered into a supplemental indenture with respect to these amendments.
Pursuant to the terms of the supplemental indenture, if either 1) the Merger Agreement is terminated in accordance with its terms or 2) the Acquisition is not consummated by the Outside Date, the indenture will revert back to its prior form as if the amendments proposed in the consent solicitation had never become operative.
Although we have been advised by Sysco that, if any of our Senior Notes remain outstanding following the consummation of the Acquisition, Sysco intends to fully and unconditionally guarantee the obligations of US Foods under the indenture for the Senior NotesSysco is under no contractual or legal obligation to do so.
Impact of the Acquisition on the Business
The Merger Agreement has some restrictive covenants that limit our ability to take certain actions until the Acquisition closes or the Merger Agreement terminates. Under the Merger Agreement, we must use commercially reasonable efforts to operate our business as we ordinarily would, and consistent with past practice in all material respects, and to preserve our business and assets. Without the consent of Sysco, we may not (with limited exceptions) take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including the following:
| Amending or otherwise changing our organizational documents in any material respect |
| Selling assets having a value in excess of $1 million, or selling a series of assets that total more than $5 million |
| Making any material modifications to employee or executive compensation or benefits |
| Changing our capital structure; taking certain actions related to equity interests or voting securities; or engaging in a dissolution, merger, consolidation, restructuring, recapitalization or other reorganization |
| Incurring any additional indebtedness, other than 1) borrowings and other extensions of credit under existing credit facilities, and other financing arrangements to fund working capital expenses in the ordinary course of business; 2) indebtedness in a principal amount not in excess of $20 million; or 3) inter-company debt |
| Creating or incurring certain liens on assets |
| Engaging in certain mergers, acquisitions or dispositions |
| Entering into, modifying or terminating material contracts |
| Making material loans, investments, or capital contributions to or in third parties |
| Disposing of certain real estate assets |
| Making material changes to accounting methods, policies or practices, except as required by GAAP or applicable law |
| Making certain material tax-related changes |
| Making capital expenditures or commitments for capital expenditures outside of the annual operating plan, or entering into fleet capital leases in excess of $100 million per year |
| Forgiving, canceling or compromising any material debt or claim, or waiving, releasing or assigning rights or claims of material value |
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| Entering into any settlement, compromise or release contemplating or involving any admission of wrongdoing or misconduct, or providing for any relief or settlement other than the payment of money not in excess of $5 million individually or $25 million in total |
Results of Operations
Accounting Periods
We operate on a 52-53 week fiscal year, with all periods ending on Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter. Fiscal 2013, 2012 and 2011 all consisted of 52 weeks. The following table presents selected consolidated results of operations of our business for the last three fiscal years:
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Consolidated Statements of Operations: |
||||||||||||
Net sales |
$ | 22,297 | $ | 21,665 | $ | 20,345 | ||||||
Cost of goods sold |
18,474 | 17,972 | 16,840 | |||||||||
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|
|
|
|
|
|||||||
Gross profit |
3,823 | 3,693 | 3,505 | |||||||||
Operating expenses: |
||||||||||||
Distribution, selling and administrative costs |
3,494 | 3,350 | 3,194 | |||||||||
Restructuring and tangible asset impairment charges |
8 | 9 | 72 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
3,502 | 3,359 | 3,266 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
321 | 334 | 239 | |||||||||
Interest expensenet |
306 | 312 | 307 | |||||||||
Loss on extinguishment of debt |
42 | 31 | 76 | |||||||||
|
|
|
|
|
|
|||||||
Loss before income taxes |
(27 | ) | (9 | ) | (144 | ) | ||||||
Income tax (provision) benefit |
(30 | ) | (42 | ) | 42 | |||||||
|
|
|
|
|
|
|||||||
Net loss |
$ | (57 | ) | $ | (51 | ) | $ | (102 | ) | |||
|
|
|
|
|
|
|||||||
Percentage of Net Sales: |
||||||||||||
Gross profit |
17.1 | % | 17.0 | % | 17.2 | % | ||||||
Distribution, selling and administrative costs |
15.7 | % | 15.5 | % | 15.7 | % | ||||||
Operating expense |
15.7 | % | 15.5 | % | 16.1 | % | ||||||
Operating income |
1.4 | % | 1.5 | % | 1.2 | % | ||||||
Net loss |
(0.3 | )% | (0.2 | )% | (0.5 | )% | ||||||
Other Data: |
||||||||||||
EBITDA(1) |
$ | 667 | $ | 659 | $ | 506 | ||||||
Adjusted EBITDA(1) |
$ | 845 | $ | 841 | $ | 812 |
(1) | EBITDA and Adjusted EBITDA are used by management to measure operating performance. EBITDA is defined as Net loss, plus Interest expensenet, Income (provision) benefit, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for 1) Sponsor fees; 2) Restructuring and tangible, and intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses, or charges as specified under our debt agreements; and 5) the non-cash impact of LIFO adjustments. EBITDA and Adjusted EBITDA are supplemental measures of our performance. They are not required byor presented in accordance withaccounting principles generally accepted in the United States of America (GAAP). They are not measurements of our performance under GAAP. In addition, they should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP, or as alternatives to cash flows from operating activities as measures of our liquidity. |
See additional information for the use of these measures and Non-GAAP reconciliations below.
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Non-GAAP Reconciliations
We believe these non-GAAP financial measures provide an important supplemental measure of our operating performance. This is because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing Company performance. Our management uses these non-GAAP financial measures to evaluate the Companys historical financial performance, establish future operating and capital budgets, and determine variable compensation for management and employees. Accordingly, our management includes those adjustments when assessing the business operating performance.
Our debt agreements specify items that should be added to EBITDA in arriving at Adjusted EBITDA. These include, among other things, Sponsor fees, share-based compensation expense, impairment charges, restructuring charges, the non-cash impact of LIFO adjustments, and gains and losses on debt transactions. Where there are other small, specified costs to add to EBITDA to arrive at Adjusted EBITDA, we combine those items under Other.
The non-recurring charges resulting from lump-sum payment settlements to former employees participating in several US Foods-sponsored pension plans were also added to EBITDA in arriving at Adjusted EBITDA. Costs to optimize our business were also added back to EBITDA to arrive at Adjusted EBITDA. These business transformation costs included third party and duplicate or incremental internal costs. Those items are related to functionalizing and optimizing our processes and systems in areas such as replenishment, finance, and category management, as well as in implementing our new brand image.
All of the items just mentioned are specified as additions to EBITDA to arrive at Adjusted EBITDA, per the US Foods debt agreements. We caution readers that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA or Adjusted EBITDA in the same manner.
We present EBITDA because it is an important supplemental measure of our performance. We also know that it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. We present Adjusted EBITDA as it is the key operating performance metric used by our Chief Operating Decision Maker to assess operating performance.
This table reconciles Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net loss for the last three fiscal years:
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Net loss |
$ | (57 | ) | $ | (51 | ) | $ | (102 | ) | |||
Interest expensenet |
306 | 312 | 307 | |||||||||
Income tax provision (benefit) |
30 | 42 | (42 | ) | ||||||||
Depreciation and amortization expense |
388 | 356 | 343 | |||||||||
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|
|
|
|||||||
EBITDA |
667 | 659 | 506 | |||||||||
Adjustments: |
||||||||||||
Sponsor fees(1) |
10 | 10 | 10 | |||||||||
Restructuring and tangible asset impairment(2) |
8 | 9 | 72 | |||||||||
Share-based compensation expense(3) |
8 | 4 | 15 | |||||||||
LIFO reserve change(4) |
12 | 13 | 59 | |||||||||
Legal(5) |
| | 3 | |||||||||
Loss on extinguishment of debt(6) |
42 | 31 | 76 | |||||||||
Pension settlement(7) |
2 | 18 | | |||||||||
Business transformation costs(8) |
61 | 75 | 45 | |||||||||
Other(9) |
35 | 22 | 26 | |||||||||
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Adjusted EBITDA |
$ | 845 | $ | 841 | $ | 812 | ||||||
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(1) | Consists of management fees paid to the Sponsors. |
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(2) | Consists primarily of facility closing, severance and related costs, and tangible asset impairment charges. |
(3) | Represents costs recorded for stock option awards, restricted stock and, restricted stock units vested. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes settlement costs accrued in 2011 for a class action matter. |
(6) | Includes fees paid to debt holders, third party costs, early redemption premiums, and the write off of old debt facility unamortized debt issuance costs. See Note 11Debt in the Notes to the Audited Consolidated Financial Statements for a further description of debt refinancing transactions. |
(7) | Consists of charges resulting from lump-sum payment settlements to retirees and former employees participating in several US Foods sponsored pension plans. |
(8) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(9) | Includes gains, losses or charges, including $3.5 million of 2013 direct and incremental costs related to the Merger Agreement, as specified under the US Foods debt agreements. |
Highlights
This is a comparison of results between fiscal 2013 and 2012:
| Net sales increased $632 million, or 2.9%, to $22,297 million. |
| Operating income, as a percentage of net sales, was 1.4% in 2013 as compared to 1.5% in 2012. Fiscal 2013 operating income included an increase in variable compensation expense of approximately $50 million, as compared to 2012. |
| Adjusted EBITDA increased 0.5% or $4 million, to $845 million. |
| In June 2013, we amended our term loan facilities. In January 2013, we redeemed the remaining $355 million in principal of our 11.25% Senior Subordinated Notes. These transactions resulted in an aggregate loss on extinguishment of debt of $42 million. |
Fiscal Years Ended December 28, 2013 and December 29, 2012
Net Sales
Net sales increased $632 million, or 2.9%, to $22,297 million in 2013 versus $21,665 million in 2012. The improvement was primarily due to increased sales to independent restaurants, healthcare and hospitality customers. Case volume grew 1.2%, or $280 million, over the prior year. Approximately $350 million of the net sales increase came from higher product cost, as a significant portion of our business is based on percentage markups over actual cost. Less than 1% of the 2013 sales growth was attributable to acquisitions.
