US Foods Holding Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (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 2019 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 because they exclude amounts that our management does not consider part of our core operations when assessing our performance and underlying trends. Information regarding reconciliations of and the rationale for these measures is discussed under “Non-GAAP Reconciliations” below. 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 3,000 sales associates manage customer relationships at local, regional, and national levels. They 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 more than 70 distribution facilities and fleet of approximately 7,000 trucks, along with our 76 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 a novel strain of coronavirus, COVID-19, as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. As of December 28, 2019, the outbreak of COVID-19 had not had a significant impact on our business. However, since mid-March 2020, our business has been significantly impacted. In March 2020, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions in businesses, schools and other public gathering spaces. Restrictions on public gatherings and attendance at retail or other establishments, including indoor restaurants, and recreational, sporting and other similar venues, continue to evolve and are expected to continue to remain in effect in some capacity until the COVID-19 pandemic has abated. These government mandates have forced many of our customers to seek government support in order to continue operating, to drastically curtail their dining options or to cease operations entirely. Currently, there is no vaccine for COVID-19, and it remains unclear when and to what extent the COVID-19 pandemic will fully abate. Impact of COVID-19 on Our Business The COVID-19 pandemic has and will continue to adversely impact our sales and liquidity (in particular, decreases in restaurant, hospitality and education case volume). In mid-March 2020, the operations of our restaurant, hospitality and education customers were suddenly and significantly disrupted by the spread of COVID-19 and the corresponding decline in consumer demand for food prepared away from home. Since that time, many of our customers were required by governmental authorities to temporarily close locations or only offer limited dining options such as carryout and delivery in an effort to reduce the spread of COVID-19, while others temporarily closed locations voluntarily or ceased operations entirely due to decreased consumer demand. While many of these government mandates started to loosen in May and June 2020 to varying degrees, restrictions still remain in place. The negative impact of COVID-19 led to a significant decline in net sales and total case volumes for the 13 weeks and 26 weeks ended June 27, 2020. Total case volumes were down approximately 28.0% and 12.6% for the 13 weeks and 26 weeks ended June 27, 2020, respectively, compared to the prior year. As further described below, our gross profit, net income and Adjusted EBITDA also decreased on a year over year basis as the Company worked to adjust its cost structure in line with the reduced level of sales. 24 Recent Activity and Sector Perspectives We are optimistic about the long-term prospects for our business. US Foods operates in a large and essential industry with a highly diversified set of end consumers. While our core customer groups (such as restaurants, hospitality and education) have been significantly affected by the effects of the COVID-19 pandemic, other customer groups (such as healthcare, government, retail and cash and carry) have been less significantly affected. Although the timetable for returning to normalcy is unknown, we believe that our case volumes will increase over time as the effects of the COVID-19 pandemic slowly dissipate, consumer demand for food prepared away from home increases, educational institutions such as colleges and universities re-open their campuses, and the hospitality industry recovers. As one of the larger companies in our industry, we believe we are well positioned for long-term success as the fragmented nature of our industry and the current environment create new opportunities for companies with the size and resources of US Foods. We believe we are differentiated from many of our competitors on a number of fronts including our national footprint, diversified omni-channel platform, strong technology capabilities and value-added service offerings, all of which have allowed us to continue to serve our customers under these unprecedented conditions. During these difficult times, we are proactively supporting our customers by helping our restaurant and hospitality customers adapt to social distancing restrictions with tools and resources to build and manage carryout and delivery capabilities. In light of the COVID-19 pandemic, we have developed additional innovative services, such as customer education webinars on the CARES Act (defined