What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-08-04 · 172 added, 140 removed, 257 unchanged (55% of the section changed)

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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.

We believe these non-GAAP measures provide meaningful supplemental information about our operating performance because these non-GAAP measures 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.

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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.

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 7,000 trucks, along with over 70 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.

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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.

As of December 28, 2019, the COVID-19 pandemic 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.

Restrictions on public gatherings and attendance at retail or other establishments, including 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, to temporarily suspend operations 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.

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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 a result of the COVID-19 pandemic and measures implemented to mitigate its spread, we have experienced decreased demand for our products, resulting in lower than anticipated net sales and total case volumes beginning in mid-March 2020 through the second quarter of 2020.

We have seen some improvement in net sales and total case volumes during the third quarter of 2020, as a result of loosened restrictions and shifts to outdoor dining.

However, demand remains lower than 2019 levels and we expect this trend to continue for at least the remainder of 2020.

Total case volumes were down approximately 8.9% and 11.4% for the 13 and 39 weeks ended September 26, 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.

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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.

While some of our core customer groups (such as restaurants, hospitality and education) have been more 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 resume in-person learning, 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.

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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;

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.

In response to the COVID-19 pandemic and ensuing decrease in total case volume, we have evolved our business focus and cost structure.

We have taken a number of steps to secure new customer relationships and expand our market share, reduce fixed and variable operating costs on a temporary and permanent basis, and strengthen our liquidity position.

We also have the ability to take further cost reduction actions on a temporary basis 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.

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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.

If our customers, particularly independent restaurants, continue to experience adverse business consequences due to the COVID-19 pandemic, some may shut down or discontinue their operations permanently, which would impact the demand for our services and have a material adverse effect on our business and results of operations.

While economic and operating conditions for our business improved in the third quarter compared to the second quarter, we do not expect to see pre-COVID-19 levels of operation until all government restrictions are lifted and consumers are once again willing and able to resume consumption of food away from home, travel and attend sporting and other events on a regular basis.

This recovery 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 39 weeks ended September 26, 2020.

The first quarter of 2020 was not significantly impacted, as the impact of the pandemic only manifested itself during the last two to three weeks of the first quarter.

The second quarter of 2020 was the most significantly impacted by the pandemic, as government mandates on our customers to temporarily close or limit dining options occurred during the second quarter.

The third quarter of 2020 showed signs of recovery as compared to the second quarter, as government restrictions were loosened to various degrees in certain states during the third quarter.

However, 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.

Operating Metrics

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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.

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.

Financial Highlights —Total case volume for the 13 weeks and 39 weeks ended September 26, 2020 decreased 8.9% and 11.4%, respectively, and independent restaurant case volume decreased 6.8% and 13.7%, respectively, for those same periods.

Net sales decreased $683 million, or 10.5%, and $2,258 million, or 11.9% for the 13 weeks and 39 weeks ended September 26, 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.

Contributions to aggregate net sales from the Food Group and Smart Foodservice acquisitions were $876 million and $2,262 million for the 13 weeks and 39 weeks ended September 26, 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.

Gross profit decreased $182 million, or 15.7%, to $974 million for the 13 weeks ended September 26, 2020 and decreased $639 million, or 19.1%, to $2,711 million for the 39 weeks ended September 26, 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 16.7% for the 13 weeks ended September 26, 2020, compared to 17.7% for the prior year period and was 16.2% for the 39 weeks ended September 26, 2020, compared to 17.6% for the prior year period.

Total operating expenses decreased $72 million, or 7.4%, to $896 million for the 13 weeks ended September 26, 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 and a $17 million gain on the sale of excess land.

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, $30 million was reversed during the third quarter of 2020, in addition to the $75 million that was reversed during the second quarter of 2020, based on better than anticipated collection of our pre-COVID-19 accounts receivable.

These decreases were partially offset by the inclusion of operating expenses from the Food Group and Smart Foodservice acquisitions, $14 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and $9 million of asset impairment charges on certain trade names related to the Food Group acquisition.

Total operating expenses decreased $19 million, or 0.7%, to $2,818 million for the 39 weeks ended September 26, 2020.

The decrease was primarily due to the negative impact of COVID-19 on case volume and the related impact of costs actions put in place at the end of March 2020.

These decreases were partially offset by a higher provision for doubtful accounts due to the impact of COVID-19, operating expenses from the Food Group and Smart Foodservice acquisitions, $30 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and $9 million of asset impairment charges on certain trade names related to the Food Group acquisition.

