US FOODS HOLDING CORP. The following discussion and analysis is intended to help the reader understand the Company, our financial condition and results of operations and our present business environment. It should be read together with our consolidated financial statements and related notes contained elsewhere in this Annual Report. The following discussion and analysis contain certain financial measures that are not required by, or presented in accordance with, accounting principles generally accepted in theU.S. ("GAAP"). We believe these non-GAAP financial measures provide meaningful supplemental information about our operating performance and liquidity. Information regarding reconciliations of and the rationale for these measures is discussed in "Non-GAAP Reconciliations" below. The following includes a comparison of our consolidated results of operations for fiscal years 2022 and 2021. For a comparison of our consolidated results of operations for fiscal years 2021 and 2020, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2022 , filed with theSEC onFebruary 17, 2022 .
Overview
Our operations, our industry and theU.S. economy continue to be impacted by higher than normal inflation, supply chain disruptions, and labor shortages. These factors also influence the buying patterns of our customers and potentially impact consumer confidence and spending. During fiscal year 2022, these factors improved significantly from fiscal year 2021 due to the declining effects of the COVID-19 pandemic. We continue to actively monitor these risks to our business. Net sales increased, primarily due to continued inflation, and total case volumes increased 1.7% compared to the prior year driven by a 4.3% increase in independent restaurant case volume, a 31.0% increase in hospitality volume and a 2.9% increase in healthcare volume. We are unable to predict the extent these factors will continue to impact our results of operations.
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.
Fiscal Year 2022 Highlights
Financial Highlights-Total case volume increased 1.7% and independent restaurant case volume increased 4.3% in fiscal year 2022. Net sales increased$4,570 million , or 15.5%, in fiscal year 2022 primarily due to year-over-year inflation in multiple product categories. Gross profit increased$837 million , or 18.0%, to$5,492 million in fiscal year 2022, primarily as a result of food cost inflation in multiple product categories, optimized pricing, increased freight income from improved inbound logistics, cost of goods sold optimization and a favorable year-over-year last-in first-out ("LIFO") adjustment. As a percentage of Net sales, gross profit was 16.1% in fiscal year 2022, compared to 15.8% in fiscal year 2021. Total operating expenses increased$667 million , or 15.8%, to$4,898 million in fiscal year 2022. The increase was primarily due to higher distribution costs, largely due to higher labor costs as a result of increased turnover and higher than normal wage inflation. These increases were partially offset by cost savings initiatives outlined in our long-range plan including: (1) further routing improvements, (2) completion of new warehouse selection technology implementation, and (3) the rollout of new warehouse process enhancements. 24 --------------------------------------------------------------------------------
Results of Operations
The following table presents selected consolidated results of operations of our business for fiscal years 2022, 2021 and 2020:
Fiscal Year
2022 2021 2020
(in millions)
Consolidated Statements of Operations:
Net sales $ 34,057 $ 29,487 $ 22,885
Cost of goods sold 28,565 24,832 19,166
Gross profit 5,492 4,655 3,719
Operating expenses:
Distribution, selling and administrative costs 4,886 4,220 3,757
Restructuring costs and asset impairment charges 12 11 39
Total operating expenses 4,898 4,231 3,796
Operating income (loss) 594 424 (77)
Other income-net (22) (26) (21)
Interest expense-net 255 213 238
Loss on extinguishment of debt - 23 -
Income (loss) before income taxes 361 214 (294)
Income tax provision (benefit) 96 50 (68)
Net income (loss) 265 164 (226)
Series A Preferred Stock dividends (37) (43) (28)
Net income (loss) available to common shareholders $ 228 $ 121 $ (254)
Net income (loss) per share:
Basic $ 1.02 $ 0.55 $ (1.15)
Diluted $ 1.01
224 222 220
Diluted 226 225 220
Percentage of Net Sales :
Gross profit 16.1 % 15.8 % 16.3 %
Operating expenses 14.4 % 14.3 % 16.6 %
Operating income (loss) 1.7 % 1.4 % (0.3) %
Net income (loss) 0.8 % 0.6 % (1.0) %
Adjusted EBITDA(1) 3.8 % 3.6 % 2.8 %
Other Data:
Cash flows-operating activities $ 765 $ 419 $ 413
Cash flows-investing activities (255) (262) (1,110)
Cash flows-financing activities (447) (837) 1,427
Capital expenditures 265 274 189
EBITDA(1) 988 805 366
Adjusted EBITDA(1) 1,310 1,057 648
Adjusted net income (1) 538 388 48
Free cash flow(2) 500 145 224
(1) EBITDA is defined as net income (loss), plus interest expense-net, income
tax provision (benefit), and depreciation and amortization. Adjusted EBITDA is
defined as EBITDA adjusted for (1) restructuring costs and asset impairment
charges; (2) share-based compensation expense; (3) the impact of LIFO reserve
adjustments; (4) loss on extinguishment of debt; (5) business transformation
costs; and (6) other gains, losses, or costs as specified in the agreements
governing our indebtedness. Adjusted EBITDA margin is Adjusted EBITDA divided by
total Net sales. 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 in this Annual Report are
supplemental measures of our performance that are not required by, or presented
in accordance with GAAP. They are not measurements of our performance under GAAP
and should not be considered as alternatives to net income (loss) or any other
performance measures derived in accordance with GAAP. For additional
information, see the discussion under the caption "Non-GAAP Reconciliations"
below.
