What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2021-11-08 · 103 added, 213 removed, 161 unchanged (66% of the section changed)

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

(Dollar amounts presented in millions, unless otherwise noted)

(Dollar amounts in tables 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 2021 Annual Report.

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Information regarding reconciliations of and the rationale for these measures is discussed under “Non-GAAP Reconciliations” below.

Results of operations for the 13 weeks and 39 weeks ended October 2, 2021 are compared to the 13 weeks and 39 weeks ended September 26, 2020 unless specifically noted otherwise.

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.

Results of operations for the 13 weeks ended April 2, 2022 are compared to the 13 weeks ended April 3, 2021 unless specifically noted otherwise.

At US Foods, we strive to inspire and empower chefs and foodservice operators to bring great food experiences to consumers.

This mission is supported by our strategy of GREAT FOOD.

MADE EASY.™ , which is centered on providing customers with the innovative products business support and technology solutions they need to operate their businesses profitably.

We have centralized activities where scale matters and our local field structure focuses on customer facing activities.

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Our sales associates are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers.

Our extensive network of approximately 70 distribution facilities and fleet of approximately 6,500 trucks, along with 80 cash and carry locations, allow us to operate efficiently and provide high levels of customer service.

Our extensive network of 69 distribution facilities and fleet of approximately 6,500 trucks, along with 81 cash and carry locations, allow us to operate efficiently and provide high levels of customer service.

This operating model allows us to leverage our nationwide scale and footprint while executing locally.

COVID-19 Update

In March 2020, the World Health Organization characterized COVID-19 as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide.

Starting in March 2020, in order to reduce the spread of COVID-19 and its variants, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions on businesses, schools and other public gathering spaces including restaurants and recreational, sporting and other similar venues.

Although vaccines have now been authorized and approved for use by the United States Food and Drug Administration for the vast majority of the United States population, including, most recently, for children aged five to eleven years, the restrictions and recommended safety measures related to COVID-19, such as capacity limits, physical distancing and face mask protocols still remain in effect in many parts of the country and continue to evolve.

As such, the timing and extent of the economic recovery from the COVID-19 pandemic is dependent upon many factors, including the rate of vaccine adoption, the extent of COVID-19 variants (and the continued effectiveness of the vaccines against those variants) and the duration and implications of continued restrictions and safety measures.

Recently-enacted federal and state executive orders have required certain employers, including us, currently or in the near term, to implement a vaccine mandate for employees and require periodic testing for employees who are not vaccinated.

Additionally, on November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued its related regulations for covered employers, including us, which set a January 4, 2022 deadline for compliance.

Such vaccine mandates could result in nationwide workforce, supply chain and production disruptions that could impact our business and delay, slow or reverse the economic recovery from the COVID-19 pandemic.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has adversely impacted many of our customers, especially our restaurant, hospitality and education customers.

As a result, we experienced decreased demand for our products, resulting in lower Net sales and total case volumes beginning in mid-March 2020.

We saw improvement in Net sales and total case volumes during the second and third quarters of 2021 as compared to the first quarter of 2021, with additional loosening of indoor dining restrictions and other safety measures.

Overall demand has started to return to pre-COVID-19 levels;

however, case volumes remained lower than pre-COVID-19 levels.

Total case volume increased 18.5% and 20.8% for the 13 weeks and 39 weeks ended October 2, 2021, compared to the prior year.

Economic and operating conditions for our business have improved in each quarter of 2021 as compared to the fourth quarter of 2020.

While many restrictions have been lifted and consumers are returning to consuming food away from home, traveling for personal and business purposes and attending sporting, entertainment and other events regularly.

However, we and the industry may continue to face pandemic-related challenges as the recovery continues, such as constrains on the availability of product supply, increased product

and logistics costs, labor shortages, and shifts in the buying patterns of our customers.

Therefore, we are unable to predict the duration and extent to which the pandemic will continue to impact our results of operations.

We are currently evaluating the impacts of the November 4, 2021 OSHA vaccine regulations related to the federal vaccine mandate and, therefore, we are unable to predict the impact vaccine mandates may have on our operations and our ability to access qualified labor or the impact such mandates may have on the workforces of our suppliers and customers.

Our operations, our industry and the U.S.

economy continue to be disrupted by the COVID-19 pandemic and related inflation, supply chain disruptions and labor shortages.

We continue to actively monitor the impacts of the COVID-19 pandemic on all aspects of our business including related actions taken by government authorities.

Although Net sales and total case volumes increased during the first quarter of 2022 as compared to the first quarter of 2021, increased infection rates and related temporary restrictions in some parts of the country resulting from the omicron variant negatively impacted Net sales for the first quarter of 2022.

Uncertainty around the pandemic persists including the risk of future variants and, as a result, we and the industry may continue to face pandemic-related challenges, as the recovery continues, such as constraints on the availability of product supply, increased product and logistics costs, labor shortages, inflation and shifts in the buying patterns of our customers.

Therefore, we are unable to predict the extent to which the pandemic will continue to impact our results of operations.

Operating Metrics

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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.

Financial Highlights —Total case volume for the 13 weeks and 39 weeks ended October 2, 2021 increased 18.5% and 20.8%, respectively, and independent restaurant case volume increased 25.1% and 33.5%, respectively for those same periods.

Net sales increased $2,042 million, or 34.9%, and $5,101 million, or 30.5% for the 13 weeks and 39 weeks ended October 2, 2021, primarily due to volume improvements commensurate with easing of COVID-19 related restrictions on our customers.

The increase in Net sales during the 39 weeks ended October 2, 2021 was also due to the contributions from the Smart Foodservice acquisition, which was acquired on April 24, 2020.

Smart Foodservice contributed Net sales of $895 million and $484 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.

Gross profit increased $267 million, or 27.4%, to $1,241 million for the 13 weeks ended October 2, 2021, and increased $702 million, or 25.9%, to $3,413 million for the 39 weeks ended October 2, 2021, primarily as a result of the increase in Net sales.

The increase in gross profit during the 39 weeks ended October 2, 2021 was also due to the contributions from the Smart Foodservice acquisition.

These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments.

As a percentage of net sales, gross profit was 15.7% for the 13 weeks ended October 2, 2021, compared to 16.7% for the prior year period and was 15.6% for the 39 weeks ended October 2, 2021, compared to 16.2% for the prior year period.

Total operating expenses increased $210 million, or 23.4%, to $1,106 million for the 13 weeks ended October 2, 2021, and increased $308 million, or 10.9%, to $3,126 million for the 39 weeks ended October 2, 2021.

The increase was primarily due to higher supply chain labor costs and increased non-labor distribution costs related to increased sales volume due to the COVID-19 recovery.

The increase in total operating expenses during the 39 weeks ended October 2, 2021 was also due to the inclusion of operating expenses from the Smart Foodservice acquisition.

As a percentage of net sales, operating expenses were 14.0% for the 13 weeks ended October 2, 2021, compared to 15.3% for the prior year period and was 14.3% for the 39 weeks ended October 2, 2021, compared to 16.8% for the prior year period.

Smart Foodservice Acquisition —On April 24, 2020, USF completed the acquisition of Smart Foodservice.

Total consideration paid at the closing of the acquisition was $972 million (net of cash acquired).

The acquisition of Smart Foodservice expanded the Company’s cash and carry business in the West and Northwest parts of the U.S.

The assets, liabilities and results of operations of Smart Foodservice have been included in our consolidated financial statements since the date the acquisition was completed.

Financial Highlights —For the 13 weeks ended April 2, 2022, compared to the same quarter a year ago, total case volume increased 4.1%, and independent restaurant case volume increased 9.2%, while net sales increased $1,503 million, or 23.9%, driven by higher total case volume and food cost inflation of approximately 17%.

After lower Net sales in January, due to reduced demand caused by the Omicron variant, Net sales grew through the end of the quarter.

Gross profit increased $192 million, or 19.1%, to $1,195 million for the 13 weeks ended April 2, 2022, primarily as a result of an increase in total case volume, optimized pricing and increased freight income from improved inbound logistics, and food cost inflation in multiple product categories.

These increases in gross profit were partially offset by an unfavorable year-over-year LIFO adjustment.

As a percentage of net sales, gross profit was 15.3% for the 13 weeks ended April 2, 2022, compared to 15.9% for the prior year period.

Total operating expenses increased $186 million, or 19.1%, to $1,161 million for the 13 weeks ended April 2, 2022.

The increase was primarily due to greater volume and higher distribution costs, in part due to higher temporary labor costs and higher than normal wage inflation in 2021.

These increases were partially offset by cost savings initiatives outlined in our long-range plan including:

(1) routing improvements that expanded from a pilot to enterprise-wide implementation, (2) continued deployment of new warehouse selection technology that is expected to be completed in the beginning of the fiscal third quarter of 2022, and (3) the rollout of new warehouse process enhancements tested in 2021.

As a percentage of net sales, operating expenses were 14.9% for the 13 weeks ended April 2, 2022, compared to 15.5% for the prior year period.

Results of Operations

The following table presents selected historical results of operations for the periods indicated:

13 Weeks Ended 39 Weeks Ended

October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

13 Weeks Ended

April 2, 2022 April 3, 2021

Consolidated Statements of Operations Data:

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Distribution, selling and administrative costs

1,099 873 3,115 2,779

Restructuring costs and asset impairment charges

Total operating expenses 1,161 975

Operating income (loss) 135 78 287 (107)

Operating income 34 28

Other income—net (6) (7)

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Loss on extinguishment of debt — 23

Income (loss) before income taxes 91 21 125 (269)

Income tax provision (benefit) 27 13 30 (53)

Net income (loss) 64 8 95 (216)

Series A convertible preferred stock dividends (see Note 14) (9) (10) (33) (15)

Net income (loss) available to common shareholders $ 55 $ (2) $ 62 $ (231)

Loss before income taxes (15) (42)

Income tax benefit (8) (18)

Net loss (7) (24)

Series A Preferred Stock Dividends (see Note 13) (9) (15)

Net loss available to common shareholders $ (16) $ (39)

Percentage of Net Sales:

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14.9 % 15.5 %

Operating income (loss)

1.7 % 1.3 % 1.3 % (0.6) %

Net income (loss)

Operating income

(0.1) % (0.4) %

Adjusted EBITDA (1)

3.7 % 3.6 % 3.6 % 2.8 %

Cash flows—operating activities

$ 270 $ (237) $ 520 $ 533

Cash flows—investing activities

(65) 9 (166) (1,087)

Cash flows—financing activities

(132) (429) (411) 1,475

Capital expenditures

66 23 173 154

232 193 569 225

Adjusted EBITDA (1)

291 209 795 474

Adjusted net income (1)

119 42 292 25

Free cash flow (2)

204 (260) 347 379

(1) EBITDA is defined as net (loss) income, plus interest expense—net, income tax (benefit) provision, and depreciation and amortization.

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and (6) other gains, losses, or costs as specified in the agreements governing our indebtedness.

Adjusted net income is defined as net income excluding the items used to calculate Adjusted EBITDA listed above and further adjusted for the tax effect of the exclusions and discrete tax items.

Adjusted net income is defined as net (loss) income excluding the items used to calculate Adjusted EBITDA listed above and further adjusted for the tax effect of the exclusions and discrete tax items.

EBITDA, Adjusted EBITDA, and Adjusted net income as presented 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.

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.

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We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry.

EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP.

EBITDA, Adjusted EBITDA and Adjusted net income 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.

We use Free cash flow as a supplemental measure to GAAP financial measures regarding the liquidity of our operations.

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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow to the most directly comparable GAAP financial performance and liquidity measures for the periods indicated:

13 Weeks Ended 39 Weeks Ended

October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

Net income (loss) available to common shareholders $ 55 $ (2) $ 62 $ (231)

Series A convertible preferred stock dividends (see Note 14) (9) (10) (33) (15)

Net income (loss) 64 8 95 (216)

13 Weeks Ended

April 2, 2022 April 3, 2021

Net loss available to common shareholders $ (16) $ (39)

Series A Preferred Stock Dividends (see Note 13) (9) (15)

Net loss (7) (24)

Interest expense—net 55 54

Income tax provision (benefit) 27 13 30 (53)

Income tax benefit (8) (18)

Depreciation expense 78 82

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Share-based compensation expense (2)

LIFO reserve change (3)

LIFO reserve adjustment (3)

Loss on extinguishment of debt (4)

Business transformation costs (5)

COVID-19 bad debt (benefit) expense (6)

— (30) (15) 65

COVID-19 product donations and inventory adjustments (7)

COVID-19 other related expenses (8)

COVID-19 bad debt benefit (6)

Business acquisition and integration related costs and

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Depreciation expense

(79) (88) (242) (257)

Interest expense—net

(50) (63) (158) (178)

Income tax provision, as adjusted (8)

(43) (16) (103) (14)

Adjusted net income $ 80 $ 27

$ 119 $ 42 $ 292 $ 25

Cash flows from operating activities

$ 270 $ (237) $ 520 $ 533

Capital expenditures

(66) (23) (173) (154)

Free cash flow

$ 204 $ (260) $ 347 $ 379

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

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(4) Includes early redemption premium and the write-off of certain pre-existing debt issuance costs.

See Note 10, Debt, for additional information.

(5) Consists primarily of costs related to significant process and systems redesign across multiple functions.

(6) Includes the changes in the reserve for doubtful accounts expense reflecting the collection risk associated with our customer base as a result of the COVID-19 pandemic.

(7) Includes COVID-19 related expenses related to inventory adjustments and product donations.

(8) Includes COVID-19 related costs that we are permitted to addback under certain agreements governing our indebtedness.

(7) Includes:

(i) aggregate acquisition and integration related costs of $4 million and $5 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $16 million and $43 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively;

(ii) favorable legal settlement recovery of $13 million for the 39 weeks ended October 2, 2021;

(i) aggregate acquisition and integration related costs of $6 million for both the 13 weeks ended April 2, 2022 and April 3, 2021;

(ii) contested proxy and related legal and consulting costs of $7 million for the 13 weeks ended April 2, 2022;

and (iii) other gains, losses or costs that we are permitted to addback for purposes of calculating Adjusted EBITDA under certain agreements governing our indebtedness.

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The tax effect of pre-tax items excluded from Adjusted net income is computed using a statutory tax rate after taking into account the impact of permanent differences and valuation allowances.

(11) Effective as of the first quarter 2021, we have presented Adjusted net income.

Previously, we presented Adjusted net income (loss) available to common shareholders.

A reconciliation between the GAAP income tax benefit and the income tax provision, as adjusted, is as follows:

13 Weeks Ended 39 Weeks Ended

October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020

GAAP income tax provision (benefit) $ 27 $ 13 $ 30 $ (53)

13 Weeks Ended

April 2, 2022 April 3, 2021

GAAP income tax benefit $ (8) $ (18)

Tax impact of pre-tax income adjustments 32 21

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Comparison of Results

13 Weeks Ended October 2, 2021 and September 26, 2020

13 Weeks Ended April 2, 2022 and April 3, 2021

• Total case volume increased 4.1% and independent restaurant case volume increased 9.2%.

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• Operating income increased $6 million, or 21.4%, to $34 million in 2022.

• Net income improved $56 million to $64 million in 2021.

• Net loss improved $17 million to $7 million in 2022.

• Adjusted EBITDA increased $69 million, or 40.1%, to $241 million in 2022.

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Total case volume increased 4.1% and independent restaurant case volume growth of 9.2%.

The increase, all organic, was primarily driven by increased leisure and business travel and increased restaurant traffic due to eased COVID-19 related restrictions on our customers.

Net sales increased $1,503 million, or 23.9%, to $7,798 million in 2022, comprised of a $257 million, or 4.1%, increase in case volume and a $1,246 million, or 19.8%, increase in the overall Net sales rate per case.

The increase in Net sales rate per case reflects a year-over-year average inflation increase of 11.5% in multiple product categories includ ing beef, poultry, and pork, as well as favorable changes in our product mix.

The increase in Net sales rate per case reflects a year-over-year average inflation increase of 17.3% in multiple product categories includin g beef, poultry, and pork, as well as favorable changes in our product mix.

The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost.

Organic sales of private brands represented approximately 34% of Net sales in both 2021 and 2020.

Gross profit increased $267 million, or 27.4%, to $1,241 million in 2021, primarily as a result of the increase in Net sales, partially offset by unfavorable year-over-year LIFO adjustments.

Our LIFO method of inventory costing resulted in an expense of $32 million in 2021 compared to expense of $3 million in 2020 due to inflation in multiple product categories including disposables, grocery, and seafood .

Organic sales of private brands represented approximately 34% and 33% of Net sales in 2022 and 2021, respectively.

Gross profit increased $192 million, or 19.1%, to $1,195 million in 2022, primarily as a result of an increase in total case volume, optimized pricing and increased freight income from improved inbound logistics, and food cost inflation in multiple product categories, partially offset by an unfavorable year-over-year LIFO adjustment.

Our LIFO method of inventory costing resulted in an expense of $72 million in 2022 compared to expense of $21 million in 2021 due to inflation in multiple product categories including dairy, poultry and grocery.

Gross profit as a percentage of net sales was 15.3% in 2022, compared to 15.9% in 2021, due to the aforementioned factors.

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Operating expenses as a percentage of net sales were 14.9% in 2022, compared to 15.5% in 2021.

The increase in operating expenses was primarily due to higher supply chain labor costs and non-labor distribution costs attributable to increased sales volume as compared to the prior year period.

The prior year period reflected cost-reduction actions taken in response to COVID-19 and a reduction in our allowance for doubtful accounts.

The Company also recognized $7 million of asset impairment charges in 2021 related to a rebranding initiative following the integration of a trade name acquired as part of the 2019 Food Group acquisition.

During 2020, the Company also recognized $9 million of asset impairment charges related to COVID-19’s adverse impacts on the fair value of certain trade names acquired as part of the 2019 Food Group acquisition.

These increases in operating expenses in 2021 were partially offset by cost savings initiated in 2020.

Operating Income (Loss)

Our operating income was $135 million in 2021, compared to an operating income of $78 million in 2020.

The increase in operating income was due to the factors discussed in the relevant sections above.

Other Income—Net

Other income—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans.

We recognized other income—net of $6 million in both 2021 and 2020.

Interest Expense—Net

Interest expense—net decreased $13 million to $50 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020.

For the 13 weeks ended October 2, 2021, our effective income tax rate of 30% 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.

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

however, when compared to the pre-tax income of $91 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 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.

Net Income (Loss)

Our net income was $64 million in 2021, compared to net income of $8 million in 2020.

The improvement in net income was due to the relevant factors discussed above.

39 Weeks Ended October 2, 2021 and September 26, 2020

• Total case volume increased 20.8% and independent restaurant case volume increased 33.5%

• Net sales increased $5,101 million, or 30.5%, to $21,848 million in 2021.

• Operating income was $287 million in 2021, compared to operating loss of $107 million in 2020.

• Net income was $95 million in 2021, compared to net loss of $216 million in 2020.

• Adjusted EBITDA increased $321 million, or 67.7%, to $795 million in 2021.

As a percentage of Net sales, Adjusted EBITDA was 3.6% in 2021, compared to 2.8% in 2020.

Total case volume increased 20.8% in 2021 and independent restaurant case volume growth of 33.5%.

Organic case volume increased 17.8% and organic independent restaurant case volume increased 29.4%.

The increase was primarily driven by increased leisure and business travel and increased restaurant traffic due to eased COVID-19 related restrictions on our customers.

Net sales increased $5,101 million, or 30.5%, to $21,848 million in 2021, comprised of a $3,490 million, or 20.8%, increase in case volume and a $1,611 million, or 9.7%, increase in the overall Net sales rate per case.

The increase in Net sales rate per case primarily reflects a year-over-year average inflation increase of 7.5% in multiple product categories including poultry, beef and disposables, as well as favorable changes in our product mix.

The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost.

Organic sales of private brands represented approximately 34% and 35% of Net sales in 2021 and 2020, respectively.

The increase in Net sales was also due to contributions from the Smart Foodservice acquisition.

Smart Foodservice contributed net sales of $895 million in 2021, as compared to $484 million in 2020.

Gross profit increased $702 million, or 25.9%, to $3,413 million in 2021, primarily as a result of the increase in Net sales.

The increase in gross profit was also due to contributions from the Smart Foodservice acquisition.

These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments.

Our LIFO method of inventory costing resulted in an expense of $150 million in 2021 compared to expense of $9 million in 2020 due to inflation in multiple product categories including beef, poultry, and grocery.

Gross profit as a percentage of net sales was 15.6% in 2021, compared to 16.2% in 2020.

Operating Expenses

Operating expenses, comprised of distribution, selling and administrative and restructuring costs and asset impairment costs, increased $308 million or 10.9%, to $3,126 million in 2021.

Operating expenses as a percentage of net sales were 14.3% in 2021, compared to 16.8% in 2020.

The increase in operating expenses was primarily due to higher supply chain labor costs and non-labor distribution costs attributable to increased sales volume as compared to the prior year period.

The prior year period reflected cost-reduction actions taken in response to COVID-19.

The Company also recognized $ 7 million of asset impairment charges related to a rebranding initiative following the integration of a trade name acquired as part of the 2019 Food Group acquisition.

The increase in operating expenses was also due to the inclusion of operating expenses for the Smart Foodservice acquisition of $119 million in 2021, as compared to $69 million in 2020.

These increases in operating expenses were partially offset by a $98 million lower provision for doubtful accounts during the 39 weeks ended October 2, 2021, cost savings initiated in 2020 and a favorable legal settlement recovery of $13 million during the 39 weeks ended October 2, 2021.

Operating Income (Loss)

Our operating income was $287 million in 2021, compared to operating loss of $107 million in 2020.

The increase in operating expenses was primarily due to greater volume and higher distribution costs, in part due to higher temporary labor costs and higher than normal wage inflation in 2021.

The increase was partially offset by cost savings initiatives outlined in our long-range plan including:

Operating Income

Our operating income was $34 million in 2022, compared to operating income of $28 million in 2021.

The increase in operating income was due to the factors discussed in the relevant sections above.

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We recognized other income—net of $6 million and $7 million in 2022 and 2021, respectively.

The increase in other income—net in 2021 is primarily due to the improved funded status of our defined benefit pension plan.

Interest Expense—Net

Interest expense—net decreased $20 million to $158 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020.

Loss on Extinguishment of Debt

As discussed in Note 10, Debt, in our consolidated financial statements, we incurred a $23 million loss on extinguishment of debt during the 39 weeks ended October 2, 2021 related to the repayment of our Unsecured Senior Notes due 2024 and 2020 Incremental Term Loan Facility related to the issuance of our Senior Unsecured Notes due 2029.

For the 39 weeks ended October 2, 2021, our effective income tax rate of 24 % 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.

Interest expense—net increased $1 million to $55 million in 2022, primarily due to an increase in interest rates, partially offset by lower outstanding debt in 2022 compared to 2021.

For the 13 weeks ended April 2, 2022, our effective income tax rate of 51% 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 $4 million, primarily related to excess tax benefits associated with share-based compensation.

For the 13 weeks ended April 3, 2021, our effective income tax rate of 43% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items.

These discrete tax items included a tax benefit of $6 million, primarily related to excess tax benefits associated with share-based compensation.

For the 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 a tax expense of $ 2 million primarily related to an increase in an unrecognized tax benefit and a tax expense of $ 2 million primarily related to a tax benefit shortfall associated with share-based compensation.

Net Income (Loss)

Our net income was $95 million in 2021, compared to net loss of $216 million in 2020.

The improvement in net income was due to the relevant factors discussed above.

Our net loss was $7 million in 2022, compared to a net loss of $24 million in 2021.

The improvement in net loss was due to the relevant factors discussed above.

Liquidity and Capital Resources

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Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements.

We believe that the combination of cash on hand and generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements through the end of fiscal year 2022.

As of October 2, 2021, the Company had approximately $2.5 billion in cash and available liquidity.

The aggregate carrying value of our indebtedness was $5,396 million, net of $48 million of unamortized deferred financing costs, as of October 2, 2021.

We had no outstanding borrowings and had issued letters of credit totaling $253 million under the ABL Facility as of October 2, 2021.

There was remaining capacity of $1,737 million under the ABL Facility as of October 2, 2021.

The Initial Term Loan Facility had a carrying value of $1,783 million, net of $2 million of unamortized deferred financing costs, as of October 2, 2021.

During the 39 weeks ended October 2, 2021, the Company made voluntary prepayments of the Initial Term Loan Facility totaling $300 million.

The 2019 Incremental Term Loan Facility had a carrying value of $1,444 million, net of $26 million of unamortized deferred financing costs, as of October 2, 2021.

The Secured Notes had a carrying value of $989 million, net of $11 million of unamortized deferred financing costs, as of October 2, 2021.

We also had $281 million of obligations under financing leases for transportation equipment and building leases as of October 2, 2021.

As of October 2, 2021, the Unsecured Senior Notes due 2029 had a carrying value of $891 million, net of $9 million of unamortized deferred financing costs.

As of April 2, 2022, the Company had approximately $1.9 billion in cash and available liquidity.

The aggregate outstanding balance of our indebtedness was $4,993 million, net of $51 million of unamortized deferred financing costs, as of April 2, 2022.

We had no outstanding borrowings and had issued letters of credit totaling $263 million under the ABL Facility as of April 2, 2022.

There was remaining capacity of $1,727 million under the ABL Facility as of April 2, 2022.

The 2019 Incremental Term Loan Facility had an outstanding balance of $1,439 million, net of $23 million of unamortized deferred financing costs, as of April 2, 2022.

The 2021 Incremental Term Loan Facility had an outstanding balance of $891 million, net of $6 million of unamortized deferred financing costs, as of April 2, 2022.

The Senior Secured Notes due 2025 an outstanding balance of $991 million, net of $9 million of unamortized deferred financing costs, as of April 2, 2022.

As of April 2, 2022, the Unsecured Senior Notes due 2029 had an outstanding balance of $892 million, net of $8 million of unamortized deferred financing costs.

As of April 2, 2022, the Unsecured Senior Notes due 2030 had an outstanding balance of $495 million, net of $5 million of unamortized deferred financing costs.

We also had $277 million of obligations under financing leases for transportation equipment and building leases as of April 2, 2022.

The ABL Facility will mature in 2024.

The Initial Term Loan Facility and the 2019 Incremental Term Loan Facility will mature in 2023 and 2026, respectively.

The Secured Notes will mature in 2025.

The Unsecured Senior Notes due 2029 will mature in 2029.

The 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility will mature in 2026 and 2028, respectively.

The Senior Secured Notes due 2025 will mature in 2025.

The Unsecured Senior Notes due 2029 and the Unsecured Senior Notes due 2030 will mature in 2029 and 2030, respectively.

As economic conditions permit, we will consider opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms.

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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 $1.4 billion of restricted payment capacity under these covenants and approximately $2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as of October 2, 2021.

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.

Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding.

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We continue to monitor the credit markets generally and the strength of our lender counterparties.

From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage, including the voluntary prepayments under the Initial Term Loan Facility noted above.

From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage.

These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt.

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13 Weeks Ended

October 2, 2021 September 26, 2020

Net income (loss) $ 95 $ (216)

April 2, 2022 April 3, 2021

Net loss $ (7) $ (24)

Changes in operating assets and liabilities 58 79

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Net cash used in investing activities (70) (46)

Net cash (used in) provided by financing activities (411) 1,475

Net (decrease) increase in cash, cash equivalents and restricted cash (57) 921

Net cash used in financing activities

Net increase in cash, cash equivalents and restricted cash 42 83

Cash, cash equivalents and restricted cash—beginning of period

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Operating Activities

Cash flows provided by operating activities was $520 million for the 39 weeks ended October 2, 2021, compared to cash flows provided by operating activities of $533 million for the 39 weeks ended September 26, 2020.

The Company’s working capital requirements increased in 2021 in line with the improvement in operating results and recovery of sales volumes.

Cash flows provided by operating activities was $158 million for the 13 weeks ended April 2, 2022, decreased by $18 million as compared to cash flows provided by operating activities of $176 million for the 13 weeks ended April 3, 2021, primarily driven by working capital needs.

Investing Activities

Cash flows used in investing activities in the 39 weeks ended October 2, 2021 and September 26, 2020 included cash expenditures of $173 million and $154 million, respectively, on investments in information technology, new construction and/or expansion of distribution facilities, and property and equipment for fleet replacement.

Cash flows used in investing activities for the 39 weeks ended September 26, 2020 also included the $973 million cash purchase price for the acquisition of Smart Foodservice.

We expect total cash capital expenditures in fiscal year 2021 to be between $300 million and $315 million, exclusive of approximately $55 million to $65 million of capital expenditures under our fleet financing leases.

Cash flows used in investing activities in the 13 weeks ended April 2, 2022 and April 3, 2021 included cash expenditures of $72 million and $46 million, respectively, on investments in information technology, new construction and/or expansion of distribution facilities, and property and equipment for fleet replacement.

We expect total cash capital expenditures in fisc al year 2022 to be between $280 million and $300 million, exclusive of approximately $110 million of capital expenditures under our fleet financing leases.

We expect to fund our capital expenditures with available cash or cash generated from operations and through fleet financing.

Financing Activities

Cash flows used by financing activities in the 39 weeks ended October 2, 2021 included $96 million of scheduled payments under our Term Loan Facilities and financing leases and $300 million of voluntary prepayments of the Initial Term Loan Facility.

We incurred approximately $18 million of lender fees and third-party costs in connection with our issuance of the Unsecured Notes due 2029, consisting of a $9 million early redemption premium related to the Unsecured Senior Notes due 2024 and $9 million of costs associated with the issuance of the Unsecured Senior Notes due 2029, which were capitalized as deferred financing costs.

Cash flows used by financing activities in the 39 weeks ended October 2, 2021 also included $18 million of dividends on our Series A convertible preferred stock.

Cash flows provided by financing activities for the 39 weeks ended October 2, 2021 included aggregate borrowings of $900 million under the Unsecured Senior Notes due 2029.

We used the proceeds from the issuance of the Unsecured Senior Notes due 2029, together with cash on hand, to redeem all of the then outstanding Unsecured Senior Notes due 2024 and repay all of the then outstanding borrowings under the 2020 Incremental Term Loan Facility.

Cash flows provided by financing activities for the 39 weeks ended October 2, 2021 also included $16 million of proceeds received from stock purchases under our employee stock purchase plan and $13 million of proceeds from the exercise of employee stock options, which were offset by $13 million of employee tax withholdings paid in connection with the vesting of stock awards.

Cash flows provided by financing activities for the 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;

$1.0 billion of gross proceeds from the issuance of the Secured Notes;

and $500 million of proceeds, net of $9 million of related fees, from the issuance and sale of 500,000 shares of our Series A convertible preferred stock.

We borrowed an aggregate of $1 billion under the ABL Facility and our former accounts receivable financing facility (the “ABS Facility”) in March 2020 for the purposes of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the onset of the COVID-19 pandemic.

Financing activities for the 39 weeks ended September 26, 2020 also included $15 million of proceeds from stock purchases under our employee stock purchase plan and $2 million of proceeds received from the exercise of employee stock options, which were partially offset by $5 million of employee tax withholdings paid in connection with the vesting of stock awards.

C ash flows used by financing activities for the 39 weeks ended September 26, 2020 included $105 million of scheduled payments under our Term Loan Facilities and financing leases.

We used part of the proceeds from the issuance of the Secured Notes to repay $400 million in principal amount of the 2020 Incremental Term Loan Facility, and we used $542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility, which was subsequently terminated.

We incurred approximately $33 million of lender fees and third-party costs in connection with the aforementioned financing transacti ons.

Cash flows used by financing activities in the 13 weeks ended April 2, 2022 included $28 million of scheduled payments under our Term Loan Facilities and financing leases, $9 million of dividends on our Series A Preferred Stock and no net payments under the ABL Facility.

Financing activities in the 13 weeks ended April 2, 2022 also included $5 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 offset by $16 million of employee tax withholdings paid in connection with the vesting of stock awards.

C ash flows used by financing activities for the 13 weeks ended April 3, 2021 included $32 million of scheduled payments under our Term Loan Facilities and financing leases.

Cash flows provided by financing activities for the 13 weeks ended April 3, 2021 included aggregate borrowings of $900 million under the Unsecured Senior Notes due 2029.

We used the proceeds from the issuance of the Unsecured Senior Notes due 2029, together with cash on hand, to redeem all of the then outstanding 5.875% unsecured senior notes due 2024 and repay all of the then outstanding borrowings under the incremental senior secured term loan facility borrowed in April 2020.

We incurred approximately $18 million of lender fees and third-party costs in connection with our financing actions, consisting of a $9 million early redemption premium related to the Unsecured Senior Notes due 2024 and $9 million of costs associated with the issuance of the Unsecured Senior Notes due 2029, which were capitalized as deferred financing costs.

Financing activities for the 13 weeks ended April 3, 2021 also included $5 million of proceeds received from stock purchases under our employee stock purchase plan and $4 million of proceeds from the exercise of employee stock options, which were offset by $12 million of employee tax withholdings paid in connection with the vesting of stock awards.

Other Obligations and Commitments

There have been no material changes in the Company’s cash obligations and commitments since the end of fiscal year 2021.

Refer to Item 7 of our 2021 Annual Report for additional information regarding the Company’s cash obligations and commitments as of the end of fiscal year 2021.

Retirement Plans

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Off-Balance Sheet Arrangements

We had $253 million of letters of credit outstanding, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs, under the ABL Facility as of October 2, 2021.

Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

See the Contractual Obligations section in Part II, Item 7—“Management's Discussion and Analysis of Financial Condition and Results of Operations” of the 2020 Annual Report for our contractual cash obligations as of January 2, 2021.

There have been no material changes to our specified contractual obligations through October 2, 2021, except as disclosed in Note 10, Debt, in our consolidated financial statements.

We had $263 million of letters of credit outstanding, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs, under the ABL Facility as of April 2, 2022.

Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

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Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2021 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 39 weeks ended October 2, 2021.

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 13 weeks ended April 2, 2022.

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