Gross Profit
Gross profit increased $130 million, or 3.5%, to $3,823 million in 2013, from $3,693 million in 2012. Gross profit as a percentage of net sales rose by 0.1% to 17.1% in 2013, as compared to 17.0% in 2012. Higher gross profit reflected favorable product cost due to merchandising initiatives, and higher case volume, partially offset by commodity pricing pressures.
Distribution, Selling and Administrative Costs
Distribution, selling and administrative costs increased $144 million, or 4.3%, to $3,494 million in 2013, compared to $3,350 million in 2012. Distribution, selling and administrative costs as a percentage of net sales grew by 0.2% to 15.7% for 2013 versus 15.5% for 2012. The 2013 increase in Distribution, selling and administrative expenses was primarily due to a $111 million increase in payroll and related costs, driven by higher incentive compensation costs from a year ago, higher wages related to year-over-year wage inflationary increases, and increased sales volume.
Other increases in Distribution, selling and administrative expenses included 1) a $23 million increase in Depreciation and amortization expense, due to recent capital expenditures for fleet replacement and investments in technology; 2) $9 million increase in amortization of intangible assets resulting from our 2012 business acquisitions; 3) a $23 million increase in self-insurance costs due to less favorable business insurance experience in 2013; and 4)
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a $9 million increase in bad debt costs. These increases were offset by productivity improvements from US Foods selling and distribution activities initiatives, and business transformation costs that were $14 million lower in 2013 than in the prior year. Pension expense decreased $15 million in 2013 from a year ago, primarily due to a 2012 settlement charge resulting from lump-sum payments to retirees and former employees participating in several US Foods-sponsored pension plans.
Restructuring and Tangible Asset Impairment Charges
During 2013, we recognized Restructuring and tangible asset impairment charges of $8 million. We closed three distribution facilities that ceased operating in 2014. That resulted in $4 million of severance and related costs. Certain Assets held for sale in 2013 were adjusted down to their estimated fair value, less costs to sell. That resulted in tangible asset impairment charges of $2 million. We also incurred $2 million of other severance costs, including $1 million for a multiemployer pension withdrawal liability.
During 2012, we recognized Restructuring and tangible asset impairment charges of $9 million. We closed four facilities, including three distribution centers and one administrative support office. The closed facilities were consolidated into other US Foods operations. These actions resulted in $5 million of tangible asset impairment charges and minimal severance and related costs. In 2012, we recognized $3 million of net severance and related costs for initiatives to optimize and transform our business processes and systems. Also, certain Assets held for sale were adjusted to their estimated fair value, less costs to sell. This created tangible asset impairment charges of $2 million. Additionally, we reversed $2 million of liabilities for unused leased facilities.
Operating Income
Operating income decreased $13 million or 3.9% to $321 million in 2013, compared to $334 million in 2012. Operating income as a percentage of net sales decreased 0.1% to 1.4% in 2013 from 1.5% in 2012. The operating income changes were primarily due to the factors discussed above.
Interest Expense
Interest expense decreased $6 million to $306 million in 2013 from $312 million in 2012. Lower overall borrowing costs as a result of the US Foods debt refinancing transactions were partially offset by an increase in average borrowings.
Loss on Extinguishment of Debt
During 2013 and 2012, we entered into a series of debt refinancing transactions to extend debt maturities or lower borrowing costs. The 2013 Loss on extinguishment of debt was $42 million. It consisted of a $20 million premium related to the early redemption of our 11.25% Senior Subordinated Notes (Senior Subordinated Notes), a write-off of $13 million of unamortized debt issuance costs related to the old debt facilities, and $9 million of lender fees and third party costs related to these transactions.
The 2012 Loss on extinguishment of debt was $31 million. This included $12 million of lender fees and third party costs related to the transactions, a write off of $10 million of unamortized debt issuance costs related to the old debt facilities, and a $9 million premium from the early redemption of our Senior Subordinated Notes. For a detailed description of our debt refinancing transactions, see Note 11Debt in the Notes to the Audited Consolidated Financial Statements.
Income Taxes
The effective tax rate of 109% for 2013 was primarily affected by a $32 million increase in the valuation allowance related to intangible assets, and a $5 million decrease in deferred tax assets for stock awards settled. The effective tax rate of 487% for 2012 was primarily affected by a $44 million increase in the valuation allowance related to intangible assets. See Note 19Income Taxes in the Notes to the Audited Consolidated Financial Statements for a reconciliation of our effective tax rates to the statutory rate.
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Net Loss
Net loss increased $6 million to $57 million in 2013, as compared to net loss of $51 million in 2012. The 2013 increase in net loss was primarily due to the factors discussed above.
Fiscal Years Ended December 29, 2012 and December 31, 2011
Highlights
Net sales increased $1,320 million, or 6.5%, in 2012 compared to 2011. Gross profit, as a percentage of net sales, decreased to 17.0% in 2012 from 17.2% in 2011. Operating expenses, as a percentage of net sales, decreased to 15.5% in 2012 in contrast to 16.1% in 2011. Operating income, as a percentage of net sales, increased to 1.5% in 2012 as compared to 1.2% in 2011. Net interest expense grew $5 million to $312 million in 2012 from $307 million in 2011. In 2012, we entered into a series of debt refinancing transactions resulting in a $31 million aggregate loss on extinguishment of debt. In May 2011, we redeemed all of our 10.25% Senior Notes due June 30, 2015 (Old Senior Notes), with an aggregate principal of $1 billion, and recorded a loss on extinguishment of debt of $76 million. Net loss was $51 million in 2012, an improvement on the net loss of $102 million in 2011.
Net Sales
Net sales increased $1,320 million, or 6.5%, to $21,665 million in 2012, as compared to $20,345 million in 2011. This reflected higher sales to independent restaurants and national chain customers. Case volume increased 3.9%, or $800 million, over the prior year. Approximately $500 million of the net sales increase came from higher product cost, as a significant portion of our business is based on percentage markups over actual cost.
Gross Profit
Gross profit increased $188 million, or 5.4%, to $3,693 million in 2012, versus $3,505 million in 2011. Gross profit, as a percentage of net sales, decreased to 17.0% in 2012 from 17.2% in 2011. The improvement in gross profit was primarily a result of higher case volume and a favorable year-over-year LIFO inventory adjustment, partially offset by commodity pricing pressures.
Distribution, Selling and Administrative Costs
Distribution, selling and administrative costs increased $156 million, or 4.9%, to $3,350 million in 2012, compared to $3,194 million in 2011. These costs as a percentage of net sales decreased by 0.2% to 15.5% for 2012 from 15.7% for 2011. The 2012 rise in Distribution, selling and administrative costs reflected a $79 million increase in payroll and related costs, due to higher wages related to year-over-year wage inflationary increases and greater sales volume, partially offset by a decrease in variable compensation. Diesel fuel costs grew $25 million as a result of higher fuel costs and increased fuel usage.
Other increases in Distribution, selling and administrative costs included 1) a $30 million rise in costs incurred to functionalize and optimize our business processes and systems, 2) a $23 million increase in pension expense (primarily related to a settlement charge resulting from lump-sum payments to former employees participating in several US Foods sponsored pension plans), and 3) a $9 million increase in depreciation expense (primarily due to recent capital expenditures for fleet replacement). The 2012 increases in this item were partially offset by an $8 million decrease in self-insurance costs from a favorable business insurance claims experience, and a $6 million decrease in bad debt expense.
Restructuring and Tangible Asset Impairment Charges
During 2012, we recognized Restructuring and tangible asset impairment charges of $9 million. Four facilities were closed, including three distribution centers and an administrative support office. These facilities were consolidated into other US Foods operations. Closing the facilities led to $5 million of tangible asset impairment charges and minimal severance and related costs. During 2012, we recognized $3 million of net severance and related costs for initiatives to optimize and transform our business processes and systems. In addition, certain Assets held for sale were adjusted down to their estimated fair value less costs to sell. That resulted in tangible asset impairment charges of $2 million. We also reversed $2 million of liabilities for unused leased facilities.