25
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(2) Free cash flow is defined as cash flows provided by operating activities
less cash capital expenditures. Free cash flow as presented in this Annual
Report 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.
Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, 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, Adjusted EBITDA and Adjusted EBITDA margin 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, Adjusted EBITDA margin 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 EBITDA margin, 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.
26
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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:
Fiscal Year
2022 2021 2020
(in millions)
Net income (loss) available to common shareholders $ 228 $ 121 $ (254)
Series A Preferred Stock dividends (see Note 14) (37) (43) (28)
Net income (loss) 265 164 (226)
Interest expense-net 255 213 238
Income tax provision (benefit) 96 50 (68)
Depreciation expense 327 323 343
Amortization expense 45 55 79
EBITDA 988 805 366
Adjustments:
Restructuring costs and asset impairment charges(1) 12 11 39
Share-based compensation expense(2) 45 48 40
LIFO reserve adjustment(3) 147 165 25
Loss on extinguishment of debt(4) - 23 -
Business transformation costs(5) 52 22 22
COVID-19 bad debt (benefit) expense(6) - (15) 47
COVID-19 product donations and inventory adjustments(7) - - 50
COVID-19 other related expenses(8) - 3 13
Business acquisition and integration related costs and other(9) 66
(5) 46
Adjusted EBITDA 1,310 1,057 648
Depreciation expense (327) (323) (343)
Interest expense-net (255) (213) (238)
Income tax provision, as adjusted(10) (190) (133) (19)
Adjusted net income(11) $ 538 $ 388 $ 48
Cash flow
Cash flows from operating activities $ 765 $ 419 $ 413
Capital expenditures (265) (274) (189)
Free cash flow $ 500 $ 145 $ 224
(1) Consists primarily of the write-off of old leases ROU asset and lease
liability of $9 million associated with entering into new lease agreements for
four distribution facilities in fiscal year 2022, non-CEO severance and related
costs, organizational realignment costs and other asset impairment charges.
(2) Share-based compensation expense for expected vesting of stock awards and
employee stock purchase plan.
(3) Represents the impact of LIFO reserve adjustments.
(4) Includes early redemption premium and the write-off of certain pre-existing
debt issuance costs. See Note 11, Debt, in our consolidated financial statements
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 add back under
certain agreements governing our indebtedness.
(9) Includes: (i) aggregate acquisition and integration related costs of $22
million for both fiscal years 2022 and 2021, and $45 million for fiscal year
2020; (ii) contested proxy and related legal and consulting costs of $21 million
for fiscal year 2022; (iii) CEO severance of $5 million for fiscal year 2022;
(iv) favorable legal settlement recoveries of $29 million for fiscal year 2021;
and (v) other gains, losses or costs that we are permitted to add back for
purposes of calculating Adjusted EBITDA under certain agreements governing our
indebtedness.
(10) Represents our income tax provision (benefit) 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.
27
--------------------------------------------------------------------------------A reconciliation between the GAAP income tax provision (benefit) and the income tax provision, as adjusted, is as follows:
Fiscal Year
2022 2021 2020
(in millions)
GAAP income tax provision (benefit) $ 96 $ 50 $ (68)
Tax impact of pre-tax income adjustments 89 74 92
Discrete tax items 5 9 (5)
Income tax provision, as adjusted $ 190 $ 133 $ 19
Comparison of Results
Fiscal Years Ended
Highlights
•Net income was
•Adjusted EBITDA increased$253 million , or 23.9%, to$1,310 million in fiscal year 2022. As a percentage of net sales, Adjusted EBITDA was 3.8% in fiscal year 2022, as compared to 3.6% in fiscal year 2021.
