US Foods Holding Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in tables presented in millions, unless otherwise noted) The following discussion and analysis should be read together with the accompanying unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and the audited consolidated financial statements and the notes thereto in the 2022 Annual Report. The following discussion and analysis contain certain financial measures that are not required by or presented in accordance with GAAP. We believe these non-GAAP measures provide meaningful supplemental information about our operating performance and liquidity. Information regarding reconciliations of and the rationale for these measures is discussed under “Non-GAAP Reconciliations” below. Results of operations for the 13 weeks and 39 weeks ended September 30, 2023 are compared to the 13 weeks and 39 weeks ended October 1, 2022, unless specifically noted otherwise. Overview At US Foods, we strive to inspire and empower chefs and foodservice operators to bring great food experiences to consumers. This mission is supported by our strategy of GREAT FOOD. MADE EASY.™ , which is centered on providing customers with the innovative products, business support and technology solutions they need to operate their businesses profitably. We operate as one business with standardized business processes, shared systems infrastructure, and an organizational model that optimizes national scale with local execution, allowing us to manage our business as a single operating segment. We have centralized activities where scale matters and our local field structure focuses on customer-facing activities. We supply approximately 250,000 customer locations nationwide. These customer locations include independent restaurants, chain restaurants, healthcare, hospitality, education and other customers. We provide more than 400,000 fresh, frozen, and dry food stock-keeping units, or SKUs, as well as non-food items, sourced from approximately 6,000 suppliers. Approximately 4,000 sales associates manage customer relationships at local, regional, and national levels. Our sales associates are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers. Our extensive network of 70 distribution facilities and fleet of approximately 6,500 trucks, along with more than 85 cash and carry locations, allow us to operate efficiently and provide high levels of customer service. This operating model allows us to leverage our nationwide scale and footprint while executing locally. Our operations, our industry and the U.S. economy continue to be impacted by higher than normal inflation, supply chain disruptions, and labor shortages. These factors also influence the buying patterns of our customers and potentially impact consumer confidence and spending. We are unable to predict the extent these factors will continue to impact our results of operations, however we continue to actively monitor these risks to our business. For the 13 weeks ended September 30, 2023, net sales increased, with a total case volume increase of 4.0% compared to the prior year driven by a 5.8% increase in independent restaurant case volume, a 7.7% increase in healthcare volume and a 5.8% increase in hospitality volume, partially offset by a 3.6% decrease in chain volume. For the 39 weeks ended September 30, 2023, net sales increased, with a total case volume increase of 4.0% compared to the prior year driven by a 6.1% increase in independent restaurant case volume, a 6.8% increase in healthcare volume and a 9.9% increase in hospitality volume, partially offset by a 2.7% decrease in chain volume. Total organic case volume increased 3.4% for the 13 weeks ended September 30, 2023 which includes 5.0% organic independent restaurant case volume growth. Total organic case volume increased 3.8% for the 39 weeks ended September 30, 2023 which includes 5.8% organic independent restaurant case volume growth. Operating Metrics Case growth —Case growth, by customer type (e.g., independent restaurants) is reported as of a point in time. Customers periodically are reclassified, based on changes in size or other characteristics, and when those changes occur, the respective customer’s historical volume follows its new classification. Organic growth —Organic growth includes growth from operating businesses that have been reflected in our results of operations for at least 12 months. Highlights For the 13 weeks and 39 weeks ended September 30, 2023, compared to the same period a year ago, total case volume increased 4.0% and 4.0%, respectively, and independent restaurant case volume increased 5.8% and 6.1%, respectively. For the 13 weeks and 39 weeks ended September 30, 2023, compared to the same period a year ago, total organic case volume increased 3.4% and 3.8%, respectively, and independent case volume increased 5.0% and 5.8%, respectively. For the 13 weeks and 39 weeks ended September 30, 2023, independent restaurant case growth was negatively impacted 0.8% and 0.8%, respectively, from slower growth in CHEF'STORE. Net sales increased $189 million, or 2.1%, for the 13 weeks ended September 30, 2023, driven primarily by case volume growth, partially offset by food cost deflation of 1.3%. Net sales increased $1,119 million, or 4.4%, for the 39 weeks ended September 30, 2023, driven primarily by case volume growth and inflation of 0.6% for the 39 weeks ended September 30, 2023. 