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During 2011, we closed four distribution facilities and recognized Restructuring and tangible asset impairment charges of $72 million. Three facilities stopped operating in 2011 and the other closed in 2012. One facility was closed because a new one was built, and the operations of the remaining three closed facilities were consolidated into other US Foods locations. Closing the four distribution facilities resulted in $45 million of severance and related costs, including a $40 million multiemployer pension withdrawal charge, and $7 million of tangible asset impairment charges. We also recognized $17 million of severance and related costs. This was largely the result of the reorganization and centralization of various functional areasincluding finance, human resources, replenishment and category managementplus $1 million of facility closing costs. Additionally, certain other Assets held for sale were adjusted to equal their estimated fair value less costs to sell, bringing tangible asset impairment charges of $2 million.
Operating Income
Operating income rose $95 million or 39.7% to $334 million in 2012, compared to $239 million in 2011. Operating income as a percentage of net sales increased 0.3% to 1.5% in 2012 versus 1.2% for 2011. The operating income changes were primarily due to the factors discussed above.
Interest Expense
Interest expense increased $5 million to $312 million in 2012 from $307 million in 2011. That was primarily due to nominal increases in the average interest rate and average borrowings outstanding under our debt facilities.
Loss on Extinguishment of Debt
During 2012 and 2011, we entered into a series of debt refinancing transactions to extend debt maturities or lower borrowing costs. The 2012 Loss on extinguishment of debt was $31 million. It consisted of $12 million of lender fees and third party costs related to the transactions, a write-off of $10 million of unamortized debt issuance costs related to the old debt facilities, and $9 million premium related to the early redemption of our Senior Subordinated Notes.
The 2011 Loss on extinguishment of debt was $76 million. This included a $64 million premium and a write-off of $12 million of unamortized debt issuance costs related to the early redemption of our 10.25% Senior Notes due June 30, 2015. For a detailed description of our debt refinancing transactions, see Note 11Debt in the Notes to the Audited Consolidated Financial Statements.
Income Taxes
The effective tax rate of 487% for 2012 was primarily affected by a $44 million increase in the valuation allowance related to intangible assets. The effective tax rate of 29% for 2011 was primarily affected by an $11 million increase in the valuation allowance related to intangible assets. See Note 19Income Taxes in the Notes to the Audited Consolidated Financial Statements for a discussion of the change in Income tax (provision) benefit and the overall effective tax rate on the Loss before income taxes.
Net Loss
Net loss decreased $51 million to $51 million in 2012 from a net loss of $102 million in 2011. The 2012 decrease in net loss was primarily due to the factors discussed above.
Liquidity and Capital Resources
Our operations and strategic objectives require continuing capital investment. Company resources include cash provided by operations, as well as access to capital from bank borrowings, various types of debt, and other financing arrangements. However, in connection with the Merger Agreement, we have agreed to several debt-related terms.
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These include our agreement 1) not to incur indebtedness in excess of $20 million other than to fund working capital expenses in the ordinary course of business and certain other agreed-upon expenditures, and 2) not to make any capital expenditures or commitmentsor enter into fleet capital leases in excess of $100 millionother than in the ordinary course of business consistent with past practice.
The Merger Agreement provides for restrictive covenants that limit our ability to take certain actions. These include raising capital and conducting other financing activities. However, we do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months.
Indebtedness
Our operating subsidiary, US Foods, is highly leveraged, with significant scheduled debt maturities during the next five years. A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing costs of operations, working capital and capital expenditures.
As of December 28, 2013, US Foods had $4,752 million in aggregate indebtedness outstanding. US Foods had commitments for additional borrowings under the asset-based senior secured revolving loan ABL Facility and 2012 ABS Facility of $901 million (of which approximately $787 million was available based on the borrowing base), all of which were secured.
Primarily financing sources for working capital and capital expenditures are an asset-backed senior secured revolving loan facility (ABL Facility) and a accounts receivable financing facility (2012 ABS Facility).
The ABL Facility provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of December 28, 2013, US Foods had $20 million of outstanding borrowings and had issued Letters of Credit totaling $293 million under the ABL Facility. There was available capacity on the ABL Facility of $787 million at December 28, 2013, based on the borrowing base calculation.
Under the 2012 ABS Facility, US Foods and certain subsidiaries sell, on a revolving basis, their eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of US Foods. This subsidiary, in turn, grants to the administrative agent for the benefit of the lenders a continuing security interest in all of its rights, title and interest in the eligible receivables (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million, with its capacity limited by borrowing base calculations. Borrowings under the 2012 ABS Facility were $686 million at December 28, 2013 and December 29, 2012. US Foods, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral.
The US Foods current debt facilities mature at various dates, primarily from August 2015 to June 2019. Debt maturities during the next five years total $1.4 billion. Due to the debt refinancing transactions completed in 2013 and 2012, $3.4 billion of US Foods debt facilities will not mature until 2019. As economic conditions permit, we will consider further opportunities to repurchase, refinance or otherwise reduce the debt obligations on favorable terms. Any further potential debt reduction or refinancing could require significant use of our liquidity and capital resources. For a detailed description of our indebtedness, see Note 11Debt in the Notes to our Audited Consolidated Financial Statements.
US Foods has $1,350 million of 8.5% unsecured Senior Notes (Senior Notes) due June 20, 2019 outstanding as of December 28, 2013. On December 19, 2013, the indenture for the Senior Notes (the Senior Note Indenture) was amended so that the Acquisition by Sysco will not constitute a Change of Control. This was authorized through the consent of the holders of the Senior Notes. In the event of a Change of Control, the holders of the Senior Notes would have the right to require US Foods to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under the terms of the Merger Agreement, or is not completed by September 8, 2015, the Senior Note Indenture will revert to its original terms. Holders of the Senior Notes received fees of $3.4 million as consideration for agreeing to the amendment. Under the Merger Agreement, Sysco funded the payment of the consent fees to the holders in December 2013. Additionally, Sysco agreed to pay the related transaction costs and fees. At December 28, 2013, the Company accrued a $0.3 million liability for transaction costs and fees and a related receivable of $0.3 million from Sysco.
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We believe that the combination of cash generated from operationstogether with availability under the debt agreements and other financing arrangementswill be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months. Our future financial and operating performance, ability to service or refinance our debt, and ability to comply with covenants and restrictions contained in our debt agreements will be subject to 1) future economic conditions, 2) the financial health of our customers and suppliers, and 3) financial, business and other factorsmany of which are beyond our control.
Every quarter, we perform a review of all of our lenders that have a continuing obligation to provide funding to us by reviewing rating agency changes. We are not aware of any facts that indicate our lender banks will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties.
The Company, its Sponsors or affiliates may, from time-to-time, repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, and other considerations. Our Sponsors or their affiliates may also purchase our debt from time-to-time, through open market purchases or other transactions. In these cases, our debt is not retired, and we would continue to pay interest in accordance with the terms of the debt.
Our credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends or make distributions on US Foods capital stock, or engage in mergers or consolidations. Certain debt agreements also contain various and customary events of default with respect to the loans. Those include, without limitation, the failure to pay interest or principal when this 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 outstandingplus unpaid interest and other amounts owedmay be declared immediately due and payable to the lenders. If this happened, we would be forced to seek new financing that may not be as favorable as our current facilities. Our ability to refinance indebtedness on favorable terms, or at all, is directly affected by the current economic and financial conditions. In addition, our ability to incur secured indebtedness (which may enable us to achieve more favorable terms than the incurrence of unsecured indebtedness) depends in part on the value of our assets. In turn, that depends, on the strength of our cash flows, results of operations, economic and market conditions and other factors. As of December 28, 2013, we were in compliance with all of our debt agreements.
Cash Flows
This table presents condensed highlights from the cash flow statements for the last three fiscal years:
2013 | 2012 | 2011 | ||||||||||
(in millions) | ||||||||||||
Net loss |
$ | (57 | ) | $ | (51 | ) | $ | (102 | ) | |||
Changes in operating assets and liabilities, net of acquisitions of businesses |
(123 | ) | (101 | ) | 84 | |||||||
Other adjustments |
502 | 468 | 437 | |||||||||
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Net cash provided by operating activities |
322 | 316 | 419 | |||||||||
Net cash used in investing activities |
(187 | ) | (380 | ) | (338 | ) | ||||||
Net cash (used in) provided by financing activities |
(197 | ) | 103 | (301 | ) | |||||||
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Net (decrease) increase in cash and cash equivalents |
(62 | ) | 39 | (220 | ) | |||||||
Cash and cash equivalents, beginning of period |
242 | 203 | 423 | |||||||||
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Cash and cash equivalents, end of period |
$ 180 | $242 | $ | 203 | ||||||||
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Cash flows provided by operating activities were $322 million in 2013, compared to $316 million in 2012 and $419 million in 2011.
