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Dynamic quotes 
OFFON

US FOODS HOLDING CORP.

(USFD)
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US FOODS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/09/2021 | 04:43pm EDT
(Dollar amounts presented in millions, unless otherwise noted)
The following discussion and analysis should be read together with the
accompanying unaudited consolidated financial statements and the notes thereto
included in this Quarterly Report and the audited consolidated financial
statements and the notes thereto in the 2020 Annual Report. The following
discussion and analysis contain certain financial measures that are not required
by, or presented in accordance with GAAP. We believe these non-GAAP measures
provide meaningful supplemental information about our operating performance and
liquidity. Information regarding reconciliations of and the rationale for these
measures is discussed under "Non-GAAP Reconciliations" below. Results of
operations for the 13 weeks and 26 weeks ended July 3, 2021 are compared to the
13 weeks and 26 weeks ended June 27, 2020 unless specifically noted otherwise.
Overview
At US Foods, our promise is to help customers Make It by providing the
innovative products and easy-to-use technology solutions they need to operate
their businesses profitably. This promise is supported by our GREAT FOOD. MADE
EASY.™ strategy. We operate as one business with standardized business
processes, shared systems infrastructure, and an organizational model that
optimizes national scale with local execution, allowing us to manage the
business as a single operating segment. We have centralized activities where
scale matters and our local field structure focuses on customer facing
activities.
We supply approximately 300,000 customer locations nationwide. These customer
locations include independently owned single and multi-unit restaurants,
regional restaurant chains, national restaurant chains, hospitals, nursing
homes, hotels and motels, country clubs, government and military organizations,
colleges and universities, and retail locations. We provide more than 400,000
fresh, frozen, and dry food stock-keeping units, or SKUs, as well as non-food
items, sourced from approximately 6,000 suppliers. Approximately 3,500 sales
associates manage customer relationships at local, regional, and national
levels. Our sales associates are supported by sophisticated marketing and
category management capabilities, as well as a sales support team that includes
world-class chefs and restaurant operations consultants, new business
development managers and others that help us provide more comprehensive service
to our customers. Our extensive network of approximately 70 distribution
facilities and fleet of approximately 6,500 trucks, along with 80 cash and carry
locations, allow us to operate efficiently and provide high levels of customer
service. This operating model allows us to leverage our nationwide scale and
footprint while executing locally.
COVID-19 Update
In March 2020, the World Health Organization characterized COVID-19 as a
pandemic amidst a rising number of confirmed cases and thousands of deaths
worldwide. Starting in March 2020, in order to reduce the spread of COVID-19 and
its variants, many countries, including the United States, took steps to
restrict travel, temporarily close or enforce capacity restrictions on
businesses, schools and other public gathering spaces including restaurants and
recreational, sporting and other similar venues. Since December 2020, three
vaccines for COVID-19 have been authorized by the FDA for emergency use and
beginning in May 2021, all individuals 12 years old and older in the United
States became eligible to receive a vaccine. During the 13 weeks ended July 3,
2021, the CDC and most states have significantly relaxed restrictions and safety
measures, such as capacity limits, physical distancing and face mask protocols,
as a result of significant progress made in vaccinating the U.S. public and the
resulting decline in COVID-19 cases.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has adversely impacted many of our customers, especially
our restaurant, hospitality and education customers. As a result, we experienced
decreased demand for our products, resulting in lower Net sales and total case
volumes beginning in mid-March 2020. We saw improvement in Net sales and total
case volumes during the second quarter of 2021 as compared to the first quarter
of 2021, with additional loosening of indoor dining restrictions and other
safety measures. Overall demand has started to return to pre-COVID-19 levels;
however, case volumes remained lower than pre-COVID-19 levels. Total case volume
increased 53.5% and 22.1% for the 13 weeks and 26 weeks ended July 3, 2021,
compared to the prior year.
Economic and operating conditions for our business have improved in the first
and second quarters of 2021 as compared to the fourth quarter of 2020. Most of
the restrictions have been lifted and consumers are returning to consuming food
away from home, traveling for personal and business purposes and attending
sporting and other events regularly. However, we and the industry may continue
to face challenges as the recovery continues, such as the availability of
product supply, increased product and logistics costs, access to labor supply,
and changes in our customer mix.
Operating Metrics
Case growth-Case growth, by customer type (e.g., independent restaurants) is
reported as of a point in time. Customers periodically are reclassified, based
on changes in size or other characteristics, and when those changes occur, the
respective customer's historical volume follows its new classification.
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Organic growth-Organic growth includes growth from operating business that has
been reflected in our results of operations for at least 12 months.
Highlights
Financial Highlights-Total case volume for the 13 weeks and 26 weeks ended July
3, 2021 increased 53.5% and 22.1%, respectively, and independent restaurant case
volume increased 79.1% and 38.5%, respectively for those same periods. Net sales
increased $3,103 million, or 68.0%, and $3,059 million, or 28.1% for the 13
weeks and 26 weeks ended July 3, 2021, primarily due to volume improvements
commensurate with easing of restrictions on our customers. The increase in Net
sales during the 26 weeks ended July 3, 2021 was also due to the contributions
from the Smart Foodservice acquisition, which was acquired on April 24, 2020.
Smart Foodservice contributed Net sales of $584 million and $208 million for the
26 weeks ended July 3, 2021 and June 27, 2020, respectively.
Gross profit increased $498 million, or 74.2%, to $1,169 million for the 13
weeks ended July 3, 2021, and increased $435 million, or 25.0%, to $2,172
million for the 26 weeks ended July 3, 2021, primarily as a result of the
increase in Net sales. The increase in gross profit during the 26 weeks ended
July 3, 2021 was also due to the contributions from the Smart Foodservice
acquisition. These increases in gross profit were partially offset by
unfavorable year-over-year LIFO adjustments. As a percentage of net sales, gross
profit was 15.3% for the 13 weeks ended July 3, 2021, compared to 14.7% for the
prior year period and was 15.6% for the 26 weeks ended July 3, 2021, compared to
15.9% for the prior year period.
Total operating expenses increased $315 million, or 43.2%, to $1,045 million for
the 13 weeks ended July 3, 2021, and increased $98 million, or 5.1%, to $2,020
million for the 26 weeks ended July 3, 2021. The increase was primarily due to
higher supply chain labor costs and increased distribution costs, including
increased fuel costs and increased repair and maintenance costs related to
increased sales volume due to the recovery. The increase in total operating
expenses during the 26 weeks ended July 3, 2021 was also due to the inclusion of
operating expenses from the Smart Foodservice acquisition. As a percentage of
net sales, operating expenses were 13.6% for the 13 weeks ended July 3, 2021,
compared to 16.0% for the prior year period and was 14.5% for the 26 weeks ended
July 3, 2021, compared to 17.6% for the prior year period.
Smart Foodservice Acquisition-On April 24, 2020, USF completed the acquisition
of Smart Foodservice. Total consideration paid at the closing of the acquisition
was $972 million (net of cash acquired). The acquisition of Smart Foodservice
expanded the Company's cash and carry business in the West and Northwest parts
of the U.S. The assets, liabilities and results of operations of Smart
Foodservice have been included in our consolidated financial statements since
the date the acquisition was completed.
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Results of Operations
The following table presents selected historical results of operations for the
periods indicated:
                                                          13 Weeks Ended                              26 Weeks Ended
                                                July 3, 2021         June 27, 2020         July 3, 2021          June 27, 2020
Consolidated Statements of Operations Data:
Net sales                                      $     7,663$      4,560$     13,958$      10,899
Cost of goods sold                                   6,494                 3,889                11,786                  9,162
Gross profit                                         1,169                   671                 2,172                  1,737
Operating expenses:
Distribution, selling and administrative costs       1,044                   714                 2,016                  1,906
Restructuring costs and asset impairment
charges                                                  1                    16                     4                     16
Total operating expenses                             1,045                   730                 2,020                  1,922
Operating income (loss)                                124                   (59)                  152                   (185)
Other income-net                                        (6)                   (4)                  (13)                   (10)
Interest expense-net                                    54                    63                   108                    115
Loss on extinguishment of debt                           -                     -                    23                      -
Income (loss) before income taxes                       76                  (118)                   34                   (290)
Income tax provision (benefit)                          21                   (26)                    3                    (66)
Net income (loss)                                       55                   (92)                   31                   (224)
Series A convertible preferred stock dividends
(see Note 14)                                           (9)                   (5)                  (24)                    (5)
Net income (loss) available to common
shareholders                                   $        46          $       