19 Gross profit increased $82 million, or 5.6%, to $1,542 million for the 13 weeks ended September 30, 2023 and increased $520 million, or 12.9%, to $4,558 million for the 39 weeks ended September 30, 2023. For both the 13 weeks and 39 weeks ended September 30, 2023, these increase were due to an increase in total case volume and cost of goods sold optimization. For the 39 weeks ended September 30, 2023, these increases were also attributed to freight income from improved inbound logistics and optimized pricing. Gross profit was negatively impacted by a LIFO expense of $37 million and $42 million for the 13 weeks and 39 weeks ended September 30, 2023 and $6 million and $143 million for the 13 weeks and 39 weeks ended October 1, 2022, respectively. As a percentage of net sales, gross profit was 16.9% for the 13 weeks ended September 30, 2023, compared to 16.4% for the prior year period and was 17.1% for the 39 weeks ended September 30, 2023, compared to 15.8% for the prior year period. Total operating expenses increased $66 million, or 5.3%, to $1,312 million for the 13 weeks ended September 30, 2023 and increased $179 million, or 4.9%, to $3,819 million for the 39 weeks ended September 30, 2023. Operating expenses increased primarily due to increased total case volume and higher seller compensation costs. These increases were partially offset by lower distribution cost per case from cost savings initiatives including routing improvements and focused efforts positively impacting labor turnover and productively as well as lower fuel costs. As a percentage of net sales, operating expenses were 14.4% for the 13 weeks ended September 30, 2023, compared to 14.0% for the prior year period and were 14.3% for the 39 weeks ended September 30, 2023 and the comparable period in the prior year. 20 Results of Operations The following table presents selected historical results of operations for the periods indicated: 13 Weeks Ended 39 Weeks Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Consolidated Statements of Operations Data: Net sales $ 9,106 $ 8,917 $ 26,661 $ 25,542 Cost of goods sold 7,564 7,457 22,103 21,504 Gross profit 1,542 1,460 4,558 4,038 Operating expenses: Distribution, selling and administrative costs 1,312 1,246 3,819 3,640 Total operating expenses 1,312 1,246 3,819 3,640 Operating income 230 214 739 398 Other income—net (1) (5) (4) (16) Interest expense—net 81 65 244 180 Loss on extinguishment of debt 21 — 21 — Income before income taxes 129 154 478 234 Income tax (benefit) provision 34 45 119 62 Net income 95 109 359 172 Series A Preferred Stock Dividends (see Note 13) — (9) (7) (27) Net income available to common shareholders $ 95 $ 100 $ 352 $ 145 Percentage of Net Sales: Gross profit 16.9 % 16.4 % 17.1 % 15.8 % Operating expenses 14.4 % 14.0 % 14.3 % 14.3 % Operating income 2.5 % 2.4 % 2.8 % 1.6 % Net income 1.0 % 1.2 % 1.3 % 0.7 % Adjusted EBITDA (1) 4.4 % 3.9 % 4.4 % 3.8 % Other Data: Cash flows—operating activities $ 282 $ 354 $ 935 $ 613 Cash flows—investing activities (195) (57) (301) (197) Cash flows—financing activities (120) (128) (499) (198) Capital expenditures 59 58 167 201 EBITDA (1) 307 311 1,012 687 Adjusted EBITDA (1) 402 351 1,171 960 Adjusted net income (1) 174 151 498 400 Free cash flow (2) 223 296 768 412 (1) EBITDA is defined as net income, plus interest expense—net, income tax provision, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for: (1) restructuring costs and asset impairment charges; (2) share-based compensation expense; (3) the impact of LIFO reserve adjustments; (4) loss on extinguishment of debt; (5) business transformation costs; and (6) other gains, losses, or costs as specified in the agreements governing our indebtedness. Adjusted net income is defined as net income excluding the items used to calculate Adjusted EBITDA listed above, except for amortization expense, and further adjusted for the tax effect of the exclusions and discrete tax items. EBITDA, Adjusted EBITDA, and Adjusted net income as presented are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below. (2) Free cash flow is defined as cash flows provided by operating activities less cash capital expenditures. Free cash flow as presented is a supplemental measure of our liquidity that is not required by, or presented in accordance with, GAAP. It is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP. For additional information, see the discussion under the caption “Non-GAAP Reconciliations” below. 