Cash flows provided by operating activities in 2013 were unfavorably affected by changes in operating assets and liabilities. This included higher Inventories and Accounts receivable and lower Accounts payable. Cash flows provided by operating activities in 2012 were unfavorably affected by changes in operating assets and liabilities, including increases in Inventories and Accounts receivable and a decrease in Accrued expenses and other current liabilities, partially offset by an increase in Accounts payable and improved operating results. Cash flows provided by operating activities in 2011 were favorably affected by changes in operating assets and liabilities, including increases in Accounts payable and Accrued expenses and other current liabilities, and a decrease in Inventories, primarily offset by higher Accounts receivable.
Cash flows provided by operating activities increased $6 million in 2013 from 2012. Decreases in Accounts receivable and Inventories, and an increase in Accrued expenses and other current liabilities, were partially offset by lower Accounts payable and lower Operating income. The $103 million decrease in Cash flows provided by operating activities in 2012 versus 2011, was primarily due to an increase in Inventories of $239 million, partially offset by a $60 million decrease in Accounts receivable and improved operating results. The 2012 inventory increase was primarily attributable to higher inventory levels carried to support improved sales and better serve our customers.
Investing Activities
Cash flows used in investing activities in 2013 included purchases of property and equipment of $191 million, and proceeds from sales of property and equipment of $15 million. Cash flows used in investing activities for 2012 included purchases of property plant and equipment of $293 million, and proceeds from sales of property and equipment of $20 million. Cash flows used in investing activities during 2011 included property plant and equipment purchases of $304 million, and proceeds from property and equipment sales of $7 million.
Capital expenditures in 2013, 2012 and 2011 included fleet replacement and investments in information technology to improve our business, as well as new construction and/or expansion of distribution facilities. Additionally, we entered into $94 million of capital lease obligations for fleet replacement during 2013.
We expect cash capital expenditures in 2014 to be approximately $100 million. The expenditures will focus on information technology, warehouse equipment and facility construction and/or expansion. We expect to also enter into approximately $75 million of fleet capital leases in 2014. We expect to fund our 2014 capital expenditures with available cash balances or cash generated from operations.
Cash flows used in investing activities during 2013 included the acquisition of one foodservice distributor for $14 million in cash, plus a contingent consideration of $2 million. We also had a purchase price adjustment of $2 million in 2013 related to two 2012 acquisitions.
In 2012, Cash flows used in investing activities included business acquisitions of five foodservice distributors for $106 million in cash, plus a contingent consideration of $6 million. In 2011, Cash flows used in investing activities included business acquisitions of $41 million. These acquisitions have been or are being integrated into our foodservice distribution network.
Financing Activities
Cash flows used in financing activities of $197 million in 2013 primarily resulted from net payments on debt facilities, and costs and fees paid related to our 2013 debt refinancing transactions.
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In June 2013, we refinanced our term loan facilities into a new $2,100 million term facility. Lenders exchanged $1,634 million in principal under our previous term loan facilities for a like amount of principal in the new facility. We received proceeds of $466 million from continuing and new lenders purchasing additional principal in the new term loan facility. The cash proceeds were used to pay down $457 million in principal of the previous term loan facilities. In January 2013, we used proceeds of $388 million from Senior Note issuances primarily to redeem $355 million in principal of our Senior Subordinated Notes, plus an early redemption premium of $20 million. We incurred total cash costs of $29 million in connection with the 2013 debt refinancing transactions, including costs to register our Senior Notes. Additionally, we made net payments on our ABL Facility of $150 million as well as $27 million of scheduled payments on other debt facilities. In 2013, we paid $6 million of contingent consideration related to 2012 business acquisitions. In 2013, we paid $8 million to repurchase shares of common stock from employees who left US Foods. The shares were acquired under a management stockholders agreement associated with the stock incentive plan.
Cash flows from financing activities of $103 million in 2012 primarily resulted from net borrowings on debt facilities, partially offset by transaction costs and fees paid related to our 2012 debt refinancing transactions. We used proceeds of $584 million from Senior Note issuances largely to repay $249 million of 2007 Term Loan principal due July 3, 2014, and redeem $166 million in principal of our Senior Subordinated Notes, plus an early redemption premium of $9 million. Our CMBS floating rate loan matured on July 9, 2012. Its outstanding borrowings, totaling $163 million, were repaid with proceeds from our ABL Facility. Scheduled repayments on debt and capital leases were $18 million. We incurred total cash costs of $35 million in connection with 2012 debt refinancing transactions. In 2012, we received proceeds of $1 million from certain US Foods employees who purchased shares of common stock through a management stockholders agreement associated with the Companys stock incentive plan. We also paid $4 million to repurchase shares of common stock from employees who left US Foods.
Cash flows used in financing activities of $301 million in 2011 largely resulted from redeeming our Old Senior Notes, funded with a combination of new borrowings and cash on hand. We redeemed the Old Senior Notes for cash of $1.1 billion, including an early redemption premium of $64 million. We borrowed $900 million from our new debt facilities to fund the redemption, and paid financing costs of $29 million in connection with the transactions. We repaid the $225 million borrowed on our ABL Facility for working capital uses, and the $75 million of ABL Facility borrowings used in part to fund the redemption of the Old Senior Notes. Scheduled repayments on debt and capital leases totaled $39 million. We received proceeds of $10 million from certain employees who purchased shares of common stock under a management stockholders agreement associated with our stock incentive plan. We also paid $3 million to repurchase shares of common stock from employees who left US Foods.
Retirement Plans
We maintain several qualified retirement plans (the Retirement Plans) that pay benefits to certain employees, using formulas based on a participants years of service and compensation. We contributed $49 million, $47 million and $37 million to the Retirement Plans in fiscal years 2013, 2012 and 2011, respectively. Estimated required and discretionary contributions expected to be contributed by US Foods to the Retirement Plans in 2014 total $49 million. See Note 17Retirement Plans in the Notes to our Audited Consolidated Financial Statements.
We also contribute to various multiemployer benefit plans under collective bargaining agreements. Our contributions to these plans were $31 million, $28 million and $26 million in fiscal 2013, 2012 and 2011, respectively. At December 28, 2013, we had $60 million of multiemployer pension withdrawal liabilities related to closed facilities, payable in monthly installments through 2031, at effective interest rates of 5.9% to 6.7%. As discussed in Note 21Commitments and Contingencies in the Notes to our Audited Consolidated Financial Statements, during 2011 we were assessed an additional $17 million multiemployer pension withdrawal liability for a facility closed in 2008. We intend to vigorously defend the Company against the assessment for any additional pension withdrawal liability and against the claim. Because we do not believe that payment of these obligations is probable at this time, no liability has been recorded for this assessment.
Additionally, employees are eligible to participate in a US Foods-sponsored defined contribution 401(k) plan. This plan provides that, under certain circumstances, we may make matching contributions of up to 50% of the first 6% of a participants compensation. We made contributions to this plan of $25 million, $25 million and $23 million in fiscal years 2013, 2012 and 2011, respectively.
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Contractual Obligations
The following table includes information about contractual obligations as of December 28, 2013 that affects our liquidity and capital needs. The table includes information about payments due under specified contractual obligations and is aggregated by type of contractual obligation. It includes the maturity profile of our consolidated debt, operating leases and other long-term liabilities.
Payments Due by Period (in millions) | ||||||||||||||||||||
Total | Less Than 1 Year |
1-3 Years | 3-5 Years | More Than 5 Years |
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Recorded Contractual Obligations: |
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Long-term debt, including capital lease obligations |
$ | 4,752 | $ | 35 | $ | 784 | $ | 549 | $ | 3,384 | ||||||||||
Multiemployer pension withdrawal obligations(1) |
60 | 9 | 10 | 9 | 32 | |||||||||||||||
Uncertain tax positions, including interest and penalties(2) |
5 | | | 5 | | |||||||||||||||
Pension plans and other post-retirement benefits contributions(3) |
49 | 49 | | | | |||||||||||||||
Unrecorded Contractual Obligations: |
||||||||||||||||||||
Interest payments on debt(4) |
1,308 | 260 | 502 | 448 | 98 | |||||||||||||||
Operating leases |
195 | 33 | 53 | 40 | 69 | |||||||||||||||
Purchase obligations(5) |
631 | 630 | 1 | | | |||||||||||||||
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Total contractual cash obligations |
$ | 7,000 | $ | 1,016 | $ | 1,350 | $ | 1,051 | $ | 3,583 | ||||||||||
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(1) | The amount shown represents multiemployer pension withdrawal obligations payable primarily in monthly installments through 2031. |
(2) | The liabilities shown represent uncertain tax positions related to temporary differences and include $2 million in interest and penalties. |
(3) | Pension plans and other postretirement benefits contributions are based on estimates for 2014. We do not have minimum funding requirement estimates under ERISA guidelines for the plans beyond 2014. |
(4) | The amounts shown in the table include future interest payments on variable rate debt at current interest rates. |
(5) | Purchase obligations include agreements for purchases of product in the normal course of business, for which all significant terms have been confirmed. |
Off-Balance Sheet Arrangements
We entered into a $93 million letter of credit in favor of Ahold to secure their contingent exposure under guarantees of our obligations with respect to certain leases. Additionally, we entered into letters of credit of $183 million in favor of certain commercial insurers securing our obligations with respect to our self-insurance programs, and letters of credit of $17 million for other obligations.
Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
We have prepared the financial information in this report in accordance with accounting principles generally accepted in the United States of America. Preparing these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent
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assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most critical accounting policies and estimates pertain to the valuation of goodwill, other intangibles assets, property and equipment, accounts receivable, vendor consideration, self-insurance programs, and income taxes.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the net assets recorded in Goodwill. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess goodwill and other intangible assets with indefinite lives for impairment each yearor more frequently, if events or changes in circumstances indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, our policy is to assess for impairment at the beginning of each third quarter. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Our most recent assessment for impairment of goodwill used a discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples. These were employed to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we 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 most recent annual impairment analysis performed in 2013, we believe the fair value of the Companys reporting unit substantially exceeded its carrying value.
Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis.
Property and Equipment
Property and equipment held and used by us are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, we compare the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows do not exceed the carrying value, the carrying value is compared to the fair value of the asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess. We also assess the recoverability of our facilities classified as Assets held for sale. If a facilitys carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the excess. Assets held for sale are not depreciated. Impairments are recorded as a component of restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss) and a reduction of the assets carrying value on the Consolidated Balance Sheets.
Vendor Consideration
We participate in various rebate and promotional incentives with our suppliers, primarily through purchase-based programs. Consideration earned under these incentives is recorded as a reduction of inventory cost as our obligations under the programs are fulfilled, primarily by the purchase of product. Consideration is typically received in the form of invoice deductions or less often in the form of cash payments. Changes in the estimated amount of incentives to be received are treated as changes in estimates and are recognized in the period of change.
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Self-Insurance Programs
We accrue estimated liability amounts for claims covering general liability, fleet liability, workers compensation and group medical insurance programs. The amounts in excess of certain levels are fully insured. We accrue our estimated liability for the self-insured medical insurance program. This includes an estimate for claims that are incurred but not reported, based on known claims and past claims history. We accrue an estimated liability for the general liability, fleet liability and workers compensation programs, that is based on an assessment of exposure related to claims that are known and incurred but not reported, as applicable. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates.
Income Taxes
We account for income taxes under the asset and liability method. This requires us to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities. We use enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized.
An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination. That includes resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely to be sustained. We adjust the amounts for uncertain tax positions when our judgment changes after evaluating new information not previously available. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; and 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required, because the ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance in fiscal year 2014 is not expected to affect our financial statements and related disclosures, as we currently present unrecognized tax benefits in our financial statements as a reduction of deferred tax assets.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to presenteither on the face of the financial statements or in the notessignificant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The update does not change the items reported in other comprehensive income, or when an item of other comprehensive income is reclassified to net income. As this guidance only revises the presentation and disclosures related to the reclassification of items out of accumulated other comprehensive income, our adoption of this guidance in the first quarter of 2013 did not affect our financial position, results of operations or cash flows.
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Forward-Looking Statements
Some information in this report includes forward-looking statements. These statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. 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, seek, will, may, would, should, could, forecasts 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. This is due to a variety of important factorsboth positive and negativeincluding, without limitation, the risks and uncertainties which may cause our financial performance, business or operations to vary, or they may materially or adversely affect our financial performance, business or operations.
Here are some important factors, among others, that could affect our actual results:
| Our ability to remain profitable during times of cost inflation, 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 |
| 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 |
| Costs and risks associated with labor relations and the availability of qualified labor |
| Any change in our relationships with GPOs |
| Our ability to increase sales to independent customers |
| Changes in industry pricing practices |
| Changes in competitors cost structures |
| Costs and risks associated with government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment, laws and regulations, and changes in existing laws or regulations |
| Technology disruptions and our ability to implement new technologies |
| Liability claims related to products we distribute |
| Our ability to maintain a good reputation |
| Costs and risks associated with litigation |
| Our ability to manage future expenses and liabilities associated with our retirement benefits |
| Our ability to successfully integrate future acquisitions |
| Our ability to achieve the benefits that we expect from our cost savings programs |
| Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates |
| Our ability to consummate the Acquisition with Sysco |
| Other factors discussed in this report |
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In light of these risks, uncertainties and assumptions, the forward-looking statements in this report might not prove to be accurate, and you should not place undue reliance upon them. All forward-looking statements attributable to usor people acting on our behalfexpressly qualified in their entirety by the cautionary statements above. All of these statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Exhibit 99.4
Managements Discussion and Analysis of Financial Condition and Results of Operations
This managements discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and the notes thereto as of June 28, 2014 and for the 26 weeks ended June 28, 2014 and June 29, 2013. This discussion of our results includes certain non-GAAP financial measures. We believe these provide meaningful supplemental information about our operating performance, because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing our performance and underlying trends. More information on the rationale for these measures is discussed in Non-GAAP Reconciliations below.
Overview
USF Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to here as we, our, us, the Company, or USF. USF conducts all of its operations through its wholly owned subsidiary, US Foods, Inc. (US Foods). All of the indebtedness, as further described in Note 9-Debt, in the Notes to the Unaudited Consolidated Financial Statements, is an obligation of US Foods, and its subsidiaries. Through our wholly owned operating subsidiary, US Foods, we are a leading foodservice distributor in the United States, with about $22 billion in net sales in fiscal 2013. The Company provides an important link between our 5,000 suppliers and our 200,000 foodservice customers nationwide. We offer an innovative array of fresh, frozen and dry food, and non-food products, with approximately 350,000 stock-keeping units (SKUs). US Foods provides value-added services that meet specific customer needs. We believe US Foods has one of the most extensive private label product portfolios in foodservice distribution. For the latest fiscal year, this represented about 30,000 SKUs, and approximately $7 billion in net sales. Many customers benefit from our support services, such as product selection, menu preparation and costing strategies.
A sales force of approximately 4,000 associates market our food products to a diverse customer base. Our principal customers include independently owned single and multi-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations. We support our business with one of the largest private refrigerated fleets in the U.S., with roughly 6,000 trucks traveling an average of 200 million miles each year. We have standardized our operations across the country. That allows us to manage the business as a single operating segment with 61 divisions nationwide.
Outlook
The foodservice market is affected by general economic conditions, consumer confidence, and continued pressure on consumer disposable income. During 2014, we experienced inflationary pressures in several product categories. Periods of prolonged product cost inflation may have a negative impact on our profit margins and earnings to the extent such product cost increases are not able to be passed on to customers due to resistance to higher prices or having a negative impact on consumer spending.
The foodservice market is highly competitive and fragmented, with intense competition and modest demand growth. During 2014, we expect continued pressures on consumer spending and competition. Because we do not anticipate any material improvement in the demand for foodservice, we will likely see modest demand growth. We will remain focused on executing our growth strategies, adding value for and differentiating ourselves with our customers, and driving continued operational improvement in the business.
Proposed Acquisition by Sysco
Merger Agreement
On December 8, 2013, USF entered into an Agreement and Plan of Merger (the Merger Agreement) with Sysco Corporation, a Delaware corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, through which Sysco will acquire USF (the Acquisition) on terms and subject to the conditions set forth in the Merger Agreement. The aggregate purchase price will consist of $500 million in cash and approximately $3 billion in Syscos common stock, subject to possible downward adjustment pursuant to the Merger Agreement. It is anticipated the transaction will close either late in the third quarter or during the fourth quarter of this calendar year. The closing is subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). On February 18, 2014, USF and Sysco received a request for additional documentary materials from the Federal Trade Commission (the FTC) in connection with the Acquisition and the companies continue to work closely and cooperatively with the FTC as it conducts its review of the proposed merger. If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, or if the Acquisition does not close by a date as specified in the Merger Agreement, in certain circumstances Sysco will be required to pay USF a termination fee of $300 million.
Results of Operations
Accounting Periods
The Company operates on a 52-53 week fiscal year with all periods ending on a Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter.