(97) $ 7 $ (229) Percentage of Net Sales: Gross profit

                                          15.3  %               14.7  %               15.6  %                15.9  %
Operating expenses                                    13.6  %               16.0  %               14.5  %                17.6  %
Operating income (loss)                                1.6  %               (1.3) %                1.1  %                (1.7) %
Net income (loss)                                      0.7  %               (2.0) %                0.2  %                (2.1) %
Adjusted EBITDA(1)                                     4.3  %                1.9  %                3.6  %                 2.4  %
Other Data:
Cash flows-operating activities                $        74$        832$        250          $         770
Cash flows-investing activities                        (55)               (1,022)                 (101)                (1,096)
Cash flows-financing activities                       (232)                  781                  (279)                 1,904
Capital expenditures                                    61                    52                   107                    131
EBITDA(1)                                              224                    51                   337                     32
Adjusted EBITDA(1)                                     332                    88                   504                    265
Adjusted net income(1)                                 146                   (49)                  173                    (17)
Free cash flow(2)                                       13                   780                   143                    639


(1)  EBITDA is defined as net (loss) income, plus interest expense-net, income
tax (benefit) provision, and depreciation and amortization. Adjusted EBITDA is
defined as EBITDA adjusted for: (1) restructuring costs and asset impairment
charges; (2) share-based compensation expense; (3) the non-cash impact of LIFO
reserve adjustments; (4) loss on extinguishment of debt; (5) business
transformation costs; and (6) other gains, losses, or costs as specified in the
agreements governing our indebtedness. Adjusted net income is defined as net
income excluding the items used to calculate Adjusted EBITDA listed above and
further adjusted for the tax effect of the exclusions and discrete tax items.
EBITDA, Adjusted EBITDA, and Adjusted net income as presented in this Quarterly
Report are supplemental measures of our performance that are not required by, or
presented in accordance with, GAAP. They are not measurements of our performance
under GAAP and should not be considered as alternatives to net (loss) income or
any other performance measures derived in accordance with GAAP. For additional
information, see the discussion under the caption "Non-GAAP Reconciliations"
below.
(2)   Free cash flow is defined as cash flows provided by operating activities
less cash capital expenditures. Free cash flow as presented in this Quarterly
Report is a supplemental measure of our liquidity that is not required by, or
presented in accordance with, GAAP. It is not a measure of our liquidity under
GAAP and should not be considered as an alternative to cash flows provided by
operating activities or any other liquidity measures derived in accordance with
GAAP. For additional information, see the discussion under the caption "Non-GAAP
Reconciliations" below.
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Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow as
supplemental measures to GAAP financial measures regarding our operating
performance and liquidity. These non-GAAP financial measures, as defined above,
exclude the impact of certain items and, therefore, have not been calculated in
accordance with GAAP.
We believe EBITDA and Adjusted EBITDA provide meaningful supplemental
information about our operating performance because they exclude amounts that we
do not consider part of our core operating results when assessing our
performance.
We believe that Adjusted net income is a useful measure of operating performance
for both management and investors because it excludes items that are not
reflective of our core operating performance and provides an additional view of
our operating performance including depreciation, interest expense and income
taxes on a consistent basis from period to period. We believe that Adjusted net
income may be used by investors, analysts and other interested parties to
facilitate period-over-period comparisons and provides additional clarity as to
how factors and trends impact our operating performance.
Management uses these non-GAAP financial measures (1) to evaluate our historical
and prospective financial performance as well as our performance relative to our
competitors as they assist in highlighting trends, (2) to set internal sales
targets and spending budgets, (3) to measure operational profitability and the
accuracy of forecasting, (4) to assess financial discipline over operational
expenditures, and (5) as an important factor in determining variable
compensation for management and employees. EBITDA and Adjusted EBITDA are also
used in connection with certain covenants and activity restrictions under the
agreements governing our indebtedness. We also believe these and similar
non-GAAP financial measures are frequently used by securities analysts,
investors, and other interested parties to evaluate companies in our industry.
EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our
performance under GAAP and should not be considered as alternatives to net
income or any other performance measures derived in accordance with GAAP.
We use Free cash flow as a supplemental measure to GAAP financial measures
regarding the liquidity of our operations. We measure Free cash flow as cash
flows provided by operating activities less cash capital expenditures. We
believe that Free cash flow is a useful financial metric to assess our ability
to pursue business opportunities and investments. Free cash flow is not a
measure of our liquidity under GAAP and should not be considered as an
alternative to cash flows provided by operating activities or any other
liquidity measures derived in accordance with GAAP.
We caution readers that amounts presented in accordance with our definitions of
EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the
same as similar measures used by other companies. Not all companies and analysts
calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the
same manner. We compensate for these limitations by using these non-GAAP
financial measures as supplements to GAAP financial measures and by presenting
the reconciliations of the non-GAAP financial measures to their most comparable
GAAP financial measures.
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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and
Free cash flow to the most directly comparable GAAP financial performance and
liquidity measures for the periods indicated:
                                                            13 Weeks Ended                                26 Weeks Ended
                                                 July 3, 2021           June 27, 2020          July 3, 2021           June 27, 2020
Net income (loss) available to common
shareholders                                    $      46             $          (97)         $          7          $         (229)
Series A convertible preferred stock dividends
(see Note 14)                                          (9)                        (5)                  (24)                     (5)
Net income (loss)                                      55                        (92)                   31                    (224)
Interest expense-net                                   54                         63                   108                     115
Income tax provision (benefit)                         21                        (26)                    3                     (66)
Depreciation expense                                   81                         87                   163                     169
Amortization expense                                   13                         19                    32                      38
EBITDA                                                224                         51                   337                      32
Adjustments:
Restructuring costs and asset impairment
charges(1)                                              1                         16                     4                      16
Share-based compensation expense(2)                    13                         12                    23                      19
LIFO reserve change(3)                                 97                         19                   118                       6
Loss on extinguishment of debt(4)                       -                          -                    23                       -
Business transformation costs(5)                        5                          2                    14                       8
COVID-19 bad debt (benefit) expense(6)                  -                        (75)                  (15)                     95
COVID-19 product donations and inventory
adjustments(7)                                          -                         40                     -                      40
COVID-19 other related expenses(8)                      1                         11                     1                      11
Business acquisition and integration related
costs and other(9)                                     (9)                        12                    (1)                     38
Adjusted EBITDA                                       332                         88                   504                     265
Depreciation expense                                  (81)                       (87)                 (163)                   (169)
Interest expense-net                                  (54)                       (63)                 (108)                   (115)
Income tax provision, as adjusted(10)                 (51)                        13                   (60)                      2
Adjusted net income (loss)(11)                  $     146             $     