below), assistance with recovery plans for location re-openings, and the creation of unique pantry kits to allow restaurants to continue servicing consumers. During the 13 weeks ended June 27, 2020, our customer initiatives have resulted in over 15,000 unique, live webinar attendees, over 8,600 one-on-one customer consultations and over 3,000 one-on-one CARES Act (as defined below) consultations. Our product development efforts remain in full force and we continue to deliver product innovations that resonate with our customers. During June 2020, we also distributed over 20,000 reopening kits to independent restaurant owners to help support restaurant reopening efforts in communities across the U.S. In addition, we are working with many of our customers to provide them with repayment plans to enable them to continue to purchase products from us as they pay down their balances on outstanding invoices. In response to the COVID-19 pandemic and ensuing decrease in total case volume, we have decisively modified our business strategy and cost structure. We have taken a number of steps to secure new retail partnerships, reduce operating costs and strengthen our liquidity position during this time, including: • actively managing our variable costs (which represent a large majority of our operating expenses), through a combination of temporary furloughs, reductions in compensation and reduction in the size of our sales force to better align our cost structure with current case volumes; • improving working capital by temporarily extending terms with vendors while focusing on receivables collection; and • managing capital expenditures effectively, including pausing construction on new facilities and significantly limiting non-essential maintenance and information technology projects. We also have the ability to take further cost reduction actions depending upon the duration of the COVID-19 pandemic and its impact on our business, results of operations and financial condition. Even so, there is no certainty that such measures, or any additional actions that we may take in the future, will be successful in mitigating the impact of the pandemic on our business, results of operations or financial condition. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to deferment of employer-side social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, technical corrections to tax depreciation methods for qualified improvement property and federally backed loans to qualifying small-businesses. US Foods has benefited from certain provisions under the aforementioned CARES Act and many of our customers are benefiting from the federally backed small business loan program. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict the extent to which our business, results of operations or financial condition will ultimately be impacted. In particular, we cannot predict the extent to which the COVID-19 pandemic will affect our business, results of operation or financial condition in the long term because the duration and severity of the pandemic and its negative impact on the economy (including our customers) is unclear. The impact of the COVID-19 pandemic on us will also be dependent on: the resiliency of the restaurant and hospitality industry and consumer spending more broadly; actions taken by national, state and local governments to contain the disease or treat its impact, including travel restrictions and bans, social distancing requirements, required closures of non-essential businesses and aid and economic stimulus efforts; and any prolonged economic recession resulting from the pandemic. We do not expect economic and operating conditions for our business to improve until consumers are once again willing and able to resume consumption of food away from home on a regular basis, travel and attend sporting and other events. This may not occur until well after the pandemic abates and the broader economy begins to improve. As expected, the COVID-19 pandemic impacted our financial performance for the 13 weeks ended June 27, 2020 much more significantly than it impacted the 13 weeks ended March 28, 2020, primarily because the impact of the outbreak only manifested itself during the last two to three weeks of the first quarter of 2020. We expect the pandemic and its effects to continue to have a significant adverse impact on our business, financial condition and results of operations for the duration of the pandemic and, if the subsequent economic recovery is slow and gradual, throughout substantial portions of that recovery. 25 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. 