•Net sales increased
•Total case volume increased 1.7% and independent restaurant case volume increased 4.3% in fiscal year 2022.
•Operating income was$594 million in fiscal year 2022, compared to operating income of$424 million in fiscal year 2021. As a percentage of net sales, operating income was 1.7% in fiscal year 2022, as compared to 1.4% in fiscal year 2021.Net Sales
Total case volume increased 1.7% and independent restaurant case volume increased 4.3% in fiscal year 2022. Year-over-year total case growth was negatively impacted roughly 2.8% by the mid-2021 exit of the lower margin grocery retail business we temporarily added during the pandemic and the strategic exit of a small number of lower margin chain restaurant and education customers.
Net sales increased$4,570 million , or 15.5%, to$34,057 million in fiscal year 2022, comprised of a$488 million , or 1.7%, increase in total case volume and a$4,082 million , or 13.8%, 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 13.0% in multiple product categories including grocery, dairy 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. Sales of private brands represented approximately 34% of Net sales in both 2022 and 2021. Gross Profit Gross profit increased$837 million , or 18.0%, to$5,492 million in fiscal year 2022, primarily as a result of food cost inflation in multiple product categories, optimized pricing, increased freight income from improved inbound logistics, cost of goods sold optimization, and a favorable year-over-year LIFO adjustment. Our LIFO method of inventory costing resulted in expense of$147 million in fiscal year 2022, compared to expense of$165 million in fiscal year 2021 due to inflation in multiple product categories including grocery, dairy and disposables. Gross profit as a percentage of net sales was 16.1% in fiscal year 2022, compared to 15.8% in fiscal year 2021, primarily driven by increased case volume, and a decrease in LIFO expense in fiscal year 2022 as compared to fiscal year 2021. 28 --------------------------------------------------------------------------------
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative costs and restructuring costs and asset impairment charges, increased$667 million , or 15.8%, to$4,898 million in fiscal year 2022. Operating expenses as a percentage of net sales were 14.4% in fiscal year 2022, compared to 14.3% in fiscal year 2021. The increase in operating expenses was primarily due to higher distribution costs, largely due to higher labor costs as a result of increased turnover and higher than normal wage inflation. The increase was partially offset by cost savings initiatives outlined in our long-range plan including: (1) further routing improvements, (2) completion of new warehouse selection technology implementation, and (3) the rollout of new warehouse process enhancements.
Operating Income
Our operating income was$594 million in fiscal year 2022, compared to operating income of$424 million in fiscal year 2021. Operating income as a percentage of Net sales was 1.7% in fiscal year 2022, compared to 1.4% in fiscal year 2021. 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 benefit costs (credits), exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income-net of$22 million and$26 million in fiscal years 2022 and 2021, respectively. The decrease in other income-net in 2022 is primarily due to a decrease in the expected return on assets compared to fiscal year 2021.
Interest Expense-Net
Interest expense-net increased$42 million in fiscal year 2022, primarily due to an increase in interest rates, partially offset by lower outstanding debt in fiscal year 2022 compared to fiscal year 2021.
Income Taxes
Our effective income tax rate for fiscal year 2022 of 27% varied 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 an aggregate tax benefit of$5 million consisting primarily of a tax benefit of$1 million related to a decrease in an unrecognized tax benefit and a tax benefit of$4 million , related to excess tax benefits associated with share-based compensation. Our effective income tax rate for fiscal year 2021 of 23% varied 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 an aggregate tax benefit of$10 million consisting of a tax benefit of$2 million related to a decrease in an unrecognized tax benefit and a tax benefit of$8 million , primarily related to excess tax benefits associated with share-based compensation. Net Income Our net income was$265 million in fiscal year 2022, compared to$164 million in fiscal year 2021. The increase in net income was due to the relevant factors discussed above.
Liquidity and Capital Resources
Our ongoing operations and strategic objectives require working capital and continuing capital investment. Our primary sources of liquidity include cash provided by operations, as well as access to capital from bank borrowings and other types of debt and financing arrangements. As ofDecember 31, 2022 , the Company had approximately$2.0 billion in cash and available liquidity.