21 Non-GAAP Reconciliations We provide EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow as supplemental measures to GAAP financial measures regarding our operating performance and liquidity. These non-GAAP financial measures, as defined above, exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because they exclude amounts that we do not consider part of our core operating results when assessing our performance. We believe that Adjusted net income is a useful measure of operating performance for both management and investors because it excludes items that are not reflective of our core operating performance and provides an additional view of our operating performance including depreciation, interest expense and income taxes on a consistent basis from period to period. We believe that Adjusted net income may be used by investors, analysts and other interested parties to facilitate period-over-period comparisons and provides additional clarity as to how factors and trends impact our operating performance. Management uses these non-GAAP financial measures (1) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors as they assist in highlighting trends, (2) to set internal sales targets and spending budgets, (3) to measure operational profitability and the accuracy of forecasting, (4) to assess financial discipline over operational expenditures, and (5) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used in connection with certain covenants and activity restrictions under the agreements governing our indebtedness. We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry. EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP. We use Free cash flow as a supplemental measure to GAAP financial measures regarding the liquidity of our operations. We measure Free cash flow as cash flows provided by operating activities less cash capital expenditures. We believe that Free cash flow is a useful financial metric to assess our ability to pursue business opportunities and investments. Free cash flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP. We caution readers that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the same manner. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by presenting the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures. 22 The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow to the most directly comparable GAAP financial performance and liquidity measures for the periods indicated: 13 Weeks Ended 39 Weeks Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 Net income available to common shareholders $ 95 $ 100 $ 352 $ 145 Series A Preferred Stock Dividends (see Note 13) — (9) (7) (27) Net income 95 109 359 172 Interest expense—net 81 65 244 180 Income tax provision 34 45 119 62 Depreciation expense 85 81 256 240 Amortization expense 12 11 34 33 EBITDA 307 311 1012 687 Adjustments: Restructuring costs and asset impairment charges (1) 2 — 2 — Share-based compensation expense (2) 15 13 43 34 LIFO reserve adjustment (3) 37 6 42 143 Loss on extinguishment of debt (4) 21 — 21 — Business transformation costs (5) 9 12 16 41 Business acquisition and integration related costs and other (6) 11 9 35 53 COVID-19 other related expenses (7) — — — 2 Adjusted EBITDA 402 351 1171 960 Depreciation expense (85) (81) (256) (240) Interest expense—net (81) (65) (244) (180) Income tax provision, as adjusted (8) (62) (54) (173) (140) Adjusted net income $ 174 $ 151 $ 498 $ 400 Cash flow Cash flows from operating activities $ 282 $ 354 $ 935 $ 613 Capital expenditures (59) (58) (167) (201) Free cash flow $ 223 $ 296 $ 768 $ 412 (1) Consists primarily of severance and related costs, organizational realignment costs and other asset impairment charges (2) Share-based compensation expense for expected vesting of stock awards and employee stock purchase plan (3) Represents the impact of LIFO reserve adjustments. (4) Includes early redemption premium and the write-off of certain pre-existing debt issuance costs. See Note 10, Debt, in our consolidated financial statements for additional information (5) Transformational costs represent non-recurring expenses prior to formal launch of strategic projects with anticipated long-term benefits to the Company. These costs generally