US FOODS HOLDING CORP. (Dollar amounts presented in millions, unless otherwise noted) The following discussion and analysis should be read together with the accompanying unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and the audited consolidated financial statements and the notes thereto in the 2020 Annual Report. The following discussion and analysis contain certain financial measures that are not required by, or presented in accordance with GAAP. We believe these non-GAAP measures provide meaningful supplemental information about our operating performance and liquidity. Information regarding reconciliations of and the rationale for these measures is discussed under "Non-GAAP Reconciliations" below. Results of operations for the 13 weeks and 39 weeks endedOctober 2, 2021 are compared to the 13 weeks and 39 weeks endedSeptember 26, 2020 unless specifically noted otherwise. OverviewAt US Foods , our promise is to help customers Make It by providing the innovative products and easy-to-use technology solutions they need to operate their businesses profitably. This promise is supported by our GREAT FOOD. MADE EASY.™ strategy. We operate as one business with standardized business processes, shared systems infrastructure, and an organizational model that optimizes national scale with local execution, allowing us to manage the business as a single operating segment. We have centralized activities where scale matters and our local field structure focuses on customer facing activities. We supply approximately 300,000 customer locations nationwide. These customer locations include independently owned single and multi-unit restaurants, regional restaurant chains, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. We provide more than 400,000 fresh, frozen, and dry food stock-keeping units, or SKUs, as well as non-food items, sourced from approximately 6,000 suppliers. Approximately 3,500 sales associates manage customer relationships at local, regional, and national levels. Our sales associates are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers. Our extensive network of approximately 70 distribution facilities and fleet of approximately 6,500 trucks, along with 80 cash and carry locations, allow us to operate efficiently and provide high levels of customer service. This operating model allows us to leverage our nationwide scale and footprint while executing locally. COVID-19 Update InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. Starting inMarch 2020 , in order to reduce the spread of COVID-19 and its variants, many countries, includingthe United States , took steps to restrict travel, temporarily close or enforce capacity restrictions on businesses, schools and other public gathering spaces including restaurants and recreational, sporting and other similar venues. Although vaccines have now been authorized and approved for use by theUnited States Food and Drug Administration for the vast majority ofthe United States population, including, most recently, for children aged five to eleven years, the restrictions and recommended safety measures related to COVID-19, such as capacity limits, physical distancing and face mask protocols still remain in effect in many parts of the country and continue to evolve. As such, the timing and extent of the economic recovery from the COVID-19 pandemic is dependent upon many factors, including the rate of vaccine adoption, the extent of COVID-19 variants (and the continued effectiveness of the vaccines against those variants) and the duration and implications of continued restrictions and safety measures. Recently-enacted federal and state executive orders have required certain employers, including us, currently or in the near term, to implement a vaccine mandate for employees and require periodic testing for employeeswho are not vaccinated. Additionally, onNovember 4, 2021 , theOccupational Safety and Health Administration ("OSHA") issued its related regulations for covered employers, including us, which set aJanuary 4, 2022 deadline for compliance. Such vaccine mandates could result in nationwide workforce, supply chain and production disruptions that could impact our business and delay, slow or reverse the economic recovery from the COVID-19 pandemic. Impact of COVID-19 on Our Business The COVID-19 pandemic has adversely impacted many of our customers, especially our restaurant, hospitality and education customers. As a result, we experienced decreased demand for our products, resulting in lower Net sales and total case volumes beginning inmid-March 2020 . We saw improvement in Net sales and total case volumes during the second and third quarters of 2021 as compared to the first quarter of 2021, with additional loosening of indoor dining restrictions and other safety measures. Overall demand has started to return to pre-COVID-19 levels; however, case volumes remained lower than pre-COVID-19 levels. Total case volume increased 18.5% and 20.8% for the 13 weeks and 39 weeks endedOctober 2, 2021 , compared to the prior year. Economic and operating conditions for our business have improved in each quarter of 2021 as compared to the fourth quarter of 2020. While many restrictions have been lifted and consumers are returning to consuming food away from home, traveling for personal and business purposes and attending sporting, entertainment and other events regularly. However, we and the industry may continue to face pandemic-related challenges as the recovery continues, such as constrains on the availability of product supply, increased product 19 -------------------------------------------------------------------------------- and logistics costs, labor shortages, and shifts in the buying patterns of our customers. Therefore, we are unable to predict the duration and extent to which the pandemic will continue to impact our results of operations. We are currently evaluating the impacts of theNovember 4, 2021 OSHA vaccine regulations related to the federal vaccine mandate and, therefore, we are unable to predict the impact vaccine mandates may have on our operations and our ability to access qualified labor or the impact such mandates may have on the workforces of our suppliers and customers. Operating Metrics Case growth-Case growth, by customer type (e.g., independent restaurants) is reported as of a point in time. Customers periodically are reclassified, based on changes in size or other characteristics, and when those changes occur, the respective customer's historical volume follows its new classification. Organic growth-Organic growth includes growth from operating business that has been reflected in our results of operations for at least 12 months. Highlights Financial Highlights-Total case volume for the 13 weeks and 39 weeks endedOctober 2, 2021 increased 18.5% and 20.8%, respectively, and independent restaurant case volume increased 25.1% and 33.5%, respectively for those same periods. Net sales increased$2,042 million , or 34.9%, and$5,101 million , or 30.5% for the 13 weeks and 39 weeks endedOctober 2, 2021 , primarily due to volume improvements commensurate with easing of COVID-19 related restrictions on our customers. The increase in Net sales during the 39 weeks endedOctober 2, 2021 was also due to the contributions from the Smart Foodservice acquisition, which was acquired onApril 24, 2020 . Smart Foodservice contributed Net sales of$895 million and$484 million for the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 , respectively. Gross profit increased$267 million , or 27.4%, to$1,241 million for the 13 weeks endedOctober 2, 2021 , and increased$702 million , or 25.9%, to$3,413 million for the 39 weeks endedOctober 2, 2021 , primarily as a result of the increase in Net sales. The increase in gross profit during the 39 weeks endedOctober 2, 2021 was also due to the contributions from the Smart Foodservice acquisition. These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments. As a percentage of net sales, gross profit was 15.7% for the 13 weeks endedOctober 2, 2021 , compared to 16.7% for the prior year period and was 15.6% for the 39 weeks endedOctober 2, 2021 , compared to 16.2% for the prior year period. Total operating expenses increased$210 million , or 23.4%, to$1,106 million for the 13 weeks endedOctober 2, 2021 , and increased$308 million , or 10.9%, to$3,126 million for the 39 weeks endedOctober 2, 2021 . The increase was primarily due to higher supply chain labor costs and increased non-labor distribution costs related to increased sales volume due to the COVID-19 recovery. The increase in total operating expenses during the 39 weeks endedOctober 2, 2021 was also due to the inclusion of operating expenses from the Smart Foodservice acquisition. As a percentage of net sales, operating expenses were 14.0% for the 13 weeks endedOctober 2, 2021 , compared to 15.3% for the prior year period and was 14.3% for the 39 weeks endedOctober 2, 2021 , compared to 16.8% for the prior year period. Smart Foodservice Acquisition-OnApril 24, 2020 , USF completed the acquisition of Smart Foodservice. Total consideration paid at the closing of the acquisition was$972 million (net of cash acquired). The acquisition of Smart Foodservice expanded the Company's cash and carry business in the West and Northwest parts of theU.S. The assets, liabilities and results of operations of Smart Foodservice have been included in our consolidated financial statements since the date the acquisition was completed. 20 --------------------------------------------------------------------------------
Results of Operations
The following table presents selected historical results of operations for the
periods indicated:
13 Weeks Ended 39 Weeks Ended
September 26, September 26,
October 2, 2021 2020 October 2, 2021 2020
Consolidated Statements of Operations Data:
Net sales $ 7,890 $ 5,848 $ 21,848 $ 16,747
Cost of goods sold 6,649 4,874 18,435 14,036
Gross profit 1,241 974 3,413 2,711
Operating expenses:
Distribution, selling and administrative costs 1,099 873 3,115 2,779
Restructuring costs and asset impairment
charges 7 23 11 39
Total operating expenses 1,106 896 3,126 2,818
Operating income (loss) 135 78 287 (107)
Other income-net (6) (6) (19) (16)
Interest expense-net 50 63 158 178
Loss on extinguishment of debt - - 23 -
Income (loss) before income taxes 91 21 125 (269)
Income tax provision (benefit) 27 13 30 (53)
Net income (loss) 64 8 95 (216)
Series A convertible preferred stock dividends
(see Note 14) (9) (10) (33) (15)
Net income (loss) available to common
shareholders $ 55 $ (2) $ 62 $ (231)
Percentage of Net Sales :
Gross profit 15.7 % 16.7 % 15.6 % 16.2 %
Operating expenses 14.0 % 15.3 % 14.3 % 16.8 %
Operating income (loss) 1.7 % 1.3 % 1.3 % (0.6) %
Net income (loss) 0.8 % 0.1 % 0.4 % (1.3) %
Adjusted EBITDA(1) 3.7 % 3.6 % 3.6 % 2.8 %
Other Data:
Cash flows-operating activities $ 270 $ (237) $ 520 $ 533
Cash flows-investing activities (65) 9 (166) (1,087)
Cash flows-financing activities (132) (429) (411) 1,475
Capital expenditures 66 23 173 154
EBITDA(1) 232 193 569 225
Adjusted EBITDA(1) 291 209 795 474
Adjusted net income(1) 119 42 292 25
Free cash flow(2) 204 (260) 347 379
(1) EBITDA is defined as net (loss) income, plus interest expense-net, income
tax (benefit) provision, and depreciation and amortization. Adjusted EBITDA is
defined as EBITDA adjusted for: (1) restructuring costs and asset impairment
charges; (2) share-based compensation expense; (3) the non-cash impact of LIFO
reserve adjustments; (4) loss on extinguishment of debt; (5) business
transformation costs; and (6) other gains, losses, or costs as specified in the
agreements governing our indebtedness. Adjusted net income is defined as net
income excluding the items used to calculate Adjusted EBITDA listed above and
further adjusted for the tax effect of the exclusions and discrete tax items.