Indebtedness
The aggregate carrying value of our indebtedness was
We had no outstanding borrowings and had issued letters of credit totaling$462 million under the ABL Facility as ofDecember 31, 2022 . There was remaining capacity of$1,838 million under the ABL Facility based on our borrowing base as ofDecember 31, 2022 .
The Company's 4.75% Senior Notes due 2029 (the "Unsecured Senior Notes due
2029"), had an outstanding balance of
The Company's 4.625% Senior Notes due 2030 (the "Unsecured Senior Notes due
2030") had an outstanding balance of
29
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The incremental senior secured term loan borrowed in September 2019 (the "2019
Incremental Term Loan Facility") had a carrying value of $1,232 million , net of
$19 million of unamortized deferred financing costs, as of December 31, 2022 .
The incremental senior secured term loan borrowed in November 2021 (the "2021
Incremental Term Loan Facility") had a carrying value of $786 million , net of $6
million of unamortized deferred financing costs, as of December 31, 2022 .
The Amended and Restated Term Loan Credit Agreement, dated as of
The Company's 6.25% senior secured notes due
We also had
The ABL Facility will mature in 2027. The 2019 Incremental Term Loan Facility and the 2021 Incremental Term Loan Facility will mature in 2026 and 2028, respectively. 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 available liquidity and capital resources. We believe that the combination of cash generated from operations, together with borrowing capacity under the agreements governing our indebtedness and other financing arrangements, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs, and capital expenditure requirements for the next 12 months as well as beyond 12 months. 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. For additional information, see Item 1A of Part I, "Risk Factors-Risks Relating to Our Indebtedness." USF had approximately$1.6 billion of restricted payment capacity under these covenants and approximately$2.9 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as ofDecember 31, 2022 . Every quarter, we review rating agency changes for all of the lenders that have a continuing obligation to provide us with funding. We are not aware of any facts that indicate our lenders will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets generally and the strength of our lender counterparties. From time to time, we may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our leverage. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, our debt trading levels, our cash position, and other considerations. Any potential debt reduction or other debt retirement could require significant use of our other available liquidity and capital resources.
See Note 11, 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 fiscal years 2022 and 2021:
Fiscal Year
2022 2021
(in millions)
Net income $ 265 $ 164
Changes in operating assets and liabilities 43 (230)
Other adjustments 457 485
Net cash provided by operating activities 765 419
Net cash used in investing activities (255) (262)
Net cash used by financing activities (447) (837)
Net increase (decrease) in cash, cash equivalents and restricted cash
63 (680) Cash, cash equivalents and restricted cash-beginning of year 148 828 Cash, cash equivalents and restricted cash-end of year $
211
30
--------------------------------------------------------------------------------Operating Activities
Cash flows provided by operating activities increased$346 million to$765 million in fiscal year 2022 driven by higher net income and changes in operating assets and liabilities. Net cash provided by operating activities in fiscal year 2021 was$419 million as the Company's working capital requirements increased in line with the recovery of sales volumes.
Investing Activities
Cash flows used in investing activities in fiscal years 2022 and 2021 included cash expenditures of$265 million and$274 million , respectively, and related to investments in information technology, new construction and expansion of distribution facilities and property and equipment for fleet replacement. We expect total cash capital expenditures in fiscal year 2023 to be between$290 million and$310 million , exclusive of approximately$120 million of capital expenditures under our fleet financing leases. We expect to fund our capital expenditures with available cash or cash generated from operations and through fleet financing. Financing Activities Cash flows used by financing activities in fiscal year 2022 included$108 million of scheduled payments under our Term Loan Facilities and financing leases,$100 million of voluntary prepayments of our 2021 Incremental Term Loan Facility,$200 million of voluntary prepayments of our 2019 Incremental Term Loan Facility,$37 million of dividends on our Series A Preferred Stock, no net payments under the ABL Facility and$14 million of share repurchases. We incurred approximately$4 million of lender fees and third-party costs in connection with the ABL Facility refinancing transaction. Financing activities in fiscal year 2022 also included$22 million of proceeds received from stock purchases under our employee stock purchase plan and$15 million of proceeds from the exercise of employee stock options, which were offset by$16 million of employee tax withholdings paid in connection with the vesting of stock awards. Cash flows used by financing activities in fiscal year 2021 included$122 million of scheduled payments under our term loans pursuant to our Term Loan Credit Agreement (the "Term Loan Facilities") and financing leases and$2,085 million of voluntary prepayments of the senior secured term loan maturing onJune 27, 2023 (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 5.875% Unsecured Senior Notes due 2024 (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. We incurred$12 million of cost associated with the issuance of the Unsecured Senior Notes due 2030 and the 2021 Incremental Term Loan Facility, which were capitalized as deferred financing costs. Cash flows used by financing activities in fiscal year 2021 also included$28 million of Series A Preferred Stock dividends. Cash flows provided by financing activities in fiscal year 2021 included aggregate borrowings of$900 million under the Unsecured Senior Notes due 2029,$900 million under the 2021 Incremental Term Loan Facility and$500 million under the Unsecured Senior Notes due 2030. 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 incremental senior secured term loan maturing onApril 24, 2025 . We used proceeds from the issuance of the 2021 Incremental Term Loan Facility and Unsecured Senior Notes due 2030, along with cash on hand to repay all of the then outstanding borrowings under the Initial Term Loan Facility. Cash flows provided by financing activities in fiscal year 2021 also included$20 million of proceeds received from stock purchases under our employee stock purchase plan and$15 million of proceeds from the exercise of employee stock options, which were offset by$14 million of employee tax withholdings paid in connection with the vesting of stock awards.