(49) $ 173 $ (17) Cash flow Cash flows from operating activities

            $      74             $          832          $        250          $          770
Capital expenditures                                  (61)                       (52)                 (107)                   (131)
Free cash flow                                  $      13             $          780          $        143          $          639


(1)  Consists primarily of severance and related costs, organizational
realignment costs and asset impairment charges.
(2)  Share-based compensation expense for expected vesting of stock awards and
employee stock purchase plan.
(3)  Represents the non-cash impact of LIFO reserve adjustments.
(4)  Includes early redemption premium and the write-off of certain pre-existing
debt issuance costs. See Note 10, Debt, in our consolidated financial
statements.
(5)  Consists primarily of costs related to significant process and systems
redesign across multiple functions.
(6)  Includes the changes in the reserve for doubtful accounts expense
reflecting the collection risk associated with our customer base as a result of
the COVID-19 pandemic.
(7)  Includes COVID-19 related expenses related to inventory adjustments and
product donations.
(8)  Includes COVID-19 related costs that we are permitted to addback under
certain agreements governing our indebtedness.
(9)  Includes: (i) aggregate acquisition and integration related costs of $6
million and $14 million for the 13 weeks ended July 3, 2021 and June 27, 2020,
respectively, and $12 million and $39 million for the 26 weeks ended July 3,
2021 and June 27, 2020, respectively; (ii) favorable legal settlement recovery
of $13 million for the 13 and 26 weeks ended July 3, 2021; and (iii) other
gains, losses or costs that we are permitted to addback for purposes of
calculating Adjusted EBITDA under certain agreements governing our indebtedness.
(10)  Represents our income tax provision adjusted for the tax effect of pre-tax
items excluded from Adjusted net income and the removal of applicable discrete
tax items. Applicable discrete tax items include changes in tax laws or rates,
changes related to prior year unrecognized tax benefits, discrete changes in
valuation allowances, and excess tax benefits associated with share-based
compensation. The tax effect of pre-tax items excluded from Adjusted net income
is computed using a statutory tax rate after taking into account the impact of
permanent differences and valuation allowances.
(11)  Effective as of the first quarter 2021, we have presented Adjusted net
income. Previously, we presented Adjusted net income available to common
shareholders.
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A reconciliation between the GAAP income tax benefit and the income tax provision, as adjusted, is as follows:

                                                        13 Weeks Ended                                 26 Weeks Ended
                                             July 3, 2021           June 27, 2020           July 3, 2021            June 27, 2020
GAAP income tax provision (benefit)        $      21              $          (26)         $        3              $          (66)
Tax impact of pre-tax income adjustments          30                          15                  51                          69
Discrete tax items                                 -                          (2)                  6                          (5)
Income tax provision, as adjusted          $      51              $          (13)         $       60              $           (2)