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 June 27, 2020 decreased 28.0% and 12.6% , respectively, and independent restaurant case volume decreased 32.1% and 16.6% , respectively, for those same periods. Net sales decreased $1,883 million , or 29.2% , and $1,575 million , or 12.6% for the 13 weeks and 26 weeks ended June 27, 2020 , respectively. The negative impact of COVID-19 on case volumes was partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Contributions to aggregate net sales from the Food Group and Smart Foodservice acquisitions were $732 million and $1,386 million for the 13 weeks and 26 weeks ended June 27, 2020 , respectively. Net sales for the Food Group and Smart Foodservice were also impacted by the COVID-19 pandemic, albeit to different degrees. Gross profit decreased $471 million , or 41.2% , to $671 million for the 13 weeks ended June 27, 2020 and decreased $457 million , or 20.8% , to $1,737 million for the 26 weeks ended June 27, 2020 , primarily as a result of the negative impact of COVID-19 on case volume, and product donations and inventory adjustments, partially offset by contributions from the Food Group and Smart Foodservice acquisitions. As a percentage of net sales, gross profit was 14.7% for the 13 weeks ended June 27, 2020 , compared to 17.7% for the prior year period and was 15.9% for the 26 weeks ended June 27, 2020 , compared to 17.6% for the prior year period. Total operating expenses decreased $218 million , or 23.0% , to $730 million for the 13 weeks ended June 27, 2020 . The decrease was primarily due to the negative impact of COVID-19 on case volume and the related impact of cost actions put in place at the end of March 2020. Additionally, during the 13 weeks ended March 28, 2020, the Company recorded an incremental reserve of $170 million for the provision for doubtful accounts, of which, $75 million was reversed during the 13 weeks ended June 27, 2020, based on better than anticipated collection of our accounts receivable. These decreases were partially offset by the inclusion of operating expenses from the Food Group and Smart Foodservice acquisitions. Total operating expenses increased $53 million , or 2.8% , to $1,922 million for the 26 weeks ended June 27, 2020 , primarily as a result of a higher provision for doubtful accounts due to the impact of COVID-19, operating expenses from the Food Group and Smart Foodservice acquisitions, and other acquisition and integration related costs, which were partially offset by the impact of lower case volume due to COVID-19 and the impact of cost actions put in place at the end of March 2020. Smart Foodservice Acquisition —On April 24, 2020, USF completed the acquisition of Smart Foodservice. Total consideration paid at the closing of the acquisition was $973 million (net of cash acquired), and is subject to certain customary post-closing adjustments. The acquisition of Smart Foodservice expands the Company’s cash and carry business into 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. 26 Results of Operations The following table presents selected historical results of operations for the periods indicated: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Consolidated Statements of Operations Data: Net sales $ 4,560 $ 6,443 $ 10,899 $ 12,474 Cost of goods sold 3,889 5,301 9,162 10,280 Gross profit 671 1,142 1,737 2,194 Operating expenses: Distribution, selling and administrative costs 714 948 1,906 1,869 Restructuring costs 16 — 16 — Total operating expenses 730 948 1,922 1,869 Operating (loss) income (59 ) 194 (185 ) 325 Other income—net (4 ) (2 ) (10 ) (4 ) Interest expense—net 63 42 115 84 (Loss) income before income taxes (118 ) 154 (290 ) 245 Income tax (benefit) provision (26 ) 38 (66 ) 58 Net (loss) income $ (92 ) $ 116 $ (224 ) $ 187 Percentage of Net Sales: Gross profit 14.7 % 17.7 % 15.9 % 17.6 % Operating expenses 16.0 % 14.7 % 17.6 % 15.0 % Operating (loss) income (1.3 )% 3.0 % (1.7 )% 2.6 % Net (loss) income (2.0 )% 1.8 % (2.1 )% 1.5 % Adjusted EBITDA (1) 1.9 % 5.0 % 2.4 % 4.4 % Other Data: Cash flows—operating activities $ 832 $ 240 $ 770 $ 394 Cash flows—investing activities (1,022 ) (41 ) (1,096 ) (102 ) Cash flows—financing activities 781 (194 ) 1,904 (300 ) Capital expenditures 52 49 131 110 EBITDA (1) 51 287 32 502 Adjusted EBITDA (1) 88 320 265 552 Adjusted net (loss) income available to common shareholders (1) (54 ) 147 (22 ) 235 Free cash flow (2) 780 191 639 284 (1) EBITDA is defined as net (loss) income, plus interest expense—net, income tax provision, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for: (1) restructuring costs; (2) share-based compensation expense; (3) the non-cash impact of LIFO reserve adjustments; (4) business transformation costs; and (5) other gains, losses, or charges as specified in the agreements governing our indebtedness. Adjusted net income available to common shareholders 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 and Series A convertible preferred stock dividends. Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income available to common shareholders to also exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation. EBITDA, Adjusted EBITDA, and Adjusted net income available to common shareholders 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 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 measurement 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. 27 Non-GAAP Reconciliations We provide EBITDA, Adjusted EBITDA, Adjusted net income available to common shareholders 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 available to common shareholders 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, income taxes and Series A convertible preferred stock dividends on a consistent basis from period to period. We believe that Adjusted net income available to common shareholders 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 available to common shareholders 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 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 available to common shareholders, 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 available to common shareholders 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. 28 The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income available to common shareholders 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 June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Net (loss) income available to common shareholders $ (97 ) $ 116 $ (229 ) $ 187 Series A convertible preferred stock dividends (see Note 18) 5 — 5 — Net (loss) income (92 ) 116 (224 ) 187 Interest expense—net 63 42 115 84 Income tax (benefit) provision (26 ) 38 (66 ) 58 Depreciation expense 87 81 169 153 Amortization expense 19 10 38 20 EBITDA 51 287 32 502 Adjustments: Restructuring costs (1) 16 — 16 — Share-based compensation expense (2) 12 9 19 15 LIFO reserve change (3) 19 14 6 12 Business transformation costs (4) 2 2 8 3 COVID-19 bad debt (benefit) expense (5) (75 ) — 95 — COVID-19 product donations and inventory adjustments (5) 40 — 40 — COVID-19 other related expenses (5) 11 — 11 — Business acquisition and integration related costs and other (6) 12 8 38 20 Adjusted EBITDA 88 320 265 552 Depreciation expense (7) (87 ) (81 ) (169 ) (153 ) Interest expense—net (63 ) (42 ) (115 ) (84 ) Income tax provision, as adjusted (7)(8) 13 (50 ) 2 (80 ) Series A convertible preferred stock dividends (see Note 18) (5 ) — (5 ) — Adjusted net (loss) income available to common shareholders (7) $ (54 ) $ 147 $ (22 ) $ 235 Free cash flow Cash flows from operating activities $ 832 $ 240 $ 770 $ 394 Capital expenditures (52 ) (49 ) (131 ) (110 ) Free cash flow $ 780 $ 191 $ 639 $ 284 (1) Consists primarily of severance and related costs and organizational realignment costs. (2) Share-based compensation expense for stock and option awards and discounts provided under employee stock purchase plan. (3) Represents the non-cash impact of LIFO reserve adjustments. (4) Consists primarily of costs related to significant process and systems redesign across multiple functions. (5) Includes COVID-19 related gains, losses or costs as specified under the agreements governing our indebtedness. (6) Includes: (i) Smart Foodservice acquisition and integration related costs of $10 million and $20 million for the 13 weeks and 26 weeks ended June 27, 2020, respectively; (ii) Food Group acquisition and integration related costs of $4 million and $19 million for the 13 weeks and 26 weeks ended June 27, 2020, respectively, and $8 million and $18 million for the 13 weeks and 26 weeks ended June 29, 2019, respectively; and (iii) gains, losses or costs as specified under the agreements governing our indebtedness. (7) Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income available to common shareholders to also exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation. (8) Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted net income available to common shareholders 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 corporate income tax rate after considering the impact of permanent differences and valuation allowances. 29 A reconciliation between the GAAP income tax (benefit) provision and the income tax provision, as adjusted, is as follows: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 GAAP income tax (benefit) provision $ (26 ) $ 38 $ (66 ) $ 58 Tax impact of pre-tax income adjustments (1) 15 10 69 17 Discrete tax items (2 ) 2 (5 ) 5 Income tax provision, as adjusted $ (13 ) $ 50 $ (2 ) $ 80 (1) Effective as of the fiscal third quarter 2019, we revised the definition of Adjusted net income available to common shareholders to exclude the effect of intangible asset amortization expense. Prior year amounts have been revised to conform with the current year presentation Comparison of Results 13 Weeks Ended June 27, 2020 and June 29, 2019 Highlights • Total case volume decreased 28.0% and independent restaurant case volume decreased 32.1% , reflecting the negative impact of COVID-19 on case volumes, partially offset by contributions from the Food Group and Smart Foodservice in 2020 . • Net sales decreased $1,883 million , or 29.2% , to $4,560 million in 2020 . • Operating loss was $59 million in 2020 , compared to operating income of $194 million in 2019 . • Net loss was $92 million in 2020 , compared to net income of $116 million in 2019 . • Adjusted EBITDA decreased $232 million , or 72.5% , to $88 million in 2020 . As a percentage of net sales, Adjusted EBITDA was 1.9% in 2020 , compared to 5.0% in 2019 . Net Sales Total case volume decreased 28.0% in 2020 . The negative impact of COVID-19 on case volumes was partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Organic case volume decreased 40.2% and organic independent restaurant case volume decreased 42.1% . Net sales decreased $1,883 , or 29.2% , to $4,560 million in 2020 , comprised of a $1,797 million, or 28.0% , decrease in case volume and a $86 million, or 1.2%, decrease in the overall net sales rate per case. The decrease in net sales rate per case of 1.2% primarily reflects changes in our product mix. Sales of private brands represented approximately 35% of net sales in both 2020 and 2019 . The Food Group and Smart Foodservice contributed aggregate net sales of $732 million in 2020 . Gross Profit Gross profit decreased $471 million , or 41.2% , to $671 million in 2020 , primarily as a result of the negative impact of COVID-19 on case volume, $40 million of product donations and inventory adjustments, and unfavorable year-over-year LIFO adjustments, and was partially offset by contributions from the Food Group and Smart Foodservice acquisitions. Our LIFO method of inventory costing resulted in an expense of $19 million in 2020 compared to expense of $14 million in 2019 . Gross profit as a percentage of net sales was 14.7% in 2020 , compared to 17.7% in 2019 . Operating Expenses Operating expenses, comprised of distribution, selling and administrative and restructuring costs, decreased $218 million or 23.0% , to $730 million in 2020 . Operating expenses as a percentage of net sales were 16.0% in 2020 , compared to 14.7% in 2019 . The decrease in operating expenses is primarily due to the negative impact of COVID-19 on case volume and the related impact of cost actions put in place at the end of March 2020, and a $75 million reduction in the provision for doubtful accounts as a result of more favorable than anticipated collection of our pre-COVID accounts receivable. These decreases were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions of $118 million in the aggregate and $16 million of restructuring costs associated with a sales force reduction due to the negative impact of COVID-19 on case volume. Operating (Loss) Income Our operating loss was $59 million in 2020 , compared to operating income of $194 million in 2019 . The decrease in operating income was due to the factors discussed in the relevant sections above. 30 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 $4 million and $2 million in 2020 and 2019 , respectively. The increase in other income—net in 2020 is primarily due to the improved funded status of our defined benefit pension plan as of December 28, 2019. Interest Expense—Net Interest expense—net increased $21 million to $63 million in 2020 , primarily due to an increase in our indebtedness to finance the Food Group and Smart Foodservice acquisitions and to strengthen our liquidity position, which were partially offset by a decrease in benchmark interest rates in 2020 compared to 2019. 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 tax expense of $2 million primarily related to an increase in unrecognized tax benefit. For the 13 weeks ended June 29, 2019 , our effective income tax rate of 25% 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 $2 million , primarily related to excess tax benefits associated with share-based compensation. Net (Loss) Income Our net loss was $92 million in 2020 , compared to net income of $116 million in 2019 . The decrease in net income was due to the relevant factors discussed above. 26 Weeks Ended June 27, 2020 and June 29, 2019 Highlights • Total case volume decreased 12.6% and independent restaurant case volume decreased 16.6% , reflecting the negative impact of COVID-19 on case volumes, partially offset by contributions from Smart Foodservice and the Food Group in 2020 . • Net sales decreased $1,575 million , or 12.6% , to $10,899 million in 2020 . • Operating loss was $185 million in 2020 , compared to operating income of $325 million in 2019 . • Net loss was $224 million in 2020 , compared to net income of $187 million in 2019 . • Adjusted EBITDA decreased $287 million , or 52.0% , to $265 million in 2020 . As a percentage of net sales, Adjusted EBITDA was 2.4% in 2020 , compared to 4.4% in 2019 . Net Sales Total case volume decreased 12.6% in 2020 . The decrease was due to the negative impact of COVID-19 on case volumes which was partially offset by contributions from the Food Group and Smart Foodservice. Organic case volume decreased 24.1% and organic independent restaurant case volume decreased 25.4% . Net sales decreased $1,575 million , or 12.6% , to $10,899 million in 2020 , primarily due to a decrease in case volume. The overall net sales rate per case was flat year-over-year. Sales of private brands represented approximately 35% of net sales in both 2020 and 2019 . The Food Group and Smart Foodservice acquisitions contributed aggregate net sales of $1,386 million in 2020 . Gross Profit Gross profit decreased $457 million , or 20.8% , to $1,737 million in 2020 , primarily as a result of the negative impact of COVID-19 on case volume and $40 million of product donations and inventory adjustments, and was partially offset by contributions from the Food Group and Smart Foodservice and favorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of $6 million in 2020 compared to expense of $12 million in 2019 . Gross profit as a percentage of net sales was 15.9% in 2020 , compared to 17.6% in 2019 . 