EBITDA, Adjusted EBITDA, and Adjusted net income as presented are supplemental
measures of our performance that are not required by, or presented in accordance
with, GAAP. They are not measurements of our performance under GAAP and should
not be considered as alternatives to net (loss) income or any other performance
measures derived in accordance with GAAP. For additional information, see the
discussion under the caption "Non-GAAP Reconciliations" below.
(2) Free cash flow is defined as cash flows provided by operating activities
less cash capital expenditures. Free cash flow as presented is a supplemental
measure of our liquidity that is not required by, or presented in accordance
with, GAAP. It is not a measure of our liquidity under GAAP and should not be
considered as an alternative to cash flows provided by operating activities or
any other liquidity measures derived in accordance with GAAP. For additional
information, see the discussion under the caption "Non-GAAP Reconciliations"
below.
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Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow as
supplemental measures to GAAP financial measures regarding our operating
performance and liquidity. These non-GAAP financial measures, as defined above,
exclude the impact of certain items and, therefore, have not been calculated in
accordance with GAAP.
We believe EBITDA and Adjusted EBITDA provide meaningful supplemental
information about our operating performance because they exclude amounts that we
do not consider part of our core operating results when assessing our
performance.
We believe that Adjusted net income is a useful measure of operating performance
for both management and investors because it excludes items that are not
reflective of our core operating performance and provides an additional view of
our operating performance including depreciation, interest expense and income
taxes on a consistent basis from period to period. We believe that Adjusted net
income may be used by investors, analysts and other interested parties to
facilitate period-over-period comparisons and provides additional clarity as to
how factors and trends impact our operating performance.
Management uses these non-GAAP financial measures (1) to evaluate our historical
and prospective financial performance as well as our performance relative to our
competitors as they assist in highlighting trends, (2) to set internal sales
targets and spending budgets, (3) to measure operational profitability and the
accuracy of forecasting, (4) to assess financial discipline over operational
expenditures, and (5) as an important factor in determining variable
compensation for management and employees. EBITDA and Adjusted EBITDA are also
used in connection with certain covenants and activity restrictions under the
agreements governing our indebtedness. We also believe these and similar
non-GAAP financial measures are frequently used by securities analysts,
investors, and other interested parties to evaluate companies in our industry.
EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our
performance under GAAP and should not be considered as alternatives to net
income or any other performance measures derived in accordance with GAAP.
We use Free cash flow as a supplemental measure to GAAP financial measures
regarding the liquidity of our operations. We measure Free cash flow as cash
flows provided by operating activities less cash capital expenditures. We
believe that Free cash flow is a useful financial metric to assess our ability
to pursue business opportunities and investments. Free cash flow is not a
measure of our liquidity under GAAP and should not be considered as an
alternative to cash flows provided by operating activities or any other
liquidity measures derived in accordance with GAAP.
We caution readers that amounts presented in accordance with our definitions of
EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the
same as similar measures used by other companies. Not all companies and analysts
calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the
same manner. We compensate for these limitations by using these non-GAAP
financial measures as supplements to GAAP financial measures and by presenting
the reconciliations of the non-GAAP financial measures to their most comparable
GAAP financial measures.