Comparison of Results
13 Weeks Ended July 3, 2021 and June 27, 2020
Highlights
•Total case volume increased 53.5% and independent restaurant case volume
increased 79.1%, primarily driven by eased restrictions on our customers in
2021.
•Net sales increased $3,103 million, or 68.0%, to $7,663 million in 2021.
•Operating income increased $183 million, or 310.2%, to $124 million in 2021.
•Net income improved $147 million, or 159.8%, to $55 million in 2021.
•Adjusted EBITDA increased $244 million, or 277.3%, to $332 million in 2021. As
a percentage of Net sales, Adjusted EBITDA was 4.3% in 2021, compared to 1.9% in
2020.
Net Sales
Total case volume increased 53.5% in 2021. The increase was primarily driven by
increased leisure and business travel and increased restaurant traffic due to
eased restrictions on our customers, resulting in independent restaurant case
volume growth of 79.1%. Organic case volume increased 50.3%; organic independent
restaurant case volume increased 74.4%.
Net sales increased $3,103 million, or 68.0%, to $7,663 million in 2021,
comprised of a $2,441 million, or 53.5%, increase in case volume and a $662
million, or 14.5%, increase in the overall Net sales rate per case. The increase
in Net sales rate per case reflects a year-over-year inflation increase of 8.2%
in multiple product categories including poultry, disposables and pork, as well
as favorable changes in our product mix. The year-over-year increase in
inflation benefited Net sales since a significant portion of our Net sales is
based on a pre-established markup over product cost. Organic sales of private
brands represented approximately 34% and 35% of Net sales in 2021 and 2020,
respectively.
Gross Profit
Gross profit increased $498 million, or 74.2%, to $1,169 million in 2021,
primarily as a result of the increase in Net sales, partially offset by
unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory
costing resulted in an expense of $97 million in 2021 compared to expense of
$19 million in 2020 due to inflation in multiple product categories including
grocery, beef and poultry. Gross profit as a percentage of net sales was 15.3%
in 2021, compared to 14.7% in 2020, due to the aforementioned factors.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and
restructuring costs and asset impairment charges, increased $315 million, or
43.2%, to $1,045 million in 2021. Operating expenses as a percentage of net
sales were 13.6% in 2021, compared to 16.0% in 2020. The increase in operating
expenses was primarily due to higher supply chain labor costs reflecting
increased sales volume compared to the prior year period when actions were taken
to reduce such costs in response to COVID-19; a $75 million higher provision for
doubtful accounts due to a $75 million reduction in the provision for doubtful
accounts during the 13 weeks ended June 27, 2020 based on better than
anticipated collection of our pre-COVID accounts receivable, with no similar
reduction during the 13 weeks ended July 3, 2021; and $34 million higher
distribution costs, primarily due to increased fuel costs and increased repair
and maintenance costs due to increased fleet usage and resumption of repair and
maintenance activities. These increases in operating expenses were partially
offset by cost savings initiated in 2020 and a favorable legal settlement
recovery of $13 million.
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Operating Income (Loss)
Our operating income was $124 million in 2021, compared to an operating loss of
$59 million in 2020. The increase in operating income was due to the factors
discussed in the relevant sections above.
Other Income-Net
Other income-net includes components of net periodic pension benefit credits,
exclusive of the service cost component associated with our defined benefit and
other postretirement plans. We recognized other income-net of $6 million and
$4 million in 2021 and 2020, respectively. The increase in other income-net in
2021 is primarily due to the improved funded status of our defined benefit
pension plan.
Interest Expense-Net
Interest expense-net decreased $9 million to $54 million in 2021, primarily due
to the reduction in outstanding debt in 2021 as compared to 2020 and a decrease
in interest rates in 2021 compared to 2020.
Income Taxes
For the 13 weeks ended July 3, 2021, our effective income tax rate of 28%
differed from the 21% federal corporate income tax rate primarily as a result of
state income taxes. For the 13 weeks ended June 27, 2020, our effective income
tax rate of 22% differed from the 21% federal corporate income tax rate
primarily as a result of state income taxes and the recognition of various
discrete tax items. These discrete tax items included a tax expense of
$2 million primarily related to an increase in an unrecognized tax benefit.
Net Income (Loss)
Our net income was $55 million in 2021, compared to a net loss of $92 million in
2020. The improvement in net income was due to the relevant factors discussed
above.
26 Weeks Ended July 3, 2021 and June 27, 2020
Highlights
•Total case volume increased 22.1% and independent restaurant case volume
increased 38.5%, primarily driven by eased restrictions on our customers and
contributions from Smart Foodservice in 2021.
•Net sales increased $3,059 million, or 28.1%, to $13,958 million in 2021.
•Operating income was $152 million in 2021, compared to operating loss of
$185 million in 2020.
•Net income was $31 million in 2021, compared to net loss of $224 million in
2020.
•Adjusted EBITDA increased $239 million, or 90.2%, to $504 million in 2021. As a
percentage of Net sales, Adjusted EBITDA was 3.6% in 2021, compared to 2.4% in
2020.
Net Sales
Total case volume increased 22.1% in 2021. The increase was primarily driven by
increased leisure and business travel and increased restaurant traffic due to
eased restrictions on our customers, resulting in independent restaurant case
volume growth of 38.5%. Organic case volume increased 17.5% and organic
independent restaurant case volume increased 32.0%.
Net sales increased $3,059 million, or 28.1%, to $13,958 million in 2021,
comprised of a $2,408 million, or 22.1%, increase in case volume and a $651
million, or 6.0%, increase in the overall Net sales rate per case. The increase
in Net sales rate per case primarily reflects a year-over-year inflation
increase of 5.6% in multiple product categories including poultry, disposables
and pork, as well as favorable changes in our product mix. The year-over-year
increase in inflation benefited Net sales since a significant portion of our Net
sales is based on a pre-established markup over product cost. Organic sales of
private brands represented approximately 33% and 35% of Net sales in 2021 and
2020, respectively. The increase in Net sales was also due to contributions from
the Smart Foodservice acquisition. Smart Foodservice contributed net sales of
$584 million in 2021, as compared to $208 million in 2020.
Gross Profit
Gross profit increased $435 million, or 25.0%, to $2,172 million in 2021,
primarily as a result of the increase in Net sales. The increase in gross profit
was also due to contributions from the Smart Foodservice acquisition. These
increases in gross profit were partially offset by unfavorable year-over-year
LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of
$118 million in 2021 compared to expense of $6 million in 2020 due to inflation
in multiple product categories including grocery, beef and poultry. Gross profit
as a percentage of net sales was 15.6% in 2021, compared to 15.9% in 2020.
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Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and
restructuring costs and asset impairment costs, increased $98 million or 5.1%,
to $2,020 million in 2021. Operating expenses as a percentage of net sales were
14.5% in 2021, compared to 17.6% in 2020. The increase in operating expenses is
primarily due to higher supply chain labor costs reflecting increased sales
volume compared to the prior year period when actions were taken to reduce such
costs in response to COVID-19, and $32 million higher distribution costs,
primarily due to increased fuel costs and increased repair and maintenance costs
due to increased fleet usage and resumption of repair and maintenance
activities. The increase in operating expenses was also due to the inclusion of
operating expenses for the Smart Foodservice acquisition of $84 million in 2021,
as compared to $27 million in 2020. These increases in operating expenses were
partially offset by a $110 million lower provision for doubtful accounts based
on better than anticipated collection of our pre-COVID-19 accounts receivable
during the 26 weeks ended July 3, 2021, cost savings initiated in 2020 and a
favorable legal settlement recovery of $13 million.
Operating Income (Loss)
Our operating income was $152 million in 2021, compared to operating loss of
$185 million in 2020. The increase in operating income was due to the factors
discussed in the relevant sections above.
Other Income-Net
Other income-net includes components of net periodic pension benefit credits,
exclusive of the service cost component associated with our defined benefit and
other postretirement plans. We recognized other income-net of $13 million and
$10 million in 2021 and 2020, respectively. The increase in other income-net in
2021 is primarily due to the improved funded status of our defined benefit
pension plan.
Interest Expense-Net
Interest expense-net decreased $7 million to $108 million in 2021, primarily due
to the decrease in outstanding debt in 2021 compared to 2020 and a decrease in
interest rates in 2021 compared to 2020.
Loss on Extinguishment of Debt
As discussed in Note 10, Debt, in our consolidated financial statements, we
incurred a $23 million loss on extinguishment of debt during the 26 weeks ended
July 3, 2021 related to the repayment of our Unsecured Senior Notes due 2024 and
2020 Incremental Term Loan Facility related to the issuance of our Senior
Unsecured Notes due 2029.
Income Taxes
For the 26 weeks ended July 3, 2021, our effective income tax rate of 9%
differed from the 21% federal corporate income tax rate primarily as a result of
state income taxes and the recognition of various discrete tax items. These
discrete tax items included a tax benefit of $6 million, primarily related to
excess tax benefits associated with share-based compensation. For the 26 weeks
ended June 27, 2020, our effective income tax rate of 23% differed from the 21%
federal corporate income tax rate primarily as a result of state income taxes
and the recognition of various discrete tax items. These discrete tax items
included a tax expense of $2 million primarily related to an increase in an
unrecognized tax benefit and a tax expense of $2 million primarily related to a
tax benefit shortfall associated with share-based compensation.
Net Income (Loss)
Our net income was $31 million in 2021, compared to net loss of $224 million in
2020. The improvement in net income was due to the relevant factors discussed
above.
Liquidity and Capital Resources
Our ongoing operations and strategic objectives require working capital and
continuing capital investment. Our primary sources of liquidity include cash
provided by operations, as well as access to capital from bank borrowings and
other types of debt and financing arrangements. We believe that the combination
of cash on hand and generated from operations, together with borrowing capacity
under the agreements governing our indebtedness and other financing
arrangements, will be adequate to permit us to meet our debt service
obligations, ongoing costs of operations, working capital needs, and capital
expenditure requirements through the end of fiscal year 2022. As of July 3,
2021, the Company had approximately $2.4 billion in cash and available
liquidity.
                                       25