31 Operating Expenses Operating expenses, comprised of distribution, selling and administrative and restructuring costs, increased $53 million or 2.8% , to $1,922 million in 2020 . Operating expenses as a percentage of net sales were 17.6% in 2020 , compared to 15.0% in 2019 . The increase in operating expenses included the inclusion of operating expenses for the Food Group and Smart Foodservice acquisitions of $223 million, a $95 million increase in the provision for doubtful accounts due to the estimated impact of COVID-19 on the collectability of accounts receivable, a $20 million increase in acquisition and integration related costs, and $16 million of restructuring costs associated with a sales force reduction due to the negative impact of COVID-19 on case volume. Operating (Loss) Income Our operating loss was $185 million in 2020 , compared to operating income of $325 million in 2019 . The decrease 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 $10 million and $4 million in 2020 and 2019 , respectively. The increase in other income—net in 2020 is primarily due to the improved funded status of our defined benefit pension plan as of December 28, 2019. Interest Expense—Net Interest expense—net increased $31 million to $115 million in 2020 , primarily due to an increase in our indebtedness to finance the Food Group and Smart Foodservice acquisitions and to strengthen our liquidity position, which were partially offset by a decrease in benchmark interest rates in 2020 compared to 2019. Income Taxes For the 26 weeks ended June 27, 2020 , our effective income tax rate of 23.0% 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 tax expense of $2 million primarily related to an increase in an unrecognized tax benefit and tax expense of $2 million , primarily related to a tax benefit shortfall associated with share-based compensation. For the 26 weeks ended June 29, 2019 , our effective income tax rate of 24.0% 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 $2 million , primarily related to the reduction of an unrecognized tax benefit following a lapse of the statute of limitations and a tax benefit of $3 million , primarily related to excess tax benefits associated with share-based compensation. Net (Loss) Income Our net loss was $224 million in 2020 , compared to net income of $187 million in 2019 . The decrease 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. In response to the impact of the COVID-19 pandemic, in March 2020 we borrowed an aggregate of $300 million under the former ABS Facility and $700 million under the ABL Facility. These borrowings were made for the purpose of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the COVID-19 pandemic. We have taken additional action during the 13 week period ended June 27, 2020 to finance the Smart Foodservice acquisition and further strengthen our liquidity. In particular: • on April 24, 2020, we borrowed an aggregate principal amount of $700 million under the 2020 Incremental Term Loan Facility, the proceeds of which were used to finance, in part, the Smart Foodservice acquisition; • on April 28, 2020, we issued an aggregate principal amount of $1.0 billion of 6.25% Secured Notes due 2025, the proceeds of which were used to repay $400 million in principal amount of the 2020 Incremental Term Loan Facility and the balance of the net proceeds has been and will be used for general corporate purposes; 32 • on May 1, 2020, we used $542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility in full and terminated the ABS Facility; in connection with the repayment and termination of the ABS Facility, we transitioned the accounts receivable that secured the ABS Facility to the collateral pool that secures the ABL Facility; • on May 4, 2020, we entered into an amendment to the credit agreement governing the ABL Facility pursuant to which certain of our lenders agreed to increase their aggregate commitments by $390 million to a total commitment of $1,990 million; and • on May 6, 2020, we completed the issuance and sale of 500,000 shares of our Series A Preferred Stock to KKR for an aggregate price of $500 million, the proceeds of which were used for working capital and general corporate purposes. After giving effect to the transactions described above, we believe that we will have sufficient liquidity to fund our operations and meet ordinary course obligations through 2021 even if total case volumes decline to the levels seen in April of this year and remained at that level until the middle of 2021. We cannot, however, assure you that this will be the case. We may pursue additional