relate to third party consulting and non-capitalizable construction or technology. For the 13 weeks and 39 weeks ended September 30, 2023, business transformation costs related to projects associated with information technology infrastructure initiatives. For the 13 weeks and 39 weeks ended October 1, 2022, business transformation costs consist of new facility openings, supply chain strategy improvements, and information technology infrastructure initiatives. (6) Includes: (i) aggregate acquisition and integration related costs of $10 million and $6 million for the 13 weeks ended September 30, 2023 and October 1, 2022, respectively, and $31 million and $18 million for the 39 weeks ended September 30, 2023 and October 1, 2022, respectively ; (ii) CEO sign on bonus of $3 million for the 39 weeks ended September 30, 2023 (iii) contested proxy and related legal and consulting costs of $21 million for the 39 weeks ended October 1, 2022, and (iv) CEO severance for $5 million for the 39 weeks ended October 1, 2022 and (v) other gains, losses or costs that we are permitted to addback for purposes of calculating Adjusted EBITDA under certain agreements governing our indebtedness. (7) Includes COVID-19 related costs that we are permitted to addback for purposes of calculating Adjusted EBITDA under certain agreements governing our indebtedness. (8) Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted net income and the removal of applicable discrete tax items. Applicable discrete tax items include changes in tax laws or rates, changes related to prior year unrecognized tax benefits, discrete changes in valuation allowances, and excess tax benefits associated with share-based compensation. The tax effect of pre-tax items excluded from Adjusted net income is computed using a statutory tax rate after taking into account the impact of permanent differences and valuation allowances. 23 A reconciliation between the GAAP income tax provision and the income tax provision, as adjusted, is as follows: 13 Weeks Ended 39 Weeks Ended September 30, 2023 October 1, 2022 September 30, 2023 October 1, 2022 GAAP income tax provision $ 34 $ 45 $ 119 $ 62 Tax impact of pre-tax income adjustments 27 11 47 75 Discrete tax items 1 (2) 7 3 Income tax provision, as adjusted $ 62 $ 54 $ 173 $ 140 Comparison of Results 13 Weeks Ended September 30, 2023 and October 1, 2022 Highlights • Net income decreased $14 million to $95 million in 2023. • Adjusted EBITDA increased $51 million, or 14.5%, to $402 million in 2023. As a percentage of net sales, Adjusted EBITDA was 4.4% in 2023, compared to 3.9% in 2022. • Net sales increased $189 million, or 2.1%, to $9,106 million in 2023. • Total case volume increased 4.0% and independent restaurant case volume increased 5.8%. • Total organic case volum e increased 3.4% and organic independent restaurant case volume increased 5.0%. • Operating income increased $16 million, to $230 million in 2023. Net Sales Net sales increased $189 million, or 2.1%, to $9,106 million in 2023 driven by case volume growth and contributions from the Renzi Foodservice acquisition, partially offset by food cost deflation of 1.3%. Total case volume increased 4.0% driven by a 5.8% increase in independent restaurant case volume, a 5.8% increase in hospitality volume and a 7.7% increase in healthcare volume, offset by a 3.6% decrease in chain volume. Total organic case volume increased 3.4% and organic independent restaurant case volume increased 5.0%. Independent restaurant case growth was negatively impacted 0.8% from slower growth in CHEF'STORE. Broadline independent case growth was 6.6%. Sales of private brands represented approximately 34% of net sales in both 2023 and 2022. Gross Profit Gross profit increased $82 million, or 5.6%, to $1,542 million in 2023 primarily as a result of an increase in total case volume and cost of goods sold optimization, partially offset by an unfavorable year-over-year LIFO adjustment. Our LIFO method of inventory costing resulted in an expense of $37 million in 2023 compared to expense of $6 million in 2022, related to a reduction in inventory values in multiple product categories. Gross profit as a percentage of net sales was 16.9% in 2023, compared to 16.4% in 2022, due to the aforementioned factors. Operating Expenses Operating expenses, comprised of distribution, selling and administrative costs, increased $66 million, or 5.3%, to $1,312 million in 2023. Operating expenses as a percentage of net sales were 14.4% in 2023, compared to 14.0% in 2022. Operating expenses increased primarily due to increased total case volume and higher seller compensation costs. These increases were partially offset by lower distribution cost per case from