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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and
Free cash flow to the most directly comparable GAAP financial performance and
liquidity measures for the periods indicated:
13 Weeks Ended 39 Weeks Ended
September 26, September 26,
October 2, 2021 2020 October 2, 2021 2020
Net income (loss) available to common
shareholders $ 55 $ (2) $ 62 $ (231)
Series A convertible preferred stock dividends
(see Note 14) (9) (10) (33) (15)
Net income (loss) 64 8 95 (216)
Interest expense-net 50 63 158 178
Income tax provision (benefit) 27 13 30 (53)
Depreciation expense 79 88 242 257
Amortization expense 12 21 44 59
EBITDA 232 193 569 225
Adjustments:
Restructuring costs and asset impairment
charges(1) 7 23 11 39
Share-based compensation expense(2) 13 10 36 29
LIFO reserve change(3) 32 3 150 9
Loss on extinguishment of debt(4) - - 23 -
Business transformation costs(5) 3 - 17 8
COVID-19 bad debt (benefit) expense(6) - (30) (15) 65
COVID-19 product donations and inventory
adjustments(7) - - - 40
COVID-19 other related expenses(8) - 4 1 15
Business acquisition and integration related
costs and
other(9) 4 6 3 44
Adjusted EBITDA 291 209 795 474
Depreciation expense (79) (88) (242) (257)
Interest expense-net (50) (63) (158) (178)
Income tax provision, as adjusted(10) (43) (16) (103) (14)
Adjusted net income(11) $ 119 $ 42 $ 292 $ 25
Cash flow
Cash flows from operating activities $ 270 $ (237) $ 520 $ 533
Capital expenditures (66) (23) (173) (154)
Free cash flow $ 204 $ (260) $ 347 $ 379
(1) Consists primarily of severance and related costs, organizational
realignment costs and asset impairment charges.
(2) Share-based compensation expense for expected vesting of stock awards and
employee stock purchase plan.
(3) Represents the non-cash impact of LIFO reserve adjustments.
(4) Includes early redemption premium and the write-off of certain pre-existing
debt issuance costs. See Note 10, Debt, for additional information.
(5) Consists primarily of costs related to significant process and systems
redesign across multiple functions.
(6) Includes the changes in the reserve for doubtful accounts expense
reflecting the collection risk associated with our customer base as a result of
the COVID-19 pandemic.
(7) Includes COVID-19 related expenses related to inventory adjustments and
product donations.
(8) Includes COVID-19 related costs that we are permitted to addback under
certain agreements governing our indebtedness.
(9) Includes: (i) aggregate acquisition and integration related costs of $4
million and $5 million for the 13 weeks ended October 2, 2021 and September 26,
2020 , respectively, and $16 million and $43 million for the 39 weeks ended
October 2, 2021 and September 26, 2020 , respectively; (ii) favorable legal
settlement recovery of $13 million for the 39 weeks ended October 2, 2021 ; and
(iii) other gains, losses or costs that we are permitted to addback for purposes
of calculating Adjusted EBITDA under certain agreements governing our
indebtedness.
(10) Represents our income tax provision adjusted for the tax effect of pre-tax
items excluded from Adjusted net income and the removal of applicable discrete
tax items. Applicable discrete tax items include changes in tax laws or rates,
changes related to prior year unrecognized tax benefits, discrete changes in
valuation allowances, and excess tax benefits associated with share-based
compensation. The tax effect of pre-tax items excluded from Adjusted net income
is computed using a statutory tax rate after taking into account the impact of
permanent differences and valuation allowances.
(11) Effective as of the first quarter 2021, we have presented Adjusted net
income. Previously, we presented Adjusted net income (loss) available to common
shareholders.
23
--------------------------------------------------------------------------------A reconciliation between the GAAP income tax benefit and the income tax provision, as adjusted, is as follows:
13 Weeks Ended 39 Weeks Ended
September 26, September 26,
October 2, 2021 2020 October 2, 2021 2020
GAAP income tax provision (benefit) $ 27 $ 13 $ 30 $ (53)
Tax impact of pre-tax income adjustments 17 3 68 72
Discrete tax items (1) - 5 (5)
Income tax provision, as adjusted $ 43 $ 16 $ 103 $ 14
Comparison of Results
13 Weeks Ended October 2, 2021 and September 26, 2020
Highlights
•Total case volume increased 18.5% and independent restaurant case volume
increased 25.1%
•Net sales increased $2,042 million , or 34.9%, to $7,890 million in 2021.
•Operating income increased $57 million , or 73.1%, to $135 million in 2021.
•Net income improved $56 million to $64 million in 2021.
•Adjusted EBITDA increased $82 million , or 39.2%, to $291 million in 2021. As a
percentage of Net sales, Adjusted EBITDA was 3.7% in 2021, compared to 3.6% in
2020.
Net Sales
Total case volume increased 18.5% and independent restaurant case volume growth
of 25.1%. The increase, all organic, was primarily driven by increased leisure
and business travel and increased restaurant traffic due to eased COVID-19
related restrictions on our customers.
Net sales increased $2,042 million , or 34.9%, to $7,890 million in 2021,
comprised of a $1,082 million , or 18.5%, increase in case volume and a $960
million , or 16.4%, increase in the overall Net sales rate per case. The increase
in Net sales rate per case reflects a year-over-year average inflation increase
of 11.5% in multiple product categories including beef, poultry, and pork, as
well as favorable changes in our product mix. The year-over-year increase in
inflation benefited Net sales since a significant portion of our Net sales is
based on a pre-established markup over product cost. Organic sales of private
brands represented approximately 34% of Net sales in both 2021 and 2020.
Gross Profit
Gross profit increased $267 million , or 27.4%, to $1,241 million in 2021,
primarily as a result of the increase in Net sales, partially offset by
unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory
costing resulted in an expense of $32 million in 2021 compared to expense of
$3 million in 2020 due to inflation in multiple product categories including
disposables, grocery, and seafood. Gross profit as a percentage of net sales was
15.7% in 2021, compared to 16.7% in 2020, due to the aforementioned factors.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and
restructuring costs and asset impairment charges, increased $210 million , or
23.4%, to $1,106 million in 2021. Operating expenses as a percentage of net
sales were 14.0% in 2021, compared to 15.3% in 2020. The increase in operating
expenses was primarily due to higher supply chain labor costs and non-labor
distribution costs attributable to increased sales volume as compared to the
prior year period. The prior year period reflected cost-reduction actions taken
in response to COVID-19 and a reduction in our allowance for doubtful accounts.
The Company also recognized $7 million of asset impairment charges in 2021
related to a rebranding initiative following the integration of a trade name
acquired as part of the 2019 Food Group acquisition. During 2020, the Company
also recognized $9 million of asset impairment charges related to COVID-19's
adverse impacts on the fair value of certain trade names acquired as part of the
2019 Food Group acquisition. These increases in operating expenses in 2021 were
partially offset by cost savings initiated in 2020.
Operating Income (Loss)
Our operating income was $135 million in 2021, compared to an operating income
of $78 million in 2020. The increase in operating income was due to the factors
discussed in the relevant sections above.
24
--------------------------------------------------------------------------------Other Income-Net Other income-net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income-net of$6 million in both 2021 and 2020. Interest Expense-Net Interest expense-net decreased$13 million to$50 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020. Income Taxes For the 13 weeks endedOctober 2, 2021 , our effective income tax rate of 30% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. The discrete tax items were not material individually or in the aggregate; however, when compared to the pre-tax income of$91 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate. For the 13 weeks endedSeptember 26, 2020 , our effective income tax rate of 58% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. Because pre-tax income for the 13 weeks endedSeptember 26, 2020 was$21 million , all tax adjustments had a significant impact on a percentage basis on the effective income tax rate. The discrete tax items were not material individually or in the aggregate; however, when compared to the pre-tax income of$21 million for the period on a percentage basis, these tax items had a significant impact on the effective tax rate. Net Income (Loss) Our net income was$64 million in 2021, compared to net income of$8 million in 2020. The improvement in net income was due to the relevant factors discussed above. 39 Weeks EndedOctober 2, 2021 andSeptember 26, 2020 Highlights •Total case volume increased 20.8% and independent restaurant case volume increased 33.5% •Net sales increased$5,101 million , or 30.5%, to$21,848 million in 2021. •Operating income was$287 million in 2021, compared to operating loss of$107 million in 2020. •Net income was$95 million in 2021, compared to net loss of$216 million in 2020. •Adjusted EBITDA increased$321 million , or 67.7%, to$795 million in 2021. As a percentage of Net sales, Adjusted EBITDA was 3.6% in 2021, compared to 2.8% in 2020.Net Sales Total case volume increased 20.8% in 2021 and independent restaurant case volume growth of 33.5%. Organic case volume increased 17.8% and organic independent restaurant case volume increased 29.4%. The increase was primarily driven by increased leisure and business travel and increased restaurant traffic due to eased COVID-19 related restrictions on our customers. Net sales increased$5,101 million , or 30.5%, to$21,848 million in 2021, comprised of a$3,490 million , or 20.8%, increase in case volume and a$1,611 million , or 9.7%, increase in the overall Net sales rate per case. The increase in Net sales rate per case primarily reflects a year-over-year average inflation increase of 7.5% in multiple product categories including poultry, beef and disposables, as well as favorable changes in our product mix. The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost. Organic sales of private brands represented approximately 34% and 35% of Net sales in 2021 and 2020, respectively. The increase in Net sales was also due to contributions from the Smart Foodservice acquisition. Smart Foodservice contributed net sales of$895 million in 2021, as compared to$484 million in 2020. Gross Profit Gross profit increased$702 million , or 25.9%, to$3,413 million in 2021, primarily as a result of the increase in Net sales. The increase in gross profit was also due to contributions from the Smart Foodservice acquisition. These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of$150 million in 2021 compared to expense of$9 million in 2020 due to inflation in multiple product categories including beef, poultry, and grocery. Gross profit as a percentage of net sales was 15.6% in 2021, compared to 16.2% in 2020. 25 --------------------------------------------------------------------------------
Operating Expenses Operating expenses, comprised of distribution, selling and administrative and restructuring costs and asset impairment costs, increased$308 million or 10.9%, to$3,126 million in 2021. Operating expenses as a percentage of net sales were 14.3% in 2021, compared to 16.8% in 2020. The increase in operating expenses was primarily due to higher supply chain labor costs and non-labor distribution costs attributable to increased sales volume as compared to the prior year period. The prior year period reflected cost-reduction actions taken in response to COVID-19. The Company also recognized$7 million of asset impairment charges related to a rebranding initiative following the integration of a trade name acquired as part of the 2019Food Group acquisition. During 2020, the Company also recognized$9 million of asset impairment charges related to COVID-19's adverse impacts on the fair value of certain trade names acquired as part of the 2019Food Group acquisition. The increase in operating expenses was also due to the inclusion of operating expenses for the Smart Foodservice acquisition of$119 million in 2021, as compared to$69 million in 2020. These increases in operating expenses were partially offset by a$98 million lower provision for doubtful accounts during the 39 weeks endedOctober 2, 2021 , cost savings initiated in 2020 and a favorable legal settlement recovery of$13 million during the 39 weeks endedOctober 2, 2021 . Operating Income (Loss) Our operating income was$287 million in 2021, compared to operating loss of$107 million in 2020. The increase in operating income was due to the factors discussed in the relevant sections above. Other Income-Net Other income-net includes components of net periodic pension benefit credits, exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income-net of$19 million and$16 million in 2021 and 2020, respectively. The increase in other income-net in 2021 is primarily due to the improved funded status of our defined benefit pension plan. Interest Expense-Net Interest expense-net decreased$20 million to$158 million in 2021, primarily due to a decrease in interest rates and outstanding debt in 2021 compared to 2020. Loss on Extinguishment of Debt As discussed in Note 10, Debt, in our consolidated financial statements, we incurred a$23 million loss on extinguishment of debt during the 39 weeks endedOctober 2, 2021 related to the repayment of our Unsecured Senior Notes due 2024 and 2020 Incremental Term Loan Facility related to the issuance of our Senior Unsecured Notes due 2029. Income Taxes For the 39 weeks endedOctober 2, 2021 , our effective income tax rate of 24% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of$5 million , primarily related to excess tax benefits associated with share-based compensation. For the 39 weeks endedSeptember 26, 2020 , our effective income tax rate of 20% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of$2 million primarily related to an increase in an unrecognized tax benefit and a tax expense of$2 million primarily related to a tax benefit shortfall associated with share-based compensation. Net Income (Loss) Our net income was$95 million in 2021, compared to net loss of$216 million in 2020. The improvement in net income was due to the relevant factors discussed above. Liquidity and Capital Resources Our ongoing operations and strategic objectives require working capital and continuing capital investment. Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements. We believe that the combination of cash on hand and generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements through the end of fiscal year 2022. As ofOctober 2, 2021 , the Company had approximately$2.5 billion in cash and available liquidity. 26 --------------------------------------------------------------------------------
Indebtedness The aggregate carrying value of our indebtedness was$5,396 million , net of$48 million of unamortized deferred financing costs, as ofOctober 2, 2021 . We had no outstanding borrowings and had issued letters of credit totaling$253 million under the ABL Facility as ofOctober 2, 2021 . There was remaining capacity of$1,737 million under the ABL Facility as ofOctober 2, 2021 . The Initial Term Loan Facility had a carrying value of$1,783 million , net of$2 million of unamortized deferred financing costs, as ofOctober 2, 2021 . During the 39 weeks endedOctober 2, 2021 , the Company made voluntary prepayments of the Initial Term Loan Facility totaling$300 million . The 2019 Incremental Term Loan Facility had a carrying value of$1,444 million , net of$26 million of unamortized deferred financing costs, as ofOctober 2, 2021 . The Secured Notes had a carrying value of$989 million , net of$11 million of unamortized deferred financing costs, as ofOctober 2, 2021 . We also had$281 million of obligations under financing leases for transportation equipment and building leases as ofOctober 2, 2021 . As ofOctober 2, 2021 , the Unsecured Senior Notes due 2029 had a carrying value of$891 million , net of$9 million of unamortized deferred financing costs. The ABL Facility will mature in 2024. The Initial Term Loan Facility and the 2019 Incremental Term Loan Facility will mature in 2023 and 2026, respectively. The Secured Notes will mature in 2025. The Unsecured Senior Notes due 2029 will mature in 2029. As economic conditions permit, we will consider opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms. Any potential debt reduction or refinancing could require significant use of our other available liquidity and capital resources. The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on our assets, pay dividends, or engage in mergers or consolidations. USF had approximately$1.4 billion of restricted payment capacity under these covenants and approximately$2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as ofOctober 2, 2021 . Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding. We are not aware of any facts that indicate our lenders will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties. From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage, including the voluntary prepayments under the Initial Term Loan Facility noted above. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, our debt trading levels, our cash position, and other considerations. See Note 10, Debt, in our consolidated financial statements, for a further description of our indebtedness. Cash Flows The following table presents condensed highlights from our Consolidated Statements of Cash Flows for the periods presented: 39 Weeks Ended September 26, October 2, 2021 2020 Net income (loss) $ 95$ (216) Changes in operating assets and liabilities 62 383 Other adjustments 363 366 Net cash provided by operating activities 520 533 Net cash used in investing activities (166) (1,087) Net cash (used in) provided by financing activities (411) 1,475
Net (decrease) increase in cash, cash equivalents and restricted cash
(57) 921
Cash, cash equivalents and restricted cash-beginning of period 829 98
Cash, cash equivalents and restricted cash-end of period $
772$ 1,019 27
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Operating Activities Cash flows provided by operating activities was$520 million for the 39 weeks endedOctober 2, 2021 , compared to cash flows provided by operating activities of$533 million for the 39 weeks endedSeptember 26, 2020 . The Company's working capital requirements increased in 2021 in line with the improvement in operating results and recovery of sales volumes. Investing Activities Cash flows used in investing activities in the 39 weeks endedOctober 2, 2021 andSeptember 26, 2020 included cash expenditures of$173 million and$154 million , respectively, on investments in information technology, new construction and/or expansion of distribution facilities, and property and equipment for fleet replacement. Cash flows used in investing activities for the 39 weeks endedSeptember 26, 2020 also included the$973 million cash purchase price for the acquisition of Smart Foodservice. We expect total cash capital expenditures in fiscal year 2021 to be between$300 million and$315 million , exclusive of approximately$55 million to$65 million of capital expenditures under our fleet financing leases. We expect to fund our capital expenditures with available cash or cash generated from operations and through fleet financing. Financing Activities Cash flows used by financing activities in the 39 weeks endedOctober 2, 2021 included$96 million of scheduled payments under our Term Loan Facilities and financing leases and$300 million of voluntary prepayments of the Initial Term Loan Facility. We incurred approximately$18 million of lender fees and third-party costs in connection with our issuance of the Unsecured Notes due 2029, consisting of a$9 million early redemption premium related to the Unsecured Senior Notes due 2024 and$9 million of costs associated with the issuance of the Unsecured Senior Notes due 2029, which were capitalized as deferred financing costs. Cash flows used by financing activities in the 39 weeks endedOctober 2, 2021 also included$18 million of dividends on our Series A convertible preferred stock. Cash flows provided by financing activities for the 39 weeks endedOctober 2, 2021 included aggregate borrowings of$900 million under the Unsecured Senior Notes due 2029. We used the proceeds from the issuance of the Unsecured Senior Notes due 2029, together with cash on hand, to redeem all of the then outstanding Unsecured Senior Notes due 2024 and repay all of the then outstanding borrowings under the 2020 Incremental Term Loan Facility. Cash flows provided by financing activities for the 39 weeks endedOctober 2, 2021 also included$16 million of proceeds received from stock purchases under our employee stock purchase plan and$13 million of proceeds from the exercise of employee stock options, which were offset by$13 million of employee tax withholdings paid in connection with the vesting of stock awards. Cash flows provided by financing activities for the 39 weeks endedSeptember 26, 2020 included aggregate borrowings of$700 million under the 2020 Incremental Term Loan Facility, the proceeds of which were used to finance, in part, the Smart Foodservice acquisition;$1.0 billion of gross proceeds from the issuance of the Secured Notes; and$500 million of proceeds, net of$9 million of related fees, from the issuance and sale of 500,000 shares of our Series A convertible preferred stock. We borrowed an aggregate of$1 billion under the ABL Facility and our former accounts receivable financing facility (the "ABS Facility") inMarch 2020 for the purposes of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the onset of the COVID-19 pandemic. Financing activities for the 39 weeks endedSeptember 26, 2020 also included$15 million of proceeds from stock purchases under our employee stock purchase plan and$2 million of proceeds received from the exercise of employee stock options, which were partially offset by$5 million of employee tax withholdings paid in connection with the vesting of stock awards. Cash flows used by financing activities for the 39 weeks endedSeptember 26, 2020 included$105 million of scheduled payments under our Term Loan Facilities and financing leases. We used part of the proceeds from the issuance of the Secured Notes to repay$400 million in principal amount of the 2020 Incremental Term Loan Facility, and we used$542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility, which was subsequently terminated. We incurred approximately$33 million of lender fees and third-party costs in connection with the aforementioned financing transactions. Retirement Plans See Note 12, Retirement Plans, in our consolidated financial statements for a description of our retirement plans. Off-Balance Sheet Arrangements We had$253 million of letters of credit outstanding, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs, under the ABL Facility as ofOctober 2, 2021 . Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. 28 --------------------------------------------------------------------------------
Contractual Obligations See the Contractual Obligations section in Part II, Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Annual Report for our contractual cash obligations as ofJanuary 2, 2021 . There have been no material changes to our specified contractual obligations throughOctober 2, 2021 , except as disclosed in Note 10, Debt, in our consolidated financial statements. Critical Accounting Policies and Estimates We have prepared the financial information in this Quarterly Report in accordance with GAAP. Preparing the Company's consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Part II, Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Annual Report includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenue, or expenses during the 39 weeks endedOctober 2, 2021 . Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see Note 2, Recent Accounting Pronouncements, in our consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to certain risks arising from both our business operations and overall economic conditions. Our market risks include interest rate risk and fuel price risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk Our debt exposes us to risk of fluctuations in interest rates. Floating rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at higher rates. We manage our debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that position. We had previously entered into interest rate swap agreements to limit our exposure to variable interest rate terms on certain borrowings under our Initial Term Loan Facility. The interest rate swap agreements expired onJuly 31, 2021 . The risks associated with interest rate swaps include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties. Approximately 60% of the principal amount of our debt bore interest at floating rates based on LIBOR or ABR, as ofOctober 2, 2021 . A hypothetical 1% change in the applicable rate would cause the interest expense on our floating rate debt to change by approximately$33 million per year (see Note 10, Debt, in our consolidated financial statements). InJuly 2017 , theUnited Kingdom's Financial Conduct Authority , which regulates LIBOR announced that it intends to phase out the use of LIBOR by the end of 2021. OnMarch 5, 2021 , theICE Benchmark Authority ("IBA"), the administrator of LIBOR, announced the cessation of the publication of the one week and two monthU.S. dollar LIBOR tenors immediately following their publication onDecember 31, 2021 , and all otherU.S. dollar LIBOR tenors immediately following their publication onJune 30, 2023 . We are unable to predict the impact of using alternative reference rates and corresponding rate risk as of this time. Fuel Price Risk We are also exposed to risk due to fluctuations in the price and availability of diesel fuel. We require significant quantities of diesel fuel for our vehicle fleet, and the price and supply of diesel fuel are unpredictable and fluctuate based on events outside our control, including geopolitical developments, supply and demand for oil and gas, regional production patterns, weather conditions and environmental concerns. Increases in the cost of diesel fuel can negatively affect consumer confidence and discretionary spending and increase the prices we pay for products, and the costs we incur to deliver products to our customers. Our activities to minimize fuel cost risk include route optimization, improving fleet utilization and assessing fuel surcharges. We also enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As ofOctober 2, 2021 , we had diesel fuel forward purchase commitments totaling$31 million , which fix approximately 19% of our projected diesel fuel purchase needs 29 -------------------------------------------------------------------------------- throughDecember 2022 . Our remaining fuel purchase needs will occur at market rates unless contracted for at a fixed price or hedged at a later date. Using current published market price projections for diesel and estimated fuel consumption needs, a hypothetical 10% unfavorable change in diesel prices from the market price could result in approximately$17 million in additional fuel cost on uncommitted volumes throughDecember 2022 . Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain 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 our reports filed or submitted under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in theSEC's rules and forms, and that this information is accumulated and communicated to Company management, including our Chief Executive Officer and Chief Financial Officer, as 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. As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as ofOctober 2, 2021 . Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the fiscal quarter endedOctober 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As permitted by applicableSEC guidance, the scope of our evaluation regarding changes in our internal control over financial reporting during the fiscal quarter endedOctober 2, 2021 excluded internal control over financial reporting for Smart Foodservice, which was acquired onApril 24, 2020 . 30
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