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Indebtedness
The aggregate carrying value of our indebtedness was $5,515 million, net of
$49 million of unamortized deferred financing costs, as of July 3, 2021. We had
no outstanding borrowings and had issued letters of credit totaling $253 million
under the ABL Facility as of July 3, 2021. There was remaining capacity of
$1,737 million under the ABL Facility as of July 3, 2021.
The Initial Term Loan Facility had a carrying value of $1,888 million, net of
$2 million of unamortized deferred financing costs, as of July 3, 2021. During
the 13 weeks ended July 3, 2021, the Company made voluntary prepayments of the
Initial Term Loan Facility totaling $200 million.
The 2019 Incremental Term Loan Facility had a carrying value of $1,447 million,
net of $27 million of unamortized deferred financing costs, as of July 3, 2021.
The Secured Notes had a carrying value of $989 million, net of $11 million of
unamortized deferred financing costs, as of July 3, 2021. We also had
$292 million of obligations under financing leases for transportation equipment
and building leases as of July 3, 2021.
As of July 3, 2021, the Unsecured Senior Notes due 2029 had a carrying value of
$891 million, net of $9 million of unamortized deferred financing costs.
The ABL Facility will mature in 2024. The Initial Term Loan Facility and the
2019 Incremental Term Loan Facility will mature in 2023 and 2026, respectively.
The Secured Notes will mature in 2025. The Unsecured Senior Notes due 2029 will
mature in 2029. As economic conditions permit, we will consider opportunities to
repurchase, refinance or otherwise reduce our debt obligations on favorable
terms. Any potential debt reduction or refinancing could require significant use
of our other available liquidity and capital resources.
The agreements governing our indebtedness contain customary covenants. These
include, among other things, covenants that restrict our ability to incur
certain additional indebtedness, create or permit liens on our assets, pay
dividends, or engage in mergers or consolidations. USF had approximately
$1.3 billion of restricted payment capacity under these covenants and
approximately $2.8 billion of its net assets were restricted after taking into
consideration the net deferred tax assets and intercompany balances that
eliminate in consolidation as of July 3, 2021.
Every quarter, we review rating agency changes for all of the lenders that have
a continuing obligation to provide us with funding. We are not aware of any
facts that indicate our lenders will not be able to comply with the contractual
terms of their agreements with us. We continue to monitor the credit markets
generally and the strength of our lender counterparties.
From time to time, we may repurchase or otherwise retire our debt and take other
steps to reduce our debt or otherwise improve our leverage, including the
voluntary prepayments under the Initial Term Loan Facility noted above. These
actions may include open market repurchases, negotiated repurchases, and other
retirements of outstanding debt. The amount of debt that may be repurchased or
otherwise retired, if any, will depend on market conditions, our debt trading
levels, our cash position, and other considerations.
See Note 10, Debt, in our consolidated financial statements, for a further
description of our indebtedness.
Cash Flows
The following table presents condensed highlights from our Consolidated
Statements of Cash Flows for the periods presented:
                                                                               26 Weeks Ended
                                                                    July 3, 2021           June 27, 2020

Net income (loss)                                                 $          31          $         (224)
Changes in operating assets and liabilities                                 (22)                    696
Other adjustments                                                           241                     298
Net cash provided by operating activities                                   250                     770
Net cash used in investing activities                                      (101)                 (1,096)
Net cash (used in) provided by financing activities                        (279)                  1,904

Net (decrease) increase in cash, cash equivalents and restricted cash

                                                                       (130)                  1,578
Cash, cash equivalents and restricted cash-beginning of period              829                      98

Cash, cash equivalents and restricted cash-end of period $ 699 $ 1,676



                                       26

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Operating Activities
Cash flows provided by operating activities was $250 million for the 26 weeks
ended July 3, 2021, compared to cash flows provided by operating activities of
$770 million for the 26 weeks ended June 27, 2020. The year-over-year decrease
was primarily attributable to the Company's working capital requirements as a
result of the improvement in operating results and recovery of sales volumes.
Investing Activities
Cash flows used in investing activities in the 26 weeks ended July 3, 2021 and
June 27, 2020 included cash expenditures of $107 million and $131 million,
respectively, on investments in information technology, new construction and/or
expansion of distribution facilities, and property and equipment for fleet
replacement. Cash flows used in investing activities for the 26 weeks ended June
27, 2020 also included the $973 million cash purchase price for the acquisition
of Smart Foodservice.
We expect total cash capital expenditures in fiscal year 2021 to be between $290
million and $305 million, exclusive of approximately $35 million to $45 million
of capital expenditures under our fleet financing leases. We expect to fund our
capital expenditures with available cash or cash generated from operations and
through fleet financing.
Financing Activities
Cash flows used by financing activities in the 26 weeks ended July 3, 2021
included $67 million of scheduled payments under our Term Loan Facilities and
financing leases and $200 million of voluntary prepayments of the Initial Term
Loan Facility. We incurred approximately $18 million of lender fees and
third-party costs in connection with our issuance of the Unsecured Notes due
2029, consisting of a $9 million early redemption premium related to the
Unsecured Senior Notes due 2024 and $9 million of costs associated with the
issuance of the Unsecured Senior Notes due 2029, which were capitalized as
deferred financing costs. Cash flows used by financing activities in the 26
weeks ended July 3, 2021 also included a $9 million dividend on our Series A
convertible preferred stock.
Cash flows provided by financing activities for the 26 weeks ended July 3, 2021
included aggregate borrowings of $900 million under the Unsecured Senior Notes
due 2029. We used the proceeds from the issuance of the Unsecured Senior Notes
due 2029, together with cash on hand, to redeem all of the then outstanding
Unsecured Senior Notes due 2024 and repay all of the then outstanding borrowings
under the 2020 Incremental Term Loan Facility. Cash flows provided by financing
activities for the 26 weeks ended July 3, 2021 also included $10 million of
proceeds received from stock purchases under our employee stock purchase plan
and $12 million of proceeds from the exercise of employee stock options, which
were offset by $13 million of employee tax withholdings paid in connection with
the vesting of stock awards.
Cash flows provided by financing activities for the 26 weeks ended June 27, 2020
included aggregate borrowings of $700 million under the 2020 Incremental Term
Loan Facility, the proceeds of which were used to finance, in part, the Smart
Foodservice acquisition; $1.0 billion of gross proceeds from the issuance of the
Secured Notes; and $500 million of proceeds, net of $9 million of related fees,
from the issuance and sale of 500,000 shares of our Series A convertible
preferred stock. Cash flows provided by financing activities for the 26 weeks
ended June 27, 2020 also included aggregate borrowings of $210 million under the
ABL Facility and former accounts receivable financing facility (the "ABS
Facility"). We borrowed an aggregate of $1 billion under the ABL Facility and
ABS Facility in March 2020 for the purposes of increasing cash on hand and to
preserve financial flexibility in light of the current economic and business
uncertainty resulting from the onset of the COVID-19 pandemic. Financing
activities for the 26 weeks ended June 27, 2020 also included $11 million of
proceeds from stock purchases under our employee stock purchase plan and
$1 million of proceeds received from the exercise of employee stock options,
which were partially offset by $5 million of employee tax withholdings paid in
connection with the vesting of stock awards.
Cash flows used by financing activities for the 26 weeks ended June 27, 2020
included $71 million of scheduled payments under our Term Loan Facilities and
financing leases. We used part of the proceeds from the issuance of the Secured
Notes to repay $400 million in principal amount of the 2020 Incremental Term
Loan Facility, and we used $542 million of cash on hand to repay all of our
outstanding borrowings under the ABS facility, which was subsequently
terminated. We incurred approximately $33 million of lender fees and third-party
costs in connection with the aforementioned financing transactions.
Retirement Plans

See Note 12, Retirement Plans, in our consolidated financial statements for a
description of our retirement plans.
Off-Balance Sheet Arrangements
We had entered into $253 million of letters of credit, primarily in favor of
certain commercial insurers to secure obligations with respect to our insurance
programs, under the ABL Facility as of July 3, 2021.
                                       27

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Except as disclosed above, we have no off-balance sheet arrangements that
currently have or are reasonably likely to have a material effect on our
consolidated financial position, changes in financial condition, results of
operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
See the Contractual Obligations section in Part II, Item 7-"Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
2020 Annual Report for our contractual cash obligations as of January 2, 2021.
There have been no material changes to our specified contractual obligations
through July 3, 2021, except as disclosed in Note 10, Debt, in our consolidated
financial statements.
Critical Accounting Policies and Estimates
We have prepared the financial information in this Quarterly Report in
accordance with GAAP. Preparing the Company's consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during these reporting periods. We base our estimates and judgments
on historical experience and other factors we believe are reasonable under the
circumstances. These assumptions form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Part II, Item 7-"Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the 2020 Annual Report
includes a summary of the critical accounting policies we believe are the most
important to aid in understanding our financial results. There have been no
changes to those critical accounting policies that have had a material impact on
our reported amounts of assets, liabilities, revenue, or expenses during the 26
weeks ended July 3, 2021.
Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2, Recent
Accounting Pronouncements, in our consolidated financial statements.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain risks arising from both our business operations and
overall economic conditions. Our market risks include interest rate risk and
fuel price risk. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
Interest Rate Risk
Our debt exposes us to risk of fluctuations in interest rates. Floating rate
debt, where the interest rate fluctuates periodically, exposes us to short-term
changes in market interest rates. Fixed rate debt, where the interest rate is
fixed over the life of the instrument, exposes us to changes in market interest
rates reflected in the fair value of the debt and to the risk that we may need
to refinance maturing debt with new debt at higher rates. We manage our debt
portfolio to achieve an overall desired position of fixed and floating rates and
may employ interest rate swaps as a tool to achieve that position. We have
entered into interest rate swap agreements to limit our exposure to variable
interest rate terms on certain borrowings under our Initial Term Loan Facility.
The interest rate swap agreements expired on July 31, 2021. The risks from
interest rate swaps include changes in the interest rates affecting the fair
value of such instruments, potential increases in interest expense due to market
increases in floating interest rates and the creditworthiness of the
counterparties.
After considering interest rate swaps that fixed the interest rate on $550
million of the principal amounts of our Initial Term Loan Facility,
approximately 51% of the principal amount of our debt bore interest at floating
rates based on LIBOR or ABR, as of July 3, 2021. A hypothetical 1% change in the
applicable rate would cause the interest expense on our floating rate debt to
change by approximately $28 million per year (see Note 10, Debt, in our
consolidated financial statements). In July 2017, the United Kingdom'sFinancial
Conduct Authority, which regulates LIBOR announced that it intends to phase out
the use of LIBOR by the end of 2021. On March 5, 2021, the ICE Benchmark
Authority ("IBA"), the administrator of LIBOR, announced the cessation of the
publication of the one week and two month U.S. dollar LIBOR tenors immediately
following their publication on December 31, 2021, and all other U.S. dollar
LIBOR tenors immediately following their publication on June 30, 2023. We are
unable to predict the impact of using alternative reference rates and
corresponding rate risk as of this time.
                                       28

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Fuel Price Risk
We are also exposed to risk due to fluctuations in the price and availability of
diesel fuel. We require significant quantities of diesel fuel for our vehicle
fleet, and the price and supply of diesel fuel are unpredictable and fluctuate
based on events outside our control, including geopolitical developments, supply
and demand for oil and gas, regional production patterns, weather conditions and
environmental concerns. Increases in the cost of diesel fuel can negatively
affect consumer confidence and discretionary spending and increase the prices we
pay for products, and the costs we incur to deliver products to our customers.
Our activities to minimize fuel cost risk include route optimization, improving
fleet utilization and assessing fuel surcharges. We also enter into forward
purchase commitments for a portion of our projected diesel fuel requirements. As
of July 3, 2021, we had diesel fuel forward purchase commitments totaling
$28 million, which fix approximately 23% of our projected diesel fuel purchase
needs through June 2022. Our remaining fuel purchase needs will occur at market
rates unless contracted for at a fixed price or hedged at a later date. Using
current published market price projections for diesel and estimated fuel
consumption needs, a hypothetical 10% unfavorable change in diesel prices from
the market price could result in approximately $13 million in additional fuel
cost on uncommitted volumes through June 2022.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is processed,
recorded, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that this information is accumulated and communicated
to Company management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this Quarterly Report. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of July 3, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during
the fiscal quarter ended July 3, 2021 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
As permitted by applicable SEC guidance, the scope of our evaluation regarding
changes in our internal control over financial reporting during the fiscal
quarter ended July 3, 2021 excluded internal control over financial reporting
for Smart Foodservice, which was acquired on April 24, 2020.

                                       29

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