capital raise transactions at some point in the future if we determine that it would be advisable to further strengthen our liquidity position. We make no assurance, however, that we will be able to raise any additional capital in the future on satisfactory terms or at all. Our continued access to sources of liquidity depends on multiple factors, including economic conditions, the condition of financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings. A rating agency announced a downgrade to our credit ratings in May 2020. Our access to additional capital and the cost of any future financing transactions could be negatively impacted by this downgrade or any future downgrade or if financing sources were to ascribe higher credit risk to us or our industry. In addition, the effect of COVID-19 on the capital markets could significantly impact our future cost of borrowing and the availability of additional capital to us. Indebtedness The aggregate carrying value of our indebtedness was $6,214 million , net of $66 million of unamortized deferred financing costs, as of June 27, 2020 . As discussed above, on May 1, 2020 we terminated the ABS Facility and transitioned the accounts receivable that secured the ABS Facility to the collateral pool that secures the ABL Facility and, on May 4, 2020, we entered into an amendment to our ABL Facility which increased the aggregate commitments by $390 million to a total commitment of $1,990 million. This transition increases the size of the borrowing base under the ABL Facility. We had an aggregate of $400 million of loans and $252 million of letters of credit outstanding under the ABL Facility as of June 27, 2020 . There was remaining capacity of $1,275 million under the ABL Facility based on our borrowing base as of June 27, 2020 . The Initial Term Loan Facility had a carrying value of $2,114 million , net of $3 million of unamortized deferred financing costs, as of June 27, 2020 . The 2019 Incremental Term Loan Facility had a carrying value of $1,460 million , net of $33 million of unamortized deferred financing costs, as of June 27, 2020 . The 2020 Incremental Term Loan Facility had a carrying value of $288 million, net of $12 million of unamortized deferred financing costs, as of June 27, 2020 . The Secured Notes had a carrying value of $986 million, net of $14 million of unamortized deferred financing costs, as of June 27, 2020 . The Unsecured Senior Notes had a carrying value of $596 million , net of $4 million of unamortized deferred financing costs, as of June 27, 2020 . We also had $362 million of obligations under financing leases for transportation equipment and building leases as of June 27, 2020 . We believe that the combination of cash 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 for the next 12 months. 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 $2.7 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 June 27, 2020 . Every quarter, we review rating agency changes for all lenders that have provided 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 specific strength of our lender counterparties. See Note 13, Debt, in our consolidated financial statements for a further description of our indebtedness. 33 Cash Flows The following table presents condensed highlights from our Consolidated Statements of Cash Flows for the periods presented: 26 Weeks Ended June 27, 2020 June 29, 2019 Net (loss) income $ (224 ) $ 187 Changes in operating assets and liabilities 696 15 Other adjustments 298 192 Net cash provided by operating activities 770 394 Net cash used in investing activities (1,096 ) (102 ) Net cash provided by (used in) financing activities 1,904 (300 ) Net increase (decrease) in cash, cash equivalents and restricted cash 1,578 (8 ) Cash, cash equivalents and restricted cash—beginning of period 98 105 Cash, cash equivalents and restricted cash—end of period $ 1,676 $ 97 Operating Activities Our net loss was $224 million in 2020 , compared to net income of $187 million in 2019 . The decrease in net income was due to the relevant factors discussed above. Cash flows provided by operating activities was $770 million for the 26 weeks ended June 27, 2020 , compared to cash flows provided by operating activities of $394 million for the 26 weeks ended June 29, 2019 . The year-over-year increase was primarily attributable to the Company's reduced working capital requirements resulting from lower case volume and lower inventories driven by the impact of COVID-19, along with the Company's working capital initiatives of temporarily extending payment terms with vendors and increased collection efforts on accounts receivable. These working capital improvements were partially offset by the decline in operating results, driven by the impact of COVID-19. Investing Activities Cash flows used in investing activities for the 26 weeks ended June 27, 2020 included the $973 million cash purchase price for the acquisition of Smart Foodservice. Cash flows used in investing activities in the 26 weeks ended June 27, 2020 and June 29, 2019 included cash expenditures of $131 million and $110 million , respectively, on property and equipment for fleet replacement and investments in information technology, as well as new construction and/or expansion of distribution facilities. Financing Activities 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, proceeds of $1.0 billion from the issuance of the Secured Notes and $491 million of net proceeds from the issuance and sale of 500,000 shares of our Series A Preferred Stock. Cash flows provided by financing activities in the 26 weeks ended June 27, 2020 also included net borrowings of $210 million under our revolving credit facilities and $71 million of scheduled payments under our non-revolving debt and financing leases. We borrowed an aggregate of $1 billion under our revolving credit facilities 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 COVID-19 pandemic. 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 terminated ABS Facility. We incurred approximately $33 million of lender fees and third-party costs in connection with our financing actions. Financing activities for the 26 weeks ended June 27, 2020 also included $11 million of proceeds received from stock purchases under our employee stock purchase plan and $1 million of proceeds 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 equity awards. Cash flows used in financing activities of $300 million in the 26 weeks ended June 29, 2019 included $247 million of net payments under our revolving credit facilities and $65 million of scheduled payments under our non-revolving debt and financing leases. Financing activities for the 26 weeks ended June 29, 2019 also included $11 million of proceeds received from the exercise of employee stock options and $10 million of proceeds from stock purchases under our employee stock purchase plan, which were partially offset by $5 million of employee tax withholdings paid in connection with the vesting of equity awards. 34 Retirement Plans See Note 16, Retirement Plans, in our consolidated financial statements for a description of our retirement plans. Off-Balance Sheet Arrangements We had entered into $222 million of letters of credit in favor of certain commercial insurers to secure obligations with respect to our self-insurance programs, primarily under the ABL Facility as of June 27, 2020 . Additionally, we entered into $36 million of letters of credit to secure obligations with respect to certain of our real estate leases, primarily under the ABL Facility, and $1 million of letters of credit 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 position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations The following table presents information about our significant contractual obligations as of June 27, 2020 that affect our liquidity and capital needs. The table includes information about payments due under specified contractual obligations and the maturity profile of our consolidated debt, operating leases and other long-term liabilities. The table reflects the impact of our financing actions and the acquisition of the Smart Foodservice on April 24, 2020 on our contractual obligations as of June 27, 2020 . Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years Recorded Contractual Obligations: Debt, including financing lease obligations $ 6,280 $ 138 $ 2,285 $ 2,393 $ 1,464 Operating lease obligations 426 58 111 75 182 Self-insured liabilities (1) 180 47 49 24 60 Pension plans and other postretirement benefits contributions (2) 7 1 2 2 2 Unrecorded Contractual Obligations: Interest payments on debt (3) 1,090 248 477 301 64 Multiemployer contractual minimum pension contributions (4) 14 4 8 2 — Purchase obligations (5) 1,708 1,655 44 9 — Total contractual cash obligations $ 9,705 $ 2,151 $ 2,976 $ 2,806 $ 1,772 (1) Represents the estimated undiscounted payments on our self-insurance programs for general, fleet and workers compensation liabilities. Actual payments may differ from these estimates. (2) Represents estimated contributions and benefit payments for Company sponsored pension and other postretirement benefit plans. Estimates beyond fiscal year 2020 are not available for the Company's defined benefit pension plan. (3) Represents future interest payments on fixed rate debt, financing leases and $3.6 billion of variable rate debt at interest rates as of June 27, 2020 . The amounts shown in the table include interest payments under interest rate swap agreements. (4) Represents minimum contributions to the Central States Teamsters Southeast and Southwest Area Pension Fund through 2023. (5) Represents purchase obligations for purchases of product in the normal course of business, for which all significant terms have been confirmed, information technology commitments and forward fuel and electricity purchase obligations. The balance does not include fiscal year 2020 capital additions. 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 2019 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 June 27, 2020 . 35 Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements.