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EXCEL - IDEA: XBRL DOCUMENT - US FOODS, INC. | Financial_Report.xls |
EX-31.2 - EX-31.2 - US FOODS, INC. | d752324dex312.htm |
EX-32.1 - EX-32.1 - US FOODS, INC. | d752324dex321.htm |
EX-10.50 - EX-10.50 - US FOODS, INC. | d752324dex1050.htm |
EX-32.2 - EX-32.2 - US FOODS, INC. | d752324dex322.htm |
EX-31.1 - EX-31.1 - US FOODS, INC. | d752324dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 333-185732
US Foods, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 36-3642294 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
9399 W. Higgins Road, Suite 500
Rosemont, IL 60018
(847) 720-8000
(Address, including Zip Code, and telephone number, including area code, of registrants principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant is a privately held corporation and its equity shares are not publicly traded. At August 12, 2014, 1,000 shares of the registrants common stock were outstanding, all of which were owned by USF Holding Corp.
Table of Contents
1
Table of Contents
US FOODS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except for share data)
June 28, | December 28, | |||||||
2014 | 2013 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 317,366 | $ | 179,744 | ||||
Accounts receivable, less allowances of $25,058 and $25,151 |
1,303,702 | 1,225,719 | ||||||
Vendor receivables, less allowances of $3,278 and $2,661 |
128,996 | 97,361 | ||||||
Inventories net |
1,079,738 | 1,161,558 | ||||||
Legal settlement indemnification receivable |
297,000 | | ||||||
Prepaid expenses |
76,268 | 75,604 | ||||||
Deferred taxes |
12,327 | 13,557 | ||||||
Assets held for sale |
15,682 | 14,554 | ||||||
Other current assets |
17,099 | 6,644 | ||||||
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|
|
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Total current assets |
3,248,178 | 2,774,741 | ||||||
PROPERTY AND EQUIPMENT Net |
1,764,234 | 1,748,495 | ||||||
GOODWILL |
3,835,477 | 3,835,477 | ||||||
OTHER INTANGIBLES Net |
678,673 | 753,840 | ||||||
DEFERRED FINANCING COSTS |
30,476 | 39,282 | ||||||
OTHER ASSETS |
36,904 | 33,742 | ||||||
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|
|
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TOTAL ASSETS |
$ | 9,593,942 | $ | 9,185,577 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Bank checks outstanding |
$ | 188,899 | $ | 185,369 | ||||
Accounts payable |
1,343,002 | 1,181,452 | ||||||
Accrued expenses and other current liabilities |
405,896 | 423,635 | ||||||
Accrued legal settlement |
297,000 | | ||||||
Current portion of long-term debt |
45,499 | 35,225 | ||||||
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|
|
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Total current liabilities |
2,280,296 | 1,825,681 | ||||||
LONG-TERM DEBT |
4,770,611 | 4,735,248 | ||||||
DEFERRED TAX LIABILITIES |
425,031 | 408,153 | ||||||
OTHER LONG-TERM LIABILITIES |
312,367 | 334,808 | ||||||
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|
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Total liabilities |
7,788,305 | 7,303,890 | ||||||
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COMMITMENTS AND CONTINGENCIES (See Note 15) |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Common stock, $1.00 par value authorized, issued, and outstanding, 1,000 shares |
1 | 1 | ||||||
Additional paid-in capital |
2,331,021 | 2,325,223 | ||||||
Accumulated deficit |
(524,747 | ) | (440,858 | ) | ||||
Accumulated other comprehensive loss |
(638 | ) | (2,679 | ) | ||||
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|
|
|
|||||
Total shareholders equity |
1,805,637 | 1,881,687 | ||||||
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 9,593,942 | $ | 9,185,577 | ||||
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See Notes to Unaudited Consolidated Financial Statements.
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Table of Contents
US FOODS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands)
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
NET SALES |
$ | 5,897,944 | $ | 5,658,748 | $ | 11,354,579 | $ | 11,063,670 | ||||||||
COST OF GOODS SOLD |
4,933,697 | 4,686,933 | 9,495,645 | 9,182,716 | ||||||||||||
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|
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Gross profit |
964,247 | 971,815 | 1,858,934 | 1,880,954 | ||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Distribution, selling and administrative costs |
900,240 | 869,847 | 1,777,598 | 1,753,817 | ||||||||||||
Restructuring and tangible asset impairment charges |
(314 | ) | 1,776 | (102 | ) | 3,568 | ||||||||||
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|
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Total operating expenses |
899,926 | 871,623 | 1,777,496 | 1,757,385 | ||||||||||||
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OPERATING INCOME |
64,321 | 100,192 | 81,438 | 123,569 | ||||||||||||
INTEREST EXPENSE Net |
73,626 | 78,522 | 146,804 | 160,348 | ||||||||||||
LOSS ON EXTINGUISHMENT OF DEBT |
| 17,829 | | 41,796 | ||||||||||||
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|
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Income (loss) before income taxes |
(9,305 | ) | 3,841 | (65,366 | ) | (78,575 | ) | |||||||||
INCOME TAX PROVISION (BENEFIT) |
9,360 | (12,167 | ) | 18,523 | 125 | |||||||||||
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NET INCOME (LOSS) |
(18,665 | ) | 16,008 | (83,889 | ) | (78,700 | ) | |||||||||
OTHER COMPREHENSIVE INCOME (LOSS) Net of tax: |
||||||||||||||||
Changes in retirement benefit obligations, net of income tax |
1,057 | 5,183 | 2,041 | 7,517 | ||||||||||||
Changes in interest rate swap derivative, net of income tax |
| | | 542 | ||||||||||||
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COMPREHENSIVE INCOME (LOSS) |
$ | (17,608 | ) | $ | 21,191 | $ | (81,848 | ) | $ | (70,641 | ) | |||||
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See Notes to Unaudited Consolidated Financial Statements.
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Table of Contents
US FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
26-Weeks Ended | ||||||||
June 28, | June 29, | |||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (83,889 | ) | $ | (78,700 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
205,049 | 191,012 | ||||||
Gain on disposal of property and equipment |
(2,675 | ) | (1,636 | ) | ||||
Loss on extinguishment of debt |
| 41,796 | ||||||
Tangible asset impairment charges |
1,580 | 1,860 | ||||||
Amortization of deferred financing costs |
9,057 | 8,990 | ||||||
Amortization of Senior Notes original issue premium |
(1,664 | ) | (1,665 | ) | ||||
Deferred tax provision (benefit) |
18,112 | (131 | ) | |||||
Share-based compensation expense |
6,198 | 5,897 | ||||||
Provision for doubtful accounts |
9,173 | 11,167 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in receivables |
(117,988 | ) | (81,599 | ) | ||||
Decrease in inventories |
71,279 | 27,081 | ||||||
Increase in prepaid expenses and other assets |
(4,455 | ) | (5,037 | ) | ||||
Increase (decrease) in accounts payable and bank checks outstanding |
174,626 | (18,181 | ) | |||||
(Decrease) increase in accrued expenses and other liabilities |
(37,018 | ) | 8,640 | |||||
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Net cash provided by (used in) operating activities |
247,385 | 109,494 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales of property and equipment |
7,340 | 11,466 | ||||||
Purchases of property and equipment |
(74,900 | ) | (97,198 | ) | ||||
Insurance recoveries related to property and equipment |
2,000 | | ||||||
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Net cash provided by (used in) investing activities |
(65,560 | ) | (85,732 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from debt refinancing |
| 854,485 | ||||||
Proceeds from debt borrowings |
770,450 | 888,088 | ||||||
Payment for debt financing costs and fees |
| (29,135 | ) | |||||
Principal payments on debt and capital leases |
(814,252 | ) | (1,400,063 | ) | ||||
Repurchase of senior subordinated notes |
| (375,144 | ) | |||||
Proceeds from parent company stock sales |
197 | 475 | ||||||
Parent company common stock repurchased |
(598 | ) | (2,030 | ) | ||||
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Net cash provided by (used in) financing activities |
(44,203 | ) | (63,324 | ) | ||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
137,622 | (39,562 | ) | |||||
CASH AND CASH EQUIVALENTS Beginning of period |
179,744 | 242,457 | ||||||
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CASH AND CASH EQUIVALENTS End of period |
$ | 317,366 | $ | 202,895 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION : |
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Cash paid (received) during the period for: |
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Interest (net of amounts capitalized) |
$ | 141,108 | $ | 167,342 | ||||
Income taxes paid (refunded) net |
(37 | ) | 243 | |||||
Property and equipment purchases included in accounts payable |
10,173 | 11,975 | ||||||
Capital lease additions |
90,204 | 51,945 | ||||||
Receivable for insurance recoveries related to property and equipment |
893 | |
See Notes to Unaudited Consolidated Financial Statements.
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Table of Contents
US FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. | OVERVIEW AND BASIS OF PRESENTATION |
US Foods, Inc. and its consolidated subsidiaries is referred to here as we, our, us, the Company, or US Foods. We are a 100% owned subsidiary of USF Holding Corp.
Ownership On July 3, 2007 (the Closing Date), USF Holding Corp., through a wholly owned subsidiary, acquired all of our predecessor companys common stock and certain related assets from Koninklijke Ahold N.V. (Ahold) for approximately $7.2 billion (the Acquisition). Through a series of related transactions, USF Holding Corp. became our direct parent company. USF Holding Corp. is a corporation formed and controlled by investment funds associated with or managed by Clayton, Dubilier & Rice, Inc. (CD&R), and Kohlberg Kravis Roberts & Co. (KKR) (collectively the Sponsors).
Proposed Acquisition by Sysco On December 8, 2013, our parent company USF Holding Corp., entered into an Agreement and Plan of Merger (the Merger Agreement) with Sysco Corporation, a Delaware corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, through which Sysco will acquire USF Holding Corp. (the Acquisition) on the terms and subject to the conditions set forth in the Merger Agreement. The aggregate purchase price will consist of $500 million in cash and approximately $3 billion in Syscos common stock, subject to possible downward adjustment pursuant to the Merger Agreement. It is anticipated that the transaction will close either late in the third quarter or during the fourth quarter of this calendar year. The closing is subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). On February 18, 2014, US Foods and Sysco received a request for additional information and documentary materials from the Federal Trade Commission (the FTC) in connection with the Acquisition and the companies continue to work closely and cooperatively with the FTC as it conducts its review of the proposed merger. If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, or if the Acquisition does not close by a date as specified in the Merger Agreement, in certain circumstances Sysco will be required to pay our parent company, USF Holding Corp., a termination fee of $300 million.
Business Description US Foods markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States including independently owned single and multi-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations.
Basis of Presentation The Company operates on a 52-53 week fiscal year with all periods ending on a Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter. The accompanying unaudited consolidated financial statements include the accounts of US Foods, Inc. and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all the information and disclosures required by GAAP for annual financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys 2013 Annual Report on Form 10-K. Certain footnote disclosures included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.
The consolidated financial statements have been prepared by the Company, without audit, with the exception of the December 28, 2013 consolidated balance sheet which was included in the audited consolidated financial statements in the Companys 2013 Annual Report on Form 10-K. The consolidated financial statements reflect all adjustments which are of a normal and recurring nature that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for the full year.
Public Filer Status During the second quarter of 2013, the Company completed the registration of $1,350 million aggregate principal amount of 8.5% Senior Notes due 2019 (Senior Notes) in exchange offers for a like principal amount of the Companys outstanding 8.5% Senior Notes due 2019 and became subject to rules and regulations of the SEC, including periodic and current reporting requirements under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. The Company did not receive any proceeds from the registration of these exchange offers. Presently, the Company files periodic reports as a voluntary filer pursuant to contractual obligations in the indenture governing the Senior Notes.
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Companys significant accounting policies are presented in Note 2 in the Companys consolidated financial statements for the fiscal year ended December 28, 2013, filed as part of the Companys Annual Report on Form 10-K. See Note 1Overview and Basis of Presentation.
Use of Estimates The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Companys consolidated financial statements and notes thereto. Actual results could differ from these estimates. The most critical estimates used in the preparation of the Companys consolidated financial statements pertain to the valuation of goodwill and other intangible assets, property and equipment, vendor consideration, self-insurance programs, and income taxes.
Inventories The Companys inventoriesconsisting mainly of food and other foodservice-related productsare considered finished goods. Inventory costs include the purchase price of the product and freight charges to deliver it to the Companys warehouses, 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, using the last-in, first-out (LIFO) method. The base year values of beginning and ending inventories are determined using the inventory price index computation method. This method links current costs to original costs in the base year when the Company adopted LIFO. At June 28, 2014, and December 28, 2013, the LIFO balance sheet reserves were $197 million and $148 million, respectively. As a result of changes in LIFO reserves, Cost of goods sold increased $24 million and $6 million in the 13-week periods ended June 28, 2014 and June 29, 2013, respectively, and increased $49 million and $8 million in the 26-weeks ended June 28, 2014 and June 29, 2013, 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 three to 40 years. Property and equipment under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the remaining terms of the leases or the estimated useful lives of the assets. At June 28, 2014 and December 28, 2013, Property and equipment-net included accumulated depreciation of $1,202 million and $1,093 million, respectively. Depreciation expense was $68 million and $60 million for the 13-weeks ended June 28, 2014 and June 29, 2013, respectively, and $130 million and $117 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
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 included in a long-lived asset recoverability test 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 closed facilities actively marketed for sale. If a facilitys 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 are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as in a reduction of the assets carrying value in the Consolidated Balance Sheets. See Note 10Restructuring and Tangible Asset Impairment Charges for a discussion of our long-lived asset impairment charges.
Goodwill and Other Intangible Assets Goodwill and Other intangible assets include the cost of the acquired business in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess 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, our policy is to assess for impairment at the beginning of each years third quarter. For other intangible assets with finite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Business Acquisitions The Company accounts for business acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired companies are included in the Companys consolidated financial statements from the date of acquisition. Acquisitionsindividually and in the aggregatedid not materially affect the Companys results of operations or financial position for any period presented. The fourth quarter 2013 acquisition has been integrated into the Companys foodservice distribution network. There were no business acquisitions in 2014.
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Certain prior year acquisitions involve contingent consideration in the event certain operating results are achieved over periods of up to two years. As of June 28, 2014 and December 28, 2013, the Company has accrued $2 million of contingent consideration relating to acquisitions.
Variable Interest Entity In April 2014, the Company entered into a sublease and subsequent purchase of a distribution facility. Under the agreement, the facility will be purchased in May 2018, commensurate with the sublease termination date. The distribution facility is the only asset owned by an investment trust, the landlord to the original lease. The Company has determined the trust is a variable interest entity (VIE) for which it is the primary beneficiary.
However, after exhaustive efforts, the Company was unable to obtain the information necessary to include the accounts and activities of the trust in its consolidated financial statements. As such, the Company has opted to invoke the scope exception available under VIE accounting guidance and will not consolidate the VIE in its financial statements. Since the Company will not be able to consolidate the trust under VIE guidance, applicable lease guidance has been applied to the transaction itself. The Company has concluded that the sublease and purchase agreements, together, qualify for capital lease treatment. Accordingly, the Company recorded a capital asset and related lease and purchase obligation totaling $27 million. This amount approximates the net present value of the purchase price and sublease commitment. In addition, the Company will depreciate the asset balance over its estimated useful life and reduce the capital lease and purchase obligation as payments are made.
Share-Based Compensation Certain employees participate in the 2007 Stock Incentive Plan for Key Employees of USF Holding Corp. and its Affiliates, as amended (Stock Incentive Plan), which allows purchases of shares of USF Holding Corp. common stock, grants of restricted stock and restricted stock units of USF Holding Corp., and grants of options exercisable in USF Holding Corp. common stock. The Company measures compensation expense for stock-based option awards at fair value at the date of grant and recognizes compensation expense over the service period for stock-based awards expected to vest. USF Holding Corp. contributes shares to the Company for employee stock purchases and upon exercise of options or grants of restricted stock and restricted stock units.
Revenue Recognition The Company recognizes revenue from the sale of product when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company grants certain customers sales incentives such as rebates or discountsand treats these as a reduction of sales at the time the sale is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales.
Cost of Goods Sold Cost of goods sold includes amounts paid to manufacturers for products soldnet of vendor considerationplus the cost of transportation necessary to bring the products to the Companys distribution facilities. Cost of goods sold excludes depreciation and amortization as the Company acquires its inventories generally in a complete and salable state and excludes warehousing related costs which are presented in distribution, selling and administrative costs. The amounts presented for Cost of goods sold may not be comparable to similar measures disclosed by other companies because not all companies calculate Cost of goods sold in the same manner. See Inventories section above for discussion of LIFO impact on Cost of goods sold.
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 consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements 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 in 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 the evaluation of new information not previously available. These differences are reflected as increases or decreases to Income tax provision (benefit) in the period in which they are determined.
3. | RECENT ACCOUNTING PRONOUNCEMENTS |
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers, which will be introduced into the FASBs Accounting Standards Codification as Topic 606. Topic 606 replaces the previous guidance on revenue recognition in Topic 605. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services.
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The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The new standard will be effective for us in the first quarter of 2017, with early adoption not permitted. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact of this ASU and has not yet selected an implementation approach.
In April 2014, the FASB issued ASU No. 2014-8, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the criteria for reporting discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. The update states that a strategic shift could include a disposal of 1) a major geographical area of operations, 2) a major line of business, or 3) a major equity method investment. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends, with early adoption permitted. The Companys adoption of this guidance in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; and 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required, because this ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2013. The Companys adoption of this guidance in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
4. | FAIR VALUE MEASUREMENTS |
The Company follows the accounting standards for fair value, whereas fair value is a market-based measurement, not an entity-specific measurement. The Companys 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 1observable inputs, such as quoted prices in active markets |
| Level 2observable inputs other than those included in Level 1such as quoted prices for similar assets and liabilities in active or inactive marketswhich are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data |
| Level 3unobservable inputs in 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 at 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.
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The Companys assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 28, 2014 and December 28, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows (in thousands):
Description |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Recurring fair value measurements: |
||||||||||||||||
Money market funds |
$ | 118,900 | $ | | $ | | $ | 118,900 | ||||||||
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|
|
|
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|
|
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Balance at June 28, 2014 |
$ | 118,900 | $ | | $ | | $ | 118,900 | ||||||||
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|
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Recurring fair value measurements: |
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Money market funds |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
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Balance at December 28, 2013 |
$ | 64,100 | $ | | $ | | $ | 64,100 | ||||||||
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Nonrecurring fair value measurements: |
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Assets held for sale |
$ | | $ | | $ | 7,400 | $ | 7,400 | ||||||||
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Balance at June 28, 2014 |
$ | | $ | | $ | 7,400 | $ | 7,400 | ||||||||
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Nonrecurring fair value measurements: |
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Assets held for sale |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
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Balance at December 28, 2013 |
$ | | $ | | $ | 10,930 | $ | 10,930 | ||||||||
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Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with an original maturity of three or fewer months. They are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy. The Company had money market funds of $119 million and $64 million at June 28, 2014 and December 28, 2013, respectively.
Nonrecurring Fair Value Measurements
Property and Equipment
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. The Company estimates the fair value of various property and equipment assets for purposes of recording necessary impairment charges. We estimate fair value based on information received from real estate brokers. During the second quarter of 2014, the Company recorded a tangible asset impairment charge of $3 million, offset by insurance recoveries, as a result of tornado damage to a distribution facility. See Note 15 Commitments and Contingencies. No material impairments to the Companys property and equipment were recognized during 2013.
The Company is required to record Assets held for sale at the lesser of the depreciated carrying amount or estimated fair value less cost to sell. Certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million in each of the 26-week periods ended June 28, 2014 and June 29, 2013. Fair value was estimated by the Company based on information received from real estate brokers.
The amounts included in the tables above, classified under Level 3 within the fair value hierarchy, represent the estimated fair values of those property and equipment that became the new carrying amounts at the time the impairments were recorded.
Other Fair Value Measurements
The carrying value of cash, restricted cash, accounts receivable, bank checks outstanding, accounts payable, accrued expenses and contingent consideration payable for business acquisitions approximate their fair values due to their short-term maturities.
The fair value of total debt approximated $4.9 billion, as compared to its aggregate carrying value of $4.8 billion as of June 28, 2014 and December 28, 2013. Fair value of the Companys 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 Companys overall credit risk. The fair value of the Companys 8.5% Senior Notes, classified under Level 2 of the fair value hierarchy, was $1.4 billion and $1.5 billion at June 28, 2014 and December 28, 2013, respectively. Fair value was based upon the closing market price at the end of the reporting period.
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5. | ACCOUNTS RECEIVABLE FINANCING PROGRAM |
Under its accounts receivable financing program (2012 ABS Facility), the Company and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The Company consolidates the Receivables Company and, consequently, the transfer of the receivables is a transaction internal to the Company and the receivables have not been derecognized from the Companys Consolidated Balance Sheets. On a daily basis, cash from accounts receivable collections is remitted to the Company as additional eligible receivables are sold to the Receivables Company. If, on a weekly settlement basis, there are not sufficient eligible receivables available as collateral, the Company is required to either provide cash collateral to cover the shortfall or, in lieu of providing cash collateral to cover the shortfall, it can pay down its borrowings on the 2012 ABS Facility. Due to sufficient eligible receivables available as collateral, no cash collateral was held at June 28, 2014 or December 28, 2013.
The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014 and December 28, 2013, respectively. Included in the Companys accounts receivable balance as of June 28, 2014 and December 28, 2013 was $993 million and $930 million, respectively, of receivables held as collateral in support of the 2012 ABS Facility. See Note 9Debt for a further description of the 2012 ABS Facility.
6. | RESTRICTED CASH |
At June 28, 2014 and December 28, 2013, the Company had $7 million of restricted cash included in the Companys Consolidated Balance Sheets in Other assets. This restricted cash primarily represented security deposits and escrow amounts related to certain properties collateralizing the commercial mortgage-backed securities loan facility (CMBS Fixed Facility). See Note 9Debt for a further description of the CMBS Fixed Facility.
7. | GOODWILL AND OTHER INTANGIBLES |
Goodwill and Other intangible assets include the cost of acquired businesses in excess of the fair value of the tangible net assets recorded in connection with acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization.
Customer relationship intangible assets have definite lives, so they are carried at the acquired fair value less accumulated amortization. Customer relationship intangible assets are amortized over the estimated useful lives (four to ten years). Amortization expense was $37 million for the 13-weeks ended June 28, 2014 and June 29, 2013, and $75 million and $74 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
Goodwill and Other intangibles, net, consisted of the following (in thousands):
June 28, | December 28, | |||||||
2014 | 2013 | |||||||
Goodwill |
$ | 3,835,477 | $ | 3,835,477 | ||||
|
|
|
|
|||||
Other intangibles net |
||||||||
Customer relationships amortizable: |
||||||||
Gross carrying amount |
$ | 1,377,663 | $ | 1,377,663 | ||||
Accumulated amortization |
(952,483 | ) | (877,396 | ) | ||||
|
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|
|||||
Net carrying value |
425,180 | 500,267 | ||||||
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|
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Noncompete agreement amortizable: |
||||||||
Gross carrying amount |
800 | 800 | ||||||
Accumulated amortization |
(107 | ) | (27 | ) | ||||
|
|
|
|
|||||
Net carrying value |
693 | 773 | ||||||
|
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|
|||||
Brand names and trademarks not amortizing |
252,800 | 252,800 | ||||||
|
|
|
|
|||||
Total Other intangibles net |
$ | 678,673 | $ | 753,840 | ||||
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As required, we assess 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, our policy is to assess for impairment at the beginning of each fiscal third quarter. For Other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
The Company completed its most recent annual impairment assessment for goodwill and its portfolio of brand names and trademarks, the indefinite-lived intangible assets on June 30, 2013the first day of fiscal 2013 third quarterwith no impairments noted. Our assessment for impairment of goodwill utilized a discounted cash flow analysis, comparative market multiples and comparative market transaction multiples to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we must then perform a comparison of the implied fair value of goodwill with its carrying value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess. Based upon our fiscal 2013 annual impairment analysis, we believe the fair value of the Companys reporting unit exceeded its carrying value. Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis. There have been no events that would indicate the need for impairment testing of the Goodwill or Other intangible assets as of June 28, 2014, although Goodwill and Other Intangible assets will be tested in connection with the Companys financial reporting for the third quarter of 2014 as the Companys selected annual impairment evaluation date falls within that reporting period.
8. | ASSETS HELD FOR SALE |
The Company classifies its closed facilities as Assets held for sale at the time management commits to a plan to sell the facility and it is unlikely the plan will be changed, the facility is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain facilities may be classified as Assets held for sale for more than one year as the Company continues to actively market the facilities at reasonable prices. For all properties held for sale, the Company has exited operations from the facilities and, thus, the properties are no longer productive assets. Further, the Company has no history of changing its plan to dispose of a facility once the decision has been made. At June 28, 2014 and December 28, 2013, $6 million and $10 million, respectively, of closed facilities were included in Assets held for sale for more than one year.
The change in Assets held for sale for the 26-weeks ended June 28, 2014 was as follows (in thousands):
Balance at beginning of period |
$ | 14,554 | ||
Transfers in |
6,133 | |||
Assets sold |
(3,425 | ) | ||
Tangible asset impairment charges |
(1,580 | ) | ||
|
|
|||
Balance at end of the period |
$ | 15,682 | ||
|
|
During 2014, three distribution facilities were closed and reclassified to Assets held for sale and two facilities classified as Assets held for sale were sold for proceeds of $5 million. The Company recognized a net gain of $1 million on sold facilities in 2014.
As discussed in Note 4Fair Value Measurements, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million in each of the 26-week periods ended June 28, 2014 and June 29, 2013.
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9. | DEBT |
The Companys debt consisted of the following (dollars in thousands):
Debt Description |
Contractual Maturity |
Interest Rate at June 28, 2014 |
June 28, 2014 |
December 28, 2013 |
||||||||
ABL Facility |
May 11, 2016 | | $ | | $ | 20,000 | ||||||
2012 ABS Facility |
August 27, 2015 | 1.45% | 686,000 | 686,000 | ||||||||
Amended 2011 Term Loan |
March 31, 2019 | 4.50 | 2,084,250 | 2,094,750 | ||||||||
CMBS Fixed Facility |
August 1, 2017 | 6.38 | 472,391 | 472,391 | ||||||||
Senior Notes |
June 30, 2019 | 8.50 | 1,350,000 | 1,350,000 | ||||||||
Obligations under capital leases |
20182025 | 3.41 - 6.25 | 194,624 | 116,662 | ||||||||
Other debt |
20182031 | 5.75 - 9.00 | 12,198 | 12,359 | ||||||||
|
|
|
|
|||||||||
Total debt |
4,799,463 | 4,752,162 | ||||||||||
Add unamortized premium |
16,647 | 18,311 | ||||||||||
Less current portion of long-term debt |
(45,499 | ) | (35,225 | ) | ||||||||
|
|
|
|
|||||||||
Long-term debt |
$ | 4,770,611 | $ | 4,735,248 | ||||||||
|
|
|
|
At June 28, 2014, $2,029 million of the total debt was at a fixed rate and $2,770 million was at a floating rate.
Revolving Credit Agreement
The Companys asset backed senior secured revolving loan facility (ABL Facility) provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of June 28, 2014, the Company had no outstanding borrowings, but had issued Letters of Credit totaling $287 million under the ABL Facility. Outstanding Letters of Credit included 1) $89 million issued in favor of Ahold to secure their contingent exposure under guarantees of our obligations with respect to certain leases, 2) $183 million issued in favor of certain commercial insurers securing our obligations with respect to our self-insurance program, and 3) letters of credit of $15 million for other obligations. There was available capacity on the ABL Facility of $813 million at June 28, 2014, according to the borrowing base calculation. As of June 28, 2014, on borrowings up to $75 million, the Company can periodically elect to pay interest at Prime plus 2.25% or LIBOR plus 3.25%. On borrowings in excess of $75 million, the Company can periodically elect to pay interest at Prime plus 1.00% or LIBOR plus 2.00%. The ABL facility also carries letter of credit fees of 2.00% and an unused commitment fee of 0.25%.
Accounts Receivable Financing Program
Under the 2012 ABS Facilitywhich replaced the Companys prior accounts receivable securitizationthe Company and certain of its subsidiaries sellon a revolving basistheir eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of the Company (the Receivables Company). This subsidiary, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014. The Company, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of $62 million at June 28, 2014 based on eligible receivables as collateral. The portion of the loan held by the lenders who fund the loan with commercial paper bears interest at the lenders commercial paper rate, plus any other costs associated with the issuance of commercial paper, plus 1.25% and an unused commitment fee of 0.35%. The portion of the loan held by lenders that do not fund the loan with commercial paper bears interest at LIBOR plus 1.25% and an unused commitment fee of 0.35%. See Note 5Accounts Receivable Financing Program for a further description of the Companys Accounts Receivable Financing Program.
Term Loan Agreement
The Companys senior secured term loan (Amended 2011 Term Loan) consisted of a senior secured term loan with outstanding borrowings of $2,084 million at June 28, 2014. The Amended 2011 Term Loan bears interest equal to Prime plus 2.5%, or LIBOR plus 3.5%, with a LIBOR floor of 1.0%, based on a periodic election of the interest rate by the Company. Principal repayments of $5 million are payable quarterly with the balance due at maturity. The Amended 2011 Term Loan may
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require mandatory repayments if certain assets are sold, or based on excess cash flow generated by the Company, as defined in the agreement. The interest rate on the Amended 2011 Term Loan was 4.5%the LIBOR floor of 1.0% plus 3.5% at June 28, 2014. At June 28, 2014, entities affiliated with KKR held $286 million of the Companys Amended 2011 Term Loan debt.
The term loan agreement was amended in June 2013. See 2013 Debt Refinancing Transactions discussed below.
Other Debt
The CMBS Fixed Facility provides financing of $472 million and is currently secured by mortgages on 34 properties, consisting of distribution centers. The CMBS Fixed Facility bears interest at 6.38%. On May 15, 2014, the CMBS Fixed Facility was modified to permit a substitution of collateral for facilities included in Assets held for sale as further discussed below in Security Interests.
The unsecured Senior Notes, with outstanding principal of $1,350 million at June 28, 2014, bear interest at 8.5%. There was unamortized issue premium associated with the Senior Notes issuances of $17 million at June 28, 2013. This is amortized as a decrease to Interest expense over the remaining life of the debt facility. At June 28, 2014, entities affiliated with KKR held $2 million of the Companys Senior Notes.
Effective December 19, 2013, upon consent of the note holders, the Senior Notes Indenture was amended so that the proposed Acquisition will not constitute a Change of Control, as defined in the Indenture. In the event of a Change of Control, the holders of the Senior Notes would have the right to require the Company to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under terms of the Merger Agreementor not completed by September 8, 2015the Senior Notes Indenture will revert to its original terms. See Note 11Related Party Transactions for a discussion of Senior Notes Indenture amendment fees paid by Sysco, and Note 1Overview and Basis of Presentation for a description of the proposed acquisition by Sysco.
Obligations under capital leases consist of amounts due for transportation equipment and building leases.
2013 Debt Refinancing Transactions
During 2013, we entered into a series of transactions to refinance our debt facilities and extend debt maturity dates, including the following transactions:
| In June 2013, the Company refinanced its term loan agreements. The aggregate principal outstanding of the 2011 Term Loan was increased to $2,100 million, and the maturity date of the loan facility was extended from March 31, 2017 to March 31, 2019. The Amended 2011 Term Loan facility refinanced an aggregate of $2,091 million in principal under the Companys Amended 2007 Term Loan and 2011 Term Loan facilities. Continuing lenders refinanced an aggregate of $1,634 million in principal of Term Loan debt. They also purchased $371 million in principal of Term Loan debt from lenders electing not to participate in, or electing to decrease their holdings in, the Amended 2011 Term Loan facility. Additionally, the Company sold $95 million in principal of the Amended 2011 Term Loan to new lenders. |
The Company performed an analysis by creditor to determine if the terms of the Amended 2011 Term Loan were substantially different from the previous term loan facilities. Based upon the analysis, it was determined that continuing lenders holding a significant portion of the Amended 2011 Term Loan had terms that were substantially different from their original loan agreements. As a result, this portion of the transaction was accounted for as an extinguishment of debt and the contemporaneous acquisition of new debt. Lenders holding the remaining portion of the Amended 2011 Term Loan had terms that were not substantially different from their original loan agreements and, as a consequence, this portion of the transaction was accounted for as a debt modification as opposed to an extinguishment of debt.
| In January 2013, the Company redeemed the remaining $355 million in aggregate principal amount of its 11.25% Senior Subordinated Notes (Senior Subordinated Notes) due June 30, 2017. This was done at a price equal to 105.625% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest to the redemption date. An entity affiliated with CD&R held all of the redeemed Senior Subordinated Notes. To fund the redemption of these notes, the Company issued $375 million in principal amount of its Senior Notes at a price equal to 103.5% of the principal amount, for gross proceeds of $388 million. |
The 2013 refinancing transactions resulted in a loss on extinguishment of debt of $42 million. That consisted of a $20 million Senior Subordinated Notes early redemption premium, a write-off of $13 million of unamortized debt issuance costs related to the old debt facilities, and $9 million of lender fees and third party costs related to these transactions. Unamortized debt issuance costs of $6 million related to the portion of the Term Loan refinancing accounted for as a debt modification were carried forward and will be amortized through March 31, 2019the maturity date of the Amended 2011 Term Loan.
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Refinancing Transaction Costs
The Company incurred transaction costs of $29 million related to the 2013 debt refinancing transactions costs, consisting of loan fees, arrangement fees, rating agency fees and legal fees.
Security Interests
Substantially all of our assets are pledged under the various debt agreements. Debt under the 2012 ABS Facility is secured by certain designated receivables and, in certain circumstances, by restricted cash. The ABL Facility is secured by certain other designated receivables not pledged under the 2012 ABS Facility, inventory and tractors and trailers owned by the Company. The CMBS Fixed Facility is currently collateralized by mortgages on 34 related properties. Our obligations under the Amended 2011 Term Loan are secured by all of the capital stock of our subsidiaries, each of the direct and indirect 100% owned domestic subsidiaries (as defined in the agreements), and are secured by substantially all assets of the Company and its subsidiaries not pledged under the 2012 ABS Facility, the CMBS Fixed Facility or the former CMBS Floating Facility. More specifically, the Amended 2011 Term Loan has priority over certain collateral securing the ABL Facility, and it has second priority for other collateral securing the ABL Facility. The former CMBS Floating Facility was collateralized by mortgages on related properties until July 2012, when all outstanding borrowings were repaid. As of June 28, 2014, 11 properties remain in this special purpose, bankruptcy remote subsidiary and are not pledged as collateral under any of the Companys debt agreements.
On May 15, 2014, the CMBS Fixed Loan Facility was modified to permit the substitution of collateral pledged under the CMBS Fixed Loan Facility primarily to allow the sale of certain of facilities that are classified as Assets held for sale. The collateral substitution consisted of an exchange of two properties formerly pledged as collateral for the former CMBS Floating Facility for six properties that collateralized the CMBS Fixed Facility. One of the substituted properties was concurrently sold to an unrelated party and the other five properties are collateral securing the Amended 2011 Term Loan. The Company incurred $1 million of costs and fees related to the CMBS Fixed Loan Facility substitution transaction.
Restrictive Covenants
Our credit facilities, loan agreements and indentures 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. Certain debt agreements also contain various and customary events of default with respect to the loans. 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, and certain insolvency events. If a default event occurs and continues, the principal amounts outstandingtogether with all accrued unpaid interest and other amounts owedmay be declared immediately due and payable by the lenders. 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 current facilities. The Companys ability to refinance its indebtedness on favorable termsor at allis directly affected by the current economic and financial conditions. In addition, the Companys 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, relies on the strength of its cash flows, results of operations, economic and market conditions and other factors.
10. | RESTRUCTURING AND TANGIBLE ASSET IMPAIRMENT CHARGES |
During 2014, the Company reversed a total of $2 million of excess liabilities for an unused facility lease settlement and closed facility severance costs. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
During 2013, the Company incurred $2 million of severance costs, including $1 million for a multiemployer pension withdrawal liability and tangible asset impairment charges. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
A summary of the restructuring charges during the 13-weeks and the 26-weeks ended June 28, 2014 and June 29, 2013 was as follows (in thousands):
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Severance and related costs |
$ | (584 | ) | $ | 1,690 | $ | (502 | ) | $ | 2,159 | ||||||
Facility closing costs |
(1,180 | ) | 86 | (1,180 | ) | (451 | ) | |||||||||
Tangible asset impairment charges |
1,450 | | 1,580 | 1,860 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (314 | ) | $ | 1,776 | $ | (102 | ) | $ | 3,568 | ||||||
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The following table summarizes the changes in the restructuring liabilities for the 26-weeks ended June 28, 2014 (in thousands):
Severance | Facility | |||||||||||
and Related | Closing | |||||||||||
Costs | Costs | Total | ||||||||||
Balance at December 28, 2013 |
$ | 69,072 | $ | 2,146 | $ | 71,218 | ||||||
Current period charges |
82 | | 82 | |||||||||
Change in estimate |
(584 | ) | (1,180 | ) | (1,764 | ) | ||||||
Payments and usage net of accretion |
(7,474 | ) | (342 | ) | (7,816 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at June 28, 2014 |
$ | 61,096 | $ | 624 | $ | 61,720 | ||||||
|
|
|
|
|
|
The $61 million of restructuring liabilities as of June 28, 2014 for severance and related costs includes $56 million of multiemployer pension withdrawal liabilities relating to closed facilities, payable in monthly installments through 2031 at effective interest rates ranging from 5.9% to 6.7%.
11. | RELATED PARTY TRANSACTIONS |
The Company pays a monthly management fee of $0.8 million to investment funds associated with or designated by the Sponsors. For each of the 13-weeks ended June 28, 2014 and June 29, 2013, the Company recorded management fees and related expenses of $2 million. For each of the 26-weeks ended June 28, 2014 and June 29, 2013, the Company recorded management fees and related expenses of $5 million. These were reported as Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income (Loss).
As discussed in Note 9Debt, entities affiliated with the Sponsors hold various positions in some of our debt facilities and participated in our 2013 refinancing transactions. At June 28, 2014, entities affiliated with KKR held $288 million in aggregate principal of the Companys debt facilities. At June 28, 2014, entities affiliated with CD&R had no holdings of the Companys debt facilities. Entities affiliated with KKR received transaction fees of $1 million for services related to the 2013 debt refinancing transactions.
Also as discussed in Note 9Debt, the Senior Note Indenture was amended in the fourth quarter of 2013 so that the proposed Acquisition by Sysco will not constitute a Change of Control. Sysco paid $3.4 million in consent fees to the holders of the Senior Notes in December 2013 on behalf of the Company in connection with this amendment.
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12. | RETIREMENT PLANS |
The Company has defined benefit and defined contribution retirement plans for its employees. Also, the Company contributes to various multiemployer plans under collective bargaining agreements and provides certain health care benefits to eligible retirees and their dependents.
The components of net pension and other post retirement benefit costs for Company sponsored defined benefit plans for the periods presented were as follows (in thousands):
13-Weeks Ended | ||||||||||||||||
Pension Benefits | Other Postretirement Plans |
|||||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Service cost |
$ | 6,687 | $ | 8,030 | $ | 20 | $ | 39 | ||||||||
Interest cost |
9,288 | 8,368 | 79 | 108 | ||||||||||||
Expected return on plan assets |
(11,828 | ) | (10,481 | ) | | | ||||||||||
Amortization of prior service cost (credit) |
49 | 49 | (83 | )(1) | | |||||||||||
Amortization of net loss (gain) |
610 | 3,258 | (19 | )(1) | 28 | |||||||||||
Settlements |
500 | | | | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 5,306 | $ | 9,224 | $ | (3 | ) | $ | 175 | |||||||
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|
|
|
|
|||||||||
26-Weeks Ended | ||||||||||||||||
Pension Benefits | Other Postretirement Plans |
|||||||||||||||
June 28, 2014 |
June 29, 2013 |
June 28, 2014 |
June 29, 2013 |
|||||||||||||
Service cost |
$ | 13,660 | $ | 16,060 | $ | 40 | $ | 77 | ||||||||
Interest cost |
18,650 | 16,736 | 159 | 216 | ||||||||||||
Expected return on plan assets |
(23,698 | ) | (20,963 | ) | | | ||||||||||
Amortization of prior service cost (credit) |
99 | 99 | (167 | )(1) | | |||||||||||
Amortization of net loss (gain) |
1,147 | 6,515 | (38 | )(1) | 56 | |||||||||||
Settlements |
1,000 | | | | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Net periodic benefit costs |
$ | 10,858 | $ | 18,447 | $ | (6 | ) | $ | 349 | |||||||
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|
|
|
|
|
(1) | The Amortization of prior service cost (credit) and Amortization of net loss (gain) reflect prospective participant eligibility changes pursuant to a renegotiated agreement for a post retirement medical plan finalized in the first quarter of 2014. |
The Company reclassified $1 million and $3 million out of Accumulated other comprehensive income (loss) to Distribution, selling and administrative costs relating to retirement benefit obligations during the 13-weeks ended June 28, 2014 and June 29, 2013, respectively. The Company reclassified $2 million and $7 million out of Accumulated other comprehensive income (loss) to Distribution, selling and administrative costs relating to retirement benefit obligations during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively.
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The Company contributed $24 million and $19 million to its defined benefit and other postretirement plans during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively. The Company anticipates making $49 million in total contributions to its pension plans and other postretirement plans during fiscal year 2014.
13. | CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
The following table presents changes in Accumulated other comprehensive income (loss) by component for the periods presented as follows (in thousands):
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
Accumulated Other Comprehensive Income (Loss) | June 28, | June 29, | June 28, | June 29, | ||||||||||||
Components |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Defined benefit retirement plans: |
||||||||||||||||
Balance at beginning of period (1) |
$ | (1,695 | ) | $ | (123,308 | ) | $ | (2,679 | ) | $ | (125,642 | ) | ||||
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|
|||||||||
Other comprehensive income (loss) before reclassifications |
| | | | ||||||||||||
Amortization of prior service (credit) cost (2) |
(34 | ) | 49 | (68 | ) | 99 | ||||||||||
Amortization of net loss (2) |
591 | 3,286 | 1,109 | 6,571 | ||||||||||||
Settlements(2) |
500 | | 1,000 | | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total before income tax (3) |
1,057 | 3,335 | 2,041 | 6,670 | ||||||||||||
Income tax provision (benefit) |
| (1,848 | ) | | (847 | ) | ||||||||||
|
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|
|
|
|
|
|||||||||
Current period comprehensive income (loss), net of tax |
1,057 | 5,183 | 2,041 | 7,517 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period (1) |
$ | (638 | ) | $ | (118,125 | ) | $ | (638 | ) | $ | (118,125 | ) | ||||
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|
|
|
|
|||||||||
Interest rate swap derivative cash flow hedge (4): |
||||||||||||||||
Balance at beginning of period (1) |
$ | | $ | | $ | | $ | (542 | ) | |||||||
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|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) before reclassifications |
| | | (653 | ) | |||||||||||
Amounts reclassified from Other comprehensive income (loss) (5) |
| | | 2,042 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total before income tax |
| | | 1,389 | ||||||||||||
Income tax provision (benefit) |
| | | 847 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Current period comprehensive income (loss), net of tax |
| | | 542 | ||||||||||||
|
|
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|
|
|
|
|
|||||||||
Balance at end of period (1) |
$ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated Other Comprehensive Income (Loss) end of period (1) |
$ | (638 | ) | $ | (118,125 | ) | $ | (638 | ) | $ | (118,125 | ) | ||||
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|
|
|
|
|
|
|
(1) | Amounts are presented net of tax, which had no impact due to the Companys full valuation allowance. See Note 14Income Taxes. |
(2) | Included in the computation of Net periodic benefit costs. See Note12 Retirement Plans for additional information. |
(3) | Included in Distribution, selling and administration expenses in the Consolidated Statements of Comprehensive Income (Loss). |
(4) | The interest rate swap derivative expired in January 2013. |
(5) | Included in Interest expensenet in the Consolidated Statements of Comprehensive Income (Loss). |
14. | INCOME TAXES |
The determination of the Companys overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in various United States federal and state jurisdictions. Tax law changes, increases and decreases in temporary and permanent differences between book and tax items, tax credits and the Companys change in income in each jurisdiction all affect the overall effective tax rate.
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The Company estimated its annual effective tax rate to be applied to the results of the 26-weeks ended June 28, 2014 and June 29, 2013. In estimating its annual effective tax rate, the Company excluded the effects of the valuation allowance necessary as a result of the tax amortization of its goodwill and trademarks. The valuation allowance impact of the tax amortization of goodwill and trademarks has been measured discretely for the quarter to calculate the income taxes. Given the Companys cumulative tax loss position, the impact of the projected current year book income and non-deductible items is being offset by a commensurate valuation allowance adjustment within the annual effective tax rate. The Company concluded that to use the forecasted annual effective tax rate, unadjusted for the effects of the valuation allowance related to the tax amortization of the goodwill and trademarks as described above, would not be reliable for use in quarterly reporting of income taxes due to such rates significant sensitivity to minimal changes in forecasted annual pre-tax income. The impact of including the tax goodwill and trademarks amortization in the annual effective tax rate computation, as applied to the year-to-date pre-tax loss for the period, would be distortive to the financial statements. As a result of these considerations, management concluded that the readers of the financial statements would best benefit from a tax provision for the quarter that reflects the accretion of the valuation allowance on a discrete, ratable basis.
The valuation allowance against the net deferred tax assets was $117 million at December 28, 2013. The deferred tax assets related to federal and state net operating losses, increased $48 million during the 26-weeks ended June 28, 2014, which resulted in a $165 million total valuation allowance at June 28, 2014. A full valuation allowance on the net deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance.
The effective tax rate for the 13-weeks ended June 28, 2014 and June 29, 2013 of 101 % and 317%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 13-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $16 million and $9 million, respectively, as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
The effective tax rate for the 26-weeks ended June 28, 2014 and June 29, 2013 of 28% and 0%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 26-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $48 million and $20 million, respectively, as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
On September 13, 2013 the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the tangible property regulations). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014. The Companys adoption of the tangible property regulations in the first quarter of 2014 had no impact on the Companys financial position, results of operations or cash flows.
15. | COMMITMENTS AND CONTINGENCIES |
Purchase Commitments The Company enters into purchase orders with vendors and other parties in the ordinary course of business. Additionally, we have a limited number of purchase contracts with certain vendors that require us to buy a predetermined volume of products, which are not recorded in the Consolidated Balance Sheets. As of June 28, 2014, the Companys purchase orders and purchase contracts with vendors, all to be delivered in 2014, were $662 million.
To minimize the Companys fuel cost risk, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. At June 28, 2014, the Company had diesel fuel forward purchase commitments totaling $66 million through June 2015. The Company also enters into forward purchase agreements for procuring electricity. At June 28, 2014, the Company had electricity forward purchase commitments totaling $12 million through December 2016. The Company does not measure its forward purchase commitments for fuel and electricity at fair value as the amounts contracted for are used in its operations.
Retention and Transaction Bonuses As part of the Merger Agreement described in Note 1Overview and Basis of Presentation, Proposed Acquisition by Sysco, the Company was given rights to offer retention and transaction bonuses to certain current employees that are integral to the successful completion of the transaction. The Company was approved to offer a maximum of $31.5 million and $10 million of retention bonuses and transaction bonuses, respectively. Additionally, the Companys Chief Executive Officer (CEO) has agreed to reduce his continuation of base salary payments and bonus amounts by $3 million to be allocated at his discretion as bonuses to current employees (other than himself). The retention, transaction and other bonus payments are subject to consummation of the Acquisition and are payable on or after the transaction date. As of June 28, 2014, the Company has not and is not required to record a liability for these bonuses until the Acquisition is consummated.
Indemnification by Ahold for Certain MattersIn connection with the sale of US Foods to USF Holding Corp., a corporation formed and controlled by investment funds associated with or managed by CD&R and KKR, by Ahold in 2007 (the 2007 Transaction), Ahold committed to indemnify and hold harmless the Company from and against damages (which includes losses, liabilities, obligations, and claims of any kind) and litigation costs (including attorneys fees and expenses)
18
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suffered, incurred or paid after the 2007 Transaction closing date related to certain matters (See discussion of Pricing Litigation). The Company was responsible for the first $40 million of damages and litigation expenses incurred after the closing of the 2007 Transaction. Aholds indemnification obligations apply to any such damages and litigation expenses as may be incurred after the 2007 Transaction closing date in excess of $40 million. As of the end of its 2009 fiscal year, the Company had surpassed the threshold of $40 million in costs related to these matters; therefore, any future litigation expenses related to the aforementioned matters are subject to the rights of indemnification from Ahold.
Pricing LitigationIn October 2006, two customers filed a putative class action against the Company and Ahold. In December 2006, an amended complaint was filed naming a third plaintiff. The complaint focuses on certain pricing practices of the Company in contracts with some of its customers. In February 2007, the Company filed a motion to dismiss the complaint. In August 2007, two additional customers filed putative class action complaints. These two additional lawsuits are based upon the pricing practices at issue in the October 2006 case. In November 2007, the Judicial Panel on Multidistrict Litigation ordered the transfer of the two additional lawsuits to the jurisdiction in which the first lawsuit was filedthe U.S. District Court for the District of Connecticutfor consolidated or coordinated proceedings. In June 2008, the Plaintiffs filed their consolidated and amended class action complaint. The Company moved to dismiss this complaint. In August 2009, the Plaintiffs filed a motion for class certification. In December 2009, the court issued a ruling on the Companys motion to dismiss. It dismissed Ahold from the case and also dismissed certain of the plaintiffs claims. On November 30, 2011, the court issued its ruling granting the plaintiffs motion to certify the class. On April 4, 2012, the U.S. Court of Appeals for the Second Circuit granted the Companys request to appeal the district courts decision which granted class certification. Oral argument was held and the court upheld the grant of class certification. The Company filed a writ of certiorari to the U.S. Supreme Court which was denied on April 29, 2014.
On May 20, 2014, an agreement in principle was reached to settle the matter for $297 million which would release the Company from all claims from all participating class members in relation to these pricing practices. Also as described above, Ahold has indemnified the Company in regards to this matter and, as a consequence, payment of the settlement will be made by Ahold and will not impact the Companys results of operations or cash flows. The settlement was preliminarily approved by the United States District Court of Connecticut on July 14, 2014 and is subject to final approval in late 2014 or early 2015. The settlement is also subject to potential reduction and/or termination based on the compensable sales volume attributable to class members that elect to opt out of the settlement. The Company has recorded a $297 million current liability and a corresponding $297 million indemnification receivable from Ahold in its June 28, 2014 Consolidated Balance Sheet to reflect the probable settlement of this matter. Based on the language in the proposed settlement agreement, public written statements of Ahold and the financial condition of Ahold, management believes that Ahold will satisfy its obligation under the indemnification agreement.
Eagan Multiemployer Pension Withdrawal LiabilityIn 2008, the Company completed the closure of its Eagan, Minnesota and Fairfield, Ohio divisions and recorded a liability of approximately $40 million for the related multiemployer pension withdrawal liability. In 2010, the Company received formal notice and demand for payment of a $40 million withdrawal liability, which is payable in monthly installments through November 2023. During the 2011 fiscal third quarter, the Company was assessed an additional $17 million multiemployer pension withdrawal liability for the Eagan facility. The parties agreed to arbitrate this matter, and discovery began during the fiscal third quarter of 2012. The parties engaged in good faith settlement negotiations during the fiscal third and fourth quarters of 2013. The negotiations reached an unexpected impasse and ceased in December 2013. The arbitration and related discovery were stayed pending settlement negotiations. The arbitrator ruled that the only contested issue is a legal question and has ordered the parties to submit cross motions for summary judgment. The parties must submit briefs by October 8, 2014. Thereafter, the arbitrator will issue an interim award. Discovery is stayed pending the arbitrators ruling. The Company believes it has meritorious defenses against the assessment for the additional pension withdrawal liability. The Company does not believe, at this time, that a loss from such obligation is probable and, accordingly, no liability has been recorded. However, it is reasonably possible the Company may ultimately be required to pay an amount up to $17 million.
Other Legal ProceedingsIn addition to the matters described above, the Company and its subsidiaries are parties to a number of other legal proceedings arising from business operations. The legal proceedingswhether pending, threatened or unassertedif decided adversely to or settled by the Company, may result in liabilities material to our financial condition or results of operations. We have recognized provisions with respect to the proceedings, where appropriate. These are reflected in the Consolidated Balance Sheets. It is possible that the Company could be required to make expenditures in excess of established provisions, in amounts that cannot reasonably be estimated. However, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows. Our policy is to expense attorney fees as incurred, except for those fees that are reimbursable under the above noted indemnification by Ahold.
Insurance Recoveries - Tornado LossOn April 28, 2014, a tornado damaged a distribution facility and its contents, including building improvements, equipment and inventory. In order to service customers, business from the damaged facility was reassigned to other Company distribution facilities. The Company has insurance coverage on the distribution facility and its contents, as well as business interruption insurance. The Companys insurance policies provide for recoveries of the damaged property at replacement value and the damaged inventory at the greater of 1) expected selling price less unincurred selling costs or 2) cost plus 10%. Discussions are underway with the insurance carrier regarding the Company's claims on the loss of the building and its contents, and the loss related to the business interruption. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. The timing of and amounts of ultimate insurance recoveries is not known at this time.
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As a result of the tornado damage, the Company recorded a tangible asset impairment charge of $3 million and a net charge to cost of goods sold of $14 million for damaged inventory. In addition, the Company has incurred costs of $3 million in the second quarter of 2014, including debris removal and clean-up costs, subject to coverage under its insurance policies. At June 28, 2014, these charges are offset by $8 million of initial advance payments received from insurance carriers and a receivable for insurance recoveries of $11 million that the Company has deemed as probable of recovery. The Company has classified the $2 million of insurance recoveries related to the damaged distribution facility assets as cash flows from investing activities and the $6 million of insurance recoveries related to damaged inventory and other costs incurred as cash flows from operating activities in its consolidated statement of cash flows.
16. | GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL INFORMATION |
The following consolidating schedules present unaudited condensed financial information of 1) the Company, and 2) certain of its subsidiaries (Guarantors) that guarantee certain Company obligations (the Senior Notes, the ABL Facility, and the Amended 2011 Term Loan), and 3) its other subsidiaries (Non-Guarantors). The Guarantors under the Senior Notes are identical to the Guarantors under the ABL Facility and the Amended 2011 Term Loan. Separate financial statements and other disclosures with respect to the Guarantor subsidiaries have not been provided. This is because the Company believes the following information is sufficient, as the Guarantor subsidiaries are 100% owned by the Company, and all guarantees under the Senior Notes are full and unconditional and joint and several, subject to certain release provisions that the Company has concluded are customary and, therefore, consistent with the Companys ability to present condensed financial information of the Guarantors. Under the Senior Notes, a Guarantor subsidiarys guarantee may be released when any of the following occur: 1) the sale of the Guarantor subsidiary or all of its assets, 2) a merger or consolidation of the Guarantor subsidiary with and into the Company or another Guarantor subsidiary, 3) upon the liquidation of the Guarantor subsidiary following the transfer of all of its assets to the Company or another Guarantor subsidiary, 4) the rating on the securities is changed to investment grade, 5) the requirements for legal defeasance or covenant defeasance or discharge of the obligation have been satisfied, 6) the Guarantor subsidiary is declared unrestricted for covenant purposes, or 7) the Guarantor subsidiarys guarantee of other indebtedness is terminated or released.
Notwithstanding these customary release provisions under the Senior Notes, 1) each subsidiary guarantee is in place throughout the life of the Senior Notes, and no Guarantor may elect to opt out or cancel its guarantee solely at its option; 2) there are no restrictions, limitations or caps on the guarantees; and 3) there are no provisions that would delay the payments that would be required of the Guarantors under the guarantees.
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Condensed Consolidating Balance Sheet | ||||||||||||||||||||
June 28, 2014 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Accounts receivable-net |
$ | 292,702 | $ | 33,439 | $ | 977,561 | $ | | $ | 1,303,702 | ||||||||||
Inventories-net |
1,021,473 | 58,265 | | | 1,079,738 | |||||||||||||||
Other current assets |
775,796 | 7,853 | 81,089 | | 864,738 | |||||||||||||||
Property and equipment-net |
932,718 | 94,981 | 736,535 | | 1,764,234 | |||||||||||||||
Goodwill |
3,835,477 | | | | 3,835,477 | |||||||||||||||
Other intangibles-net |
678,673 | | | | 678,673 | |||||||||||||||
Investments in subsidiaries |
1,349,015 | | | (1,349,015 | ) | | ||||||||||||||
Intercompany receivables |
| 649,831 | | (649,831 | ) | | ||||||||||||||
Other assets |
58,961 | 11 | 31,608 | (23,200 | ) | 67,380 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 8,944,815 | $ | 844,380 | $ | 1,826,793 | $ | (2,022,046 | ) | $ | 9,593,942 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Accounts payable |
$ | 1,295,158 | $ | 47,844 | $ | | $ | | $ | 1,343,002 | ||||||||||
Other current liabilities |
915,382 | 18,050 | 3,862 | | 937,294 | |||||||||||||||
Long-term debt |
3,579,101 | 33,119 | 1,158,391 | | 4,770,611 | |||||||||||||||
Intercompany payables |
594,655 | | 55,176 | (649,831 | ) | | ||||||||||||||
Other liabilities |
754,882 | | 5,716 | (23,200 | ) | 737,398 | ||||||||||||||
Shareholders equity |
1,805,637 | 745,367 | 603,648 | (1,349,015 | ) | 1,805,637 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 8,944,815 | $ | 844,380 | $ | 1,826,793 | $ | (2,022,046 | ) | $ | 9,593,942 | |||||||||
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet | ||||||||||||||||||||
December 28, 2013 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Accounts receivablenet |
$ | 281,242 | $ | 30,023 | $ | 914,454 | $ | | $ | 1,225,719 | ||||||||||
Inventoriesnet |
1,103,180 | 58,378 | | | 1,161,558 | |||||||||||||||
Other current assets |
299,053 | 6,989 | 81,422 | | 387,464 | |||||||||||||||
Property and equipmentnet |
881,110 | 88,150 | 779,235 | | 1,748,495 | |||||||||||||||
Goodwill |
3,835,477 | | | | 3,835,477 | |||||||||||||||
Other intangiblesnet |
753,840 | | | | 753,840 | |||||||||||||||
Investments in subsidiaries |
1,341,633 | | | (1,341,633 | ) | | ||||||||||||||
Intercompany receivables |
| 614,377 | | (614,377 | ) | | ||||||||||||||
Other assets |
63,461 | 10 | 32,753 | (23,200 | ) | 73,024 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 8,558,996 | $ | 797,927 | $ | 1,807,864 | $ | (1,979,210 | ) | $ | 9,185,577 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Accounts payable |
$ | 1,145,381 | $ | 36,071 | $ | | $ | | $ | 1,181,452 | ||||||||||
Other current liabilities |
624,189 | 16,212 | 3,828 | | 644,229 | |||||||||||||||
Long-term debt |
3,554,812 | 22,045 | 1,158,391 | | 4,735,248 | |||||||||||||||
Intercompany payables |
592,482 | | 21,895 | (614,377 | ) | | ||||||||||||||
Other liabilities |
760,445 | | 5,716 | (23,200 | ) | 742,961 | ||||||||||||||
Shareholders equity |
1,881,687 | 723,599 | 618,034 | (1,341,633 | ) | 1,881,687 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 8,558,996 | $ | 797,927 | $ | 1,807,864 | $ | (1,979,210 | ) | $ | 9,185,577 | |||||||||
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Condensed Consolidating Statement of Comprehensive Income (Loss) | ||||||||||||||||||||
13-Weeks Ended June 28, 2014 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 5,742,413 | $ | 155,531 | $ | 25,195 | $ | (25,195 | ) | $ | 5,897,944 | |||||||||
Cost of goods sold |
4,810,578 | 123,119 | | | 4,933,697 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
931,835 | 32,412 | 25,195 | (25,195 | ) | 964,247 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
894,065 | 24,209 | 12,207 | (30,241 | ) | 900,240 | ||||||||||||||
Restructuring and tangible asset impairment charges |
(314 | ) | | | | (314 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
893,751 | 24,209 | 12,207 | (30,241 | ) | 899,926 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
38,084 | 8,203 | 12,988 | 5,046 | 64,321 | |||||||||||||||
Interest expense - net |
61,025 | 445 | 12,156 | | 73,626 | |||||||||||||||
Other expense (income) - net |
27,643 | (5,046 | ) | (27,643 | ) | 5,046 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income taxes |
(50,584 | ) | 12,804 | 28,475 | | (9,305 | ) | |||||||||||||
Income tax (benefit) provision |
1,402 | | 7,958 | | 9,360 | |||||||||||||||
Equity in earnings of subsidiaries |
33,321 | | | (33,321 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(18,665 | ) | 12,804 | 20,517 | (33,321 | ) | (18,665 | ) | ||||||||||||
Other comprehensive income |
1,057 | | | | 1,057 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (17,608 | ) | $ | 12,804 | $ | 20,517 | $ | (33,321 | ) | $ | (17,608 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Comprehensive Income (Loss) | ||||||||||||||||||||
13-Weeks Ended June 29, 2013 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 5,515,864 | $ | 142,884 | $ | 23,450 | $ | (23,450 | ) | $ | 5,658,748 | |||||||||
Cost of goods sold |
4,573,934 | 112,999 | | | 4,686,933 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
941,930 | 29,885 | 23,450 | (23,450 | ) | 971,815 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
861,121 | 22,767 | 13,985 | (28,026 | ) | 869,847 | ||||||||||||||
Restructuring and tangible asset impairment charges |
1,776 | | | | 1,776 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
862,897 | 22,767 | 13,985 | (28,026 | ) | 871,623 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
79,033 | 7,118 | 9,465 | 4,576 | 100,192 | |||||||||||||||
Interest expensenet |
66,916 | 302 | 11,304 | | 78,522 | |||||||||||||||
Loss on extinguishment of debt |
17,829 | | | | 17,829 | |||||||||||||||
Other expense (income)net |
27,847 | (4,576 | ) | (27,847 | ) | 4,576 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) Income before income taxes |
(33,559 | ) | 11,392 | 26,008 | | 3,841 | ||||||||||||||
Income tax (benefit) provision |
(20,163 | ) | | 7,996 | | (12,167 | ) | |||||||||||||
Equity in earnings of subsidiaries |
29,404 | | | (29,404 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
16,008 | 11,392 | 18,012 | (29,404 | ) | 16,008 | ||||||||||||||
Other comprehensive income, net of tax |
5,183 | | | | 5,183 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | 21,191 | $ | 11,392 | $ | 18,012 | $ | (29,404 | ) | $ | 21,191 | |||||||||
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
Condensed Consolidating Statement of Comprehensive Income (Loss) | ||||||||||||||||||||
26-Weeks Ended June 28, 2014 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 11,049,736 | $ | 304,843 | $ | 48,064 | $ | (48,064 | ) | $ | 11,354,579 | |||||||||
Cost of goods sold |
9,253,729 | 241,916 | | | 9,495,645 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
1,796,007 | 62,927 | 48,064 | (48,064 | ) | 1,858,934 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
1,761,741 | 47,532 | 25,952 | (57,627 | ) | 1,777,598 | ||||||||||||||
Restructuring and tangible asset impairment charges |
(182 | ) | | 80 | | (102 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
1,761,559 | 47,532 | 26,032 | (57,627 | ) | 1,777,496 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
34,448 | 15,395 | 22,032 | 9,563 | 81,438 | |||||||||||||||
Interest expense - net |
122,847 | 771 | 23,186 | | 146,804 | |||||||||||||||
Other expense (income) - net |
53,570 | (9,563 | ) | (53,570 | ) | 9,563 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income taxes |
(141,969 | ) | 24,187 | 52,416 | | (65,366 | ) | |||||||||||||
Income tax (benefit) provision |
3,124 | | 15,399 | | 18,523 | |||||||||||||||
Equity in earnings of subsidiaries |
61,204 | | | (61,204 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(83,889 | ) | 24,187 | 37,017 | (61,204 | ) | (83,889 | ) | ||||||||||||
Other comprehensive income |
2,041 | | | | 2,041 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (81,848 | ) | $ | 24,187 | $ | 37,017 | $ | (61,204 | ) | $ | (81,848 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Comprehensive Income (Loss) | ||||||||||||||||||||
26-Weeks Ended June 29, 2013 | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | 10,780,450 | $ | 283,220 | $ | 47,018 | $ | (47,018 | ) | $ | 11,063,670 | |||||||||
Cost of goods sold |
8,957,368 | 225,348 | | | 9,182,716 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
1,823,082 | 57,872 | 47,018 | (47,018 | ) | 1,880,954 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
1,734,085 | 46,261 | 29,550 | (56,079 | ) | 1,753,817 | ||||||||||||||
Restructuring and tangible asset impairment charges |
2,178 | | 1,390 | | 3,568 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
1,736,263 | 46,261 | 30,940 | (56,079 | ) | 1,757,385 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
86,819 | 11,611 | 16,078 | 9,061 | 123,569 | |||||||||||||||
Interest expensenet |
137,639 | 302 | 22,407 | | 160,348 | |||||||||||||||
Loss on extinguishment of debt |
41,796 | | | | 41,796 | |||||||||||||||
Other expense (income)net |
54,848 | (9,061 | ) | (54,848 | ) | 9,061 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) Income before income taxes |
(147,464 | ) | 20,370 | 48,519 | | (78,575 | ) | |||||||||||||
Income tax (benefit) provision |
(15,661 | ) | | 15,786 | | 125 | ||||||||||||||
Equity in earnings of subsidiaries |
53,103 | | | (53,103 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
(78,700 | ) | 20,370 | 32,733 | (53,103 | ) | (78,700 | ) | ||||||||||||
Other comprehensive income, net of tax |
8,059 | | | | 8,059 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income (loss) |
$ | (70,641 | ) | $ | 20,370 | $ | 32,733 | $ | (53,103 | ) | $ | (70,641 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
Condensed Consolidating Statement of Cash Flows
26-Weeks Ended June 28, 2014 (in thousands) |
||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Consolidated | |||||||||||||
Net cash provided by operating activities |
$ | 226,488 | $ | 8,206 | $ | 12,691 | $ | 247,385 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash flows from investing activities: |
||||||||||||||||
Proceeds from sales of property and equipment |
4,990 | | 2,350 | 7,340 | ||||||||||||
Purchases of property and equipment |
(69,248 | ) | (5,639 | ) | (13 | ) | (74,900 | ) | ||||||||
Insurance recovery |
2,000 | | | 2,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(62,258 | ) | (5,639 | ) | 2,337 | (65,560 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash flows from financing activities: |
||||||||||||||||
Proceeds from debt borrowings |
770,410 | | 40 | 770,450 | ||||||||||||
Principal payments on debt and capital leases |
(812,002 | ) | (2,210 | ) | (40 | ) | (814,252 | ) | ||||||||
Capital contributions (distributions) |
15,028 | | (15,028 | ) | | |||||||||||
Proceeds from parent company common stock sales |
197 | | | 197 | ||||||||||||
Parent company common stock repurchased |
(598 | ) | | | (598 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash provided by (used in) financing activities |
(26,965 | ) | (2,210 | ) | (15,028 | ) | (44,203 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net increase in cash and cash equivalents |
137,265 | 357 | | 137,622 | ||||||||||||
Cash and cash equivalentsbeginning of period |
178,872 | 872 | | 179,744 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalentsend of period |
$ | 316,137 | $ | 1,229 | $ | | $ | 317,366 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Condensed Consolidating Statement of Cash Flows 26-Weeks Ended June 29, 2013 (in thousands) |
||||||||||||||||
US Foods, Inc. | Guarantors | Non-Guarantors | Consolidated | |||||||||||||
Net cash provided by operating activities |
$ | 92,797 | $ | 3,346 | $ | 13,351 | $ | 109,494 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash flows from investing activities: |
||||||||||||||||
Proceeds from sales of property and equipment |
4,479 | | 6,987 | 11,466 | ||||||||||||
Purchases of property and equipment |
(94,355 | ) | (2,843 | ) | | (97,198 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash (used in) provided by investing activities |
(89,876 | ) | (2,843 | ) | 6,987 | (85,732 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash flows from financing activities: |
||||||||||||||||
Proceeds from debt refinancing |
854,485 | | 854,485 | |||||||||||||
Proceeds from other borrowings |
888,088 | | | 888,088 | ||||||||||||
Payment for debt financing costs and fees |
(29,135 | ) | | | (29,135 | ) | ||||||||||
Principal payments on debt and capital leases |
(1,399,241 | ) | (822 | ) | (1,400,063 | ) | ||||||||||
Repurchase of senior subordinated notes |
(375,144 | ) | | | (375,144 | ) | ||||||||||
Capital contributions (distributions) |
20,338 | | (20,338 | ) | | |||||||||||
Proceeds from parent company common stock sales |
475 | | | 475 | ||||||||||||
Parent company common stock repurchased |
(2,030 | ) | | | (2,030 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in financing activities |
(42,164 | ) | (822 | ) | (20,338 | ) | (63,324 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net decrease in cash and cash equivalents |
(39,243 | ) | (319 | ) | | (39,562 | ) | |||||||||
Cash and cash equivalentsbeginning of period |
240,902 | 1,555 | | 242,457 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalentsend of period |
$ | 201,659 | $ | 1,236 | $ | | $ | 202,895 | ||||||||
|
|
|
|
|
|
|
|
24
Table of Contents
17. | BUSINESS SEGMENT INFORMATION |
The Company operates in one business segment based on how the Chief Operating Decision Maker (CODM)the CEOviews the business for purposes of evaluating performance and making operating decisions. The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States.
We use a centralized management structure, and Company strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. We use shared resources for sales, procurement, and general and administrative activities across each of our distribution centers. Our distribution centers form a single network to reach our customers; it is common for a single customer to make purchases from several different distribution centers. Capital projectswhether for cost savings or generating incremental revenueare evaluated based on estimated economic returns to the organization as a whole (e.g., net present value, return on investment).
The measure used by the CODM to assess operating performance is Adjusted EBITDA. Adjusted EBITDA is defined as Net income (loss), plus Interest expense net, Income tax provision (benefit), and depreciation and amortization adjusted for 1) Sponsor fees; 2) Restructuring and tangible and intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses or charges as permitted under the Companys debt agreements; and 5) the non-cash impact of LIFO adjustments. Costs to optimize and transform our business are noted as business transformation costs in the table below and are added to EBITDA in arriving at Adjusted EBITDA as permitted under the Companys debt agreements. Business transformation costs include costs related to functionalization and significant process and systems redesign in the Companys replenishment, finance, category management and human resources functions; company rebranding; cash & carry retail store strategy; and implementation and process and system redesign related to the Companys sales model.
The aforementioned items are specified as items to add to EBITDA in arriving at Adjusted EBITDA per the Companys debt agreements and, accordingly, our management includes such adjustments when assessing the operating performance of the business.
The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net income (loss) for the periods indicated (in thousands):
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Adjusted EBITDA |
$ | 237,136 | $ | 226,097 | $ | 406,594 | $ | 382,582 | ||||||||
Adjustments: |
||||||||||||||||
Sponsor fees (1) |
(2,811 | ) | (2,598 | ) | (5,397 | ) | (5,165 | ) | ||||||||
Restructuring and tangible asset impairment charges (2) |
314 | (1,776 | ) | 102 | (3,568 | ) | ||||||||||
Share-based compensation expense (3) |
(3,145 | ) | (2,097 | ) | (6,198 | ) | (5,897 | ) | ||||||||
LIFO reserve change (4) |
(24,135 | ) | (5,473 | ) | (48,678 | ) | (7,363 | ) | ||||||||
Loss on extinguishment of debt (5) |
| (17,829 | ) | | (41,796 | ) | ||||||||||
Business transformation costs (6) |
(14,463 | ) | (14,644 | ) | (26,663 | ) | (28,544 | ) | ||||||||
Sysco merger costs (7) |
(15,625 | ) | | (19,722 | ) | | ||||||||||
Other (8) |
(7,699 | ) | (2,482 | ) | (13,551 | ) | (17,464 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
169,572 | 179,198 | 286,487 | 272,785 | ||||||||||||
Interest expense, net |
(73,626 | ) | (78,522 | ) | (146,804 | ) | (160,348 | ) | ||||||||
Income tax benefit (provision) |
(9,360 | ) | 12,167 | (18,523 | ) | (125 | ) | |||||||||
Depreciation and amortization expense |
(105,251 | ) | (96,835 | ) | (205,049 | ) | (191,012 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (18,665 | ) | $ | 16,008 | $ | (83,889 | ) | $ | (78,700 | ) | |||||
|
|
|
|
|
|
|
|
(1) | Consists of management fees paid to the Sponsors. |
(2) | Primarily consists of facility closing, severance and related costs and tangible asset impairment charges. |
(3) | Share-based compensation expense represents costs recorded for vesting of USF Holding Corp. stock option awards, restricted stock and restricted stock units. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of old debt facility unamortized debt issuance costs. See Note 9Debt for a further description of debt refinancing transactions. |
(6) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(7) | Consists of direct and incremental costs related to the Acquisition. |
(8) | Other includes gains, losses or charges as specified under the Companys debt agreements. |
25
Table of Contents
18. | SUBSEQUENT EVENT |
On August 8, 2014, the 2012 ABS Facility was amended whereby the maturity date was extended from August 27, 2015 to August 5, 2016 (or the termination date of the ABL Facility, if earlier), and the interest rate on outstanding borrowings was reduced 25 basis points. The Company incurred $1 million of costs and fees related to the 2012 ABS Facility amendment.
26
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This managements discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and the notes thereto for the quarter ended June 28, 2014 and the consolidated financial statements and the notes thereto included in our 2013 Annual Report on Form 10-K, as filed with the SEC. This discussion of our results includes certain non-GAAP financial measures. We believe these provide meaningful supplemental information about our operating performance, because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing our performance and underlying trends. More information on the rationale for these measures is discussed in Non-GAAP Reconciliations below.
Overview
We are a leading foodservice distributor in the United States, with about $22 billion in net sales in fiscal 2013. The Company provides an important link between our 5,000 suppliers and our 200,000 foodservice customers nationwide. We offer an innovative array of fresh, frozen and dry food, and non-food products, with approximately 350,000 stock-keeping units (SKUs). US Foods provides value-added services that meet specific customer needs. We believe the Company has one of the most extensive private label product portfolios in foodservice distribution. For fiscal 2013, this represented about 30,000 SKUs, and approximately $7 billion in net sales. Many customers benefit from our support services, such as product selection, menu preparation and costing strategies.
A sales force of approximately 4,000 associates market our food products to a diverse customer base. Our principal customers include independently owned single and multi-location restaurants, regional concepts, national chains, hospitals, nursing homes, hotels and motels, country clubs, fitness centers, government and military organizations, colleges and universities, and retail locations. We support our business with one of the largest private refrigerated fleets in the U.S., with roughly 6,000 trucks traveling an average of 200 million miles each year. We have standardized our operations across the country. That allows us to manage the business as a single operating segment with 61 divisions nationwide.
Outlook
The foodservice market is affected by general economic conditions, consumer confidence, and continued pressure on consumer disposable income. During 2014, we experienced inflationary pressures in several product categories. Periods of prolonged product cost inflation may have a negative impact on our profit margins and earnings to the extent such product cost increases are not able to be passed on to customers due to resistance to higher prices or having a negative impact on consumer spending.
The foodservice market is highly competitive and fragmented, with intense competition and modest demand growth. During 2014, we expect continued pressures on consumer spending and competition. Because we do not anticipate any material improvement in the demand for foodservice, we will likely see modest demand growth. We will remain focused on executing our growth strategies, adding value for and differentiating ourselves with our customers, and driving continued operational improvement in the business.
Proposed Acquisition by Sysco
Merger Agreement
On December 8, 2013, our parent company USF Holding Corp., entered into an Agreement and Plan of Merger (the Merger Agreement) with Sysco Corporation, a Delaware corporation (Sysco); Scorpion Corporation I, Inc., a Delaware corporation and a wholly owned subsidiary of Sysco (Merger Sub One); and Scorpion Company II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Sysco, through which Sysco will acquire USF Holding Corp. (the Acquisition) on terms and subject to the conditions set forth in the Merger Agreement. The aggregate purchase price will consist of $500 million in cash and approximately $3 billion in Syscos common stock, subject to possible downward adjustment pursuant to the Merger Agreement. It is anticipated that the transaction will close either late in the third quarter or during the fourth quarter of this calendar year. The closing is subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). On February 18, 2014, US Foods and Sysco received a request for additional documentary materials from the Federal Trade Commission (the FTC) in connection with the Acquisition and the companies continue to work closely and cooperatively with the FTC as it conducts its review of the proposed merger. If the Merger Agreement is terminated because the required antitrust approvals cannot be obtained, or if the Acquisition does not close by a date as specified in the Merger Agreement, in certain circumstances Sysco will be required to pay our parent company, USF Holding Corp., a termination fee of $300 million.
Impact of the Acquisition on Holders of Senior Notes
In connection with the Merger Agreement, on December 10, 2013, we solicited the consents (the Consent Solicitation) of holders of our 8.5% unsecured Senior Notes (Senior Notes) due June 30, 2019 to amend the indenture with respect to the Senior Notes to modify certain definitions contained in the indenture for the Senior Notes, so that the Acquisition would not constitute a Change of Control under the indenture, and US Foods will not be required to make a Change of Control Offer to holders of the Senior Notes in connection with the Acquisition. On December 19, 2013, we received the required consents in connection with the consent solicitation and entered into a supplemental indenture with respect to these amendments.
27
Table of Contents
Pursuant to the terms of the supplemental indenture, if either 1) the Merger Agreement is terminated in accordance with its terms or 2) the Acquisition is not consummated by a date as specified in the Merger Agreement, the indenture will revert to its prior form as if the amendments proposed in the consent solicitation had never become operative.
Although we have been advised by Sysco that, if any of our Senior Notes remain outstanding following the consummation of the Acquisition, Sysco intends to fully and unconditionally guarantee the obligations of US Foods under the indenture for the Senior NotesSysco is under no contractual or legal obligation to do so.
Impact of the Acquisition on the Business
The Merger Agreement has some restrictive covenants that limit our ability to take certain actions until the Acquisition closes or the Merger Agreement terminates. Under the Merger Agreement, we must use commercially reasonable efforts to operate our business as we ordinarily would, and consistent with past practice in all material respects, and to preserve our business and assets. Without the consent of Sysco, we may not (with limited exceptions) take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including the following:
| Amending or otherwise changing our organizational documents in any material respect |
| Selling assets having a value in excess of $1 million, or selling a series of assets that total more than $5 million |
| Making any material modifications to employee or executive compensation or benefits |
| Changing our capital structure; taking certain actions related to equity interests or voting securities; or engaging in a dissolution, merger, consolidation, restructuring, recapitalization or other reorganization |
| Incurring any additional indebtedness, other than 1) borrowings and other extensions of credit under existing credit facilities, and other financing arrangements to fund working capital expenses in the ordinary course of business; 2) indebtedness in a principal amount not in excess of $20 million; or 3) inter-company debt |
| Creating or incurring certain liens on assets |
| Engaging in certain mergers, acquisitions or dispositions |
| Entering into, modifying or terminating material contracts |
| Making material loans, investments, or capital contributions to or in third parties |
| Disposing of certain real estate assets |
| Making material changes to accounting methods, policies or practices, except as required by GAAP or applicable law |
| Making certain material tax-related changes |
| Making capital expenditures or commitments for capital expenditures outside of the annual operating plan, or entering into fleet capital leases in excess of $100 million per year |
| Forgiving, canceling or compromising any material debt or claim, or waiving, releasing or assigning rights or claims of material value |
| Entering into any settlement, compromise or release contemplating or involving any admission of wrongdoing or misconduct, or providing for any relief or settlement other than the payment of money not in excess of $5 million individually or $25 million in total |
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Results of Operations
Accounting Periods
The Company operates on a 52-53 week fiscal year with all periods ending on a Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter.
Selected Historical Results of Operations
The following table presents selected historical results of operations of our business for the periods indicated:
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
June 28, 2014 |
June 29, 2013 |
June 28, 2014 |
June 29, 2013 |
|||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net sales |
$ | 5,898 | $ | 5,659 | $ | 11,355 | $ | 11,064 | ||||||||
Cost of goods sold |
4,934 | 4,687 | 9,496 | 9,183 | ||||||||||||
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|
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|
|
|
|
|||||||||
Gross profit |
964 | 972 | 1,859 | 1,881 | ||||||||||||
Operating expenses: |
||||||||||||||||
Distribution, selling and administrative costs |
900 | 870 | 1,778 | 1,754 | ||||||||||||
Restructuring and tangible asset impairment charges |
| 2 | | 4 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total operating expenses |
900 | 872 | 1,778 | 1,758 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Operating income |
64 | 100 | 81 | 123 | ||||||||||||
Interest expense, net |
74 | 78 | 146 | 160 | ||||||||||||
Loss on extinguishment of debt |
| 18 | | 42 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(10 | ) | 4 | (65 | ) | (79 | ) | |||||||||
Income tax provision (benefit) |
9 | (12 | ) | 19 | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (19 | ) | $ | 16 | $ | (84 | ) | $ | (79 | ) | |||||
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|
|
|
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|
|||||||||
Percentage of Net Sales: |
||||||||||||||||
Gross profit |
16.3 | % | 17.2 | % | 16.4 | % | 17.0 | % | ||||||||
Distribution, selling and administrative costs |
15.3 | % | 15.4 | % | 15.7 | % | 15.9 | % | ||||||||
Operating expenses |
15.3 | % | 15.4 | % | 15.7 | % | 15.9 | % | ||||||||
Operating income |
1.1 | % | 1.8 | % | 0.7 | % | 1.1 | % | ||||||||
Net income (loss) |
(0.3 | )% | 0.3 | % | (0.7 | )% | (0.7 | )% | ||||||||
Other Data: |
||||||||||||||||
EBITDA (1) |
$ | 170 | $ | 179 | $ | 286 | $ | 273 | ||||||||
Adjusted EBITDA (1) |
$ | 237 | $ | 226 | $ | 407 | $ | 383 |
(1) | EBITDA and Adjusted EBITDA are measures used by management to measure operating performance. EBITDA is defined as Net loss, plus Interest expense net, Income tax provision (benefit) and depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for 1) Sponsor fees; 2) Restructuring and tangible and intangible asset impairment charges; 3) share-based compensation expense; 4) other gains, losses, or charges as specified under our debt agreements; and 5) the non-cash impact of LIFO adjustments. EBITDA and Adjusted EBITDA, as presented in the Quarterly Report on Form 10-Q, are supplemental measures of our performance that are not required byor presented in accordance withaccounting principles generally accepted in the United States of America (GAAP). They are not measurements of our performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP or as alternatives to cash flows from operating activities as measures of our liquidity. |
See additional information about the use of these measures and Non-GAAP reconciliations below.
Non-GAAP Reconciliations
We believe these non-GAAP financial measures provide an important supplemental measure of our operating performance. This is because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing Company performance. Our management uses these non-GAAP financial measures to evaluate the Companys historical financial performance, establish future operating and capital budgets, and determine variable compensation for management and employees. Accordingly, our management includes those adjustments when assessing the business operating performance.
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Our debt agreements specify items that should be added to EBITDA in arriving at Adjusted EBITDA. These include, among other things, Sponsor fees, share-based compensation expense, impairment charges, restructuring charges, the non-cash impact of LIFO adjustments, and gains and losses on debt transactions. Where there are other small, specified costs to add to EBITDA to arrive at Adjusted EBITDA, we combine those items under Other.
Costs to optimize our business were also added back to EBITDA to arrive at Adjusted EBITDA. These business transformation costs included third party and duplicate or incremental internal costs. Those items are related to functionalizing and optimizing our processes and systems in areas such as replenishment, finance, and category management, as well as in implementing our new brand image.
All of the items just mentioned are specified as additions to EBITDA to arrive at Adjusted EBITDA, per the Companys debt agreements. We caution readers that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA or Adjusted EBITDA in the same manner.
We present EBITDA because we consider it an important supplemental measure of our performance. It is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. We present Adjusted EBITDA as it is the key operating performance metric used by our Chief Operating Decision Maker to assess operating performance.
The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is Net income (loss) for the periods indicated:
13-Weeks Ended | 26-Weeks Ended | |||||||||||||||
June 28, 2014 |
June 29, 2013 |
June 28, 2014 |
June 29, 2013 |
|||||||||||||
(in millions) | (in millions) | |||||||||||||||
Net income (loss) |
$ | (19 | ) | $ | 16 | $ | (84 | ) | $ | (79 | ) | |||||
Interest expense, net |
74 | 78 | 146 | 160 | ||||||||||||
Income tax (benefit) provision |
9 | (12 | ) | 19 | | |||||||||||
Depreciation and amortization expense |
106 | 97 | 205 | 192 | ||||||||||||
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|
|||||||||
EBITDA |
170 | 179 | 286 | 273 | ||||||||||||
Adjustments: |
||||||||||||||||
Sponsor fees (1) |
2 | 2 | 5 | 5 | ||||||||||||
Restructuring and tangible asset impairment charges (2) |
| 2 | | 4 | ||||||||||||
Share-based compensation expense (3) |
3 | 2 | 6 | 6 | ||||||||||||
LIFO reserve change (4) |
24 | 5 | 49 | 7 | ||||||||||||
Loss on extinguishment of debt (5) |
| 18 | | 42 | ||||||||||||
Business transformation costs (6) |
14 | 15 | 27 | 29 | ||||||||||||
Sysco merger costs (7) |
16 | | 20 | | ||||||||||||
Other (8) |
8 | 3 | 14 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | 237 | $ | 226 | $ | 407 | $ | 383 | ||||||||
|
|
|
|
|
|
|
|
(1) | Consists of management fees paid to the Sponsors. |
(2) | Primarily consists of facility closing, severance and related costs and tangible asset impairment charges. |
(3) | Share-based compensation expense represents costs recorded for vesting of USF Holding Corp. stock option awards, restricted stock and restricted stock units. |
(4) | Consists of changes in the LIFO reserve. |
(5) | Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of old debt facility unamortized debt issuance costs. See Note 9Debt for a further description of debt refinancing transactions. |
(6) | Consists primarily of costs related to functionalization and significant process and systems redesign. |
(7) | Consists of direct and incremental costs related to the Acquisition. |
(8) | Other includes gains, losses or charges as specified under the Companys debt agreements. |
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Table of Contents
Comparison of Results
13-Weeks Ended June 28, 2014 and June 29, 2013
Highlights
Net sales increased $239 million, or 4.2%, in 2014 from 2013. Gross profit decreased $8 million, or 0.8%, for the second quarter of 2014. Operating expenses as a percentage of net sales were 15.3% in 2014 versus 15.4% in 2013. Operating income as a percentage of net sales decreased to 1.1% compared to 1.8% in 2013. Interest expense-net decreased $4 million to $74 million in 2014 from $78 million a year ago. In June 2013, we amended our 2011 and 2007 Term Loan facilities and recorded a loss on extinguishment of debt of $18 million. There were no debt refinancing transactions in 2014. Net loss was $19 million for the 13-weeks ended June 28, 2014 versus net income of $16 million for this time last year.
Net Sales
Net sales increased $239 million, or 4.2%, to $5,898 million in the second quarter of 2014 from $5,659 million in 2013. Increased sales to independent restaurants and healthcare and hospitality customers, was partially offset by decreased sales to national chain customers. Case volume decreased 0.6% from the prior year. Higher product cost favorably impacted net sales in 2014 by approximately $270 million, as a significant portion of our business is based on percentage markups over actual cost. Lower case volume unfavorably impacted 2014 Net sales by approximately $30 million.
Gross Profit
Gross profit decreased $8 million, or 0.8%, to $964 million in the latest quarter from $972 million last year. Lower gross profit reflected commodity pricing pressures, partially offset by merchandising initiatives. Gross profit as a percentage of net sales decreased by 0.9% to 16.3% versus 17.2% in 2013.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses increased $30 million, or 3.4%, to $900 million in 2014 from $870 million in 2013. As a percentage of net sales, we saw a decrease of 0.1% to 15.3% from 15.4% at this time last year. Increases in Distribution, selling and administrative costs included $16 million of 2014 direct and incremental costs related to the Merger Agreement, a $9 million increase in Depreciation and amortization expense, primarily due to investments in technology and fleet, and a $7 million increase in payroll and related costs from a year ago. These increases were partially offset by a $4 million decrease in pension costs for Company sponsored plans.
Restructuring and Tangible Asset Impairment Charges
In the most recent quarter, we reversed a total of $2 million of excess liabilities for an unused facility lease settlement and closed facility severance costs. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in a tangible asset impairment charge of $1 million. During the 2013 quarter, we also incurred $2 million of severance costs, including $1 million for a multiemployer pension withdrawal liability.
Operating Income
Operating income decreased $36 million, or 36%, to $64 million, compared with $100 million in 2013. Operating income as a percent of net sales decreased 0.7% to 1.1% for the three months from 1.8% in 2013. The change was primarily due to the factors discussed above.
Interest Expense
Interest expense decreased $4 million to $74 million from $78 million in the 2014 quarter due to lower overall borrowing costs as a result of the US Foods 2013 debt refinancing transactions and a decrease in average borrowings on our revolving credit facility, partially offset by capital lease additions.
Loss on Extinguishment of Debt
The 2013 loss on extinguishment of debt consists of a write-off of unamortized debt issuance costs, as well as loan fees and third party costs relating to the Amended 2011 Term Loan. For a detailed description of our Senior Subordinated Notes redemption transaction, see Note 9Debt in the Notes to our Unaudited Consolidated Financial Statements.
Income Taxes
The determination of the Companys overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in various United State federal and state jurisdictions. Tax law changes, increases and decreases in temporary and permanent differences between book and tax items, tax credits and the Companys change in income in each jurisdiction all affect the overall effective tax rate.
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For interim periods, the Company estimates annual pre-tax income, temporary and permanent differences between book and tax items and other items, including changes in its valuation allowance, to derive a year to date effective tax rate for the interim period.
We recorded an income tax provision of $9 million for the 13-weeks ended June 28, 2014 compared with an income tax benefit of $12 million in the prior year period. The effective tax rate for the 13-weeks ended June 28, 2014 and June 29, 2013 of 101% and 317%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 13-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $16 million and $9 million, respectively, as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
Net Income (Loss)
Our 2014 net loss was $19 million in 2014 as compared with net income of $16 million in 2013. The 2014 net loss was primarily due to the factors discussed above.
26-Weeks Ended June 28, 2014 and June 29, 2013
Highlights
Net sales increased $291 million, or 2.6%, in 2014 from 2013. Gross profit decreased $22 million, or 1.2%, from 2013. Operating expenses as a percentage of net sales were 15.7% in 2014 versus 15.9% in 2013. Operating income as a percentage of net sales decreased to 0.7% compared to 1.1% in 2013. Interest expense-net decreased $14 million to $146 million in 2014 from $160 million a year ago. In June 2013, we amended our 2011 and 2007 Term Loan facilities and recorded a loss on extinguishment of debt of $18 million. In January 2013, we redeemed the remaining $355 million in principal of our 11.25% Senior Subordinated Notes (Senior Subordinated Notes) and recorded a loss on extinguishment of debt of $24 million. There were no debt refinancing transactions in 2014. Net loss was $84 million for the 26-weeks ended June 28, 2014 versus net loss of $79 million for this time last year.
Net Sales
Net sales increased $291 million, or 2.6%, to $11,355 million in 2014 from $11,064 million in 2013. Increased sales to independent restaurants and healthcare and hospitality customers, was partially offset by decreased sales to national chain customers. Case volume decreased 1.0% from the prior year. Higher product cost favorably impacted net sales in 2014 by approximately $380 million, as a significant portion of our business is based on percentage markups over actual cost. Lower case volume unfavorably impacted 2014 Net sales by approximately $90 million.
Gross Profit
Gross profit decreased $22 million, or 1.2%, to $1,859 million in 2014 from $1,881 million last year. Lower gross profit reflected commodity pricing pressures, partially offset by merchandising initiatives. Gross profit as a percentage of net sales decreased by 0.6% to 16.4% versus 17.0% in 2013.
Distribution, Selling and Administrative Expenses
Distribution, selling and administrative expenses increased $24 million, or 1.4%, to $1,778 million in 2014 from $1,754 million in 2013. As a percentage of net sales, we saw a decrease of 0.2% to 15.7% from 15.9% at this time last year. Increases in Distribution, selling and administrative costs included $20 million of 2014 direct and incremental costs related to the Merger Agreement, and a $13 million increase in Depreciation and amortization expense, primarily due to investments in technology and fleet. These increases were partially offset by an $8 million decrease in pension costs for Company sponsored plans.
Restructuring and Tangible Asset Impairment Charges
During 2014, we reversed $2 million of excess liabilities for an unused lease facility settlement and closed facility severance costs. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
During 2013, we incurred $2 million of severance costs, including $1 million for a multiemployer pension withdrawal liability and tangible asset impairment charges. Additionally, certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $2 million.
Operating Income
Operating income decreased $42 million, or 34.1%, to $81 million, compared with $123 million in 2013. Operating income as a percent of net sales decreased 0.4% to 0.7% for the three months from 1.1% in 2013. The change was primarily due to the factors discussed above.
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Table of Contents
Interest Expense
Interest expense decreased $14 million to $146 million from $160 million in 2014 due to lower overall borrowing costs as a result of the US Foods 2013 debt refinancing transactions and a decrease in average borrowings on our revolving credit facility, partially offset by capital lease additions.
Loss on Extinguishment of Debt
The 2013 loss on extinguishment of debt consists of a write-off of unamortized debt issuance costs, as well as loan fees and third party costs relating to the Amended 2011 Term Loan and an early redemption premium and a write-off of unamortized debt issuance costs relating to the redemption of our 11.25% Senior Subordinated Notes. For a detailed description of our Senior Subordinated Notes redemption transaction, see Note 9Debt in the Notes to our Unaudited Consolidated Financial Statements.
Income Taxes
The Company estimated its annual effective tax rate to be applied to the results of the 26-weeks ended June 28, 2014 and June 29, 2013. In estimating its annual effective tax rate, the Company excluded the effects of the valuation allowance necessary as a result of the tax amortization of its goodwill and trademarks. The valuation allowance impact of the tax amortization of goodwill and trademarks has been measured discretely for the quarter to calculate the income taxes. Given the Companys cumulative tax loss position, the impact of the projected current year book income and non-deductible items is being offset by a commensurate valuation allowance adjustment within the annual effective tax rate. The Company concluded that to use the forecasted annual effective tax rate, unadjusted for the effects of the valuation allowance related to the tax amortization of the goodwill and trademarks as described above would not be reliable for use in quarterly reporting of income taxes due to such rates significant sensitivity to minimal changes in forecasted annual pre-tax income. The impact of including the tax goodwill and trademarks amortization in the annual effective tax rate computation, as applied to the pre-tax loss of $65 million for the period, would be distortive to the financial statements. As a result of these considerations, management concluded that the readers of the financial statements would best benefit from a tax provision for the quarter that reflects the accretion of the valuation allowance on a discrete, ratable basis.
The valuation allowance against the net deferred tax assets was $117 million at December 28, 2013. The deferred tax assets related to federal and state net operating losses, increased $48 million during the 26-weeks ended June 28, 2014, which resulted in a $165 million total valuation allowance at June 28, 2014. A full valuation allowance on the net deferred tax assets will be maintained until sufficient positive evidence related to sources of future taxable income exists to support a reversal of the valuation allowance.
We recorded an income tax provision of $19 million for the 26-weeks ended June 28, 2014 compared with a minimal income tax provision in the prior year period. The effective tax rate for the 26-weeks ended June 28, 2014 and June 29, 2013 of 28% and 0%, respectively, varied from the 35% federal statutory rate primarily due to an increase in the valuation allowance. During the 26-weeks ended June 28, 2014 and June 29, 2013, the valuation allowance increased $48 million and $20 million, respectively, as a result of increased deferred tax assets (net operating losses) not covered by future reversals of deferred tax liabilities.
Net Loss
Our net loss increased $5 million to $84 million in 2014 as compared with net loss of $79 million in 2013. The higher net loss was primarily due to the factors discussed above.
Liquidity and Capital Resources
Our operations and strategic objectives require continuing capital investment. Company resources include cash provided by operations, as well as access to capital from bank borrowings, various types of debt, and other financing arrangements. However, in connection with the Merger Agreement, we have agreed to several debt-related terms. These include our agreement 1) not to incur indebtedness in excess of $20 million other than to fund working capital expenses in the ordinary course of business and certain other agreed-upon expenditures, and 2) not to make any capital expenditures or commitmentsor enter into fleet capital leases in excess of $100 million per yearother than in the ordinary course of business consistent with past practice.
The Merger Agreement provides for restrictive covenants that limit our ability to take certain actions. These include raising capital and conducting other financing activities. However, we do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months.
Indebtedness
We are highly leveraged, with significant scheduled debt maturities during the next five years. A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing costs of operations, working capital and capital expenditures.
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Table of Contents
As of June 28, 2014, we had $4,816 million in aggregate indebtedness outstanding. We had commitments for additional borrowings under our asset-based senior secured revolving loan ABL Facility (ABL Facility) and our 2012 ABS Facility (2012 ABS Facility) of $927 million (of which $875 million was available based on our borrowing base), all of which were secured.
Our primary financing sources for working capital and capital expenditures are the ABL Facility and the 2012 ABS Facility.
The ABL Facility provides for loans of up to $1,100 million, with its capacity limited by borrowing base calculations. As of June 28, 2014, we had no outstanding borrowings, but had issued Letters of Credit totaling $287 million under the ABL Facility. There was available capacity on the ABL Facility of $813 million at June 28, 2014, based on the borrowing base calculation.
Under the 2012 ABS Facility, the Company and certain subsidiaries sell, on a revolving basis, their eligible receivables to a 100% owned, special purpose, bankruptcy remote subsidiary of the Company. This subsidiary, in turn, grants to the administrative agent for the benefit of the lenders a continuing security interest in all of its rights, title and interest in the eligible receivables (as defined by the 2012 ABS Facility). The maximum capacity under the 2012 ABS Facility is $800 million, with its capacity limited by borrowing base calculations. Borrowings under the 2012 ABS Facility were $686 million at June 28, 2014. The Company, at its option, can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of $62 million at June 28, 2014, based on the borrowing base calculation. On August 8, 2014, the 2012 ABS Facility was amended whereby the maturity date was extended from August 27, 2015 to August 5, 2016 (or the termination date of the ABL Facility, if earlier), and the interest rate on outstanding borrowings was reduced 25 basis points. The Company incurred $1 million of costs and fees related to the 2012 ABS Facility amendment.
The Company has $1,350 million of 8.5% unsecured Senior Notes due June 30, 2019 outstanding as of June 28, 2014. On December 19, 2013, the indenture for the Senior Notes (the Senior Note Indenture) was amended so that the Acquisition by Sysco will not constitute a Change of Control. This was authorized through the consent of the holders of our Senior Notes. In the event of a Change of Control, the holders of the Senior Notes would have the right to require the Company to repurchase all or any part of their notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. If the Acquisition is terminated under the terms of the Merger Agreement, or is not completed by September 8, 2015, the Senior Note Indenture will revert to its original terms. Holders of the Senior Notes received fees of $3.4 million as consideration for agreeing to the amendment. Under the Merger Agreement, Sysco funded the payment of the consent fees to the holders in December 2013.
Due to the debt refinancing transactions completed in 2013 and 2012, $3.4 billion of our debt facilities will not mature until 2019. Our remaining $1.4 billion of debt facilities mature at various dates, including $700 million in 2015 and $500 million in 2017. As economic conditions permit, we will consider further opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms. Any further potential debt reduction or refinancing could require significant use of our liquidity and capital resources. For a detailed description of our indebtedness, see Note 9Debt in the Notes to our Unaudited Consolidated Financial Statements.
We believe that the combination of cash generated from operationstogether with availability under our debt agreements and other financing arrangementswill 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. Our future financial and operating performance, ability to service or refinance our debt, and ability to comply with covenants and restrictions contained in our debt agreements will be subject to 1) future economic conditions, 2) the financial health of our customers and suppliers, and 3) financial, business and other factorsmany of which are beyond our control.
Every quarter, we perform a review of all of our lenders that have a continuing obligation to provide funding to us by reviewing rating agency changes. We are not aware of any facts that indicate our lender banks 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.
The Company, its Sponsors or affiliates may, from time-to-time, repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. 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, trading levels of our debt, our cash position, and other considerations. Our Sponsors or their affiliates may also purchase our debt from time-to-time, through open market purchases or other transactions. In these cases, our debt is not retired, and we would continue to pay interest in accordance with the terms of the debt.
Our credit facilities, loan agreements and indentures 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. Certain debt agreements also contain various and customary events of default with respect to the loans. Those include, without limitation, the failure to pay interest or principal when this is due under the agreements, cross default provisions, the failure of representations and warranties contained in the agreements to be true, and certain insolvency events. If a default event occurs and
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Table of Contents
continues, the principal amounts outstandingplus unpaid interest and other amounts owedmay be declared immediately due and payable to the lenders. If this happened, we would be forced to seek new financing that may not be as favorable as our current facilities. Our ability to refinance indebtedness on favorable terms, or at all, is directly affected by the current economic and financial conditions. In addition, our ability to incur secured indebtedness (which may enable us to achieve more favorable terms than the incurrence of unsecured indebtedness) depends on the strength of our cash flows, results of operations, economic and market conditions and other factors. As of June 28, 2014, we were in compliance with all of our debt agreements.
Cash Flows
For the periods presented, the following table presents condensed highlights from the cash flow statements:
26-Weeks Ended | ||||||||
June 28, 2014 | June 29, 2013 | |||||||
(in millions) | ||||||||
Net loss |
$ | (84 | ) | $ | (79 | ) | ||
Changes in operating assets and liabilities |
86 | (69 | ) | |||||
Other adjustments |
245 | 258 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
247 | 110 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(66 | ) | (86 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(44 | ) | (63 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
137 | (39 | ) | |||||
Cash and cash equivalents, beginning of period |
180 | 242 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 317 | $ | 203 | ||||
|
|
|
|
Operating Activities
Cash flows provided by operating activities were $247 million and $110 million for the 26-weeks ended June 28, 2014 and June 29, 2013, respectively. Cash flows provided by operating activities increased $137 million in 2014 from 2013. Higher accounts payable and a decrease in inventories, were partially offset by an increase in accounts receivable and lower accrued expenses and other liabilities.
Cash flows provided by operating activities in 2014 were favorably affected by changes in operating assets and liabilitiesincluding a decrease in inventories and an increase in accounts payable, partially offset an increase in accounts receivable and a decrease in accrued expenses and other current liabilities. Cash flows from operating activities include $6 million of insurance recoveries related to tornado damage to a distribution facility. Cash flows provided by operating activities in 2013 were unfavorably affected by changes in operating assets and liabilitiesincluding an increase in accounts receivable and a decrease in accounts payablepartially offset by a decrease in inventories.
Investing Activities
Cash flows used in investing activities for the 26-weeks ended June 28, 2014 included purchases of property and equipment of $75 million, proceeds from sales of property and equipment of $7 million and $2 million of insurance recoveries related to property and equipment of a distribution facility damaged by a tornado. Last years cash flows from investing activities included purchases of property and equipment of $97 million, and proceeds from sales of property and equipment of $11 million.
Capital expenditures in 2014 and 2013 included fleet replacement and investments in information technology to improve our business, as well as new construction and/or expansion of distribution facilities. Additionally, we entered into $90 million and $52 million of capital lease obligations during the 26-week periods in 2014 and 2013, respectively. The 2014 capital lease obligations included $63 million for fleet replacement and $27 million for a distribution facility addition. The 2013 capital lease obligations were primarily for fleet replacement.
We expect cash capital expenditures in 2014 to be approximately $190 million, including the amounts described above. The expenditures will focus on information technology, warehouse equipment and facility construction and/or expansion, including approximately $10 million as we begin construction on a new facility to replace the distribution facility severely damaged by a tornado in April 2014. We also expect fleet capital leases during 2014 to total $75 million, including the amounts described above. We expect to fund our 2014 capital expenditures with available cash balances or cash generated from operations.
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Financing Activities
Cash flows used by financing activities of $44 million during the 26-weeks ended June 28, 2014 resulted from $20 million of net payments on our ABL Facility and $24 million of scheduled payments on other debt facilities and capital lease obligations.
For the same time in 2013, cash flows used in financing activities of $63 million primarily resulted from net payments on debt facilities, and costs and fees paid related to our 2013 debt refinancing transactions. In June 2013, we refinanced our term loan facilities into a new $2,100 million term loan facility. Lenders exchanged $1,634 in principal under our previous term loan facilities for a like amount of principal in the new term loan facility and we received proceeds of $466 million from continuing and new lenders purchasing additional principal in the new term loan facility. The cash proceeds were used to pay down $457 million in principal of the previous term loan facilities. In January 2013, we used proceeds of $388 million from Senior Note issuances primarily to redeem $355 million in principal of our Senior Subordinated Notes, plus an early redemption premium of $20 million. We incurred total cash costs of $29 million in connection with the 2013 debt refinancing transactions, including costs to register our Senior Notes. Additionally, we made net payments on our ABL Facility of $40 million as well as $15 million of scheduled payments on other debt facilities. In 2013, we paid $2 million to repurchase common shares of our parent company, USF Holding Corp., from employees who left the company. The shares were acquired through a management stockholders agreement associated with our stock incentive plan.
Retirement Plans
We maintain several qualified retirement plans (the Retirement Plans) that pay benefits to certain employees at retirement, using formulas based on a participants years of service and compensation. We contributed $24 million and $19 million to the Retirement Plans during the 26-weeks ended June 28, 2014 and June 29, 2013, respectively. We expect to make $49 million total contributions, including payments described above, to the Retirement Plans in 2014.
The Company also contributes to various multiemployer benefit plans under collective bargaining agreements. We contributed $16 million during 2014 and $15 million during this time last year. At June 28, 2014, we had $56 million of multiemployer pension withdrawal liabilities relating to closed facilities, payable in monthly installments through 2031, at effective interest rates ranging from 5.9% to 6.7%. As discussed in Note 15Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements, we were assessed an additional $17 million multiemployer pension withdrawal liability for a facility closed in 2008. We believe we have meritorious defenses against this assessment and intend to vigorously defend ourselves against the claim. At this time, we do not believe that paying this obligation is probable and, accordingly, have recorded no related liability.
Pricing Litigation
As described in Note15 Commitments and Contingencies in the Notes to our Unaudited Consolidated Financial Statements, on May 20, 2014 an agreement in principle was reached to settle a pricing practices class action complaint against the Company and Ahold relating to periods prior to the 2007 acquisition of the Company by it Sponsors for $297 million. Ahold has indemnified the Company in regards to this matter and, as a consequence, payment of the settlement will be made by Ahold and will not impact the Companys results of operations or cash flows. The settlement was preliminarily approved by the United States District Court for the District of Connecticut on July 14, 2014 and is subject to final approval by late 2014 or early 2015. The settlement is also subject to potential reduction and/or termination based on the compensable sales volume attributable to class members that elect to opt out of the settlement. The Company has recorded a $297 million current liability and a corresponding $297 million indemnification receivable from Ahold in its June 28, 2014 Consolidated Balance Sheet to reflect the probable settlement of this matter. Based on the language in the proposed settlement agreement, public written statements of Ahold and the financial condition of Ahold management believes that Ahold will satisfy its obligation under the indemnification agreement.
Insurance Recoveries Tornado Loss
As described in Note15 Commitments and Contingencies in the Notes to our Unaudited Consolidated Financial Statements, on April 28, 2014, a tornado severely damaged a distribution facility and its contents, including building improvements, equipment and inventory. In order to service customers, business from the damaged facility was reassigned to other distribution facilities. We have insurance coverage on the distribution facility and its contents, as well as business interruption insurance. Our insurance policies provide for recoveries of the damaged property at replacement value and the damaged inventory at the greater of 1) expected selling price less unincurred selling costs or 2) cost plus 10%. Discussions are underway with the insurance carrier regarding the Company's claims on the loss of the building and its contents, and the loss related to the business interruption. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. The timing of and amounts of ultimate insurance recoveries is not known at this time.
As a result of the tornado damage, we recorded a tangible asset impairment charge of $3 million and a net charge to cost of goods sold of $14 million for damaged inventory. In addition, the Company has incurred costs of $3 million in the second quarter of 2014, including debris removal and clean-up costs, subject to coverage under its insurance policies. At June 28, 2014, these charges are offset by $8 million of initial advance payments received from insurance carriers and a receivable for insurance recoveries of $11 million that we have deemed as probable of recovery.
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Retention and Transaction Bonuses
As part of the Merger Agreement, the Company was given rights to offer retention and transaction bonuses to certain current employees that are integral to the successful completion of the transaction. The Company was approved to offer a maximum of $31.5 million and $10 million of retention bonuses and transaction bonuses, respectively. Additionally, the Companys Chief Executive Officer (CEO) has agreed to reduce his continuation of base salary payments and bonus amounts by $3 million to be allocated at his discretion as bonuses to current employees (other than himself). The retention, transaction and other bonus payments are subject to consummation of the Acquisition and are payable on or after the transaction date. As of June 28, 2014, the Company has not and is not required to record a liability for these bonuses until the Acquisition is consummated.
Off-Balance Sheet Arrangements
We entered into letters of credit of $89 million in favor of certain lessors securing our obligations with respect to certain leases in favor of Ahold, securing Aholds contingent exposure under guarantees of our obligations with respect to those leases. Additionally, we entered into letters of credit of $183 million in favor of certain commercial insurers, securing our obligations for our insurance program, and letters of credit of $15 million for other obligations.
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 report in accordance with GAAP. Preparing these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and 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. The most critical accounting policies and estimates pertain to the valuation of goodwill and other intangible assets, property and equipment, vendor consideration, self-insurance programs, and income taxes.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the net assets recorded in Goodwill. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess goodwill and other intangible assets with indefinite lives for impairment each yearor more frequently, if events or changes in circumstances indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, our policy is to assess for impairment at the beginning of each fiscal third quarter. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to the consolidated Company as the reporting unit.
Our most recent assessment for impairment of goodwill used a discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples. These were employed to determine the fair value of the reporting unit for comparison to the corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, we must then perform a comparison of the implied fair value of goodwill with its carrying value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess. Based upon the most recent annual impairment analysis performed in 2013, we believe the fair value of the Companys reporting unit substantially exceeded its carrying value.
Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a discounted cash flow analysis. 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 our impairment analysis.
Property and Equipment
Property and equipment held and used by us 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, we compare 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 the asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess. We also assess the recoverability of our closed facilities actively marketed for sale. If a facilitys 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.
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Impairments are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as a reduction of the assets carrying value in the Consolidated Balance Sheets.
Vendor Consideration
We participate in various rebate and promotional incentives with our suppliers, primarily through purchase-based programs. Consideration earned under these incentives is recorded as a reduction of inventory cost, as the Companys obligations under the programs are fulfilled primarily when products are purchased. Consideration is typically received in the form of invoice deductions, or less often in the form of cash payments. Changes in the estimated amount of incentives earned are treated as changes in estimates and are recognized in the period of change.
Self-Insurance Programs
We accrue estimated liability amounts for claims covering general liability, fleet liability, workers compensation and group medical insurance programs. The amounts in excess of certain levels are fully insured. We accrue our estimated liability for the self-insured medical insurance program. This includes an estimate for claims that are incurred but not reported, based on known claims and past claims history. We accrue an estimated liability for the general liability, fleet liability and workers compensation programs, that is based on an assessment of exposure related to claims that are known and incurred but not reported, as applicable. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements 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 in the period that includes the enactment date. We record net deferred tax assets to the extent we believe 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. We adjust the amounts recorded for uncertain tax positions when our judgment changes as a result of the evaluation of new information not previously available. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers, which will be introduced into the FASBs Accounting Standards Codification as Topic 606. Topic 606 replaces the previous guidance on revenue recognition in Topic 605. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The standard will be effective for us in the first quarter of 2017, with early adoption not permitted. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. We are currently evaluating the impact of this ASU and have not yet selected an implementation approach.
In April 2014, the FASB issued ASU No. 2014-8, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the criteria for reporting discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. The update states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) or a major equity method investment. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends, with early adoption permitted. Our adoption of this guidance in the first quarter of 2014 had no impact on our financial position, results of operations or cash flows.
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In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. This update requires an entity to present an unrecognized tax benefitor a portion of an unrecognized tax benefitin the financial statements as a reduction to a deferred tax asset for a net operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward except when 1) an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; and 2) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice). If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. Additional recurring disclosures are not required, because this ASU does not affect the recognition, measurement or tabular disclosure of uncertain tax positions. This guidance is effective for fiscal yearsand interim periods within those fiscal yearsbeginning after December 15, 2013. Our adoption of this guidance in the first quarter of 2014 had no impact on our financial position, results of operations or cash flows.
Forward-Looking Statements
This report includes forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as believe, expect, project, anticipate, intend, plan, estimate, seek, will, may, would, should, could, forecasts, or similar expressions. These statements are based on certain assumptions that we have made in light of our industry experience, as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in these circumstances. We believe these judgments are reasonable. However, you should understand that these statements are not guarantees of performance or results. Our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, positive and negative.
Here are some important factors, among others, that could affect our actual results:
| Our ability to remain profitable during times of cost inflation, commodity volatility, and other factors |
| Industry competition and our ability to successfully compete |
| Our reliance on third-party suppliers, including the impact of any interruption of supplies or increases in product costs |
| Shortages of fuel and increases or volatility in fuel costs |
| Any declines in the consumption of food prepared away from home, including as a result of changes in the economy or other factors affecting consumer confidence |
| Costs and risks associated with labor relations and the availability of qualified labor |
| Any change in our relationships with GPOs |
| Our ability to increase sales to independent customers |
| Changes in industry pricing practices |
| Changes in competitors cost structures |
| Costs and risks associated with government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment, laws and regulations, and changes in existing laws or regulations |
| Technology disruptions and our ability to implement new technologies |
| Liability claims related to products we distribute |
| Our ability to maintain a good reputation |
| Costs and risks associated with litigation |
| Our ability to manage future expenses and liabilities associated with our retirement benefits |
| Our ability to successfully integrate future acquisitions |
| Our ability to achieve the benefits that we expect from our cost savings programs |
| Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates |
| Our ability to consummate the Acquisition with Sysco |
| Other factors discussed in this report |
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In light of these risks, uncertainties and assumptions, the forward-looking statements in this report might not prove to be accurate, and you should not place undue reliance on them. All forward-looking statements attributable to usor people acting on our behalfare expressly qualified in their entirety by the cautionary statements above. All of these statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the possibility of loss from adverse changes in market rates and prices, such as interest rates and commodity prices. A substantial portion of our debt facilities bear interest at floating rates, based on London Inter Bank Offered Rate (LIBOR) or the prime rate. Accordingly, we will be exposed to fluctuations in interest rates. A 1% change in LIBOR and the prime rate would cause the interest expense on our $2.8 billion of floating rate debt facilities to change by approximately $28 million per year. This change does not consider the LIBOR floor of 1.0% on $2 billion in principal of our variable rate term loans.
We are exposed to certain risks arising from both our business operations and overall economic conditions. We principally manage our exposures to a wide variety of business and operational risks through managing of our core business activities. We manage economic risksincluding interest rate, liquidity, and credit riskprimarily by managing the amount, sources, and duration of our debt funding. While we have held derivative financial instruments in the past to assist in managing our exposure to variable interest rate terms on certain of our borrowings, we are not currently party to any derivative contracts.
We are also exposed to risk due to fluctuations in the price and availability of diesel fuel. Increases in the cost of diesel fuel can negatively affect consumer spending, raise the price we pay for product purchases, and increase the costs we incur to deliver products to our customers. To minimize fuel-related risks, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As of June 28, 2014, we had diesel fuel forward purchase commitments totaling $66 million through June 2015. These locked in approximately 37% of our projected diesel fuel purchase needs for the contracted periods. A 10% change in diesel prices would cause our uncommitted diesel fuel costs through June 2015 to change by less than$10 million.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
US Foods maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SECs rules and forms, and that this information is accumulated and communicated to Company managementincluding its Chief Executive Officer and Chief Financial Officeras appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d-15(e) under the Securities Exchange Act of 1934, as amended) on June 28, 2014. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that on June 28, 2014, our disclosure controls and procedures were effective.
For information relating to legal proceedings, see Note 15 in the Notes to Unaudited Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Pricing Litigation
In October 2006, two customers filed a putative class action against the Company and Ahold. In December 2006, an amended complaint was filed naming a third plaintiff. The complaint focuses on the pricing practices we have in contracts with some of our customers. In February 2007, the Company filed a motion to dismiss the complaint. In August 2007, two additional customers filed putative class action complaints. These two additional lawsuits are based upon the same pricing practices as the October 2006 case. In November 2007, the Judicial Panel on Multidistrict Litigation ordered the transfer of the two additional lawsuits to the jurisdiction in which the first lawsuit was filedthe U.S. District Court for the District of Connecticutfor consolidated or coordinated proceedings. In June 2008, the Plaintiffs filed their consolidated and amended class action complaint. The Company moved to dismiss this
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complaint. In August 2009, the Plaintiffs filed a motion for class certification. In December 2009, the court issued a ruling on the Companys motion to dismiss. It dismissed Ahold from the case and also dismissed some of the plaintiffs claims. On November 30, 2011, the court issued its ruling granting the plaintiffs motion to certify the class. On April 4, 2012, the U.S. Court of Appeals for the Second Circuit granted the Companys request to appeal the district courts decision, which granted class certification. Oral argument was held and the court upheld the grant of class certification. The Company filed a writ of certiorari to the U.S. Supreme Court which was denied on April 29, 2014.
On May 20, 2014, an agreement in principle was reached to settle the matter for $297 million which would release the Company from all claims from all participating class members in relation to these pricing practices. Ahold has indemnified the Company in regards to this matter and, as a consequence, payment of the settlement will be made by Ahold and will not impact the Companys results of operations or cash flows. Accordingly, the Company has accrued a $297 million current liability and a corresponding $297 million indemnification receivable from Ahold in its Consolidated Balance Sheet at June 28, 2014 to reflect the settlement. The settlement was preliminarily approved by the United States District Court for the District of Connecticut on July 14, 2014 and is subject to final approval in late 2014 or early 2015. The settlement is also subject to potential reduction and/or termination based on the compensable sales volume attributable to class members that elect to opt out of the settlement.
See Risk Factors in the Companys Annual Report on Form 10-K as of and for the fiscal year ended December 28, 2013 There have been no material changes in this information.
In connection with the proposed Acquisition by Sysco, on December 8, 2013, our CEO, John Lederer, entered into a Letter Agreement (the Letter Agreement) with the Company whereby, subject to and conditioned upon the occurrence of the closing of the Acquisition by Sysco, Mr. Lederer has agreed to reduce his continuation of base salary payments and bonus amounts by $3 million to be allocated at his discretion as bonuses to current employees (other than himself). If the Merger Agreement terminates for any reason before the Acquisition closes or if the Acquisition does not close on or before March 8, 2015, the Letter Agreement will terminate and have no force and effect.
Exhibit Number |
Document Description | |
10.50* | Letter Agreement, dated December 8, 2013, by and between US Foods, Inc. and John Lederer | |
31.1* | Section 302 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Section 302 Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Interactive Data File. |
* | Filed herewith. |
| Furnished with this Report. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
US FOODS, INC. | ||||||
Date: August 12, 2014 | By: | /s/ FAREED KHAN | ||||
Fareed Khan | ||||||
Chief Financial Officer |
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