US Foods Holding Corp. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Audited Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 37 Consolidated Balance Sheets as of December 31, 2022 and January 1, 2022 39 Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 31, 2022, January 1, 2022, and January 2, 2021 40 Consolidated Statements of Shareholders’ Equity for the Fiscal Years Ended December 31, 2022, January 1, 2022, and January 2, 2021 41 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2022, January 1, 2022, and January 2, 2021 42 Notes to Consolidated Financial Statements 43 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of US Foods Holding Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of US Foods Holding Corp. and subsidiaries (the “Company”) as of December 31, 2022 and January 1, 2022, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows, for each of the three fiscal years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Vendor Consideration and Receivables - Refer to Note 2 to the financial statements. Critical Audit Matter Description The Company receives rebates and incentives from certain suppliers, primarily through purchase-based programs. Consideration earned under these incentives is estimated during the year based on purchasing activity, as obligations under the program are fulfilled primarily as products are purchased. Consideration is typically received in the form of invoice deductions to be applied against the amounts owed to the Company’s vendors, or less often in the form of cash payments. The purchase-based incentives are recorded as a reduction to inventory as they are earned based on inventory purchases. As the related inventory is sold, the amounts are recorded as a reduction to cost of goods sold. Total vendor receivables were $ 143 million at December 31, 2022. Although many of these incentives are under long-term agreements others are negotiated on an annual basis or shorter. We identified vendor consideration as a critical audit matter due to the extent of audit effort required to evaluate whether vendor consideration is recorded in accordance with the terms of the vendor agreements. 37 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the evaluation of the vendor agreements included the following, among others: • We tested the design and operating effectiveness of controls over the calculation of the amount recorded and the accuracy of the agreement information input in the system utilized to calculate the amount of vendor consideration recorded. • We selected a sample of vendor consideration recorded and (1) confirmed the amount recorded directly with the vendors or (2) recalculated vendor consideration amounts recorded by the Company using the terms of the executed vendor agreement. • We selected a sample of inventory on hand and evaluated whether the related vendor consideration was properly recognized at and during the period ended December 31, 2022. • We tested the amount of vendor consideration recorded as a reduction to inventory by developing an independent expectation for the amount based on historical ratios experienced by the Company and comparing our expectation to the amount recorded in the current year. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois February 16, 2023 We have served as the Company’s auditor since 2006. 38 US FOODS HOLDING CORP. CONSOLIDATED BALANCE SHEETS (In millions, except par value) December 31, 2022 January 1, 2022 ASSETS Current assets: Cash and cash equivalents $ 211 $ 148 Accounts receivable, less allowances of $30 and $33 1,705 1,469 Vendor receivables, less allowances of $8 and $7 143 145 Inventories—net 1,616 1,686 Prepaid expenses 124 120 Assets held for sale 2 8 Other current assets 19 18 Total current assets 3,820 3,594 Property and equipment—net 2,171 2,033 Goodwill 5,625 5,625 Other intangibles—net 785 830 Deferred tax assets — 8 Other assets 372 431 Total assets $ 12,773 $ 12,521 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY Current liabilities: Cash overdraft liability $ 175 $ 183 Accounts payable 1,855 1,662 Accrued expenses and other current liabilities 650 610 Current portion of long-term debt 116 95 Total current liabilities 2,796 2,550 Long-term debt 4,738 4,916 Deferred tax liabilities 298 307 Other long-term liabilities 446 479 Total liabilities 8,278 8,252 Commitments and contingencies (Note 22) Mezzanine equity: Series A convertible preferred stock, $0.01 par value—25 shares authorized; 0.5 issued and outstanding as of December 31, 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 December 31, 2022 and January 1, 2022, respectively 2 2 Additional paid-in capital 3,036 2,970 Retained earnings 1,010 782 Accumulated other comprehensive loss ( 73 ) ( 19 ) Treasury Stock, .5 and 0 shares, respectively ( 14 ) — Total shareholders’ equity 3,961 3,735 Total liabilities, mezzanine equity and shareholders’ equity $ 12,773 $ 12,521 See Notes to Consolidated Financial Statements. 39 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions, except per share data) Fiscal Years Ended December 31, 2022 January 1, 2022 January 2, 2021 Net sales $ 34,057 $ 29,487 $ 22,885 Cost of goods sold 28,565 24,832 19,166 Gross profit 5,492 4,655 3,719 Operating expenses: Distribution, selling and administrative costs 4,886 4,220 3,757 Restructuring costs and asset impairment charges 12 11 39 Total operating expenses 4,898 4,231 3,796 Operating income (loss) 594 424 ( 77 ) Other income—net ( 22 ) ( 26 ) ( 21 ) Interest expense—net 255 213 238 Loss on extinguishment of debt — 23 — Income (loss) before income taxes 361 214 ( 294 ) Income tax provision (benefit) 96 50 ( 68 ) Net income (loss) 265 164 ( 226 ) Other comprehensive income (loss)—net of tax: Changes in retirement benefit obligations ( 54 ) 10 23 Recognition of interest rate swaps — 5 ( 3 ) Comprehensive income (loss) $ 211 $ 179 $ ( 206 ) Net income (loss) $ 265 $ 164 $ ( 226 ) Series A convertible preferred stock dividends ( 37 ) ( 43 ) ( 28 ) Net income (loss) available to common shareholders $ 228 $ 121 $ ( 254 ) Net income (loss) per share: Basic $ 1.02 $ 0.55 $ ( 1.15 ) Diluted $ 1.01 $ 0.54 $ ( 1.15 ) Weighted-average common shares outstanding Basic 224 222 220 Diluted 226 225 220 See Notes to Consolidated Financial Statements. 40 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In millions) Number of Common Shares Common Shares at Par Value Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Shareholders’ Equity BALANCE-December 28, 2019 220 $ 2 $ 2,845 $ 916 $ — $ ( 54 ) $ 3,709 Share-based compensation expense — — 40 — — — 40 Proceeds from employee stock purchase plan 1 — 18 — — — 18 Exercise of stock options — — 3 — — — 3 Tax withholding payments for net share-settled equity awards — — ( 5 ) — — — ( 5 ) Series A convertible preferred stock dividends — — — ( 28 ) — — ( 28 ) Changes in retirement benefit obligations, net of income tax — — — — — 23 23 Recognition of interest rate swaps, net of income tax — — — — — ( 3 ) ( 3 ) Adoption of ASU 2016-13 (Note 6) — — — ( 1 ) — — ( 1 ) Net loss — — — ( 226 ) — — ( 226 ) BALANCE-January 2, 2021 221 $ 2 $ 2,901 $ 661 $ — $ ( 34 ) $ 3,530 Share-based compensation expense — — 48 — — — 48 Proceeds from employee stock purchase plan 1 — 20 — — — 20 Vested restricted stock units, net 1 — — — — — — Exercise of stock options — — 15 — — — 15 Tax withholding payments for net share-settled equity awards — — ( 14 ) — — — ( 14 ) Series A convertible preferred stock dividends — — — ( 43 ) — — ( 43 ) Changes in retirement benefit obligations, net of income tax — — — — — 10 10 Recognition of interest rate swaps, net of income tax — — — — — 5 5 Net income — — — 164 — — 164 BALANCE-January 1, 2022 223 $ 2 $ 2,970 $ 782 $ — $ ( 19 ) $ 3,735 Share-based compensation expense — — 45 — — — 45 Proceeds from employee stock purchase plan — — 22 — — — 22 Vested restricted stock units, net 1 — — — — — — Exercise of stock options 1 — 15 — — — 15 Tax withholding payments for net share-settled equity awards — — ( 16 ) — — — ( 16 ) Series A convertible preferred stock dividends — — — ( 37 ) — — ( 37 ) Changes in retirement benefit obligations, net of income tax — — — — — ( 54 ) ( 54 ) Stock repurchased — — — — ( 14 ) — ( 14 ) Net income — — — 265 — — 265 BALANCE-December 31, 2022 225 $ 2 $ 3,036 $ 1,010 $ ( 14 ) $ ( 73 ) $ 3,961 See Notes to Consolidated Financial Statements. 41 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Fiscal Years Ended December 31, 2022 January 1, 2022 January 2, 2021 Cash flows from operating activities: Net income (loss) $ 265 $ 164 $ ( 226 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 372 378 422 Gain on disposal of property and equipment, net ( 5 ) ( 1 ) ( 17 ) Tangible asset impairment charges 10 1 3 Intangible asset impairment charges — 7 9 Loss on extinguishment of debt — 23 — Amortization of deferred financing costs 12 15 16 Deferred tax provision (benefit) 17 38 ( 51 ) Share-based compensation expense 45 48 40 Provision (benefit) for doubtful accounts 6 ( 24 ) 63 Changes in operating assets and liabilities, net of business acquisitions: (Increase) decrease in receivables ( 240 ) ( 386 ) 334 Decrease (increase) in inventories 70 ( 413 ) 201 (Increase) decrease in prepaid expenses and other assets ( 24 ) 4 ( 30 ) Increase (decrease) in accounts payable and cash overdraft liability 193 471 ( 339 ) Increase (decrease) in accrued expenses and other liabilities 44 94 ( 12 ) Net cash provided by operating activities 765 419 413 Cash flows from investing activities: Acquisition of businesses—net of cash — — ( 972 ) Proceeds from sales of divested assets — 5 7 Proceeds from sales of property and equipment 10 7 44 Purchases of property and equipment ( 265 ) ( 274 ) ( 189 ) Net cash used in investing activities ( 255 ) ( 262 ) ( 1,110 ) Cash flows from financing activities: Proceeds from debt borrowings 1,207 2,305 3,645 Principal payments on debt and financing leases ( 1,620 ) ( 3,105 ) ( 2,692 ) Net proceeds from issuance of Series A convertible preferred stock — — 491 Dividends paid on Series A convertible preferred stock ( 37 ) ( 28 ) — Debt financing costs and fees ( 4 ) ( 30 ) ( 33 ) Repurchase of common stock ( 14 ) — — Proceeds from employee stock purchase plan 22 20 18 Proceeds from exercise of stock options 15 15 3 Tax withholding payments for net share-settled equity awards ( 16 ) ( 14 ) ( 5 ) Net cash (used in) provided by financing activities ( 447 ) ( 837 ) 1,427 Net (decrease) increase in cash, cash equivalents and restricted cash 63 ( 680 ) 730 Cash, cash equivalents and restricted cash—beginning of year 148 828 98 Cash, cash equivalents and restricted cash—end of year $ 211 $ 148 $ 828 Supplemental disclosures of cash flow information: Interest paid—net of amounts capitalized $ 243 $ 185 $ 216 Income taxes paid (received)—net 68 1 ( 1 ) Property and equipment purchases included in accounts payable 36 40 21 Property and equipment transferred to assets held for sale — 11 24 Leased assets obtained in exchange for financing lease liabilities 207 56 73 Leased assets obtained in exchange for operating lease liabilities 41 32 48 Cashless exercise of stock options 1 1 — Paid-in-kind Series A convertible preferred stock dividends — 15 28 See Notes to Consolidated Financial Statements. 42 US FOODS HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in tables in millions, except share and 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 11, 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 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. The fiscal years ended December 31, 2022 and January 1, 2022, referred to herein as fiscal years 2022 and 2021, respectively, were 52-week fiscal years. The fiscal year ended January 2, 2021, referred to herein as fiscal year 2020, was a 53-week fiscal year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation —The Company’s consolidated financial statements include the accounts of US Foods and its wholly owned subsidiary, USF, and its subsidiaries. Intercompany transactions have been eliminated in consolidation. Use of Estimates —The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Cash Equivalents —The Company considers all highly liquid investments purchased with an original maturity of three or fewer months to be cash equivalents. Accounts Receivable —Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the Company’s accompanying Consolidated Balance Sheets. 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. Vendor Consideration and Receivables —The Company participates in various rebate and promotional incentives with its suppliers, primarily through purchase-based programs. Consideration earned is estimated during the year as the Company’s obligations under the programs are fulfilled, which is primarily when products are purchased. Changes in the estimated amount of incentives earned are recognized in the period of change. Vendor consideration is typically deducted from invoices or collected in cash within 30 days of being earned. Vendor receivables represent the uncollected balance of vendor consideration. Since collections occur primarily from deducting the consideration from the amounts due to the vendor, the Company does not experience significant collectability issues. The Company evaluates the collectability of its vendor receivables based on specific vendor information and vendor collection history. 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, except for Smart Foodservice, as further described in Note 5, Business Acquisitions, which uses the retail method of inventory 43 accounting. 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. As of December 31, 2022 and January 1, 2022, LIFO reserves in the Company’s Consolidated Balance Sheets were $ 489 million and $ 342 million, respectively. As a result of changes in LIFO reserves, cost of goods sold increased $ 147 million, $ 165 million and $ 25 million in fiscal years 2022, 2021 and 2020, respectively. 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 term of the related lease or the estimated useful lives of the assets. Routine maintenance and repairs are charged to expense as incurred. Applicable interest charges incurred during the construction of new facilities or development of software for internal use are capitalized as one of the elements of cost and are amortized over the useful life of the respective assets. Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, the Company compares the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows do not exceed the carrying value, the carrying value is compared to the fair value of such asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess. The Company also assesses the recoverability of its vacant land and closed facilities actively marketed for sale. If an asset’s carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the excess. Assets held for sale are not depreciated. Impairments resulting from restructuring activities are recorded as a component of restructuring costs and asset impairment charges in the Company’s Consolidated Statements of Comprehensive Income, and a reduction of the asset’s carrying value in the Company’s Consolidated Balance Sheets. Goodwill and Other Intangible Assets —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, 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. The Company assesses goodwill and other intangible assets with 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. For intangible assets with definite lives, the Company assesses impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. The reporting unit used in assessing goodwill impairment is the Company’s one business segment as described in Note 24, and all goodwill is assigned to the consolidated Company. Impairments are recorded as a component of restructuring costs and asset impairment charges in the Company’s Consolidated Statements of Comprehensive Income, and a reduction of the asset’s carrying value in the Company’s Consolidated Balance Sheets. Self-Insurance Programs —The Company estimates its liabilities for claims covering general, fleet, and workers’ compensation. Amounts in excess of certain levels, which range from $ 1 million to $ 10 million per occurrence, are insured as a risk reduction strategy to mitigate catastrophic losses. The workers’ compensation liability is discounted, as the amount and timing of cash payments is reliably determinable given the nature of benefits and the level of historic claim volume to support the actuarial assumptions and judgments used to derive the expected loss payment pattern. The amount accrued is discounted using an interest rate that approximates the U.S. Treasury rate consistent with the duration of the liability. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates. We are primarily self-insured for group medical claims not covered under multiemployer health plans covering certain of our union-represented employees. The Company accrues its self-insured medical liability, including an estimate for incurred but not reported claims, based on known claims and past claims history. These accruals are included in accrued expenses and other current liabilities and other long-term liabilities in the Company’s Consolidated Balance Sheets. Share-Based Compensation —The Company measures compensation expense for share-based awards at fair value as of the date of grant, and recognizes compensation expense over the service period for awards, and as applicable based upon predetermined financial performance conditions for performance share-based awards. Forfeitures are recognized as incurred. Fair value of each Option is estimated as of the date of grant using a Black-Scholes option-pricing model, the fair value of all other awards is the closing price per share for the Company’s common stock as reported on the New York Stock Exchange. Prior to the Company’s 2016 initial public offering, the grant date fair value of share-based awards was measured as of the end 44 of each fiscal quarter using the combination of a market and income approach. The fair value was applied to all stock and stock award activity in the subsequent fiscal quarter. Shares issued as a result of stock options exercises will be funded with the issuance of new shares. Compensation expense related to our employee stock purchase plan, which allows eligible employees to purchase our common stock at a discount of 15 % represents the difference between the fair market value as of acquisition date and the employee purchase price. Treasury Stock — The company records treasury stock purchases at cost. Business Acquisitions —The Company accounts for business acquisitions under the acquisition method. Assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition. Cost of Goods Sold —Cost of goods sold includes amounts paid to vendors for products sold, net of vendor consideration, including in-bound freight necessary to bring the products to the Company’s distribution facilities. Depreciation related to processing facilities and equipment is presented in cost of goods sold. Because the majority of the inventories are finished goods, depreciation related to warehouse facilities and equipment is presented in distribution, selling and administrative costs. See “Inventories” above for discussion of the LIFO impact on cost of goods sold. Shipping and Handling Costs —Shipping and handling costs, which include costs related to the selection of products and their delivery to customers, are presented in distribution, selling and administrative costs. Shipping and handling costs were $ 2.3 billion, $ 2.0 billion, and $ 1.7 billion in fiscal years 2022, 2021 and 2020, respectively. Income Taxes —The Company accounts for income taxes under the asset and liability method. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period that includes the enactment date. Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized. An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely than not to be sustained. The Company adjusts the amounts recorded for uncertain tax positions when its judgment changes, as a result of evaluating new information not previously available. These differences are reflected as increases or decreases to income tax expense (benefit) in the period in which they are determined. Derivative Financial Instruments —The Company has utilized derivative financial instruments to assist in managing its exposure to variable interest rates on certain borrowings. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company is not currently party to any interest rate swap agreements. In the normal course of business, the Company enters into forward purchase agreements to procure fuel, electricity and product commodities related to its business. These agreements often meet the definition of a derivative. However, the Company does not measure its forward purchase commitments at fair value as the amounts under contract meet the physical delivery criteria in the normal purchase exception. Concentration Risks —Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. The Company’s cash equivalents are invested primarily in money market funds at major financial institutions. The account balances at these institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage, and as a result, there may be a concentration of risk related to amounts invested in excess of FDIC insurance coverage. Credit risk related to accounts receivable is dispersed across a significantly large number of customers located throughout the U.S. The Company attempts to reduce credit risk through initial and ongoing credit evaluations of its customers’ financial condition. There were no receivables from any one customer representing more than 5% of our consolidated gross accounts receivable as of December 31, 2022. 3. 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 45 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. 4. 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 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 December 31, 2022 or January 1, 2022. Customer receivables, which are included in accounts receivable, less allowances for doubtful accounts in the Company’s Consolidated Balance Sheets, were $ 1.7 billion and $ 1.5 billion as of December 31, 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 costs 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 $ 29 million and $ 27 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of December 31, 2022 and January 1, 2022, respectively, and $ 31 million and $ 26 million included in other assets in the Company’s Consolidated Balance Sheets as of December 31, 2022 and January 1, 2022, respectively. The following table presents the disaggregation of revenue for each of the Company’s principal product categories: 2022 2021 2020 Meats and seafood $ 12,375 $ 11,245 $ 8,131 Dry grocery products 5,758 4,979 3,931 Refrigerated and frozen grocery products 5,253 4,453 3,583 Dairy 3,564 2,801 2,394 Equipment, disposables and supplies 3,536 3,090 2,455 Produce 1,840 1,454 1,205 Beverage products 1,731 1,465 1,186 Total Net sales $ 34,057 $ 29,487 $ 22,885 5. BUSINESS ACQUISITIONS Smart Foodservice Acquisition —On April 24, 2020, USF completed the acquisition of Smart Stores Holding Corp., a Delaware corporation (“Smart Foodservice”), from funds managed by affiliates of Apollo Global Management, Inc. Total consideration paid at the closing of the acquisition (net of cash acquired) was $ 972 million. At the time of the acquisition, Smart Foodservice operated 70 small-format cash and carry stores across California, Idaho, Montana, Nevada, Oregon, Utah, and Washington that serve small and mid-sized restaurants and other food business customers. The acquisition of Smart Foodservice expanded the Company’s cash and carry business in the West and Northwest parts of the U.S. 46 USF financed the Smart Foodservice acquisition with a $ 700 million incremental senior secured term loan borrowed in April 2020 (the “2020 Incremental Term Loan Facility”), and with cash on hand. The assets, liabilities and results of operations of Smart Foodservice have been included in the Company’s consolidated financial statements since the date the acquisition was completed. The following table summarizes the final purchase price allocation recognized for the Smart Foodservice acquisition as of April 24, 2020. The decrease in goodwill from January 2, 2021 to January 1, 2022 was due to the finalization of deferred income taxes associated with the acquisition in the first quarter of fiscal year 2021 . Purchase Price Allocation Accounts receivable $ 5 Inventories 43 Other current assets 24 Property and equipment 84 Goodwill (1) 895 Other intangibles (2) 14 Other assets 145 Accounts payable ( 38 ) Accrued expenses and other current liabilities ( 32 ) Deferred income taxes ( 8 ) Other long-term liabilities, including financing leases ( 160 ) Cash paid for acquisition $ 972 (1) Goodwill recognized is primarily attributable to intangible assets that do not qualify for separate recognition, as well as expected synergies from the combined company. The acquired goodwill is not deductible for U.S. federal income tax purposes. (2) Other intangibles consist of a trade name of $ 14 million with an estimated useful life of approximately 1 year. Smart Foodservice acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $ 16 million, $ 15 million, and $ 21 million during fiscal years 2022, 2021, and 2020, respectively. Pro Forma Financial Information — The following table presents the Company’s unaudited pro forma consolidated net sales, net income and earnings per share (“EPS”) for fiscal year 2020. The unaudited pro forma financial information presents the combined results of operations as if the acquisition and related financing of Smart Foodservice had occurred as of December 30, 2018 which date represents the first day of the Company’s fiscal year that preceded the year of acquisition. 2020 (Unaudited) Pro forma net sales $ 23,258 Pro forma net loss available to common shareholders $ ( 225 ) Pro forma net loss per share: Basic $ ( 1.02 ) Diluted $ ( 1.02 ) The unaudited pro forma financial information above includes adjustments for: (1) incremental depreciation expense related to fair value increases of certain acquired property and equipment, (2) amortization expense related to the fair value of amortizable intangible assets acquired, (3) interest expense related to the term loan facilities and revolving credit facilities used to finance the acquisitions, (4) the elimination of acquisition-related costs that were included in the Company’s historical results, and (5) adjustments to the income tax provision based on pro forma results of operations. No effect has been given to potential synergies, operating efficiencies or costs arising from the integration of Smart Foodservice with our previously existing operations or the standalone cost estimates and estimated costs incurred by their former respective parent companies. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the date indicated. Further, the pro forma financial information does not purport to project the Company’s future consolidated results of operations following the acquisitions. 47 6. ALLOWANCE FOR DOUBTFUL ACCOUNTS Since mid-March 2020, our business has been significantly impacted by the COVID-19 pandemic. Due to the impact that the COVID-19 pandemic was expected to have on our customers, particularly our restaurant and hospitality customers, and to reflect the increased collection risk associated with our customers, we significantly increased our allowance for doubtful accounts in 2020. Since that initial charge in 2020, due to more favorable than anticipated collections on our pre-COVID-19 accounts receivable, we reduced our allowance for doubtful accounts. All pre-COVID-19 accounts receivable have been collected or written off by the end of fiscal year 2022. A summary of the activity in the allowance for doubtful accounts for the last three fiscal years is as follows: 2022 2021 2020 Balance as of beginning of year $ 33 $ 67 $ 30 Charged (benefit) to costs and expenses, net 6 ( 24 ) 63 Adoption of ASU 2016-13 — — 1 Customer accounts written off—net of recoveries ( 9 ) ( 10 ) ( 27 ) Balance as of end of year $ 30 $ 33 $ 67 This table excludes the vendor receivable related allowance for doubtful accounts of $ 8 million, $ 7 million, and $ 5 million as of December 31, 2022, January 1, 2022, and January 2, 2021, respectively. At the beginning of fiscal year 2020, the Company adopted the provisions of ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which resulted in the recording of a cumulative-effect adjustment to retained earnings of $ 1 million. 7. ASSETS HELD FOR SALE The Company classifies its vacant land and closed facilities as assets held for sale at the time management commits to a plan to sell the asset, the asset is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain assets may be classified as assets held for sale for more than one year as the Company continues to actively market the assets. During fiscal year 2022, no excess facilities or vacant land previously held for future use were transferred to assets held for sale. The Company sold vacant land for cash proceeds of $ 5 million, resulting in a gain on sale of $ 2 million, which was included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income. The Company also sold one excess facility for aggregate cash proceeds of $ 1 million which approximated the carrying value. During fiscal year 2021, two excess facilities and vacant land previously held for future use were transferred to assets held for sale. The Company sold one facility for cash proceeds of $ 4 million, which approximated the carrying value. The changes in assets held for sale for fiscal years 2022 and 2021 were as follows: 2022 2021 Balance as of beginning of year $ 8 $ 1 Transfers in — 11 Assets sold ( 6 ) ( 4 ) Balance as of end of the year $ 2 $ 8 48 8. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2022 and January 1, 2022 consisted of the following: December 31, 2022 January 1, 2022 Range of Useful Lives Land $ 397 $ 379 Buildings and building improvements 1,713 1,508 5–40 years Transportation equipment 1,340 1,250 5–10 years Warehouse equipment 569 520 5–12 years Office equipment, furniture and software 1,056 933 3–7 years Construction in process 77 165 5,152 4,755 Less accumulated depreciation and amortization ( 2,981 ) ( 2,722 ) Property and equipment—net $ 2,171 $ 2,033 Transportation equipment included $ 575 million and $ 537 million of financing lease assets as of December 31, 2022 and January 1, 2022, respectively. Office equipment, furniture and software included $5 million of financing lease assets as of December 31, 2022. Buildings and building improvements included $ 78 million and $ 15 million of financing lease assets as of December 31, 2022 and January 1, 2022. Accumulated amortization of financing lease assets was $ 263 million and $ 261 million as of December 31, 2022 and January 1, 2022, respectively. Interest capitalized was not material in both fiscal years 2022 and 2021. Depreciation and amortization expense of property and equipment, including amortization of financing lease assets, was $ 327 million, $ 323 million and $ 343 million for fiscal years 2022, 2021 and 2020, respectively. 9. 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, 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 and amortizable trade names are intangible assets with definite lives, and are carried at the acquired fair value less accumulated amortization. Customer relationships and amortizable trade names are amortized over the estimated useful lives (which range from approximately 3 to 15 years). Amortization expense was $ 45 million, $ 55 million and $ 79 million for fiscal years 2022, 2021 and 2020, respectively. The weighted-average remaining useful life of all definite lived intangibles was approximately nine years as of December 31, 2022. Amortization of these definite lived intangible assets is estimated to be $ 44 million for each of fiscal years 2023, 2024, 2025, 2026, and 2027, and $ 294 million in the aggregate thereafter. Goodwill and other intangibles—net consisted of the following: December 31, 2022 January 1, 2022 Goodwill $ 5,625 $ 5,625 Other intangibles—net Customer relationships—amortizable: Gross carrying amount $ 655 $ 655 Accumulated amortization ( 144 ) ( 99 ) Net carrying value 511 556 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 $ 785 $ 830 49 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 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 the first day of the third quarter of fiscal year 2022, with no impairments noted. For goodwill, the reporting unit used in assessing impairment is the Company’s one business segment as described in Note 24, Business Information. The Company performed the annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. In performing the qualitative assessment, the Company identified and considered the significance of relevant key factors, events, and circumstances that affect the fair value of its goodwill. These factors include external factors such as market conditions, macroeconomic, and industry, as well as entity-specific factors, such as actual and planned financial performance. Based upon the Company’s qualitative fiscal 2022 annual goodwill impairment analysis, the Company concluded that it is more likely than not that the fair value of goodwill exceeded its carrying value and there is no risk of impairment. The Company’s fair value estimates of the brand names and trademarks indefinite-lived intangible assets are based on a relief from royalty method. The fair value of these intangible assets is determined for comparison to the corresponding carrying value. If the carrying value of these assets exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Key assumptions used in the relief from royalty method included the long-term growth rates of future revenues, the royalty rate for such revenue, and a discount rate. These assumptions require significant judgment by management, and are therefore considered Level 3 inputs in the fair value hierarchy. Based upon the Company’s fiscal year 2022 annual impairment analysis, the Company concluded the fair value of its brand names and trademarks exceeded its carrying value. During fiscal year 2021, the Company implemented rebranding initiatives related to the integration of a trade name acquired as part of an earlier 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 will be amortized with an estimated remaining useful life of 10 years. No other impairments were noted as part of the annual impairment assessment for fiscal year 2021. Due to the adverse impacts of the COVID-19 pandemic in fiscal year 2020 on forecasted earnings and the discount rate utilized in our valuation models, the Company recognized impairment charges of $ 9 million related to two trade names acquired as part of an earlier acquisition. Due to the many variables inherent in estimating fair value and the relative size of the recorded indefinite-lived intangible assets, differences in assumptions may have a material effect on the results of the Company’s impairment analysis in future periods. 10. 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. 50 The Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and January 1, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows: December 31, 2022 Level 1 Level 2 Level 3 Total Assets Money market funds $ 139 $ — $ — $ 139 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, except as further disclosed in Note 9, 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. As of December 31, 2022, the Company had no outstanding interest rate swap agreements. On July 31, 2021, a four-year interest rate swap with a notional value of $ 550 million expired. Gains and losses on the interest rate swaps are initially recorded in accumulated o ther comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affects income. The following table presents the effect of the Company’s interest rate swaps in its Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2022, January 1, 2022 , and January 2, 2021: Derivatives in Cash Flow Hedging Relationships Amount of (Loss) Gain Recognized in Accumulated Other Comprehensive Loss, net of tax Location of Amounts Reclassified from Accumulated Other Comprehensive Loss Amount of (Gain) Loss Reclassified from Accumulated Other Comprehensive Loss to Income, net of tax For the fiscal year ended December 31, 2022 Interest rate swaps $ — Interest expense—net $ — For the fiscal year ended January 1, 2022 Interest rate swaps $ — Interest expense—net $ 5 For the fiscal year ended January 2, 2021 Interest rate swaps $ ( 8 ) Interest expense—net $ 5 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, compared to its carrying value of $ 4.8 billion as of December 31, 2022. The fair value of the Company’s total debt approximated $ 5.1 billion compared to its carrying value of $ 5.0 billion as of January 1, 2022. 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 December 31, 2022 and January 1, 2022, respectively. 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 December 31, 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 December 31, 2022 and January 1, 2022. The Fair value of the Unsecured Senior Notes due 2030, the Unsecured Senior Notes due 2029, and the Secured Senior Notes due 2025 is based upon their closing market prices on the respective dates. The fair value of the Unsecured Senior Notes due 2030, the 51 Unsecured Senior Notes due 2029, and the Secured Senior Notes due 2025 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. 11. DEBT Total debt consisted of the following: Debt Description Maturity Interest Rate as of December 31, 2022 Carrying Value as of December 31, 2022 Carrying Value as of January 1, 2022 ABL Facility December 7, 2027 — % $ — $ — 2019 Incremental Term Loan Facility (net of $19 and $25 of unamortized deferred financing costs, respectively) September 13, 2026 6.38 % 1,232 1,442 2021 Incremental Term Loan Facility (net of $6 and $7 of unamortized deferred financing costs, respectively) November 22, 2028 7.13 % 786 893 Secured Senior Notes due 2025 (net of $7 and $11 of unamortized deferred financing costs, respectively) April 15, 2025 6.25 % 993 989 Unsecured Senior Notes due 2029 (net of $7 and $8 of unamortized deferred financing costs, respectively) February 15, 2029 4.75 % 893 892 Unsecured Senior Notes due 2030 (net of $4 and $5 of unamortized deferred financing costs, respectively) June 1, 2030 4.625 % 496 495 Obligations under financing leases 2023–2040 1.26% -8.08% 446 292 Other debt January 1, 2031 5.75 % 8 8 Total debt 4,854 5,011 Current portion of long-term debt ( 116 ) ( 95 ) Long-term debt $ 4,738 $ 4,916 As of December 31, 2022, approximately 42 % of the Company’s total debt bears interest at a floating rate. Principal payments to be made on outstanding debt, exclusive of deferred financing costs, as of December 31, 2022, were as follows: 2023 $ 116 2024 113 2025 1,097 2026 1,278 2027 65 Thereafter 2,228 $ 4,897 ABL Facility On December 7, 2022, USF entered into an amendment to its asset based senior secured revolving credit facility (the “ABL Facility”). Pursuant to this amendment, the total aggregate amount of commitments under the ABL facility was increased from $ 1,990 million to $ 2,300 million. The amendment also replaced the London Interbank Offered Rate (“LIBOR”) interest rate benchmark with a forward-looking term rate based on the Secured Overnight Financing Rate (“SOFR”) as administered by the Federal Reserve Bank of New York, as determined in accordance with the ABL Facility. Extensions of credit under the ABL Facility are subject to availability under a borrowing base comprised of various percentages of the value of eligible accounts receivable, inventory, transportation equipment and certain unrestricted cash and cash equivalents, which, along with other assets, also serve as collateral for borrowings under the ABL Facility. The ABL Facility is now scheduled to mature on December 7, 2027, subject to a springing maturity date in the event that more than $ 300 million of aggregate principal amount of earlier maturing indebtedness under USF’s Term Loan Credit Agreement or any of USF’s Secured Senior Notes due 2025, Unsecured Senior Notes due 2029 or Unsecured Senior Notes due 2030 (the “Senior Notes”) (described below) remains 52 outstanding on a date that is sixty (60) days prior to such earlier maturity date for such indebtedness under the Term Loan Credit Agreement or any of such Senior Notes. 