cost savings initiatives including routing improvements and focused efforts positively impacting labor turnover and productivity as well as lower fuel costs. Operating Income Our operating income was $230 million in 2023, compared to operating income of $214 million in 2022. The increase in operating income was due to the factors discussed in the relevant sections above. Other Income—Net Other income—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $1 million and $5 million in 2023 and 24 2022, respectively. The decrease in other income-net is due primarily to a decrease in the expected return on pension assets compared to 2022. Interest Expense—Net Interest expense—net increased $16 million to $81 million in 2023 primarily due to an increase in interest rates, partially offset by lower outstanding debt in 2023 compared to 2022. Income Taxes For the 13 weeks ended September 30, 2023, the Company’s effective income tax rate of 27% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. The discrete tax items were not material individually or in the aggregate.For the 13 weeks ended October 1, 2022, our effective income tax rate of 29% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $2 million primarily related to a tax benefit shortfall associated with share-based compensation. Net Income Our net income was $95 million in 2023, compared to a net income of $109 million in 2022. The decrease in net income was due to the relevant factors discussed above. 39 Weeks Ended September 30, 2023 and October 1, 2022 Highlights • Net income increased $187 million to $359 million in 2023. • Adjusted EBITDA increased $211 million or 22.0%, to $1,171 million in 2023. As a percentage of net sales, Adjusted EBITDA was 4.4% in 2023, compared to 3.8% in 2022. • Net sales increased $1,119 million, or 4.4%, to $26,661 million in 2023. • Total case volume increased 4.0% and independent restaurant case volume increased 6.1%. • Total organic case volume increased 3.8% and organic independent restaurant case volume increased 5.8%. • Operating income increased $341 million, to $739 million in 2023. Net Sales Net sales increased $1,119 million, or 4.4%, to $26,661 million in 2023 driven by case growth and food cost inflation of 0.6%. Total case volume increased 4.0% driven by a 6.1% increase in independent restaurant case volume, a 9.9% increase in hospitality volume and a 6.8% increase in healthcare volume, partially offset by a 2.7% decrease in chain volume. Total organic case volume increased 3.8% and organic independent restaurant case volume increased 5.8%. Independent restaurant case growth was negatively impacted 0.8% from slower growth in CHEF'STORE. Broadline independent restaurant case growth was 6.9%. Sales of private brands represented approximately 34% of net sales in both 2023 and 2022. Gross Profit Gross profit increased $520 million, or 12.9%, to $4,558 million in 2023 primarily as a result of an increase in total case volume, cost of goods sold optimization, increased freight income from improved inbound logistics, optimized pricing and a favorable year-over-year LIFO adjustment. Our LIFO method of inventory costing resulted in an expense of $42 million in 2023, compared to expense of $143 million in 2022. 2023 LIFO expense is driven by a reduction in inventory values in multiple categories. Gross profit as a percentage of net sales was 17.1% in 2023, compared to 15.8% in 2022, due to the aforementioned factors. Operating Expenses Operating expenses, comprised of distribution, selling and administrative costs, increased $179 million, or 4.9%, to $3,819 million in 2023. Operating expenses as a percentage of net sales were 14.3% in 2023, consistent with the same period in the prior year.. Operating expenses increased primarily due to increased total case volume and higher seller compensation costs. These increases were partially offset by lower distribution cost per case from cost savings initiatives including routing improvements and focused efforts positively impacting labor turnover and productivity as well as lower fuel costs. 25 Operating Income Our operating income was $739 million in 2023, compared to operating income of $398 million in 2022. The increase in operating income was due to the factors discussed in the relevant sections above. Other Income—Net Other income—net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $4 million and $16 million in 2023 and 2022, respectively. The decrease in other income-net is due primarily to a decrease in the expected return on pension assets compared to 2022. Interest Expense—Net Interest expense—net increased $64 million to $244 million in 2023 primarily due to an increase in interest rates, partially offset by lower outstanding debt in 2023 compared to 2022. Income Taxes For the 39 weeks ended September 30, 2023, our effective income tax rate of 25% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $6 million primarily related to excess tax benefits associated with share-based compensation and a tax benefit of $4 million, primarily related to adjustments to prior year tax provision estimates. For the 39 weeks ended October 1, 2022, our effective income tax rate of 26% was equivalent to the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $3 million, primarily related to excess tax benefits associated with share-based compensation. Net Income Our net income was $359 million in 2023, compared to a net income of $172 million in 2022. The improvement in net income was due to the relevant factors discussed above. Liquidity and Capital Resources Our ongoing operations and strategic objectives require working capital and continuing capital investment. Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements. As of September 30, 2023, the Company had approximately $2.2 billion in cash and available liquidity. Indebtedness The aggregate outstanding balance of our indebtedness was $4,686 million, net of $35 million of unamortized deferred financing costs, as of September 30, 2023. We had no outstanding borrowings and had issued letters of credit totaling $487 million under the ABL Facility as of September 30, 2023. There was remaining capacity of $1,813 million under the ABL Facility as of September 30, 2023. The 2019 Incremental Term Loan Facility had an outstanding balance of $1,108 million, net of $12 million of unamortized deferred financing costs, as of September 30, 2023. The 2021 Incremental Term Loan Facility had an outstanding balance of $718 million, net of $3 million of unamortized deferred financing costs, as of September 30, 2023. The Unsecured Senior Notes due 2028 had an outstanding balance of $495 million, net of $5 million of unamortized deferred financing costs, as of September 30, 2023. The Unsecured Senior Notes due 2029 had an outstanding balance of $894 million, net of $6 million of unamortized deferred financing costs, as of September 30, 2023. The Unsecured Senior Notes due 2030 had an outstanding balance of $496 million, net of $4 million of unamortized deferred financing costs, as of September 30, 2023. The Unsecured Senior Notes due 2032 had an outstanding balance of $495 million, net of $5 million of unamortized deferred financing costs, as of September 30, 2023. We also had $472 million of obligations under financing leases for transportation equipment and building leases as of September 30, 2023. 26 The ABL Facility will mature in 2027. The 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility will mature in 2026 and 2028, respectively. The Unsecured Senior Notes due 2028, the Unsecured Senior Notes due 2029, the Unsecured Senior Notes due 2030 and the Unsecured Senior Notes due 2032 will mature in 2028, 2029, 2030 and 2032, respectively. The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on our assets, pay dividends, or engage in mergers or consolidations. USF had approximately $1.9 billion of restricted payment capacity under these covenants and approximately $2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as of September 30, 2023. We believe that the combination of cash generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months. Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding. We are not aware of any facts that indicate our lenders will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties. From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, our debt trading levels, our cash position, and other considerations. Any potential debt reduction or other debt retirement could require significant use of our other available liquidity and capital resources. See Note 10, Debt, in our consolidated financial statements, for a further description of our indebtedness. Cash Flows The following table presents condensed highlights from our Consolidated Statements of Cash Flows for the periods presented: 39 Weeks Ended September 30, 2023 October 1, 2022 Net income $ 359 $ 172 Changes in operating assets and liabilities 188 124 Other adjustments 388 317 Net cash provided by operating activities 935 613 Net cash used in investing activities (301) (197) Net cash used in financing activities (499) (198) Net increase in cash, and cash equivalents and restricted cash 135 218 Cash, cash equivalents and restricted cash—beginning of period 211 148 Cash, cash equivalents and restricted cash—end of period $ 346 $ 366 Operating Activities Cash flows provided by operating activities was $935 million for the 39 weeks ended September 30, 2023, representing an increase of $322 million as compared to cash flows provided by operating activities of $613 million for the 39 weeks ended October 1, 2022 driven by earnings growth and strong working capital management for the 39 weeks ended September 30, 2023. Investing Activities During the 39 weeks ended September 30, 2023, the Company completed the asset acquisition of Renzi Foodservice. Total consideration consisted of cash of approximately $142 million. In addition, cash flows used in investing activities in the 39 weeks ended September 30, 2023 and October 1, 2022 included cash expenditures of $167 million and $201 million, respectively, on investments in information technology, property and equipment for fleet replacement and maintenance of distribution facilities. We expect total cash capital expenditures in fisc al year 2023 to be between $290 million and $310 million, exclusive of approximately $120 million of capital expenditures under our fleet financing leases. We expect to fund our capital expenditures with available cash or cash generated from operations and through fleet financing. 27 Financing Activities Cash flows used by financing activities in the 39 weeks ended September 30, 2023 included $95 million of scheduled payments under our Term Loan Facilities and financing leases, $1 billion for refinancing of the Unsecured Senior Notes due 2025, $10 million of financing fees related to the refinancing, $65 million of voluntary prepayments of our 2021 Incremental Term Loan Facility, $120 million of voluntary prepayments of our 2019 Incremental Term Loan Facility, $3 million associated with interest rate cap purchases, $7 million of dividends on our Series A Preferred Stock and no net payments under the ABL Facility. Financing activities in the 39 weeks ended September 30, 2023 also included $229 million common stock repurchased under the Share Repurchase Program, $2 million of excise tax associated with common stock repurchases, $19 million of proceeds received from stock purchases under our employee stock purchase plan and $23 million of proceeds from the exercise of employee stock options, which were offset by $12 million of employee tax withholdings paid in connection with the vesting of stock awards. We incurred approximately $26 million total of lender fees and third party costs in connection with our issuance of the Unsecured Senior Notes due 2028 and the Unsecured Senior Notes due 2032, consisting of a $16 million redemption premium related to the Secured Senior Notes due 2025 and $10 million of costs associated with the issuance of the Unsecured Senior Notes due 2028 and the Unsecured Senior Notes due 2032, which were capitalized as deferred financing costs. We incurred approximately $1 million total of lender fees and third party costs in connection with the repricing of the 2021 Incremental Term Loan Facility, which were capitalized as deferred financing costs. Cash flows used by financing activities in the 39 weeks ended October 1, 2022 included $80 million of scheduled payments under our Term Loan Facilities and financing leases, $100 million of voluntary prepayments of our 2021 Incremental Term Loan Facility, $27 million of dividends on our Series A Preferred Stock and no net payments under the ABL Facility. Financing activities in the 39 weeks ended October 1, 2022 also included $17 million of proceeds received from stock purchases under our employee stock purchase plan and $12 million of proceeds from the exercise of employee stock options, which were offset by $16 million of employee tax withholdings paid in connection with the vesting of stock awards. Other Obligations and Commitments There have been no material changes in the Company’s cash obligations and commitments since the end of fiscal year 2022. Refer to Item 7 of our 2022 Annual Report for additional information regarding the Company’s cash obligations and commitments as of the end of fiscal year 2022. Retirement Plans See Note 12, Retirement Plans, in our consolidated financial statements for a description of our retirement plans. Off-Balance Sheet Arrangements We had $487 million of letters of credit outstanding primarily securing USF’s obligations with respect to its insurance program and certain real estate leases, under the ABL Facility as of September 30, 2023. Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies and Estimates We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing the Company’s consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Annual Report includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the 39 weeks ended September 30, 2023. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements. 28