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 acquisition of Smart Foodservice expands 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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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

13 Weeks Ended 39 Weeks Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

Consolidated Statements of Operations Data:

Net sales $ 5,848 $ 6,531 $ 16,747 $ 19,005

Cost of goods sold 4,874 5,375 14,036 15,655

Gross profit 974 1,156 2,711 3,350

Operating expenses:

Distribution, selling and administrative costs

Restructuring costs

873 968 2,779 2,837

Restructuring and asset impairment charges

Total operating expenses 896 968 2,818 2,837

Operating (loss) income

Other income—net

Operating income (loss) 78 188 (107) 513

Other (income) expense—net (6) 1 (16) (3)

Interest expense—net 63 43 178 127

(Loss) income before income taxes

Income tax (benefit) provision

Net (loss) income

Income (loss) before income taxes 21 144 (269) 389

Income tax provision (benefit) 13 39 (53) 97

Income (loss) from continuing operations 8 105 (216) 292

Income from discontinued operations — 1 — 1

Net income (loss) $ 8 $ 106 $ (216) $ 293

Percentage of Net Sales:

16.7 % 17.7 % 16.2 % 17.6 %

Operating expenses

Operating (loss) income

Net (loss) income

15.3 % 14.8 % 16.8 % 14.9 %

Operating income (loss)

1.3 % 2.9 % (0.6) % 2.7 %

Net income (loss)

0.1 % 1.6 % (1.3) % 1.5 %

Adjusted EBITDA (1)

3.6 % 4.7 % 2.8 % 4.5 %

Cash flows—operating activities

$ (237) $ 165 $ 533 $ 559

Cash flows—investing activities

9 (1,875) (1,087) (1,977)

Cash flows—financing activities

(429) 1,711 1,475 1,411

Capital expenditures

23 47 154 157

193 275 225 777

Adjusted EBITDA (1)

Adjusted net (loss) income available to common shareholders (1)

209 307 474 859

Adjusted net income available to common shareholders (1)

32 143 10 378

Free cash flow (2)

(260) 118 379 402

(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;

(1) restructuring and asset impairment charges;

(2) share-based compensation expense;

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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.

These 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.

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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 EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because these measures 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.

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 these measures 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.

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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

13 Weeks Ended 39 Weeks Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

Net (loss) income available to common shareholders $ (2) $ 106 $ (231) $ 293

Series A Convertible Preferred Stock dividends (see Note 18) 10 — 15 —

Net (loss) income

Net income (loss) 8 106 (216) 293

Interest expense—net 63 43 178 127

Income tax (benefit) provision

Income tax provision (benefit) 13 39 (53) 97

Depreciation expense 88 75 257 228

Amortization expense 21 12 59 32

Restructuring costs (1)

EBITDA 193 275 225 777

Restructuring and asset impairment charges (1)

Share-based compensation expense (2)

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COVID-19 other related expenses (5)

Income from discontinued operations (6)

Business acquisition and integration related costs and other (7)

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Depreciation expense

(88) (75) (257) (228)

Interest expense—net

(63) (43) (178) (127)

Income tax provision, as adjusted (8)

(16) (46) (14) (126)

Series A Convertible Preferred Stock dividends (see Note 18)

Adjusted net (loss) income available to common shareholders (7)

(10) — (15) —

Adjusted net income available to common shareholders $ 32 $ 143 $ 10 $ 378

Free cash flow

Cash flows from operating activities

$ (237) $ 165 $ 533 $ 559

Capital expenditures

(23) (47) (154) (157)

Free cash flow

Consists primarily of severance and related costs and organizational realignment costs.

$ (260) $ 118 $ 379 $ 402

(1) Consists primarily of severance and related costs, organizational realignment costs and asset impairment charges.

(2) Share-based compensation expense for stock and option awards and discounts provided under employee stock purchase plan.

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(5) Includes COVID-19 related gains, losses or costs as specified under the agreements governing our indebtedness.

(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;

(6) Consists of income net of income taxes from the Divested Assets.

(7) Includes:

(i) Smart Foodservice acquisition and integration related costs of less than $1 million and $20 million for the 13 weeks and 39 weeks ended September 26, 2020, respectively;

(ii) Food Group acquisition and integration related costs of $4 million and $23 million for the 13 weeks and 39 weeks ended September 26, 2020, respectively, and $17 million and $35 million for the 13 weeks and 39 weeks ended September 28, 2019, respectively;

and (iii) gains, losses or costs as specified under the agreements governing our indebtedness.

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.

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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

13 Weeks Ended 39 Weeks Ended

September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019

GAAP income tax provision (benefit) $ 13 $ 39 $ (53) $ 97

Tax impact of pre-tax income adjustments 3 10 72 27

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Income tax provision, as adjusted $ 16 $ 46 $ 14 $ 126

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

13 Weeks Ended September 26, 2020 and September 28, 2019

• Total case volume decreased 8.9% and independent restaurant case volume decreased 6.8%, 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 $683 million, or 10.5%, to $5,848 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 .

• Operating income decreased $110 million, or 58.5%, to $78 million in 2020.

• Net income decreased $98 million, or 92.5%, to $8 million in 2020.

• Adjusted EBITDA decreased $98 million, or 31.9%, to $209 million in 2020.

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Organic case volume decreased 22.2% and organic independent restaurant case volume decreased 20.0%.

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 .

Net sales decreased $683 million, or 10.5%, to $5,848 million in 2020, comprised of a $584 million, or 8.9%, decrease in case volume and a $99 million, or 1.6%, decrease in the overall net sales rate per case.

The decrease in net sales rate per case primarily reflects changes in our sales mix partially offset by a year-over-year inflation of 2.2%.

The year-over-year increase in inflation primarily reflects inflation in multiple product categories including beef, cheese and disposables, which benefited net sales since a significant portion of our sales is based on markups over product cost.

Sales of private brands represented approximately 34% and 35% of net sales in 2020 and 2019, respectively.

The Food Group and Smart Foodservice contributed aggregate net sales of $876 million in 2020.

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.

Gross profit decreased $182 million, or 15.7%, to $974 million in 2020, primarily as a result of the negative impact of COVID-19 on case volume, 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 $3 million in 2020 compared to expense of $1 million in 2019.

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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, comprised of distribution, selling and administrative and restructuring and asset impairment costs, decreased $72 million or 7.4%, to $896 million in 2020.

Operating expenses as a percentage of net sales were 15.3% in 2020, compared to 14.8% 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 expenses is primarily due to the negative impact of COVID-19 on case volume and the related impact of cost actions put in place, and a $30 million reduction in the provision for doubtful accounts as a result of more favorable than anticipated collection of our pre-COVID-19 accounts receivable and a $17 million gain on the sale of excess land.

These decreases were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions of $140 million in the aggregate, $14 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and $9 million of asset impairment charges.

The $9 million of asset impairment charges relate to the decline in fair value of certain trade names acquired as part of the Food Group acquisition primarily due to the adverse impact of COVID-19 on forecasted earnings and the discount rate utilized in our valuation models.

The Food Group will continue to remain a key focus in expanding our network in the West and Northwest parts of the United States.

Operating Income

Our operating income was $78 million in 2020, compared to operating income of $188 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 $4 million and $2 million in 2020 and 2019 , respectively.

Other Income (Expense)—Net

Other income (expense)—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 in 2020.

We recognized other expense—net of $1 million in 2019, including $3 million of non-cash settlement charges resulting from lump sum payments to former participants in our defined benefit pension plan.

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.

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Interest expense—net increased $20 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.

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 .

For the 13 weeks ended September 26, 2020, our effective income tax rate of 58% 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.

Because pre-tax income for the 13 weeks ended September 26, 2020 was $21 million, all tax adjustments had a significant impact on a percentage basis on the effective income tax rate.

The discrete tax items were not material individually or in the aggregate;

however, when compared to the pre-tax income of $21 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate.

For the 13 weeks ended September 28, 2019, our effective income tax rate of 27% 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 a change in valuation allowance.

Our net income was $8 million in 2020, compared to net income of $106 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

39 Weeks Ended September 26, 2020 and September 28, 2019

• Total case volume decreased 11.4% and independent restaurant case volume decreased 13.7%, reflecting the negative impact of COVID-19 on case volumes, partially offset by contributions from Smart Foodservice and the Food Group in 2020.

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Organic case volume decreased 23.5% and organic independent restaurant case volume decreased 24.0%.

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 .

Net sales decreased $2,258 million, or 11.9%, to $16,747 million in 2020, comprised of a $2,158 million, or 11.4%, decrease in case volume and a $100 million, or 0.5%, decrease in the overall net sales rate per case.

The decrease in net sales rate per case primarily reflects changes in our sales mix partially offset by a year-over-year inflation of 1.9%.

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 $2,262 million in 2020.

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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, comprised of distribution, selling and administrative and restructuring and asset impairment costs, decreased $19 million or 0.7%, to $2,818 million in 2020.

Operating expenses as a percentage of net sales were 16.8% in 2020, compared to 14.9% 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.

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 into place and a $17 million gain on the sale of excess land.

These decreases were partially offset by operating expenses for the Food Group and Smart Foodservice acquisitions of $369 million, a $65 million increase in the provision for doubtful accounts due to the estimated impact of COVID-19 on the collectability of accounts receivable, $30 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and $9 million of asset impairment charges.

The Food Group will continue to remain a key focus in expanding our network in the West and Northwest parts of the United States.

Operating (Loss) Income

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Interest expense—net increased $51 million to $178 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.

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.

For the 39 weeks ended September 26, 2020, our effective income tax rate of 20% 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.

For the 39 weeks ended September 28, 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 $3 million, primarily related to excess tax benefits associated with share-based compensation.

Net (Loss) Income

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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.

We have taken additional action during the 39 week period ended September 26, 2020 to further strengthen our liquidity.

In particular:

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• 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.

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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.

A rating agency announced a downgrade to our credit ratings in September 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.

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 .

The aggregate carrying value of our indebtedness was $5,787 million, net of $64 million of unamortized deferred financing costs, as of September 26, 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 had an aggregate of $274 million of letters of credit outstanding under the ABL Facility as of September 26, 2020.

There was remaining capacity of $1,716 million under the ABL Facility based on our borrowing base as of September 26, 2020.

The Initial Term Loan Facility had a carrying value of $2,109 million, net of $3 million of unamortized deferred financing costs, as of September 26, 2020.

The 2019 Incremental Term Loan Facility had a carrying value of $1,458 million, net of $31 million of unamortized deferred financing costs, as of September 26, 2020.

The 2020 Incremental Term Loan Facility had a carrying value of $287 million, net of $12 million of unamortized deferred financing costs, as of September 26, 2020.

The Secured Notes had a carrying value of $986 million, net of $14 million of unamortized deferred financing costs, as of September 26, 2020.

The Unsecured Senior Notes had a carrying value of $596 million, net of $4 million of unamortized deferred financing costs, as of September 26, 2020.

We also had $343 million of obligations under financing leases for transportation equipment and building leases as of September 26, 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.

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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.

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39 Weeks Ended

June 27, 2020

June 29, 2019

September 26, 2020 September 28, 2019

Net (loss) income $ (216) $ 293

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Net cash used in investing activities (1,087) (1,977)

Net cash provided by (used in) financing activities

Net cash provided by financing activities 1,475 1,411

Net increase (decrease) in cash, cash equivalents and restricted cash 921 (7)

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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.

Cash flows provided by operating activities was $533 million for the 39 weeks ended September 26, 2020, compared to cash flows provided by operating activities of $559 million for the 39 weeks ended September 28, 2019.

The year-over-year decrease 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.

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.

Cash flows used in investing activities for the 39 weeks ended September 26, 2020 and September 28, 2019 included the $973 million cash purchase price for the acquisition of Smart Foodservice and the $1.8 billion cash purchase price for the acquisition of the Food Group, respectively.

Cash flows used in investing activities in the 39 weeks ended September 26, 2020 and September 28, 2019 included cash expenditures of $154 million and $157 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.

Cash flows provided by financing activities for the 39 weeks ended September 26, 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 used by financing activities in the 39 weeks ended September 26, 2020 included $105 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.

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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.

Financing activities

for the 39 weeks ended September 26, 2020 also included $15 million of proceeds received from stock purchases under our employee stock purchase plan and $2 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 provided by financing activities for the 39 weeks ended September 28, 2019 included aggregate borrowings of $1.5 billion under the Incremental Term Loan Facility and approximately $330 million in borrowings under the ABL Facility and ABS Facility, which were used to finance the acquisition of the Food Group.

Cash flows used in financing activities for the 39 weeks ended September 28, 2019 included $3 million of net payments under our revolving credit facilities and $79 million of scheduled payments under our non-revolving debt and financing leases.

Financing activities for the 39 weeks ended September 28, 2019 also included $13 million of proceeds received from the exercise of employee stock options and $15 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.

Retirement Plans

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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.

We had entered into $274 million of letters of credit, primarily in favor of certain commercial insurers to secure obligations with respect to our self-insurance programs, under the ABL Facility as of September 26, 2020.

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 following table presents information about our significant contractual obligations as of September 26, 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 .

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 September 26, 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

$ 5,850 $ 138 $ 2,276 $ 1,982 $ 1,454

Operating lease obligations

416 57 112 74 173

Self-insured liabilities (1)

181 48 49 23 61

Pension plans and other postretirement benefits contributions (2)

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Interest payments on debt (3)

1,038 246 458 283 51

Multiemployer contractual minimum pension contributions (4)

Purchase obligations (5)

1,258 1,195 53 10 —

Total contractual cash obligations $ 8,764 $ 1,689 $ 2,958 $ 2,376 $ 1,741

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Estimates beyond fiscal year 2020 are not available for the Company's defined benefit pension plan.

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 .

(3) Represents future interest payments on fixed rate debt, financing leases and $3.3 billion of variable rate debt at interest rates as of September 26, 2020.

The amounts shown in the table include interest payments under interest rate swap agreements.

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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.

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.

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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 .

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 39 weeks ended September 26, 2020.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis