US Foods Holding Corp. 10-Q

Item 1. Financial Statements US FOODS HOLDING CORP. CONSOLIDATED BALANCE SHEETS (In millions, except par value) October 1, 2022 January 1, 2022 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 366 $ 148 Accounts receivable, less allowances of $32 and $33 1,853 1,469 Vendor receivables, less allowances of $10 and $7 193 145 Inventories—net 1,761 1,686 Prepaid expenses 106 120 Assets held for sale 8 8 Other current assets 11 18 Total current assets 4,298 3,594 Property and equipment—net 2,075 2,033 Goodwill 5,625 5,625 Other intangibles—net 797 830 Deferred tax assets — 8 Other assets 447 431 Total assets $ 13,242 $ 12,521 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY Current liabilities: Cash overdraft liability $ 219 $ 183 Accounts payable 2,180 1,662 Accrued expenses and other current liabilities 671 610 Current portion of long-term debt 100 95 Total current liabilities 3,170 2,550 Long-term debt 4,837 4,916 Deferred tax liabilities 298 307 Other long-term liabilities 476 479 Total liabilities 8,781 8,252 Commitments and contingencies (Note 17) Mezzanine equity: Series A convertible preferred stock, $0.01 par value—25 shares authorized; 0.5 issued and outstanding as of October 1, 2022 and January 1, 2022 534 534 Shareholders’ equity: Common stock, $0.01 par value—600 shares authorized; 225 and 223 issued and outstanding as of October 1, 2022 and January 1, 2022, respectively 2 2 Additional paid-in capital 3,017 2,970 Retained earnings 927 782 Accumulated other comprehensive loss ( 19 ) ( 19 ) Total shareholders’ equity 3,927 3,735 Total liabilities, mezzanine equity and shareholders’ equity $ 13,242 $ 12,521 See Notes to Consolidated Financial Statements (Unaudited). 1 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In millions, except per share data) 13 Weeks Ended 39 Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net sales $ 8,917 $ 7,890 $ 25,542 $ 21,848 Cost of goods sold 7,457 6,649 21,504 18,435 Gross profit 1,460 1,241 4,038 3,413 Operating expenses: Distribution, selling and administrative costs 1,246 1,099 3,640 3,115 Restructuring costs and asset impairment charges — 7 — 11 Total operating expenses 1,246 1,106 3,640 3,126 Operating income 214 135 398 287 Other income—net ( 5 ) ( 6 ) ( 16 ) ( 19 ) Interest expense—net 65 50 180 158 Loss on extinguishment of debt — — — 23 Income before income taxes 154 91 234 125 Income tax provision 45 27 62 30 Net income 109 64 172 95 Other comprehensive income —net of tax: Changes in retirement benefit obligations — — — — Recognition of interest rate swaps — 1 — 5 Comprehensive income $ 109 $ 65 $ 172 $ 100 Net income $ 109 $ 64 $ 172 $ 95 Series A convertible preferred stock dividends ( 9 ) ( 9 ) ( 27 ) ( 33 ) Net income available to common shareholders $ 100 $ 55 $ 145 $ 62 Net income per share Basic (Note 12) $ 0.44 $ 0.25 $ 0.65 $ 0.28 Diluted (Note 12) $ 0.43 $ 0.24 $ 0.64 $ 0.28 Weighted-average common shares outstanding Basic (Note 12) 225 222 224 222 Diluted (Note 12) 251 225 226 225 See Notes to Consolidated Financial Statements (Unaudited). 2 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (In millions) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount BALANCE—January 1, 2022 223 $ 2 $ 2,970 $ 782 $ ( 19 ) $ 3,735 Share-based compensation expense — — 12 — — 12 Proceeds from employee stock purchase plan — — 5 — — 5 Vested restricted stock units, net 1 — — — — — Exercise of stock options — — 2 — — 2 Tax withholding payments for net share-settled equity awards — — ( 16 ) — — ( 16 ) Series A convertible preferred stock dividends — — — ( 9 ) — ( 9 ) Net Loss — — — ( 7 ) — ( 7 ) BALANCE—April 2, 2022 224 $ 2 $ 2,973 $ 766 $ ( 19 ) $ 3,722 Share-based compensation expense — — 9 — — 9 Proceeds from employee stock purchase plan — — 7 — — 7 Exercise of stock options — — 5 — — 5 Series A convertible preferred stock dividends — — — ( 9 ) — ( 9 ) Net Income — — — 70 — 70 BALANCE—July 2, 2022 224 $ 2 $ 2,994 $ 827 $ ( 19 ) $ 3,804 Share-based compensation expense — — 13 — — 13 Proceeds from employee stock purchase plan — — 5 — — 5 Exercise of stock options 1 — 5 — — 5 Series A convertible preferred stock dividends — — — (9) — (9) Net Income — — — 109 — 109 BALANCE—October 1, 2022 225 $ 2 $ 3,017 $ 927 $ ( 19 ) $ 3,927 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Shares Amount BALANCE—January 2, 2021 221 $ 2 $ 2,901 $ 661 $ ( 34 ) $ 3,530 Share-based compensation expense — — 10 — — 10 Proceeds from employee stock purchase plan — — 5 — — 5 Vested restricted stock units, net 1 — — — — — Exercise of stock options — — 4 — — 4 Tax withholding payments for net share-settled equity awards — — ( 12 ) — — ( 12 ) Series A convertible preferred stock dividends — — — ( 15 ) — ( 15 ) Unrecognized gain on interest rate swaps, net of income tax — — — — 2 2 Net Loss — — — ( 24 ) — ( 24 ) BALANCE—April 3, 2021 222 $ 2 $ 2,908 $ 622 $ ( 32 ) $ 3,500 Share-based compensation expense — — 13 — — 13 Proceeds from employee stock purchase plan — — 5 — — 5 Exercise of stock options — — 8 — — 8 Tax withholding payments for net share-settled equity awards — — ( 1 ) — — ( 1 ) Series A convertible preferred stock dividends — — — ( 9 ) — ( 9 ) Unrecognized gain on interest rate swaps, net of income tax — — — — 2 2 Net Income — — — 55 — 55 BALANCE—July 3, 2021 222 $ 2 $ 2,933 $ 668 $ ( 30 ) $ 3,573 Share-based compensation expense — — 13 — — 13 Proceeds from employee stock purchase plan 1 — 6 — — 6 Exercise of stock options — — 1 — — 1 Series A convertible preferred stock dividends — — — ( 9 ) — ( 9 ) Unrecognized gain on interest rate swaps, net of income tax — — — — 1 1 Net income — — — 64 — 64 BALANCE—October 2, 2021 223 $ 2 $ 2,952 $ 723 $ ( 29 ) $ 3,648 See Notes to Consolidated Financial Statements (Unaudited). 3 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) 39 Weeks Ended October 1, 2022 October 2, 2021 Cash flows from operating activities: Net income $ 172 $ 95 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 273 286 Gain on disposal of property and equipment—net ( 2 ) — Intangible asset impairment charges — 7 Loss on extinguishment of debt — 23 Amortization of deferred financing costs 10 10 Deferred tax provision ( 1 ) 19 Share-based compensation expense 34 36 Provision (benefit) for doubtful accounts 3 ( 18 ) Changes in operating assets and liabilities: Increase in receivables ( 435 ) ( 530 ) Increase in inventories—net ( 74 ) ( 292 ) Decrease in prepaid expenses and other assets 2 9 Increase in accounts payable and cash overdraft liability 574 780 Increase in accrued expenses and other liabilities 57 95 Net cash provided by operating activities 613 520 Cash flows from investing activities: Proceeds from sales of divested assets — 5 Proceeds from sales of property and equipment 4 2 Purchases of property and equipment ( 201 ) ( 173 ) Net cash used in investing activities ( 197 ) ( 166 ) Cash flows from financing activities: Proceeds from debt borrowings 1,031 900 Principal payments on debt and financing leases ( 1,215 ) ( 1,291 ) Dividends paid on Series A convertible preferred stock ( 27 ) ( 18 ) Debt financing costs and fees — ( 18 ) Proceeds from employee stock purchase plan 17 16 Proceeds from exercise of stock options 12 13 Tax withholding payments for net share-settled equity awards ( 16 ) ( 13 ) Net cash used in financing activities ( 198 ) ( 411 ) Net increase (decrease) in cash, and cash equivalents and restricted cash 218 ( 57 ) Cash, cash equivalents and restricted cash—beginning of period 148 829 Cash, cash equivalents and restricted cash—end of period $ 366 $ 772 Supplemental disclosures of cash flow information: Interest paid—net of amounts capitalized $ 162 $ 134 Income taxes paid—net 45 — Property and equipment purchases included in accounts payable 25 32 Property and equipment transferred to assets held for sale — 11 Leased assets obtained in exchange for financing lease liabilities 98 24 Leased assets obtained in exchange for operating lease liabilities 35 24 Cashless exercise of stock options 1 1 Paid-in-kind Series A convertible preferred stock dividends — 15 See Notes to Consolidated Financial Statements (Unaudited). 4 US FOODS HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in tables in millions, except per share data, unless otherwise noted) 1. OVERVIEW AND BASIS OF PRESENTATION US Foods Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to in these consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods Holding Corp. conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (“USF”) and its subsidiaries. All of the Company’s indebtedness, as further described in Note 9, Debt, is a direct obligation of USF and its subsidiaries. Business Description —The Company, through USF, operates in one business segment in which it markets, sells and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States (“U.S.”). These customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities and retail locations. Basis of Presentation —The Company operates on a 52- or 53-week fiscal year, with all periods ending on a Saturday. When a 53-week fiscal year occurs, the Company reports the additional week in the fiscal fourth quarter. Fiscal years 2022 and 2021 are both 52-week fiscal years. The consolidated financial statements included in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included in this Quarterly Report are adequate to make the information presented not misleading. These interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the 2021 Annual Report. The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for any other interim period or the full fiscal year. 2. RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, convertible debt will be accounted for as a single liability measured at its amortized cost. Additionally, the new guidance requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. This guidance is effective for fiscal years beginning after December 15, 2021. The Company adopted the provisions of ASU No. 2020-06 at the beginning of the first quarter of fiscal year 2022, with no impact on our financial position, results of operations, cash flows or diluted earnings per share reporting. In October 2021, the FASB issued ASU No. 2021-08 Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which amends Accounting Standards Codification (“ASC”) 805 to require an acquirer to, at the date of acquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-9, Revenue from Contracts with Customers (Topic 606) . The guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted, and is to be applied prospectively to business combinations occurring on or after adoption of the new guidance. The Company adopted the provisions of ASU No. 2021-08 at the beginning of the first quarter of fiscal year 2022, with no impact on our financial position, results of operations or cash flows. 3. REVENUE RECOGNITION The Company recognizes revenue when the performance obligation is satisfied, which occurs when a customer obtains control of the promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services. The Company generates substantially all of its revenue from the distribution and sale of food and food-related products and recognizes revenue when title and risk of loss passes to the customer 5 and the customer accepts the goods, which occurs at delivery. Customer sales incentives, such as volume-based rebates or discounts, are treated as a reduction of revenue at the time the revenue is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from Net sales. Shipping and handling costs are treated as fulfillment costs and included in distribution, selling and administrative costs. The Company did not have any material outstanding performance obligations, contract liabilities or capitalized contract acquisition costs as of October 1, 2022 or January 1, 2022. Customer receivables, which are included in accounts receivable, less allowances in the Company’s Consolidated Balance Sheets, were $ 1.9 billion and $ 1.5 billion as of October 1, 2022 and January 1, 2022, respectively. The Company has certain customer contracts under which incentives are paid upfront to its customers. These payments have become industry practice and are not related to financing any customer’s business, nor are these payments associated with any distinct good or service to be received from any customer. These incentive payments are capitalized in prepaid expenses and other assets and amortized as a reduction of revenue over the life of the contract or as goods or services are transferred to the customer. The Company’s contract assets for these upfront payments were $ 26 million and $ 27 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of October 1, 2022 and January 1, 2022, respectively, and $ 30 million and $ 26 million included in other assets in the Company’s Consolidated Balance Sheets as of October 1, 2022 and January 1, 2022, respectively. The following table presents the disaggregation of revenue for each of the Company’s principal product categories: 13 Weeks Ended 39 Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Meats and seafood $ 3,207 $ 3,067 $ 9,443 $ 8,280 Dry grocery products 1,529 1,319 4,347 3,684 Refrigerated and frozen grocery products 1,386 1,168 3,880 3,303 Dairy 959 739 2,658 2,098 Equipment, disposables and supplies 916 815 2,622 2,305 Beverage products 441 391 1,248 1,104 Produce 479 391 1,344 1,074 Total Net sales $ 8,917 $ 7,890 $ 25,542 $ 21,848 4. INVENTORIES The Company’s inventories, consisting mainly of food and other food-related products, are primarily considered finished goods. Inventory costs include the purchase price of the product, freight costs to deliver it to the Company’s distribution and retail facilities, and depreciation and labor related to processing facilities and equipment, and are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions. The Company records inventories at the lower of cost or market primarily using the last-in, first-out (“LIFO”) method. For our LIFO based inventories, the base year values of beginning and ending inventories are determined using the inventory price index computation method. This “links” current costs to original costs in the base year when the Company adopted LIFO. LIFO reserves in the Company’s Consolidated Balance Sheets were $ 485 million and $ 342 million as of October 1, 2022 and January 1, 2022, respectively. As a result of changes in LIFO reserves, cost of goods sold increased $ 6 million and $ 32 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and increased $ 143 million and $ 150 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. The Company maintains an allowance for doubtful accounts, which is based upon historical experience, future expected losses, as well as specific customer collection issues that have been identified. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods. 6 Activity in the allowance for doubtful accounts for both the 13 weeks ended October 1, 2022 and October 2, 2021 was de minimis. A summary of the activity in the allowance for doubtful accounts for the 39 weeks ended October 1, 2022 and October 2, 2021 was as follows: October 1, 2022 October 2, 2021 Balance as of beginning of year $ 33 $ 67 Charged (benefit) to costs and expenses, net 3 ( 18 ) Customer accounts written off—net of recoveries ( 4 ) ( 10 ) Balance as of end of period $ 32 $ 39 This table excludes the vendor receivable related allowance for doubtful accounts of $ 10 million and $ 7 million as of October 1, 2022 and January 1, 2022, respectively and $ 6 million and $ 5 million as of October 2, 2021 and January 2, 2021, respectively . 6. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Property and equipment under financing leases and leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the related leases or the estimated useful lives of the assets, if reasonably assured the Company will purchase the assets at the end of the lease terms. As of October 1, 2022 and January 1, 2022, property and equipment-net included accumulated depreciation of $ 2,917 million and $ 2,722 million, respectively. Depreciation expense was $ 81 million and $ 79 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $ 240 million and $ 242 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively . 7. GOODWILL AND OTHER INTANGIBLES Goodwill includes the cost of acquired businesses in excess of the fair value of the tangible and other intangible net assets acquired. Other intangible assets include customer relationships, amortizable trade names, noncompete agreements, the brand names comprising the Company’s portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization, but are subject to impairment assessments as described below. Customer relationships, amortizable trade names and noncompete agreements are intangible assets with definite lives, and are carried at the acquired fair value less accumulated amortization. Customer relationships, amortizable trade names and noncompete agreements are amortized over their estimated useful lives (which range from approximately 3 to 15 years). Amortization expense was $ 11 million and $ 12 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $ 33 million and $ 44 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. Goodwill and other intangibles—net consisted of the following: October 1, 2022 January 1, 2022 Goodwill $ 5,625 $ 5,625 Other intangibles—net Customer relationships—amortizable: Gross carrying amount $ 655 $ 655 Accumulated amortization ( 132 ) ( 99 ) Net carrying value 523 556 Trade names—amortizable: Gross carrying amount 4 4 Accumulated amortization ( 1 ) ( 1 ) Net carrying value 3 3 Brand names and trademarks—not amortizing 271 271 Total other intangibles—net $ 797 $ 830 The Company assesses for impairment of intangible assets with definite lives only if events occur that indicate that the carrying amount of an intangible asset may not be recoverable. The Company assesses goodwill and other intangible assets with 7 indefinite lives for impairment annually, or more frequently if events occur that indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, the Company’s policy is to assess for impairment as of the beginning of each fiscal third quarter. The Company completed its most recent annual impairment assessment for goodwill and indefinite-lived intangible assets as of July 3, 2022, the first day of the third quarter of fiscal year 2022, with no impairments noted. During the third quarter of fiscal year 2021, the Company implemented rebranding initiatives related to the integration of a trade name acquired as part of the 2019 Food Group acquisition. As a result of the rebranding initiatives, the Company recognized an impairment charge of $ 7 million, which was included in restructuring costs and asset impairment charges in the Company’s Consolidated Statements of Comprehensive Income. The remaining carrying value of the acquired trade name of $ 3 million was reclassified to trade names—amortizable and is being amortized with an estimated remaining useful life of 10 years. 8. FAIR VALUE MEASUREMENTS Certain assets and liabilities are carried at fair value under GAAP, under which fair value is a market-based measurement, not an entity-specific measurement. The Company’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: • Level 1—observable inputs, such as quoted prices in active markets • Level 2—observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active or inactive markets that are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data • Level 3—unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized as of the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below. The Company’s assets and liabilities measured at fair value on a recurring basis as of October 1, 2022 and January 1, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows: October 1, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 303 $ — $ — $ 303 January 1, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 99 $ — $ — $ 99 There were no significant assets or liabilities on the Company’s Consolidated Balance Sheets measured at fair value on a nonrecurring basis for the periods presented above, except as further disclosed in Note 7, Goodwill and Other Intangibles. Recurring Fair Value Measurements Money Market Funds Money market funds include highly liquid investments with an original maturity of three or fewer months. These funds are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy. Derivative Financial Instruments The Company has in the past, and may in the future, use interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements in connection with its variable-rate debt. T he Company had no outstanding interest rate swap agreements a s of either October 1, 2022 or January 1, 2022. 8 Other Fair Value Measurements The carrying value of cash, accounts receivable, vendor receivables, cash overdraft liability and accounts payable approximate their fair values due to their short-term maturities. The fair value of the Company’s total debt approximated $ 4.6 billion and $ 5.1 billion as of October 1, 2022 and January 1, 2022, respectively, as compared to its carrying value of $ 4.9 billion and $ 5.0 billion as of October 1, 2022 and January 1, 2022, respectively. The fair value of the Company’s 6.25 % senior secured notes due April 15, 2025 (the “Secured Senior Notes due 2025”) was $ 1.0 billion as of both October 1, 2022 and January 1, 2022. The fair value of the Company’s 4.75 % unsecured senior notes due February 15, 2029 (the “Unsecured Senior Notes due 2029”) was $ 0.8 billion and $ 0.9 billion as of October 1, 2022 and January 1, 2022, respectively. The fair value of the Company’s 4.625 % unsecured senior notes due June 1, 2030 (the “Unsecured Senior Notes due 2030”) was $ 0.4 billion and $ 0.5 billion as of October 1, 2022 and January 1, 2022, respectively. Fair value of the Secured Senior Notes due 2025, the Unsecured Senior Notes due 2029 and the Unsecured Senior Notes due 2030 is based upon their closing market prices on the respective dates. The fair value of the Secured Senior Notes due 2025, the Unsecured Senior Notes due 2029 and the Unsecured Senior Notes due 2030 is classified under Level 2 of the fair value hierarchy. The fair value of the balance of the Company’s debt is primarily classified under Level 3 of the fair value hierarchy, with fair value estimated based upon a combination of the cash outflows expected under these debt facilities, interest rates that are currently available to the Company for debt with similar terms, and estimates of the Company’s overall credit risk. 9. DEBT Total debt consisted of the following: Debt Description Maturity Interest Rate as of October 1, 2022 Carrying Value as of October 1, 2022 Carrying Value as of January 1, 2022 ABL Facility May 31, 2024 — % $ — $ — 2019 Incremental Term Loan Facility (net of $21 and $25 of unamortized deferred financing costs, respectively) September 13, 2026 5.12 % 1,434 1,442 2021 Incremental Term Loan Facility (net of $5 and $7 of unamortized deferred financing costs, respectively) November 22, 2028 5.87 % 788 893 Secured Senior Notes due 2025 (net of $8 and $11 of unamortized deferred financing costs, respectively) April 15, 2025 6.25 % 992 989 Unsecured Senior Notes due 2029 (net of $8 and $8 of unamortized deferred financing costs, respectively) February 15, 2029 4.75 % 892 892 Unsecured Senior Notes due 2030 (net of $4 of and $5 of unamortized deferred financing costs, respectively) June 1, 2030 4.625 % 496 495 Obligations under financing leases 2022–2032 1.26%-7.16% 327 292 Other debt January 1, 2031 5.75% 8 8 Total debt 4,937 5,011 Current portion of long-term debt ( 100 ) ( 95 ) Long-term debt $ 4,837 $ 4,916 As of October 1, 2022, approximately 45 % of the Company’s total debt bore interest at a floating rate. ABL Facility USF’s asset based senior secured revolving credit facility (the “ABL Facility”) provides USF with loan commitments having a maximum aggregate principal amount of $ 1,990 million. The ABL Facility is scheduled to mature on May 31, 2024. Borrowings under the ABL Facility bear interest, at USF’s periodic election, at a rate equal to the sum of an alternative base rate (“ABR”), as described in the ABL Facility, plus a margin ranging from 0.00 % to 0.50 %, or the sum of LIBOR plus a margin ranging from 1.00 % to 1.50 %, in each case based on USF’s excess availability under the ABL Facility. The margin under the ABL Facility as of October 1, 2022 was 0.00 % for ABR loans and 1.00 % for LIBOR loans. 9 USF had no outstanding borrowings, and had outstanding letters of credit totaling $ 247 million, under the ABL Facility as of October 1, 2022. The outstanding letters of credit primarily relate to securing USF’s obligations with respect to its insurance program and certain real estate leases. There was available capacity of $ 1,743 million under the ABL Facility as of October 1, 2022. Term Loan Facilities Under its term loan credit agreement, USF has entered into an incremental senior secured term loan facility borrowed in September 2019 (the “2019 Incremental Term Loan Facility”) and an incremental senior secured term loan facility borrowed in November 2021 (the “2021 Incremental Term Loan Facility”). 2019 Incremental Term Loan Facility The 2019 Incremental Term Loan Facility had an outstanding balance of $ 1,434 million, net of $ 21 million of unamortized deferred financing costs as of October 1, 2022. Borrowings under the 2019 Incremental Term Loan Facility bear interest at a rate per annum equal to, at USF’s option, either the sum of LIBOR plus a margin of 2.00 %, or the sum of an ABR, as described in the 2019 Incremental Term Loan Facility plus a margin of 1.00 % (subject to a LIBOR “floor” of 0.00 %). The 2019 Incremental Term Loan Facility will mature on September 13, 2026. 2021 Incremental Term Loan Facility The 2021 Incremental Term Loan Facility had an outstanding balance of $ 788 million, net of $ 5 million of unamortized deferred financing costs as of October 1, 2022. During the 13 and 39 weeks ended October 1, 2022 we voluntarily prepaid $ 100 million of the 2021 Incremental Term Loan Facility. Borrowings under the 2021 Incremental Term Loan Facility bear interest at a rate per annum equal to, at USF’s option, either the sum of LIBOR plus a margin of 2.75 %, or the sum of an ABR, as described in the 2021 Incremental Term Loan Facility, plus a margin of 1.75 % (subject to a LIBOR “floor” of 0.00 %). The 2021 Incremental Term Loan Facility will mature on November 22, 2028. Secured Senior Notes due 2025 The Secured Senior Notes due 2025 had an outstanding balance of $ 992 million, net of $ 8 million of unamortized deferred financing costs, as of October 1, 2022. The Secured Senior Notes due 2025 bear interest at a rate of 6.25 % per annum and will mature on April 15, 2025. Unsecured Senior Notes due 2029 The Unsecured Senior Notes due 2029 had an outstanding balance of $ 892 million, net of $ 8 million of unamortized deferred financing costs, as of October 1, 2022. The Unsecured Senior Notes due 2029 bear interest at a rate of 4.75 % per annum and will mature on February 15, 2029. Unsecured Senior Notes due 2030 The Unsecured Senior Notes due 2030 had an outstanding balance of $ 496 million, net of $ 4 million of unamortized deferred financing costs, as of October 1, 2022. The Unsecured Senior Notes due 2030 bear interest at a rate of 4.625 % per annum and will mature on June 1, 2030. Debt Covenants The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. USF had approximately $ 1.6 billion of restricted payment capacity under these covenants, and approximately $ 2.9 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 1, 2022. 10. RESTRUCTURING LIABILITIES From time to time, the Company may implement initiatives or close or consolidate facilities in an effort to reduce costs and improve operating effectiveness. In connection with these activities, the Company may incur various costs including severance and other employee-related separation costs. Net restructuring costs were de minimis for both the 13 weeks and 39 weeks ended October 1, 2022. During the 13 weeks ended October 2, 2021, net restructuring costs were de minimis. During the 39 weeks ended October 2, 2021, the Company incurred net restructuring costs of $ 3 million primarily related to initiatives to improve operational effectiveness. Net restructuring liabilities were $ 0 million and $ 3 million as of October 1, 2022 and January 1, 2022, respectively. 10 11. RETIREMENT PLANS The Company sponsors a defined benefit pension plan and a 401(k) savings plan for eligible employees, and provides certain postretirement health and welfare benefits to eligible retirees and their dependents. The components of net periodic pension benefit credits for Company sponsored defined benefit plans were as follows: 13 Weeks Ended 39 Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Components of net periodic pension benefit credits Service cost $ 1 $ — $ 2 $ 2 Interest cost 7 8 22 22 Expected return on plan assets ( 12 ) ( 14 ) ( 38 ) ( 41 ) Amortization of net loss — — — — Net periodic pension benefit credits $ ( 4 ) $ ( 6 ) $ ( 14 ) $ ( 17 ) Other postretirement benefit costs were de minimis for both the 13 weeks and 39 weeks ended October 1, 2022 and October 2, 2021. The service cost component of net periodic benefit credits is included in distribution, selling and administrative costs, while the other components of net periodic benefit credits are included in other income—net in the Company’s Consolidated Statements of Comprehensive Income. The Company does not expect to make significant contributions to its defined benefit pension plan in fiscal year 2022. Certain employees are eligible to participate in the Company’s 401(k) plan. The Company made employer matching contributions to the 401(k) plan of $ 14 million and $ 13 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $ 44 million and $ 39 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. The Company is also required to contribute to various multiemployer pension plans under the terms of collective bargaining agreements that cover certain of its union-represented employees. The Company’s contributions to these plans were $ 12 million and $ 11 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $ 36 million and $ 33 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. 12. EARNINGS PER SHARE The Company computes EPS in accordance with ASC 260, Earnings per Share . Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed using the weighted average number of shares of common stock, plus the effect of potentially dilutive securities. The Company applies the treasury method to calculate the dilution impact of share-based awards—stock options, non-vested restricted shares with forfeitable dividend rights, restricted stock units, and employee stock purchase plan deferrals. The Company applies the if-converted method to calculate the dilution impact of the Series A convertible preferred stock (the “Series A Preferred Stock”), if dilutive in the period. For the 13 weeks and 39 weeks ended October 1, 2022 and October 2, 2021, share-based awards representing 3 million and 2 million underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. Additionally, for the 13 weeks ended October 2, 2021 and for both the 39 weeks ended October 1, 2022 and October 2, 2021, Series A Preferred Stock representing 25 million of underlying common shares was not included in the computation because the effect would have been anti-dilutive. The Series A Preferred Stock shares were dilutive for the 13 weeks ended October 1, 2022. 11 The following table sets forth the computation of basic and diluted EPS: 13 Weeks Ended 39 Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Numerator: Net Income $ 109 $ 64 $ 172 $ 95 Less: Series A Preferred Stock Dividends (1) ( 9 ) ( 9 ) ( 27 ) ( 33 ) Net income available to common shareholders $ 100 $ 55 $ 145 $ 62 Denominator: Weighted-average common shares outstanding—basic 225 222 224 222 Effect of dilutive share-based awards 1 3 2 3 Effect of dilutive underlying shares of the Series A Preferred Stock (2) 25 — — — Weighted-average common shares outstanding—diluted 251 225 226 225 Net income per share Basic $ 0.44 $ 0.25 $ 0.65 $ 0.28 Diluted $ 0.43 $ 0.24 $ 0.64 $ 0.28 (1) Series A Preferred Stock dividends for the first quarter of 2021 were paid in kind on March 31, 2021 in the form of shares of Series A Preferred Stock. Series A Preferred Stock dividends for the second and third quarter of 2021 were paid in cash on June 30, 2021 and September 28, 2021, respectively. Preferred Stock dividends for the first, second and third quarters of 2022 were paid in cash on March 31, 2022, June 30, 2022, and September 30, 2022, respectively. (2) Under the if-converted method, outstanding shares of the Series A Preferred Stock are converted to common shares for inclusion in the calculation of the weighted-average common shares outstanding—diluted. Once converted, there would be no preferred stock outstanding and therefore no Series A Preferred Stock dividend. 13. CONVERTIBLE PREFERRED STOCK On May 6, 2020 (the “Issuance Date”), pursuant to the terms of an Investment Agreement (the “Investment Agreement”) with KKR Fresh Aggregator L.P., a Delaware limited partnership, which agreement was joined on February 25, 2021 by permitted transferee KKR Fresh Holdings L.P., a Delaware limited partnership (“KKR”), the Company issued and sold 500,000 shares of the Company’s Series A Preferred Stock, par value $ 0.01 per share, to KKR Fresh Aggregator L.P. for an aggregate purchase price of $ 500 million, or $ 1,000 per share (the “Issuance”). The Company used the net proceeds from the Issuance for working capital and general corporate purposes. As of both October 1, 2022 and January 1, 2022, the Company had issued a total of 532,281 shares of Series A Preferred Stock. The Series A Preferred Stock had a carrying value of $ 534 million as of both October 1, 2022 and January 1, 2022. On September 30, 2022, June 30, 2022, and March 31, 2022, the Company paid cash dividends of $ 9 million each on the shares of the Series A Preferred Stock. 12 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS The following table presents changes in accumulated other comprehensive loss by component for the periods presented: 13 Weeks Ended 39 Weeks Ended October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Accumulated other comprehensive loss components Retirement benefit obligations: Balance as of beginning of period (1) $ ( 19 ) $ ( 29 ) $ ( 19 ) $ ( 29 ) Reclassification adjustments: Amortization of net loss (2) (3) — — — — Total before income tax — — — — Income tax provision — — — — Current period comprehensive income, net of tax — — — — Balance as of end of period (1) $ ( 19 ) $ ( 29 ) $ ( 19 ) $ ( 29 ) Interest rate swaps (4) : Balance as of beginning of period (1) $ — $ ( 1 ) $ — $ ( 5 ) Change in fair value of interest rate swaps — 1 — 1 Amounts reclassified to interest expense—net — 1 — 5 Total before income tax — 2 — 6 Income tax provision — 1 — 1 Current period comprehensive income, net of tax — 1 — 5 Balance as of end of period (1) $ — $ — $ — $ — Accumulated other comprehensive loss as of end of period (1) $ ( 19 ) $ ( 29 ) $ ( 19 ) $ ( 29 ) (1) Amounts are presented net of tax. (2) Included in the computation of net periodic benefit costs. See Note 11, Retirement Plans, for additional information. (3) Included in other income—net in the Company’s Consolidated Statements of Comprehensive Income. (4) The Company’s interest rate swaps expired on July 31, 2021. The Company has not entered into any new interest rate swap agreements. 15. RELATED PARTY TRANSACTIONS As of January 1, 2022, FMR LLC held approximately 11 % of the Company’s outstanding common stock based solely on information provided in its most recent amendment to its Schedule 13G filed with the SEC. As of October 1, 2022 and January 1, 2022, as reported by the administrative agent of the 2019 and 2021 Incremental Term Loan Facilities, investment funds managed by an affiliate of FMR LLC held approximately $ 22 million and $ 24 million in aggregate principal amount of the 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility. Certain FMR LLC affiliates also provide administrative and trustee services for the Company’s 401(k) Plan and provide administrative services for other Company sponsored employee benefit plans. Fees earned by FMR LLC affiliates are not material to the Company’s consolidated financial statements. As of October 1, 2022, KKR held 100% of the Company’s outstanding Series A Preferred Stock, representing approximately 10 % of the Company’s outstanding stock on a converted basis. As reported by the administrative agent of the 2019 Incremental Term Loan Facility, investment funds managed by an affiliate of KKR held approximately $ 17 million in aggregate principal amount of the 2019 Incremental Term Loan Facility as of both October 1, 2022 and January 1, 2022. During the 39 weeks ended October 2, 2021, KKR Capital Markets LLC, an affiliate of KKR, received $ 1 million for debt advisory services rendered in connection with the Unsecured Senior Notes due 2029 financing. 16. INCOME TAXES The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative income in each jurisdiction. 13 The Company estimated its annual effective income tax rate for the full fiscal year and applied the annual effective income tax rate to the results of the 39 weeks ended October 1, 2022 and October 2, 2021, and then recognized the impact of discrete tax items for purposes of determining its year-to-date tax provision. For the 13 weeks ended October 1, 2022, the Company’s effective income tax rate of 29 % 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 tax benefit shortfall associated with share-based compensation. For the 13 weeks ended October 2, 2021, the Company’s 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 39 weeks ended October 1, 2022, the Company’s effective income tax rate of 26 % 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. For the 39 weeks ended October 2, 2021, the Company’s 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. These discrete tax items include a tax benefit of $ 5 million primarily related to excess tax benefits associated with share-based compensation. 17. COMMITMENTS AND CONTINGENCIES Purchase Commitments —The Company enters into purchase orders with vendors and other parties in the ordinary course of business and has a limited number of purchase contracts with certain vendors that require it to buy a predetermined volume of products. The Company had $ 1,147 million of purchase orders and purchase contract commitments as of October 1, 2022 to be purchased in the remainder of fiscal year 2022 and $ 85 million of information technology commitments through September 2025 that are not recorded in the Company’s Consolidated Balance Sheets. To minimize fuel price risk, the Company enters into forward purchase commitments for a portion of its projected diesel fuel requirements. The Company had diesel fuel forward purchase commitments totaling $ 43 million through December 2023, as of October 1, 2022. Additionally, the Company had electricity forward purchase commitments totaling $ 10 million through June 2024, as of October 1, 2022. The Company does not measure its forward purchase commitments for fuel and electricity at fair value, as the amounts under contract meet the physical delivery criteria in the normal purchase exception. Legal Proceedings —The Company is subject to a number of legal proceedings arising in the normal course of business. These legal proceedings, whether pending, threatened or unasserted, if decided adversely to or settled by the Company, may result in liabilities material to its financial position, results of operations, or cash flows. The Company has recognized provisions with respect to the proceedings, where appropriate, in its Consolidated Balance Sheets. It is possible that the Company could settle one or more of these proceedings or could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, the Company, at present, believes that the ultimate outcome of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows. 18. BUSINESS INFORMATION The Company’s consolidated results represent the results of its one business segment based on how the Company’s chief operating decision maker, our Interim Chief Executive Officer, views the business for purposes of evaluating performance and making operating decisions. The Company markets, sells and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the U.S. The Company uses a centralized management structure, and its strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. The Company uses shared resources for sales, procurement, and general and administrative activities across each of its distribution facilities and operations. The Company’s distribution facilities form a single network to reach its customers; it is common for a single customer to make purchases from several different distribution facilities. Capital projects, whether for cost savings or generating incremental revenue, are evaluated based on estimated economic returns to the organization as a whole. 19. SUBSEQUENT EVENTS 2019 Incremental Term Loan Facility - Following the fiscal third quarter principal prepayment discussed within Note 9. Debt, on October 31, 2022 the Company voluntarily prepaid $ 100 million of the 2019 Incremental Term Loan Facility principal. The outstanding balance as of November 10, 2022 was $ 1,334 million, net of $ 21 million of unamortized deferred financing costs. 14 Share Repurchase Program - On November 2, 2022, our Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $ 500 million of its outstanding common stock. The size and timing of any repurchases will depend on a number of factors, including share price, general business and market conditions and other factors. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, including open market purchases, privately negotiated transactions, accelerated share repurchases and Rule 10b5-1 trading plans. The share repurchase program does not obligate the Company to acquire any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The repurchase authorization does not have an expiration date. 15