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 under the ABL Facility, plus a margin ranging from 0.00 % to 0.50 %, or the sum of a SOFR plus a margin ranging from 1.00 % to 1.50 % and a credit spread adjustment of 0.10%, in each case based on USF’s excess availability under the ABL Facility. The margin under the ABL Facility as of December 31, 2022, was 0.00 % for ABR loans and 1.00 % for SOFR loans. The ABL Facility also carries letter of credit financing fees equal to 0.125 % per annum in respect of each letter of credit outstanding, letter of credit participation fees equal to a percentage per annum equal to the applicable LIBOR margin minus the letter of credit facing fees in respect of each letter of credit outstanding and a commitment fee of 0.25 % per annum on the average unused amount of the commitments under the ABL Facility. The weighted-average interest rate on outstanding borrowings for the ABL Facility was 2.87 % and 3.25 % for fiscal years 2022 and 2021, respectively. The Company incurred $4 million of third party costs in connection with the ABL Facility amendment which were capitalized as deferred financing costs recorded in other assets in the Company’s Consolidated Balance Sheet. These deferred financing costs, along with $3 million of unamortized deferred financing costs related to the former asset based senior secured revolving credit facility, will be amortized through December 7, 2027, the ABL Facility maturity date. USF had no outstanding borrowings, and had outstanding letters of credit totaling $ 462 million, under the ABL Facility as of December 31, 2022. The outstanding letters of credit are entered into in favor of certain commercial insurers to secure obligations with respect to our insurance programs and certain real estate leases, under the ABL Facility as of December 31, 2022. There was available capacity of $ 1,838 million under the ABL Facility as of December 31, 2022. Term Loan Facilities The Amended and Restated Term Loan Credit Agreement, dated as of June 27, 2016 (as amended, the “Term Loan Credit Agreement”), provides USF with an incremental senior secured term loan borrowed in September 2019 (the “2019 Incremental Term Loan Facility”), an incremental senior secured term loan borrowed in November 2021 (the “2021 Incremental Term Loan Facility”) and the right to request additional incremental senior secured term loan commitments. 2019 Incremental Term Loan Facility The 2019 Incremental Term Loan Facility had an outstanding balance of $ 1,232 million, net of $ 19 million of unamortized deferred financing costs, as of December 31, 2022. During fiscal year 2022 we voluntarily prepaid $ 200 million of the 2019 Incremental Term Loan Facility. 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 under 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 is scheduled to mature on September 13, 2026. Borrowings under the 2019 Incremental Term Loan Facility may be voluntarily prepaid without penalty or premium, other than customary breakage costs related to prepayments of LIBOR-based borrowings. The 2019 Incremental Term Loan Facility may require mandatory repayments if certain assets are sold. 2021 Incremental Term Loan Facility The 2021 Incremental Term Loan Facility had an outstanding balance of $ 786 million, net of $ 6 million of unamortized deferred financing costs, as of December 31, 2022. During fiscal year 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 under 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 is scheduled to mature on November 22, 2028. Borrowings under the 2021 Incremental Term Loan Facility may be voluntarily prepaid without penalty or premium, other than customary breakage costs related to prepayments of LIBOR-based borrowings The 2021 Incremental Term Loan Facility may require mandatory repayments if certain assets are sold. Secured Senior Notes due 2025 As of December 31, 2022, the Secured Senior Notes due 2025 had a carrying value of $ 993 million, net of $ 7 million of unamortized deferred financing costs. The Secured Senior Notes due 2025 bear interest at a rate of 6.25 % per annum and will mature on April 15, 2025. On or after April 15, 2022, the Secured Senior Notes due 2025 are redeemable, at USF’s option, in 53 whole or in part at a price of 103.125 % of the remaining principal, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. On or after April 15, 2023 and April 15, 2024, the optional redemption price for the Secured Senior Notes due 2025 declines to 101.563 % and 100.000 %, respectively, of the remaining principal amount, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. Unsecured Senior Notes due 2029 The Unsecured Senior Notes due 2029 had an outstanding balance of $ 893 million, net of $ 7 million of unamortized deferred financing costs, as of December 31, 2022. The Unsecured Senior Notes due 2029 bear interest at a rate of 4.75 % per annum and will mature on February 15, 2029. On or after February 15, 2024, the Unsecured Senior Notes due 2029 are redeemable, at USF’s option, in whole or in part at a price of 102.375 % of the remaining principal, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. On or after February 15, 2025 and February 15, 2026, the optional redemption price for the Unsecured Senior Notes due 2029 declines to 101.188 % and 100.000 %, respectively, of the remaining principal amount, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. 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 December 31, 2022. The Unsecured Senior Notes due 2030 bear interest at a rate of 4.625 % per annum and will mature on June 1, 2030. On or after June 1, 2025, the Unsecured Senior Notes due 2030 are redeemable, at USF’s option, in whole or in part at a price of 102.313 % of the remaining principal, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. On or after June 1, 2026 and June 1, 2027, the optional redemption price for the Unsecured Senior Notes due 2030 declines to 101.156 % and 100.000 %, respectively, of the remaining principal amount, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. Financing Leases— Obligations under financing leases of $ 446 million as of December 31, 2022 consist primarily of amounts due for transportation equipment and building leases. Security Interests Substantially all of the Company’s assets are pledged under the various agreements governing our indebtedness. The ABL Facility is secured by certain designated receivables, as well as inventory and certain owned transportation equipment and certain unrestricted cash and cash equivalents. Additionally, the lenders under the ABL Facility have a second priority interest in all of the capital stock of USF and its subsidiaries and substantially all other non-real estate assets of USF and its subsidiaries. USF’s obligations under the 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility are secured by all the capital stock of USF and its subsidiaries and substantially all the non-real estate assets of USF. Additionally, the lenders under the 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility have a second priority interest in the inventory and certain transportation equipment pledged under the ABL Facility. 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 December 31, 2022. The agreements governing our indebtedness also contain customary events of default. Those include, without limitation, the failure to pay interest or principal when it is due under the agreements, cross default provisions, the failure of representations and warranties contained in the agreements to be true when made, and certain insolvency events. If an event of default occurs and remains uncured, the principal amounts outstanding, together with all accrued unpaid interest and other amounts owed, may be declared immediately due and payable. Were such an event to occur, the Company would be forced to seek new financing that may not be on as favorable terms as its existing debt. The Company’s ability to refinance its indebtedness on favorable terms, or at all, is directly affected by the then prevailing economic and financial conditions. In addition, the Company’s ability to incur secured indebtedness (which may enable it to achieve more favorable terms than the incurrence of unsecured indebtedness) depends in part on the value of its assets. This, in turn, is dependent on the strength of its cash flows, results of operations, economic and market conditions, and other factors. 54 2021 Refinancing Activities In February 2021, USF completed a private offering of the Unsecured Senior Notes due 2029 and used the proceeds, together with cash on hand, to redeem all of the Company’s then outstanding 5.875 % Unsecured Senior Notes due 2024 (the “Unsecured Senior Notes due 2024”), and repay all of the then outstanding borrowings under the 2020 Incremental Term Loan Facility. In connection with the repayment of the Unsecured Senior Notes due 2024 and the 2020 Incremental Term Loan Facility, the Company applied debt extinguishment accounting and recorded $ 23 million in the Company’s Consolidated Statements of Comprehensive Income, consisting of a $ 14 million write-off of pre-existing unamortized deferred financing costs related to the redeemed facilities and a $ 9 million early redemption premium related to the Unsecured Senior Notes due 2024. In November 2021, USF entered into the 2021 Incremental Term Loan Facility and completed a private offering of Unsecured Senior Notes due 2030 and used the proceeds and cash on hand, to repay all of the then outstanding borrowings under the Initial Term Loan Facility. In connection with the repayment of the Initial Term Loan Facility, the Company applied debt extinguishment accounting and recorded $ 2 million in the Company’s Consolidated Statements of Comprehensive Income, primarily consisting of a write-off of pre-existing unamortized deferred financing costs related to the Initial Term Loan Facility. 12. ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES Accrued expenses and other long-term liabilities consisted of the following: December 31, 2022 January 1, 2022 Accrued expenses and other current liabilities: Salary, wages and bonus expenses $ 205 $ 156 Operating expenses 93 82 Workers’ compensation, general and fleet liability 41 41 Group medical liability 33 28 Customer rebates and other selling expenses 125 116 Property and sales tax payable 49 47 Operating lease liability 36 36 Interest payable 33 34 Other 35 70 Total accrued expenses and other current liabilities $ 650 $ 610 Other long-term liabilities: Workers’ compensation, general and fleet liability $ 145 $ 151 Operating lease liability 246 244 Accrued pension and other postretirement benefit obligations 5 6 Uncertain tax positions 32 31 Other 18 47 Total Other long-term liabilities $ 446 $ 479 Self-Insured Liabilities — The Company is self-insured for general liability, fleet liability and workers’ compensation claims. Claims in excess of certain levels are insured by external parties. The workers’ compensation liability, included in the table above under “Workers’ compensation, general liability and fleet liability,” is recorded at present value. This table summarizes self-insurance liability activity for the last three fiscal years: 2022 2021 2020 Balance as of beginning of the year $ 192 $ 175 $ 165 Charged to costs and expenses 107 95 83 Acquisition — — 3 Reinsurance recoverable 2 7 2 Payments ( 115 ) ( 85 ) ( 78 ) Balance as of end of the year $ 186 $ 192 $ 175 Discount rate 4.25 % 0.49 % 0.15 % Estimated future payments for self-insured liabilities are as follows: 55 2023 $ 44 2024 39 2025 21 2026 15 2027 11 Thereafter 73 Total self-insured liability 203 Less amount representing interest ( 17 ) Present value of self-insured liability $ 186 13. RESTRUCTURING LIABILITIES The following table summarizes the changes in the restructuring liabilities for the last three fiscal years: Severance and Related Costs Facility Closing Costs Total Balance as of December 28, 2019 $ 1 $ — $ 1 Current period costs 27 3 30 Payments, net ( 27 ) ( 2 ) ( 29 ) Balance as of January 2, 2021 1 1 2 Current period costs (benefits) 5 ( 1 ) 4 Payments, net ( 3 ) — ( 3 ) Balance as of January 1, 2022 3 — 3 Current period costs 3 — 3 Payments, net ( 3 ) — ( 3 ) Balance as of December 31, 2022 $ 3 $ — $ 3 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. 2022 Activities During fiscal year 2022, the Company incurred restructuring costs of $ 3 million for severance and related costs associated with support office work force reductions. 2021 Activities During fiscal year 2021, the Company incurred net restructuring costs of $ 4 million for severance and related costs associated with the closure of an excess facility and initiatives to improve operational effectiveness. 2020 Activities During fiscal year 2020, in order to adjust its cost structure in line with the decrease in Net sales caused by the impact of the COVID-19 pandemic on the operations of our restaurant, hospitality and education customers, the Company reduced its work force, and separately closed two facilities, incurring net restructuring costs of $ 30 million. See Note 9, Goodwill and Other Intangibles, for discussion related to asset impairment charges incurred during fiscal years 2021 and 2020. 14. 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 convertible preferred stock, par value $0.01 per share (the “Series A Preferred Stock”) 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. In accordance with the terms of the 56 Certificate of Designations for the Series A Preferred Stock (the “Certificate of Designations”), the Company paid dividends on the shares of the Series A Preferred Stock in the form of (a) 5,288 ; 8,842 ; 8,997 and 9,154 shares of Series A Preferred Stock on June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, respectively, plus a de minimis amount in cash in lieu of fractional shares and (b) cash in the amount of $ 28 million in the aggregate during subsequent quarters in fiscal year 2021 (c) cash in the amount of $ 37 million during fiscal year 2022. The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $ 0.01 per share (the “Common Stock”), with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has a liquidation preference of $ 1,000 per share. Holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7.0 % per annum. If the Company does not declare and pay a dividend on the Series A Preferred Stock, the dividend rate will increase by 3.0 % to 10.0 % per annum until all accrued but unpaid dividends have been paid in full. Dividends are payable in kind through the issuance of additional shares of Series A Preferred Stock for the first four dividend payments following the Issuance Date, and thereafter, in cash or in kind, or a combination of both, at the option of the Company. The Series A Preferred Stock is convertible at the option of the holders thereof at any time into shares of Common Stock at an initial conversion price of $ 21.50 per share and an initial conversion rate of 46.5116 shares of Common Stock per share of Series A Preferred Stock, subject to certain anti-dilution adjustments set forth in the Certificate of Designations. At any time after May 6, 2023 (the third anniversary of the Issuance Date), if the volume weighted average price of the Common Stock exceeds $ 43.00 per share, as may be adjusted pursuant to the Certificate of Designations, for at least 20 trading days in any period of 30 consecutive trading days, at the election of the Company, all of the Series A Preferred Stock will be convertible into the relevant number of shares of Common Stock. At any time after May 6, 2025 (the fifth anniversary of the Issuance Date), the Company may redeem some or all of the Series A Preferred Stock for a per share amount in cash equal to: (i) the sum of (x) 100 % of the liquidation preference thereof, plus (y) all accrued and unpaid dividends, multiplied by (ii) (A) 105 % if the redemption occurs at any time after the fifth anniversary of the Issuance Date and prior to the sixth anniversary of the Issuance Date, (B) 103 % if the redemption occurs at any time after May 6, 2026 (the sixth anniversary of the Issuance Date) and prior to May 6, 2027 (the seventh anniversary of the Issuance Date), and (C) 100 % if the redemption occurs at any time after May 6, 2027 (the seventh anniversary of the Issuance Date). Upon certain change of control events involving the Company, the holders of the Series A Preferred Stock must either (i) convert their shares of Series A Preferred Stock into Common Stock at the then-current conversion price or (ii) cause the Company to redeem their shares of Series A Preferred Stock for an amount in cash equal to 100 % of the liquidation preference thereof plus all accrued but unpaid dividends. If any such change of control event occurs on or before May 6, 2025 (the fifth anniversary of the Issuance Date), the Company will also be required to pay the holders of the Series A Preferred Stock a “make-whole” premium of 5 %. Holders of the Series A Preferred Stock are entitled to vote with the holders of the Common Stock on an as-converted basis. Holders of the Series A Preferred Stock are also entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series A Preferred Stock, authorization or issuances by the Company of securities that are senior to, or equal in priority with, the Series A Preferred Stock, increases or decreases in the number of authorized shares of Series A Preferred Stock, and issuances of shares of Series A Preferred Stock after the Issuance Date, other than shares issued as in-kind dividends with respect to shares of the Series A Preferred Stock issued after the Issuance Date. The following table summarizes the activity for the outstanding Series A Preferred Stock and associated carrying value for fiscal years 2022, 2021 and 2020: Series A Preferred Stock Shares Carrying Value Balance, December 28, 2019 — $ — Shares issued for cash - Series A Preferred Stock, net of issuance costs 500,000 491 Shares issued as paid in kind dividend - Series A Preferred Stock 23,127 28 Balance, January 2, 2021 523,127 519 Shares issued as paid in kind dividend - Series A Preferred Stock 9,154 15 Balance, January 1, 2022 532,281 534 Shares issued as paid in kind dividend - Series A Preferred Stock — — Balance, December 31, 2022 532,281 $ 534 57 15. RELATED PARTY TRANSACTIONS As of December 31, 2022 FMR LLC, is a holder of approximately 11 % of the Company’s outstanding common stock based on information provided in its most recent amendment to its Schedule 13G filed with the SEC. As of December 31, 2022 investment funds managed by an affiliate of FMR LLC held approximately $ 19 million in aggregate principal amount of the 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility. As of January 1, 2022, investment funds managed by an affiliate of FMR LLC held approximately $ 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. KKR Capital Markets LLC (“KKR Capital Markets”), an affiliate of KKR, received an aggregate of $ 2 million for debt advisory services rendered in connection with the Company’s 2021 debt refinancing activities and $ 6 million for debt advisory services rendered in connection with the financing of the Smart Foodservice acquisition during fiscal year 2020. As reported by the administrative agent of the Initial Term Loan Facility and the 2019 Incremental Term Loan Facility (the “Term Loan Agent”), investment funds managed by an affiliate of KKR held approximately $ 15 million and $ 17 million in aggregate principal amount of the 2019 Incremental Term Loan Facility as of December 31, 2022 and January 1, 2022, respectively. 16. SHARE-BASED COMPENSATION, COMMON STOCK ISSUANCES AND COMMON STOCK Our long-term incentive plans provide for the grant of various forms of share-based awards to our directors, officers and other eligible employees. Total compensation expense related to share-based arrangements was $ 45 million, $ 48 million and $ 40 million for fiscal years 2022, 2021 and 2020, respectively, and is reflected in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income. The total income tax benefit associated with share-based compensation recorded in the Company’s Consolidated Statements of Comprehensive Income was $ 9 million, $ 10 million and $ 8 million for fiscal years 2022, 2021 and 2020, respectively. In addition, the Company sponsors an employee stock purchase plan to provide eligible employees with the opportunity to acquire shares of our common stock at a discount of 15 % of the fair market value of the common stock on the date of purchase, and as such, the plan is considered compensatory for federal income tax purposes. The Company recorded $ 4 million, $ 4 million and $ 3 million of share-based compensation expense for fiscal years 2022, 2021 and 2020, respectively, associated with the employee stock purchase plan. Stock Options —Certain directors, executive officers and other eligible employees have been granted time-based stock options (the “Time-Based Options”) and performance-based options (the “Performance Options” and, together with the Time-Based Options, the “Options”) to purchase shares of our common stock. The Time-Based Options generally vest and become exercisable ratably over a three year period from the date of the grant. Share-based compensation expense related to the Time-Based Options was $ 6 million, $ 12 million and $ 10 million for fiscal years 2022, 2021 and 2020, respectively. The Performance Options generally vest and become exercisable ratably over a period o f three years, from the date of the grant, provided that the Company achieves a predetermined financial performance condition established by the Compensation and Human Capital Committee of our Board of Directors for the respective award tranche. There was no share-based compensation expense recorded in fiscal year 2022, 2021 and 2020 related to the Performance Options. The Options are nonqualified, with exercise prices equal to the estimated fair value of a share of common stock as of the date of the grant. Exercise prices range from $ 12.56 to $ 38.17 per share and generally have a 10 -year life. The fair value of each Option is estimated as of the date of grant using a Black-Scholes option-pricing model. 58 The weighted-average assumptions for Options granted in fiscal years 2021 and 2020 are included in the following table. No options were granted in fiscal year 2022. 2021 2020 Expected volatility 53.0 % 29.3 % Expected dividends — — Risk-free interest rate 1.1 % 0.5 % Expected term (in years) 6.1 6.1 Expected volatility is calculated leveraging the historical volatility of public companies similar to US Foods. The assumed dividend yield is zero because the Company has not historically paid dividends. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury securities having a maturity approximately equal to the expected term, as of the grant date. Due to a lack of relevant historical data, the simplified approach was used to determine the expected term of the options. The summary of Options outstanding and changes during fiscal year 2022 are presented below: Time Options Performance Options Total Options Weighted- Average Fair Value Weighted- Average Exercise Price Weighted- Average Remaining Contractual Years Outstanding as of January 1, 2022 5,184,172 263,643 5,447,815 $ 8.96 $ 24.14 Granted — — — $ — $ — Exercised ( 782,675 ) ( 76,356 ) ( 859,031 ) $ 6.54 $ 19.07 Forfeited ( 750,891 ) ( 966 ) ( 751,857 ) $ 11.29 $ 29.01 Outstanding as of December 31, 2022 3,650,606 186,321 3,836,927 $ 9.05 $ 24.32 6.1 Vested and exercisable as of December 31, 2022 2,610,641 186,321 2,796,962 $ 8.54 $ 24.53 5.5 The weighted-average grant date fair value of Options granted for fiscal years 2021 and 2020 was $ 18.59 and $ 3.91 , respectively. During fiscal years 2022, 2021 and 2020, Options were exercised with total intrinsic values of $ 13 million, $ 14 million and $ 3 million, respectively, representing the excess of fair value over the exercise price. There was $ 5 million of total unrecognized compensation costs related to unvested Options expected to vest as of December 31, 2022, which is expected to be recognized over a weighted-average period of 1 year. Restricted Stock Awards —Certain executive officers have been granted restricted stock awards (“RSAs”), some of which vest ratably over a three-year period from the date of grant (the “Time-Based RSA”) and others of which vest to the extent certain performance conditions are met (the “Performance RSAs”). The Company recorded de minimis share-based compensation expense for the Time-Based RSAs in fiscal year 2022, and $ 1 million in both fiscal years 2021 and 2020. The Performance RSAs were granted assuming the maximum level of performance and vest on the third anniversary of the grant date if specific performance conditions over a three-year performance period are achieved. The number of shares eligible to vest on the vesting date range from zero to 200 % of the target award amount, based on the achievement of the performance conditions. The fair value of the Performance RSAs is measured using the fair market value of our common stock on the date of grant and recognized over the three-year vesting period for the portion of the award that is expected to vest. Compensation expense for the Performance RSAs is remeasured as of the end of each reporting period, based on management’s evaluation of whether, and to what extent, it is probable that performance conditions will be met. Share-based compensation expense for the Performance RSAs was de minimis for fiscal year 2022, and $ 1 million and $ 2 million for fiscal years 2021 and 2020, respectively. 59 The summary of unvested RSAs and changes during fiscal year 2022 is presented below: Time-Based RSAs Performance RSAs Total RSAs Weighted- Average Fair Value Unvested as of January 1, 2022 35,693 214,134 249,827 $ 34.56 Granted — — — $ — Vested ( 35,693 ) ( 109,651 ) ( 145,344 ) $ 34.56 Forfeited — — — $ — Performance adjustment (1) — ( 104,483 ) ( 104,483 ) $ 34.56 Unvested as of December 31, 2022 — — — $ — (1) Represents an adjustment to the 2019 Performance RSAs based on the actual performance during the three-year performance period. There were no RSAs granted in fiscal years 2022, 2021 and 2020. There was no unrecognized compensation expense related to the RSAs as of December 31, 2022. Restricted Stock Units —Certain directors, executive officers and other eligible employees have been granted time-based restricted stock units (the “Time-Based RSUs”), performance-based restricted stock units (the “Performance RSUs”) and market performance-based restricted stock units (the “Market Performance RSUs” and collectively with the Time-Based RSUs and Performance RSUs, the “RSUs”). The Time-Based RSUs generally vest ratably over three years, starting on the anniversary date of the grant. For fiscal years 2022, 2021 and 2020, the Company recognized $ 29 million, $ 26 million and $ 23 million, respectively, in share-based compensation expense related to the Time-Based RSUs. The Performance RSUs generally vest over a three year period, as and to the extent predetermined performance conditions are met. The fair value of each share underlying the Performance RSUs is measured at the fair market value of our common stock on the date of grant and recognized over the vesting period for the portion of the award that is expected to vest. Compensation expense for the Performance RSUs is remeasured as of the end of each reporting period, based on management’s evaluation of whether it is probable that the performance conditions will be met. The Company recognized $ 4 million, $ 1 million and $ 1 million of share-based compensation expense in fiscal years 2022, 2021 and 2020, respectively, for the Performance RSUs. During fiscal year 2021, the Company granted Market Performance RSUs to certain executive officers and other eligible employees. These Market Performance RSUs awards vest at the end of a four-year performance period contingent on our achievement of certain total shareholder return performance (“TSR”) targets during the performance period. The grant date fair value of the Market Performance RSUs was estimated using a Monte-Carlo simulation. The Company recognized $ 1 million and $ 3 million of share-based compensation expense in fiscal years 2022 and 2021, respectively, for the Market Performance RSUs. There were no Market Performance RSUs outstanding prior to fiscal year 2021 and therefore no share-based compensation expense was recorded in 2020 related to the Market Performance RSUs. A summary of RSUs outstanding and changes during fiscal year 2022 is presented below. Time-Based RSUs Performance RSUs Market Performance RSUs Total RSUs Weighted- Average Fair Value Unvested as of January 1, 2022 2,305,296 106,063 350,143 2,761,502 $ 25.60 Granted 1,373,553 516,484 — 1,890,037 $ 35.81 Vested ( 1,079,225 ) ( 106,090 ) — ( 1,185,315 ) $ 23.73 Forfeited ( 426,687 ) ( 127,217 ) ( 140,816 ) ( 694,720 ) $ 32.54 Performance adjustment (1) — 2,536 — 2,536 $ 34.61 Unvested as of December 31, 2022 2,172,937 391,776 209,327 2,774,040 $ 31.62 (1) Represents an adjustment to the 2019 Performance RSUs based on actual performance during the respective three-year performance period. The weighted-average grant date fair values for the RSUs granted in fiscal years 2022, 2021, and 2020 was $ 35.81 , $ 37.74 and $ 13.83 , respectively. As of December 31, 2022, there was $ 52 million of unrecognized compensation cost related to the RSUs that is expected to be recognized over a weighted-average period of 2 years. 60 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. For the year ended December 31, 2022, the Company repurchased 396,069 shares at an aggregate purchase price of approximately $ 14 million under the program. At December 31, 2022, there was approximately $ 486 million in remaining funds authorized under this program. 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. 17. LEASES The Company leases certain distribution and warehouse facilities, office facilities, fleet vehicles, and office and warehouse equipment. The Company determines if an arrangement is a lease at inception and recognizes a financing or operating lease liability and right-of-use (“ROU”) asset in the Company’s Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term as of commencement date. For the Company’s leases that do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate based on the information available as of commencement date in determining the present value of future payments. The lease terms may include options to extend, terminate or buy out the lease. When it is reasonably certain that the Company will exercise these options, the associated payments are included in ROU assets and the estimated lease liabilities. Leases with an initial term of 12 months or less are not recorded in the Company’s Consolidated Balance Sheets. The Company recognizes lease expense for leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. For office and warehouse equipment leases, the Company accounts for the lease and non-lease components as a single lease component. Variable lease payments that do not depend on an index or a rate, such as insurance and property taxes, are excluded from the measurement of the lease liability and are recognized as variable lease cost when the obligation for that payment is incurred. As of December 31, 2022, lease agreements included residual value guarantees of up to $221 million that could potentially come due in future periods. For leases which we believe it probable amounts will be owed under these guarantees we have included the residual value guarantee within the lease payments to measure the right-of-use assets and lease liabilities. During 2022, the Company entered into new lease agreements for four distribution facilities that were previously classified as operating leases. As a result of terminating the original leases, the Company recognized a charge of $9 million, which was recorded in distribution, selling and administrative costs. These new leases are classified as financing leases, were measured using our incremental borrowing rate and are included in our right of use assets and lease liabilities in the Consolidated Balance Sheets. Rental payments are calculated at the applicable reference rate plus a margin. The following table presents the location of the ROU assets and lease liabilities in the Company’s Consolidated Balance Sheets: Leases Consolidated Balance Sheet Location December 31, 2022 January 1, 2022 Assets Operating Other assets $ 265 $ 275 Financing Property and equipment-net (1) 395 291 Total leased assets $ 660 $ 566 Liabilities Current: Operating Accrued expenses and other current liabilities $ 36 $ 36 Financing Current portion of long-term debt 92 72 Noncurrent: Operating Other long-term liabilities 246 244 Financing Long-term debt 354 220 Total lease liabilities $ 728 $ 572 (1) Financing lease assets are recorded net of accumulated amortization of $ 263 million and $ 261 million as of December 31, 2022 and January 1, 2022. 61 The following table presents the location of lease costs in fiscal years 2022, 2021 and 2020 in the Company’s Consolidated Statements of Comprehensive Income: Lease Cost Statements of Comprehensive Income Location 2022 2021 2020 Operating lease cost Distribution, selling and administrative costs $ 69 $ 58 $ 52 Financing lease cost: Amortization of leased assets Distribution, selling and administrative costs 70 73 79 Interest on lease liabilities Interest expense-net 11 10 12 Short-term lease cost Distribution, selling and administrative costs 2 1 — Variable lease cost Distribution, selling and administrative costs 10 11 13 Net lease cost $ 162 $ 153 $ 156 Future lease payments under lease agreements as of December 31, 2022 were as follows: Maturity of Lease Liabilities Operating Leases Financing Lease Obligation Total 2023 $ 53 $ 107 $ 160 2024 49 102 151 2025 47 83 130 2026 43 71 114 2027 38 61 99 After 2027 142 84 226 Total lease payments 372 508 880 Less amount representing interest ( 90 ) ( 62 ) ( 152 ) Present value of lease liabilities $ 282 $ 446 $ 728 Other information related to lease agreements for fiscal years 2022, 2021 and 2020 was as follows: Cash Paid For Amounts Included In Measurement of Liabilities 2022 2021 2020 Operating cash flows from operating leases $ 56 $ 55 $ 56 Operating cash flows from financing leases 11 10 12 Financing cash flows from financing leases 73 87 102 Lease Term and Discount Rate December 31, 2022 January 1, 2022 January 2, 2021 Weighted-average remaining lease term (years): Operating leases 8.32 8.30 8.42 Financing leases 6.36 5.74 5.31 Weighted-average discount rate: Operating leases 6.5 % 6.1 % 6.6 % Financing leases 4.1 % 3.2 % 3.2 % 18. RETIREMENT PLANS The Company sponsors a defined benefit pension plan and 401(k) plan for eligible employees, and provides certain postretirement health and welfare benefits to eligible retirees and their dependents. Company Sponsored Defined Benefit Plans — The Company sponsors the US Foods Consolidated Defined Benefit Retirement Plan (the “Retirement Plan”), a qualified defined benefit retirement plan, that pays benefits to eligible employees at the time of retirement, using actuarial formulas based upon a participant’s years of credited service and compensation. Only certain union associates are eligible to participate and continue to accrue benefits under the plan per the collective bargaining 62 agreements. The plan is closed and frozen to all other employees. During fiscal year 2020, in connection with the Smart Foodservice acquisition, the Company assumed a defined benefit pension plan with net liabilities of approximately $ 19 million. This defined benefit pension plan was merged into the Retirement Plan as of December 31, 2020. The Company also maintains postretirement health and welfare plans for certain employees. Amounts related to the Retirement Plan and other postretirement plans recognized in the Company’s consolidated financial statements are determined on an actuarial basis. The components of net periodic pension benefit costs (credits) for the Retirement Plan the last three fiscal years were as follows: 2022 2021 2020 Components of net periodic pension benefit (credits) costs: Service cost $ 3 $ 3 $ 3 Interest cost 30 29 32 Expected return on plan assets ( 52 ) ( 54 ) ( 55 ) Amortization of net loss — — 1 Net periodic pension benefit (credits) costs $ ( 19 ) $ ( 22 ) $ ( 19 ) Other postretirement benefit costs were de minimis for fiscal years 2022, 2021 and 2020. The service cost component of net periodic benefit (credits) costs is included in distribution, selling and administrative costs, while the other components of net periodic benefit (credits) costs are included in other income—net in the Company’s Consolidated Statements of Comprehensive Income. The Company did not make a significant contribution to the Retirement Plan in fiscal years 2022, 2021 and 2020. There have been no non-cash settlement costs incurred in fiscal years 2022, 2021, and 2020. Changes in plan assets and benefit obligations recorded in accumulated other comprehensive loss for pension benefits for the last three fiscal years were as follows: 2022 2021 2020 Changes recognized in accumulated other comprehensive loss: Actuarial (loss) gain $ ( 73 ) $ 14 $ 29 Amortization of net loss — — 1 Net amount recognized $ ( 73 ) $ 14 $ 30 Changes in plan assets and benefit obligations recorded in accumulated other comprehensive loss for other postretirement benefits for the last three fiscal years were de minimis. The funded status of the Retirement Plan for the last three fiscal years was as follows: Pension Benefits 2022 2021 2020 Change in benefit obligation: Benefit obligation as of beginning of year $ 1,016 $ 1,061 $ 903 Service cost 3 3 3 Interest cost 30 29 32 Actuarial (gain) loss ( 274 ) ( 30 ) 98 Benefit disbursements ( 55 ) ( 47 ) ( 45 ) Smart Foodservice assumed benefit obligations — — 70 Projected benefit obligation as of end of year 720 1,016 1,061 Change in plan assets: Fair value of plan assets as of beginning of year 1,103 1,112 923 (Loss) return on plan assets ( 295 ) 38 183 Benefit disbursements ( 55 ) ( 47 ) ( 45 ) Smart Foodservice acquired plan assets — — 51 Fair value of plan assets as of end of year 753 1,103 1,112 Net funded status $ 33 $ 87 $ 51 63 The net funded status of the Retirement Plan for fiscal year 2022 decreased from a net asset of $ 87 million to a net asset of $ 33 million, primarily due to negative investment returns on assets, offset by an increase in the discount rate. The net funded status of the Retirement Plan for fiscal year 2021 improved from a net asset of $ 51 million to a net asset of $ 87 million, primarily due to asset returns, and an increase in the discount rate. The net funded status of the Retirement Plan for fiscal year 2020 improved from a net asset of $ 20 million to a net asset of $ 51 million, primarily due to asset returns, partially offset by a decrease in the discount rate and the merger of the Smart Foodservice pension plan into the Retirement Plan. The fiscal year 2022 pension benefits actuarial gain of $ 274 million was primarily due to an increase in the discount rate. The fiscal year 2021 pension benefits actuarial gain of $ 30 million was primarily due to an increase in the discount rate. The fiscal year 2020 pension benefits actuarial loss of $ 98 million was primarily due to a decrease in the discount rate. The funded status of the Other Post Retirement Plans for the last three fiscal years was as follows: Other Postretirement Plans 2022 2021 2020 Change in benefit obligation: Benefit obligation as of beginning of year $ 6 $ 6 $ 6 Benefit disbursements ( 1 ) ( 1 ) ( 1 ) Other — 1 1 Benefit obligation as of end of year 5 6 6 Change in plan assets: Fair value of plan assets as of beginning of year — — — Employer contribution 1 1 1 Benefit disbursements ( 1 ) ( 1 ) ( 1 ) Fair value of plan assets as of end of year — — — Net funded status $ ( 5 ) $ ( 6 ) $ ( 6 ) Service cost, interest cost and actuarial (gain) loss for other postretirement benefits were de minimis for fiscal years 2022, 2021 and 2020. 64 The amounts recognized on the Company’s Consolidated Balance Sheets related to the company-sponsored defined benefit plans and other postretirement benefit plans consisted of the following: Pension Benefits 2022 2021 2020 Amounts recognized in the consolidated balance sheets consist of the following: Prepaid benefit obligation—noncurrent $ 34 $ 89 $ 53 Accrued benefit obligation—noncurrent ( 1 ) ( 1 ) ( 2 ) Net amount recognized in the consolidated balance sheets $ 33 $ 88 $ 51 Amounts recognized in accumulated other comprehensive loss consist of the following: Net loss $ 159 $ 85 $ 98 Net loss recognized in accumulated other comprehensive loss $ 159 $ 85 $ 98 Additional information: Accumulated benefit obligation $ 717 $ 1,012 $ 1,057 Other Postretirement Plans 2022 2021 2020 Amounts recognized in the consolidated balance sheets consist of the following: Accrued benefit obligation—current $ ( 1 ) $ ( 1 ) $ — Accrued benefit obligation—noncurrent ( 4 ) ( 5 ) ( 6 ) Net amount recognized in the consolidated balance sheets $ ( 5 ) $ ( 6 ) $ ( 6 ) Amounts recognized in accumulated other comprehensive loss consist of the following: Gain, net of prior service cost $ 1 $ 1 $ — Net gain recognized in accumulated other comprehensive loss $ 1 $ 1 $ — Additional information: Accumulated postretirement benefit obligation $ 5 $ 6 $ 6 Weighted average assumptions used to determine benefit obligations as of period-end and net pension costs for the last three fiscal years were as follows: Pension Benefits 2022 2021 2020 Benefit obligation: Discount rate 5.50 % 3.00 % 2.80 % Annual compensation increase 2.96 % 2.96 % 2.96 % Net cost: Discount rate 3.00 % 2.80 % 3.50 % Expected return on plan assets 4.75 % 5.00 % 6.00 % Annual compensation increase 2.96 % 2.96 % 3.60 % Other Postretirement Plans 2022 2021 2020 Benefit obligation—discount rate 5.50 % 3.00 % 2.80 % Net cost—discount rate 3.00 % 2.80 % 3.50 % 65 The measurement date for the defined benefit and other postretirement benefit plans was December 31 for fiscal years 2022, 2021 and 2020. For 2022, 2021 and 2020, the Company applies the practical expedient under ASU No. 2015-4 to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. The mortality assumptions used to determine the pension benefit obligation as of December 31, 2022 are based on the Pri-2012 base mortality table with the MP-2020 mortality improvement scale published by the Society of Actuaries. A health care cost trend rate is used in the calculations of postretirement medical benefit plan obligations. The assumed healthcare trend rates for the last three fiscal years were as follows: 2022 2021 2020 Immediate rate 6.50 % 5.50 % 5.60 % Ultimate trend rate 4.50 % 4.50 % 4.50 % Year the rate reaches the ultimate trend rate 2037 2037 2037 Retirees covered under these plans are responsible for the cost of coverage in excess of the subsidy, including all future cost increases. In determining the discount rate, the Company determines the implied rate of return on a hypothetical portfolio of high-quality fixed-income investments, for which the timing and amount of cash outflows approximates the estimated pension plan payouts. The discount rate assumption is reviewed annually and revised as appropriate. The expected long-term rate of return on plan assets is derived from a mathematical asset model. This model incorporates assumptions on the various asset class returns, reflecting a combination of historical performance analysis and the forward-looking views of the financial markets regarding the yield on long-term bonds and the historical returns of the major stock markets. The rate of return assumption is reviewed annually and revised as deemed appropriate. The US Foods, Inc. Retirement Investment Committee (the “Committee”) has authority and responsibility to oversee the investment and management of the trust (“the Trust”) which holds the assets of the Retirement Plan and has adopted an Investment Policy to provide a framework for the management of the Trust’s assets, including the objectives and long-term strategy with respect to the investment program of the Trust. Pursuant to the Investment Policy, the primary goal of investing Trust assets is to ensure that pension liabilities are met over time, and that Trust assets are invested in a manner that maximizes the probability of meeting pension liabilities. The secondary goal of investing Trust assets is to maximize long-term investment return consistent with a reasonable level of risk. Through consultation with its investment consultant, the Committee has developed long-term asset allocation guidelines intended to achieve investment objectives relative to projected liabilities. Based on those projections, the Committee has approved a dynamic asset allocation strategy that increases the liability-hedging assets of the Trust and decreases the return-seeking assets of the Trust as the funded ratio of the Retirement Plan improves. Based upon the funded ratio of the Retirement Plan, an asset allocation of 30 % equity securities (U.S. large cap equities, U.S. small and mid-cap equities and non-U.S. equities) and 70 % fixed income securities (U.S. Treasuries, STRIPs, and investment grade corporate bonds) was targeted during the Company’s fiscal year 2022. The actual mix of assets in the Trust as of December 31, 2022 consisted of 32 % equity securities and 68 % fixed income securities. 66 The following table sets forth the fair value of our defined benefit plans’ assets by asset fair value hierarchy level: Asset Fair Value as of December 31, 2022 Level 1 Level 2 Level 3 Total Equities: Domestic $ 32 $ — $ — $ 32 International 2 — — 2 Mutual fund: International equities 22 — — 22 Long-term debt securities: Corporate debt securities: Domestic — 216 — 216 International — 27 — 27 U.S. government securities 7 — 7 Other 3 3 $ 56 $ 253 $ — 309 Common collective trust funds: Cash equivalents 24 Domestic equities 147 International equities 41 Treasury STRIPS 164 U.S. government securities 68 Total investments measured at net asset value as a practical expedient 444 Total defined benefit plans’ assets $ 753 Asset Fair Value as of January 1, 2022 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 2 $ — $ — $ 2 Equities: Domestic 44 — — 44 International 2 — — 2 Mutual fund: International equities 26 — — 26 Long-term debt securities: Corporate debt securities: Domestic — 286 — 286 International — 45 — 45 U.S. government securities — 7 — 7 $ 74 $ 338 $ — 412 Common collective trust funds: Cash equivalents 24 Domestic equities 219 International equities 49 Treasury STRIPS 303 U.S. government securities 96 Total investments measured at net asset value as a practical expedient 691 Total defined benefit plans’ assets $ 1,103 67 A description of the valuation methodologies used for assets measured at fair value is as follows: • Cash and cash equivalents are valued at original cost plus accrued interest. • Equities are valued at the closing price reported on the active market on which individual securities are traded. • Mutual funds are valued at the closing price reported on the active market on which individual funds are traded. • Long-term debt securities are valued at the estimated price a dealer will pay for the individual securities. • Common collective trust funds are measured at the net asset value as of the December 31, 2022 and 2021 measurement dates. This class represents investments in common collective trust funds that invest in: ◦ Equity securities, which may include common stocks, options and futures in actively managed funds; and ◦ Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) representing zero coupon Treasury securities with long-term maturities. ◦ U.S. government securities representing government bonds with long-term maturities. Estimated future benefit payments, under Company sponsored plans as of December 31, 2022, were as follows: Pension Benefits Other Postretirement Plans 2023 $ 50 $ 1 2024 47 1 2025 49 1 2026 50 — 2027 51 — Subsequent five years 241 2 The Company does not expect to make a significant contribution to the Retirement Plans in fiscal year 2023. Other Company Sponsored Benefit Plans —Certain employees are eligible to participate in the Company’s 401(k) savings plan. The Company made employer matching contributions to the 401(k) plan of $ 57 million, $ 52 million and $ 47 million for fiscal years 2022, 2021 and 2020, respectively. Multiemployer Pension Plans —The Company is also required to contribute to various multiemployer pension plans under the terms of collective bargaining agreement (“CBAs”) that cover certain of its union-represented employees. These plans are jointly administered by trustees for participating employers and the applicable unions. The risks of participating in multiemployer pension plans differ from traditional single-employer defined benefit plans as follows: • Assets contributed to a multiemployer pension plan by one employer may be used to provide benefits to the employees of other participating employers. • If a participating employer stops contributing to a multiemployer pension plan, the unfunded obligations of the plan may be borne by the remaining participating employers. • If the Company elects to stop participation in a multiemployer pension plan, or if the number of the Company’s employees participating in a plan is reduced to a certain degree over certain periods of time, the Company may be required to pay a withdrawal liability based upon the underfunded status of the plan. The Company’s participation in multiemployer pension plans for the fiscal year ended December 31, 2022 is outlined in the tables below. The Company considers significant plans to be those plans to which the Company contributed more than 5 % of total contributions to the plan in a given plan year, or for which the Company believes its estimated withdrawal liability, should it decide to voluntarily withdraw from the plan, may be material to the Company. For each plan that is considered individually significant to the Company, the following information is provided: • The EIN/Plan Number column provides the Employee Identification Number (“EIN”) and the three-digit plan number assigned to a plan by the Internal Revenue Service. • The most recent Pension Protection Act (“PPA”) zone status available for fiscal years 2022 and 2021 is for the plan years beginning in 2021 and 2020, respectively. The zone status is based on information provided to participating employers by each plan and is certified by the plan’s actuary. A plan in the red zone has been determined to be in critical status, or 68 critical and declining status, based on criteria established under the Internal Revenue Code (the “Code”), and is generally less than 65% funded. Plans are generally considered “critical and declining” if they are projected to become insolvent within 20 years. A plan in the yellow zone has been determined to be in endangered status, based on criteria established under the Code, and is generally less than 80% but more than 65% funded. A plan in the green zone has been determined to be neither in critical status nor in endangered status, and is generally at least 80% funded. • The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. In addition to regular plan contributions, participating employers may be subject to a surcharge if the plan is in the red zone. • The Surcharge Imposed column indicates whether a surcharge has been imposed on participating employers contributing to the plan. • The Expiration Dates column indicates the expiration dates of the CBAs to which the plans are subject. Pension Fund EIN/ Plan Number PPA Zone Status FIP/RP Status Pending/ Implemented Surcharge Imposed Expiration Dates 2022 2021 Minneapolis Food Distributing Industry Pension Plan 41-6047047/001 Green Green N/A No 04/05/2025 Teamster Pension Trust Fund of Philadelphia and Vicinity 23-1511735/001 Green Yellow Implemented No 02/13/2026 Local 703 I.B. of T. Grocery and Food Employees’ Pension Plan 36-6491473/001 Green Green N/A No 06/30/2026 United Teamsters Trust Fund A 13-5660513/001 Yellow Yellow Implemented No 05/01/2027 Warehouse Employees Local 169 and Employers Joint Pension Fund 23-6230368/001 Red Red Implemented No 02/13/2026 UFCW National Pension Fund 51-6055922 / 001 Green Green N/A No 04/03/2024 The following table provides information about the Company’s contributions to its multiemployer pension plans. For plans that are not individually significant to the Company, the total amount of the Company’s contributions is aggregated. Contributions (1)(2) Contributions That Exceed 5% of Total Plan Contributions (3) 2022 2021 2020 2021 2020 Pension Fund Minneapolis Food Distributing Industry Pension Plan $ 6 $ 5 $ 5 Yes Yes Teamster Pension Trust Fund of Philadelphia and Vicinity 5 4 4 No No Local 703 I.B. of T. Grocery and Food Employees’ Pension Plan 3 4 2 Yes Yes United Teamsters Trust Fund A 1 1 1 Yes Yes Warehouse Employees Local 169 and Employers Joint Pension Fund 1 1 1 Yes Yes UFCW National Pension Fund — 1 1 No No Other funds 31 27 30 — — $ 47 $ 43 $ 44 (1) Contributions made to these plans during the Company’s fiscal year, which may not coincide with the plans’ respective fiscal years. (2) Contributions do not include payments related to multiemployer pension plan withdrawals/settlements. (3) Indicates whether the Company was listed in the respective multiemployer pension plan Form 5500 for the applicable plan year as having made more than 5 % of total contributions to the plan. 69 If the Company elects to voluntarily withdraw from a multiemployer pension plan, it may be responsible for its proportionate share of the respective plan’s unfunded vested liability. Based on the latest information available from plan administrators, the Company estimates its aggregate withdrawal liability from the multiemployer pension plans in which it participates to be approximately $ 119 million as of December 31, 2022. Actual withdrawal liabilities incurred by the Company, if it were to withdraw from one or more plans, could be materially different from the estimates noted here, based on better or more timely information from plan administrators or other changes affecting the respective plans’ funded status. 19. EARNINGS PER SHARE The Company computes EPS in accordance with ASC 260, Earnings per Share . Basic EPS is computed by dividing net income (loss) 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 Preferred Stock, if dilutive in the period. For fiscal years 2022, 2021 and 2020, share-based awards representing 2 million, 2 million and 9 million underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. For fiscal years 2022, 2021, and 2020, Series A Preferred Stock representing 25 million, 25 million and 15 million of underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. The following table sets forth the computation of basic and diluted EPS: 2022 2021 2020 Numerator: Net income (loss) $ 265 $ 164 $ ( 226 ) Less: Series A Preferred Stock dividends (1) ( 37 ) ( 43 ) ( 28 ) Net income (loss) available to common shareholders $ 228 $ 121 $ ( 254 ) Denominator: Weighted-average common shares outstanding 224 222 220 Effect of dilutive share-based awards 2 3 — Effect of dilutive underlying shares of the Series A Preferred Stock (2) — — — Weighted-average dilutive shares outstanding 226 225 220 Net income (loss) per share: Basic $ 1.02 $ 0.55 $ ( 1.15 ) Diluted $ 1.01 $ 0.54 $ ( 1.15 ) (1) As discussed in Note 14 Convertible Preferred Stock, Series A Preferred Stock dividends for fiscal year 2020 and the first quarter of 2021 were paid-in-kind in the form of shares of Series A Preferred Stock. Series A Preferred Stock dividends for the remaining quarters of fiscal year 2021 and 2022 were paid in cash. (2) The Company applies the if-converted method to calculate the dilution impact of the Series A Preferred Stock, if dilutive in the period. Under the if-converted method, 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 Series A Preferred Stock outstanding and therefore no Series A convertible preferred stock dividend. 70 20. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS The following table presents changes in accumulated other comprehensive loss, by component, for the last three fiscal years: 2022 2021 2020 Accumulated other comprehensive loss components Retirement benefit obligations: Balance as of beginning of year (1) $ ( 19 ) $ ( 29 ) $ ( 52 ) Other comprehensive (loss) income before reclassifications ( 73 ) 14 29 Reclassification adjustments: Amortization of net loss (2) (3) — — 1 Settlements (2) (3) — — — Total before income tax ( 73 ) 14 30 Income tax provision ( 19 ) 4 7 Current year comprehensive income, net of tax ( 54 ) 10 23 Balance as of end of year (1) $ ( 73 ) $ ( 19 ) $ ( 29 ) Interest rate swaps: Balance as of beginning of year (1) $ — $ ( 5 ) $ ( 2 ) Change in fair value of interest rate swaps — 1 ( 11 ) Amounts reclassified to interest expense — 5 6 Total before income tax — 6 ( 5 ) Income tax provision (benefit) — 1 ( 2 ) Current year comprehensive income (loss), net of tax — 5 ( 3 ) Balance as of end of year (1) $ — $ — $ ( 5 ) Accumulated other comprehensive loss as of end of year (1) $ ( 73 ) $ ( 19 ) $ ( 34 ) (1) Amounts are presented net of tax. (2) Included in the computation of net periodic benefit costs. See Note 18, Retirement Plans, for additional information. (3) Included in other income—net in the Company’s Consolidated Statements of Comprehensive Income. 21. INCOME TAXES The income tax provision (benefit) for the fiscal years 2022, 2021 and 2020 consisted of the following: 2022 2021 2020 Current: Federal $ 69 $ 11 $ ( 20 ) State 10 1 3 Current income tax provision (benefit) 79 12 ( 17 ) Deferred: Federal 3 31 ( 39 ) State 14 7 ( 12 ) Deferred income tax provision (benefit) 17 38 ( 51 ) Total income tax provision (benefit) $ 96 $ 50 $ ( 68 ) The Company’s effective income tax rates for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 were 27 %, 23 % and 23 %, respectively. 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. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and the Company’s effective income tax rate in the future. 71 The reconciliation of the provision (benefit) for income taxes at the U.S. federal statutory income tax rate of 21 % to the Company’s income tax provision (benefit) for the fiscal years 2022, 2021, and 2020 is shown below: 2022 2021 2020 Federal income taxes computed at statutory rate $ 76 $ 45 $ ( 62 ) State income taxes, net of federal income tax benefit 21 10 ( 10 ) Share-based compensation ( 3 ) ( 5 ) 1 Non-deductible expenses 7 5 7 Change in the valuation allowance for deferred tax assets ( 12 ) ( 7 ) ( 1 ) Net operating loss expirations 9 5 3 Tax credits ( 1 ) ( 1 ) ( 3 ) Change in unrecognized tax benefits ( 1 ) ( 2 ) ( 3 ) Total income tax provision (benefit) $ 96 $ 50 $ ( 68 ) Temporary differences and carryforwards that created significant deferred tax assets and liabilities were as follows: December 31, 2022 January 1, 2022 Deferred tax assets: Operating lease liabilities $ 70 $ 70 Workers’ compensation, general and fleet liabilities 43 45 Financing lease and other long term liabilities 80 71 Net operating loss carryforwards 48 68 Other deferred tax assets 114 97 Total gross deferred tax assets 355 351 Less valuation allowance ( 16 ) ( 28 ) Total net deferred tax assets 339 323 Deferred tax liabilities: Property and equipment ( 166 ) ( 195 ) Operating lease assets ( 66 ) ( 68 ) Inventories ( 40 ) ( 40 ) Intangibles ( 304 ) ( 290 ) Financing lease and other long term liabilities ( 45 ) — Other deferred tax liabilities ( 16 ) ( 29 ) Total deferred tax liabilities ( 637 ) ( 622 ) Net deferred tax liability $ ( 298 ) $ ( 299 ) The net deferred tax liabilities presented in the Company’s Consolidated Balance Sheets were as follows: December 31, 2022 January 1, 2022 Noncurrent deferred tax assets $ — $ 8 Noncurrent deferred tax liability ( 298 ) ( 307 ) Net deferred tax liability $ ( 298 ) $ ( 299 ) 72 The Company had tax affected state net operating loss carryforwards of $ 48 million as of December 31, 2022. The Company’s net operating loss carryforwards expire as follows: State 2023-2027 $ 17 2028-2032 10 2033-2037 7 2038-2042 11 Indefinite 3 $ 48 The Company also has state credit carryforwards of $ 16 million. The U.S. federal and state net operating loss carryforwards in the income tax returns filed included unrecognized tax benefits taken in prior years. The net operating losses for which a deferred tax asset is recognized for financial statement purposes in accordance with ASC 740, Income Taxes, are presented net of these unrecognized tax benefits. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of the Company’s domestic net operating losses and tax credit carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. The Company maintained a valuation allowance on certain state net operating loss and tax credit carryforwards expected to expire unutilized as a result of insufficient forecasted taxable income in the carryforward period or the utilization of which is subject to limitation. A summary of the activity in the valuation allowance for the fiscal years 2022, 2021 and 2020 is as follows: 2022 2021 2020 Balance as of beginning of year $ 28 $ 35 36 (Benefit) expense recognized ( 12 ) ( 7 ) ( 1 ) Balance as of end of year $ 16 $ 28 $ 35 The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax laws and regulations in U.S. federal and state jurisdictions. The Company (1) records unrecognized tax benefits as liabilities in accordance with ASC 740, Income Taxes and (2) adjusts these liabilities when the Company’s judgment changes because of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of liabilities for unrecognized tax benefits. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. The Company recognizes an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Reconciliation of the beginning and ending amount of unrecognized tax benefits as of fiscal years 2022, 2021, and 2020 was as follows: Balance at December 28, 2019 $ 39 Gross increases due to positions taken in prior years 3 Decreases due to lapses of statute of limitations ( 1 ) Decreases due to changes in tax rates ( 5 ) Positions assumed in business acquisition 3 Balance at January 2, 2021 39 Gross increases due to positions taken in prior years 5 Gross decreases due to positions taken in prior years ( 2 ) Decreases due to lapses of statute of limitations ( 5 ) Decreases due to settlements with taxing authorities ( 5 ) Balance at January 1, 2022 32 Decreases due to lapses of statute of limitations ( 2 ) Balance at December 31, 2022 $ 30 73 The Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $15 million in the next 12 months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. Included in the balance of unrecognized tax benefits as of the end of fiscal years 2022, 2021 and 2020 was $ 27 million, $ 28 million and $ 34 million, respectively, of tax benefits that, if recognized, would affect the effective income tax rate. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had accrued interest and penalties of approximately $ 8 million and $ 7 million as of December 31, 2022 and January 1, 2022, respectively. The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. Our 2007 through 2021 U.S. federal income tax years, and various state income tax years from 2000 through 2021, remain subject to income tax examinations by the relevant taxing authorities. Prior to 2007, the Company was owned by Royal Ahold N.V. (“Ahold”). Ahold indemnified the Company for 2007 pre-closing consolidated U.S. federal and certain combined state income taxes, and the Company is responsible for all other taxes, interest and penalties. 22. 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 $ 1,077 million of purchase orders and purchase contract commitments as of December 31, 2022 to be purchased in fiscal year 2023 and $ 38 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 $ 41 million through December 2023, as of December 31, 2022. Additionally, the Company had electricity forward purchase commitments totaling $ 8 million through June 2024, as of December 31, 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. 23. US FOODS HOLDING CORP. CONDENSED FINANCIAL INFORMATION These condensed parent company financial statements should be read in conjunction with the Company’s consolidated financial statements. Under terms of the agreements governing its indebtedness, the net assets of USF are restricted from being transferred to US Foods in the form of loans, advances or dividends with the exception of income tax payments, share-based compensation settlements and minor administrative costs. USF had $ 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 December 31, 2022. See Note 16, Share-Based Compensation, Common Stock Issuances and Common Stock, for a discussion of the Company’s equity-related transactions. In the condensed parent company financial statements below, the investment in the operating subsidiary, USF, is accounted for using the equity method. 74 Condensed Parent Company Balance Sheets (In millions, except par value) December 31, 2022 January 1, 2022 ASSETS Investment in subsidiary 4,492 $ 4,266 Other assets 4 4 Total assets $ 4,496 $ 4,270 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY Deferred tax liabilities $ 1 $ 1 Total liabilities 1 1 Commitments and Contingencies (Note 22) Mezzanine equity: Series A convertible preferred stock, $0.01 par value—25 shares authorized; 0.5 issued and outstanding as of December 31, 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 December 31, 2022 and January 1, 2022 2 2 Additional paid-in capital 3,036 2,970 Retained earnings 1,010 782 Accumulated other comprehensive loss ( 73 ) ( 19 ) Treasury Stock, .5 and 0 shares, respectively ( 14 ) — Total shareholders’ equity 3,961 3,735 Total liabilities, mezzanine equity and shareholders’ equity $ 4,496 $ 4,270 Condensed Parent Company Statements of Comprehensive Income Fiscal Years Ended December 31, 2022 January 1, 2022 January 2, 2021 Income before income taxes $ — $ — $ — Income tax benefit — ( 4 ) ( 5 ) Income before equity in net earnings of subsidiary — 4 5 Equity in net earnings of subsidiary 265 160 ( 231 ) Net income (loss) 265 164 ( 226 ) Other comprehensive income—net of tax: Changes in retirement benefit obligations ( 54 ) 10 23 Unrecognized gain (loss) on interest rate swaps — 5 ( 3 ) Comprehensive income (loss) $ 211 $ 179 $ ( 206 ) Net income (loss) $ 265 $ 164 $ ( 226 ) Series A convertible preferred stock dividends ( 37 ) ( 43 ) ( 28 ) Net income (loss) available to common shareholders $ 228 $ 121 $ ( 254 ) 75 Condensed Parent Company Statements of Cash Flows Fiscal Years Ended December 31, 2022 January 1, 2022 January 2, 2021 Cash flows from operating activities: Net income (loss) $ 265 $ 164 $ ( 226 ) Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of subsidiary ( 265 ) ( 160 ) 231 Changes in operating assets and liabilities: Increase in other assets — ( 4 ) — Decrease in accrued expenses and other liabilities — — ( 5 ) Net cash used in operating activities — — — Cash flows from investing activities: Investment in subsidiary 51 28 ( 491 ) Net cash provided by (used in) investing activities 51 28 ( 491 ) Cash flows from financing activities: Net proceeds from issuance of Series A convertible preferred stock — — 491 Dividends paid on Series A convertible preferred stock ( 37 ) ( 28 ) — Repurchase of common stock (14) — — Net cash (used in) provided by financing activities ( 51 ) ( 28 ) 491 Net increase in cash, cash equivalents and restricted cash — — — Cash, cash equivalents and restricted cash—beginning of year — — — Cash, cash equivalents and restricted cash—end of year $ — $ — $ — 24. 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, the 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. No single customer accounted for more than 3 % of the Company’s consolidated net sales in fiscal year 2022, 2 % of the Company’s consolidated net sales for fiscal years 2021, and 3 % of the Company’s consolidated net sales in fiscal year 2020. However, customers who are members of one group purchasing organization accounted, in the aggregate, for approximately 12 % of the Company’s consolidated net sales in fiscal year 2022, 11 % of the Company’s consolidated net sales for fiscal year 2021 and 13 % of the Company’s consolidated net sales for fiscal years 2020. 25. SUBSEQUENT EVENTS Share Repurchase Program - For the month ended January 31, 2023, the Company repurchased 460,060 shares at an aggregate purchase price of approximately $17 million under the program. At January 31, 2023, there was approximately $469 million in remaining funds authorized under this program. 76 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.