Selected Historical Results of Operations
The following table presents selected historical results of operations of our business for the periods indicated:
26-Weeks Ended | ||||||||
June 28, 2014 |
June 29, 2013 |
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(in millions) | ||||||||
Net sales |
$ | 11,355 | $ | 11,064 | ||||
Cost of goods sold |
9,496 | 9,183 | ||||||
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Gross profit |
1,859 | 1,881 | ||||||
Operating expenses: |
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Distribution, selling and administrative costs |
1,778 | 1,754 | ||||||
Restructuring and tangible asset impairment charges |
| 4 | ||||||
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Total operating expenses |
1,778 | 1,758 | ||||||
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Operating income |
81 | 123 | ||||||
Interest expense, net |
146 | 160 | ||||||
Loss on extinguishment of debt |
| 42 | ||||||
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Income (loss) before income taxes |
(65 | ) | (79 | ) | ||||
Income tax provision (benefit) |
19 | | ||||||
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Net income (loss) |
$ | (84 | ) | $ | (79 | ) | ||
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Percentage of Net Sales: |
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Gross profit |
16.4 | % | 17.0 | % | ||||
Distribution, selling and administrative costs |
15.7 | % | 15.9 | % | ||||
Operating expenses |
15.7 | % | 15.9 | % | ||||
Operating income |
0.7 | % | 1.1 | % | ||||
Net income (loss) |
(0.7 | )% | (0.7 | )% | ||||
Other Data: |
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EBITDA (1) |
$ | 286 | $ | 273 | ||||
Adjusted EBITDA (1) |
$ | 407 | $ | 383 |
(1) | EBITDA and Adjusted EBITDA are measures used by management to measure operating performance. EBITDA is defined as Net loss, plus Interest expensenet, Income tax provision (benefit) and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for 1) Sponsor fees; 2) Restructuring and tangible and intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses, or charges as specified under our debt agreements; and 5) the non-cash impact of LIFO adjustments. EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required byor presented in accordance withaccounting principles generally accepted in the United States of America (GAAP). They are not measurements of our performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP or as alternatives to cash flows from operating activities as measures of our liquidity. |
See additional information about the use of these measures and Non-GAAP reconciliations below.
Non-GAAP Reconciliations
We believe these non-GAAP financial measures provide an important supplemental measure of our operating performance. This is because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing Company performance. Our management uses these non-GAAP financial measures to evaluate the Companys historical financial performance, establish future operating and capital budgets, and determine variable compensation for management and employees. Accordingly, our management includes those adjustments when assessing the business operating performance.
2
Our debt agreements specify items that should be added to EBITDA in arriving at Adjusted EBITDA. These include, among other things, Sponsor fees, share-based compensation expense, impairment charges, restructuring charges, the non-cash impact of LIFO adjustments, and gains and losses on debt transactions. Where there are other small, specified costs to add to EBITDA to arrive at Adjusted EBITDA, we combine those items under Other.
Costs to optimize our business were also added back to EBITDA to arrive at Adjusted EBITDA. These business transformation costs included third party and duplicate or incremental internal costs. Those items are related to functionalizing and optimizing our processes and systems in areas such as replenishment, finance, and category management, as well as in implementing our new brand image.
All of the items just mentioned are specified as additions to EBITDA to arrive at Adjusted EBITDA, per the Companys debt agreements. We caution readers that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA or Adjusted EBITDA in the same manner.
We present EBITDA because we consider it an important supplemental measure of our performance. It is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. We present Adjusted EBITDA as it is the key operating performance metric used by our Chief Operating Decision Maker to assess operating performance.
The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net income (loss) for the periods indicated:
26-Weeks Ended | ||||||||
June 28, 2014 |
June 29, 2013 |
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(in millions) | ||||||||
Net income (loss) |
$ | (84 | ) | $ | (79 | ) | ||
Interest expense, net |
146 | 160 | ||||||
Income tax (benefit) provision |
19 | | ||||||
Depreciation and amortization expense |
205 | 192 | ||||||
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EBITDA |
286 | 273 | ||||||
Adjustments: |
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Sponsor fees (1) |
5 | 5 | ||||||
Restructuring and tangible asset impairment charges (2) |
| 4 | ||||||
Share-based compensation expense (3) |
6 | 6 | ||||||
LIFO reserve change (4) |
49 | 7 | ||||||
Loss on extinguishment of debt (5) |
| 42 | ||||||
Business transformation costs (6) |
27 | 29 | ||||||
Sysco merger costs (7) |
20 | | ||||||
Other (8) |
14 | 17 | ||||||
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Adjusted EBITDA |
$ | 407 | $ | 383 | ||||
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(1) | Consists of management fees paid to the Sponsors. |
(2) | Primarily consists of facility closing, severance and related costs and tangible asset impairment charges. |
(3) | Represents costs recorded for stock option awards, restricted stock and, restricted stock units vested. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of old debt facility unamortized debt issuance costs. See Note 9Debt for a further description of debt refinancing transactions. |
(6) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(7) | Consists of direct and incremental costs related to the Acquisition. |
(8) | Other includes gains, losses or charges as specified under the Companys debt agreements. |
3
Comparison of Results
26-Weeks Ended June 28, 2014 and June 29, 2013
Highlights
Net sales increased $291 million, or 2.6%, in 2014 from 2013. Gross profit decreased $22 million, or 1.2%, from 2013. Operating expenses as a percentage of net sales were 15.7% in 2014 versus 15.9% in 2013. Operating income as a percentage of net sales decreased to 0.7% compared to 1.1% in 2013. Interest expense-net decreased $14 million to $146 million in 2014 from $160 million a year ago. In June 2013, we amended our 2011 and 2007 Term Loan facilities and recorded a loss on extinguishment of debt of $18 million. In January 2013, we redeemed the remaining $355 million in principal of our 11.25% Senior Subordinated Notes (Senior Subordinated Notes) and recorded a loss on extinguishment of debt of $24 million. There were no debt refinancing transactions in 2014. Net loss was $84 million for the 26-weeks ended June 28, 2014 versus net loss of $79 million for this time last year.
Net Sales
Net sales increased $291 million, or 2.6%, to $11,355 million in 2014 from $11,064 million in 2013. Increased sales to independent restaurants and healthcare and hospitality customers, was partially offset by decreased sales to national chain customers. Case volume decreased 1.0% from the prior year. Higher product cost favorably impacted net sales in 2014 by approximately $380 million, as a significant portion of our business is based on percentage markups over actual cost. Lower case volume unfavorably impacted 2014 Net sales by approximately $90 million.
Gross Profit
Gross profit decreased $22 million, or 1.2%, to $1,859 million in 2014 from $1,881 million last year. Lower gross profit reflected commodity pricing pressures, partially offset by merchandising initiatives. Gross profit as a percentage of net sales decreased by 0.6% to 16.4% versus 17.0% in 2013.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses increased $24 million, or 1.4%, to $1,778 million in 2014 from $1,754 million in 2013. As a percentage of net sales, we saw a decrease of 0.2% to 15.7% from 15.9% at this time last year. Increases in Distribution, selling and administrative costs included $20 million of 2014 direct and incremental costs related to the Merger Agreement, and a $13 million increase in Depreciation and amortization expense, primarily due to investments in technology and fleet. These increases were partially offset by an $8 million decrease in pension costs for Company sponsored plans.
Restructuring and Tangible Asset Impairment Charges
During 2014, we reversed $2 million of excess liabilities for an unused lease facility settlement and closed facility severance costs. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
During 2013, we incurred $2 million of severance costs, including $1 million for a multiemployer pension withdrawal liability and tangible asset impairment charges. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
Operating Income
Operating income decreased $42 million, or 34.1%, to $81 million, compared with $123 million in 2013. Operating income as a percent of net sales decreased 0.4% to 0.7% in 2014 as compared to 1.1% in 2013. The change was primarily due to the factors discussed above.
Interest Expense
Interest expense decreased $14 million to $146 million from $160 million in 2013 due to lower overall borrowing costs as a result of the US Foods 2013 debt refinancing transactions and a decrease in average borrowings on our revolving credit facility, partially offset by capital lease additions.
4
Loss on Extinguishment of Debt
The 2013 loss on extinguishment of debt consists of a write-off of unamortized debt issuance costs, as well as loan fees and third party costs relating to the Amended 2011 Term Loan and an early redemption premium and a write-off of unamortized debt issuance costs relating to the redemption of our 11.25% Senior Subordinated Notes. For a detailed description of our Senior Subordinated Notes redemption transaction, see Note 9Debt in the Notes to our Unaudited Consolidated Financial Statements.
Income Taxes
The Company estimated its annual effective tax rate to be applied to the results of the 26-weeks ended June 28, 2014 and June 29, 2013. In estimating its annual effective tax rate, the Company excluded the effects of the valuation allowance necessary as a result of the tax amortization of its goodwill and trademarks. The valuation allowance impact of the tax amortization of goodwill and trademarks has been measured discretely for the quarter to calculate the income taxes. Given the Companys cumulative tax loss position, the impact of the projected current year book income and non-deductible items is being offset by a commensurate valuation allowance adjustment within the annual effective tax rate. The Company concluded that to use the forecasted annual effective tax rate, unadjusted for the effects of the valuation allowance related to the tax amortization of the goodwill and trademarks as described above would not be reliable for use in quarterly reporting of income taxes due to such rates significant sensitivity to minimal changes in forecasted annual pre-tax income. The impact of including the tax goodwill and trademarks amortization in the annual effective tax rate computation, as applied to the pre-tax loss of $65 million for the period, would be distortive to the financial statements. As a result of these considerations, management concluded that the readers of the financial statements would best benefit from a tax provision for the quarter that reflects the accretion of the valuation allowance on a discrete, ratable basis.
The valuation allowance against the net deferred tax assets was $117 million at December 28, 2013. The deferred tax assets related to federal and state net operating losses, increased $48 million during the 26-weeks ended June 28, 2014, which resulted in a $165 million total valuation allowance at June 28, 2014. A full valuation allowance on the net deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance.
We recorded an income tax provision of $19 million for the 26-weeks ended June 28, 2014 compared with a minimal income tax provision in the prior year period. The effective tax rate for the 26-weeks ended June 28, 2014 and June 29, 2013 of 28% and 0%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 26-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $48 million and $20 million, respectively, as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
Net Loss
Our net loss increased $5 million to $84 million in 2014 as compared with net loss of $79 million in 2013. The higher net loss was primarily due to the factors discussed above.
Liquidity and Capital Resources
Our operations and strategic objectives require continuing capital investment. Company resources include cash provided by operations, as well as access to capital from bank borrowings, various types of debt, and other financing arrangements. However, in connection with the Merger Agreement, we have agreed to several debt-related terms. These include our agreement 1) not to incur indebtedness in excess of $20 million other than to fund working capital expenses in the ordinary course of business and certain other agreed-upon expenditures, and 2) not to make any capital expenditures or commitmentsor enter into fleet capital leases in excess of $100 million per yearother than in the ordinary course of business consistent with past practice.
The Merger Agreement provides for restrictive covenants that limit our ability to take certain actions. These include raising capital and conducting other financing activities. However, we do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months.
Indebtedness
We are highly leveraged, with significant scheduled debt maturities during the next five years. A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing costs of operations, working capital and capital expenditures.
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As of June 28, 2014, we had $4,816 million in aggregate indebtedness outstanding. We had commitments for additional borrowings under our asset-based senior secured revolving loan ABL Facility (ABL Facility) and our 2012 ABS Facility (2012 ABS Facility) of $927 million (of which $875 million was available based on our borrowing base), all of which were secured.
Our primary financing sources for working capital and capital expenditures are the ABL Facility and the 2012 ABS Facility.
The ABL Facility provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of June 28, 2014, we had no outstanding borrowings, but had issued Letters of Credit totaling $287 million under the ABL Facility. There was available capacity on the ABL Facility of $813 million at June 28, 2014, based on the borrowing base calculation.
Under the 2012 ABS Facility, the Company and certain subsidiaries sell, on a revolving basis, their eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of the Company. This subsidiary, in turn, grants to the administrative agent for the benefit of the lenders a continuing security interest in all of its rights, title and interest in the eligible receivables (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million, with its capacity limited by borrowing base calculations. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014. The Company, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of $62 million at June 28, 2014, based on the borrowing base calculation. On August 8, 2014, the 2012 ABS Facility was amended whereby the maturity date was extended from August 27, 2015 to August 5, 2016 (or the termination date of the ABL Facility, if earlier), and the interest rate on outstanding borrowings was reduced 25 basis points. The Company incurred $1 million of costs and fees related to the 2012 ABS Facility amendment.
The Company has $1,350 million of 8.5% unsecured Senior Notes due June 30, 2019 outstanding as of June 28, 2014. On December 19, 2013, the indenture for the Senior Notes (the Senior Note Indenture) was amended so that the Acquisition by Sysco will not constitute a Change of Control. This was authorized through the consent of the holders of our Senior Notes. In the event of a Change of Control, the holders of the Senior Notes would have the right to require the Company to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under the terms of the Merger Agreement, or is not completed by September 8, 2015, the Senior Note Indenture will revert to its original terms. Holders of the Senior Notes received fees of $3.4 million as consideration for agreeing to the amendment. Under the Merger Agreement, Sysco funded the payment of the consent fees to the holders in December 2013.
Due to the debt refinancing transactions completed in 2013 and 2012, $3.4 billion of our debt facilities will not mature until 2019. Our remaining $1.4 billion of debt facilities mature at various dates, including $700 million in 2015 and $500 million in 2017. As economic conditions permit, we will consider further opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms. Any further potential debt reduction or refinancing could require significant use of our liquidity and capital resources. For a detailed description of our indebtedness, see Note 9Debt in the Notes to our Unaudited Consolidated Financial Statements.
We believe that the combination of cash generated from operationstogether with availability under our debt agreements and other financing arrangementswill be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months. Our future financial and operating performance, ability to service or refinance our debt, and ability to comply with covenants and restrictions contained in our debt agreements will be subject to 1) future economic conditions, 2) the financial health of our customers and suppliers, and 3) financial, business and other factorsmany of which are beyond our control.
Every quarter, we perform a review of all of our lenders that have a continuing obligation to provide funding to us by reviewing rating agency changes. We are not aware of any facts that indicate our lender banks will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties.
The Company, its Sponsors or affiliates may, from time-to-time, repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, and other considerations. Our Sponsors or their affiliates may also purchase our debt from time-to-time, through open market purchases or other transactions. In these cases, our debt is not retired, and we would continue to pay interest in accordance with the terms of the debt.
Our credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. Certain debt agreements also contain various and customary events of default with respect to the loans. Those include, without limitation, the failure to pay interest or principal when this is due under the agreements, cross default
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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 outstandingplus unpaid interest and other amounts owedmay be declared immediately due and payable to the lenders. If this happened, we would be forced to seek new financing that may not be as favorable as our current facilities. Our ability to refinance indebtedness on favorable terms, or at all, is directly affected by the current economic and financial conditions. In addition, our ability to incur secured indebtedness (which may enable us to achieve more favorable terms than the incurrence of unsecured indebtedness) depends on the strength of our cash flows, results of operations, economic and market conditions and other factors. As of June 28, 2014, we were in compliance with all of our debt agreements.
Cash Flows
For the periods presented, the following table presents condensed highlights from the cash flow statements:
26-Weeks Ended | ||||||||
June 28, 2014 | June 29, 2013 | |||||||
(in millions) | ||||||||
Net loss |
$ | (84 | ) | $ | (79 | ) | ||
Changes in operating assets and liabilities |
86 | (69 | ) | |||||
Other adjustments |
245 | 258 | ||||||
|
|
|
|
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Net cash provided by operating activities |
247 | 110 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(66 | ) | (86 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(44 | ) | (63 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
137 | (39 | ) | |||||
Cash and cash equivalents, beginning of period |
180 | 242 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 317 | $ | 203 | ||||
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|
|
|
Operating Activities
Cash flows provided by operating activities were $247 million and $110 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively. Cash flows provided by operating activities increased $137 million in 2014 from 2013. Higher accounts payable and a decrease in inventories, were partially offset by an increase in accounts receivable and lower accrued expenses and other liabilities.
Cash flows provided by operating activities in 2014 were favorably affected by changes in operating assets and liabilitiesincluding a decrease in inventories and an increase in accounts payable, partially offset an increase in accounts receivable and a decrease in accrued expenses and other current liabilities. Cash flows from operating activities include $6 million of insurance recoveries related to tornado damage to a distribution facility. Cash flows provided by operating activities in 2013 were unfavorably affected by changes in operating assets and liabilitiesincluding an increase in accounts receivable and a decrease in accounts payablepartially offset by a decrease in inventories.
Investing Activities
Cash flows used in investing activities for the 26-weeks ended June 28, 2014 included purchases of property and equipment of $75 million, proceeds from sales of property and equipment of $7 million and $2 million of insurance recoveries related to property and equipment of a distribution facility damaged by a tornado. Last years cash flows from investing activities included purchases of property and equipment of $97 million, and proceeds from sales of property and equipment of $11 million.
Capital expenditures in 2014 and 2013 included fleet replacement and investments in information technology to improve our business, as well as new construction and/or expansion of distribution facilities. Additionally, we entered into $90 million and $52 million of capital lease obligations during the 26-week periods in 2014 and 2013, respectively. The 2014 capital lease obligations included $63 million for fleet replacement and $27 million for a distribution facility addition. The 2013 capital lease obligations were primarily for fleet replacement.
We expect cash capital expenditures in 2014 to be approximately $190 million, including the amounts described above. The expenditures will focus on information technology, warehouse equipment and facility construction and/or expansion, including approximately $10 million as we begin construction on a new facility to replace the distribution facility severely damaged by a tornado in April 2014. We also expect fleet capital leases during 2014 to total $75 million, including the amounts described above. We expect to fund our 2014 capital expenditures with available cash balances or cash generated from operations.
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Financing Activities
Cash flows used by financing activities of $44 million during the 26-weeks ended June 28, 2014 resulted from $20 million of net payments on our ABL Facility and $24 million of scheduled payments on other debt facilities and capital lease obligations.
For the same time in 2013, cash flows used in financing activities of $63 million primarily resulted from net payments on debt facilities, and costs and fees paid related to our 2013 debt refinancing transactions. In June 2013, we refinanced our term loan facilities into a new $2,100 million term loan facility. Lenders exchanged $1,634 million in principal under our previous term loan facilities for a like amount of principal in the new term loan facility and we received proceeds of $466 million from continuing and new lenders purchasing additional principal in the new term loan facility. The cash proceeds were used to pay down $457 million in principal of the previous term loan facilities. In January 2013, we used proceeds of $388 million from Senior Note issuances primarily to redeem $355 million in principal of our Senior Subordinated Notes, plus an early redemption premium of $20 million. We incurred total cash costs of $29 million in connection with the 2013 debt refinancing transactions, including costs to register our Senior Notes. Additionally, we made net payments on our ABL Facility of $40 million as well as $15 million of scheduled payments on other debt facilities. In 2013, we paid $2 million to repurchase shares of common stock from employees who left US Foods. The shares were acquired under a management stockholders agreement associated with the stock incentive plan.
Retirement Plans
We maintain several qualified retirement plans (the Retirement Plans) that pay benefits to certain employees at retirement, using formulas based on a participants years of service and compensation. We contributed $24 million and $19 million to the Retirement Plans during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively. We expect to make $49 million total contributions, including payments described above, to the Retirement Plans in 2014.
The Company also contributes to various multiemployer benefit plans under collective bargaining agreements. We contributed $16 million during 2014 and $15 million during this time last year. At June 28, 2014, we had $56 million of multiemployer pension withdrawal liabilities relating to closed facilities, payable in monthly installments through 2031, at effective interest rates ranging from 5.9% to 6.7%. As discussed in Note 15Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements, we were assessed an additional $17 million multiemployer pension withdrawal liability for a facility closed in 2008. We believe we have meritorious defenses against this assessment and intend to vigorously defend ourselves against the claim. At this time, we do not believe that paying this obligation is probable and, accordingly, have recorded no related liability.
Pricing Litigation
As described in Note 15Commitments and Contingencies in the Notes to our Unaudited Consolidated Financial Statements, on May 20, 2014 an agreement in principle was reached to settle a pricing practices class action complaint against the Company and Ahold relating to periods prior to the 2007 acquisition of the Company by it Sponsors for $297 million. Ahold has indemnified the Company in regards to this matter and, as a consequence, payment of the settlement will be made by Ahold and will not impact the Companys results of operations or cash flows. The settlement was preliminarily approved by the United States District Court for the District of Connecticut on July 14, 2014 and is subject to final approval by late 2014 or early 2015. The settlement is also subject to potential reduction and/or termination based on the compensable sales volume attributable to class members that elect to opt out of the settlement. The Company has recorded a $297 million current liability and a corresponding $297 million indemnification receivable from Ahold in its June 28, 2014 Consolidated Balance Sheet to reflect the probable settlement of this matter. Based on the language in the proposed settlement agreement, public written statements of Ahold and the financial condition of Ahold management believes that Ahold will satisfy its obligation under the indemnification agreement.
Insurance Recoveries Tornado Loss
As described in Note 15Commitments and Contingencies in the Notes to our Unaudited Consolidated Financial Statements, on April 28, 2014, a tornado severely damaged a distribution facility and its contents, including building improvements, equipment and inventory. In order to service customers, business from the damaged facility was reassigned to other distribution facilities. We have insurance coverage on the distribution facility and its contents, as well as business interruption insurance. Our insurance policies provide for recoveries of the damaged property at replacement value and the damaged inventory at the greater of 1) expected selling price less unincurred selling costs or 2) cost plus 10%. Discussions are underway with the insurance carrier regarding the Companys claims on the loss of the building and its contents, and the loss related to the business interruption. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. The timing of and amounts of ultimate insurance recoveries is not known at this time.
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As a result of the tornado damage, we recorded a tangible asset impairment charge of $3 million and a net charge to cost of goods sold of $14 million for damaged inventory. In addition, the Company has incurred costs of $3 million in the second quarter of 2014, including debris removal and clean-up costs, subject to coverage under its insurance policies. At June 28, 2014, these charges are offset by $8 million of initial advance payments received from insurance carriers and a receivable for insurance recoveries of $11 million that we have deemed as probable of recovery.
Retention and Transaction Bonuses
As part of the Merger Agreement, the Company was given rights to offer retention and transaction bonuses to certain current employees that are integral to the successful completion of the transaction. The Company was approved to offer a maximum of $31.5 million and $10 million of retention bonuses and transaction bonuses, respectively. Additionally, the Companys Chief Executive Officer (CEO) has agreed to reduce his continuation of base salary payments and bonus amounts by $3 million to be allocated at his discretion as bonuses to current employees (other than himself). The retention, transaction and other bonus payments are subject to consummation of the Acquisition and are payable on or after the transaction date. As of June 28, 2014, the Company has not and is not required to record a liability for these bonuses until the Acquisition is consummated.
Off-Balance Sheet Arrangements
We entered into letters of credit of $89 million in favor of certain lessors securing our obligations with respect to certain leases in favor of Ahold, securing Aholds contingent exposure under guarantees of our obligations with respect to those leases. Additionally, we entered into letters of credit of $183 million in favor of certain commercial insurers, securing our obligations for our insurance program, and letters of credit of $15 million for other obligations.
Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
We have prepared the financial information in this report in accordance with GAAP. Preparing these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The most critical accounting policies and estimates pertain to the valuation of goodwill and other intangible assets, property and equipment, vendor consideration, self-insurance programs, and income taxes.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the net assets recorded in Goodwill. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess goodwill and other intangible assets with indefinite lives for impairment each yearor more frequently, if events or changes in circumstances indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, our policy is to assess for impairment at the beginning of each fiscal third quarter. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Our most recent assessment for impairment of goodwill used a discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples. These were employed to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we 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 most recent annual impairment analysis performed in 2013, we believe the fair value of the Companys reporting unit substantially exceeded its carrying value.
Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis.
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Property and Equipment
Property and equipment held and used by us are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, we compare the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows do not exceed the carrying value, the carrying value is compared to the fair value of the asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess. We also assess the recoverability of our closed facilities actively marketed for sale. If a facilitys carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the excess. Assets held for sale are not depreciated.
Impairments are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as a reduction of the assets carrying value in the Consolidated Balance Sheets.
Vendor Consideration
We participate in various rebate and promotional incentives with our suppliers, primarily through purchase-based programs. Consideration earned under these incentives is recorded as a reduction of inventory cost, as the Companys obligations under the programs are fulfilled primarily when products are purchased. Consideration is typically received in the form of invoice deductions, or less often in the form of cash payments. Changes in the estimated amount of incentives earned are treated as changes in estimates and are recognized in the period of change.
Self-Insurance Programs
We accrue estimated liability amounts for claims covering general liability, fleet liability, workers compensation and group medical insurance programs. The amounts in excess of certain levels are fully insured. We accrue our estimated liability for the self-insured medical insurance program. This includes an estimate for claims that are incurred but not reported, based on known claims and past claims history. We accrue an estimated liability for the general liability, fleet liability and workers compensation programs, that is based on an assessment of exposure related to claims that are known and incurred but not reported, as applicable. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized.
An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely than not to be sustained. We adjust the amounts recorded for uncertain tax positions when our judgment changes as a result of the evaluation of new information not previously available. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers, which will be introduced into the FASBs Accounting Standards Codification as Topic 606. Topic 606 replaces the previous guidance on revenue recognition in Topic 605. The core principle of the new standard 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 standard will be effective for us in the first quarter of 2017, with early adoption not permitted. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact of this ASU and have not yet selected an implementation approach.
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In April 2014, the FASB issued ASU No. 2014-8, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the criteria for reporting discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. The update states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) or a major equity method investment. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends, with early adoption permitted. Our adoption of this guidance in the first quarter of 2014 had no impact on our financial position, results of operations or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; and 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required, because this ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2013. Our adoption of this guidance in the first quarter of 2014 had no impact on our financial position, results of operations or cash flows.
Forward-Looking Statements
This report includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. 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, seek, will, may, would, should, could, forecasts, or similar expressions. These statements are based on certain assumptions that we have made in light of our industry experience, as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in these circumstances. 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 due to a variety of important factors, positive and negative.
Here are some important factors, among others, that could affect our actual results:
| Our ability to remain profitable during times of cost inflation, 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 |
| 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 |
| Costs and risks associated with labor relations and the availability of qualified labor |
| Any change in our relationships with GPOs |
| Our ability to increase sales to independent customers |
| Changes in industry pricing practices |
| Changes in competitors cost structures |
| Costs and risks associated with government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment, laws and regulations, and changes in existing laws or regulations |
| Technology disruptions and our ability to implement new technologies |
| Liability claims related to products we distribute |
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| Our ability to maintain a good reputation |
| Costs and risks associated with litigation |
| Our ability to manage future expenses and liabilities associated with our retirement benefits |
| Our ability to successfully integrate future acquisitions |
| Our ability to achieve the benefits that we expect from our cost savings programs |
| Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates |
| Our ability to consummate the Acquisition with Sysco |
| Other factors discussed in this report |
In light of these risks, uncertainties and assumptions, the forward-looking statements in this report might not prove to be accurate, and you should not place undue reliance on them. All forward-looking statements attributable to usor people acting on our behalfare expressly qualified in their entirety by the cautionary statements above. All of these statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.
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