Other Obligations and Commitments
The Company's cash requirements within the next twelve months include the current portion of long-term debt, accounts payable and accrued liabilities, other current liabilities, and purchase commitments and other obligations. We expect the cash required to meet these obligations to be primarily generated through a combination of cash from operations and access to capital from financial markets. Our long-term cash requirements under our various contractual obligations and commitments include:
•Debt, including financing lease obligations - See Note 11, Debt, in our consolidated financial statements for further detail of our debt and the timing of expected future principal payments.
•Operating and finance lease obligations - See Note 17, Leases, in our consolidated financial statements for further detail of our obligations and the timing of expected future payments.
•Pension plans and other postretirement benefit contributions - We sponsor a
defined benefit plan that pays benefits to eligible employees at retirement. In
addition, we provide certain postretirement health and welfare benefits to
eligible retirees and
31
--------------------------------------------------------------------------------their dependents. See Note 18, Retirement Plans, in our consolidated financial statements for further detail of our obligations and the timing of expected future payments.
•Self-insured liabilities - We are self-insured for general liability, fleet liability and workers' compensation claims. Claims in excess of certain levels are insured by external parties. See Note 12, Accrued Expenses and Other Long-Term Liabilities, in our consolidated financial statements for further detail of our obligations and the expected timing of expected future payments. •Purchase and Other Obligations - The Company enters into purchase orders with vendors and other parties in the ordinary course of business and has a limited number of purchase contracts with certain vendors that require it to buy a predetermined volume of products. Purchase obligations also include amounts committed with various third-party service providers to provide information technology services for periods up to fiscal 2025. See Note 22, Commitments and Contingencies, in our consolidated financial statements for further detail of our obligations and the expected timing of expected future payments. We believe the following sources will be sufficient to meet our anticipated cash requirements for at least the next twelve months, while maintaining sufficient liquidity for normal operating purposes: •Our cash flow from operations; •The availability of additional capital under our existing ABL Facility; and •Our availability to access capital from financial markets.
Retirement Plans
We sponsor a defined benefit plan that pays benefits to eligible participants at retirement. Only certain union associates are eligible to participate and continue to accrue benefits under the plan per the collective bargaining agreements. The plan is closed and frozen to all other employees. In addition, we provide certain postretirement health and welfare benefits to eligible retirees and their dependents. We did not make significant contributions to the Company-sponsored defined benefit and other postretirement plans in fiscal years 2022 and 2021, and we do not expect to make significant contributions in fiscal year 2023.
Certain employees are eligible to participate in our 401(k) savings plan. We
made employer matching contributions to the 401(k) plan of
We also are required to contribute to various multiemployer pension plans under
the terms of certain of our CBAs. Our contributions to these plans were
Off-Balance Sheet Arrangements
We had entered into$462 million of letters of credit, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs and certain real estate leases, under the ABL Facility as ofDecember 31, 2022 .
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
Except as otherwise set forth herein, we have prepared the financial information in this Annual 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, the disclosure of contingent assets and liabilities as of 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. Our most critical accounting policies and estimates pertain to the valuation of goodwill and other intangible assets, vendor consideration and income taxes.
Valuation of
Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with each acquisition. Other intangible assets include customer relationships, amortizable trade names, non-compete agreements, the brand names comprising our portfolio of private brands, and trademarks. We assess goodwill and other intangible assets with indefinite lives for impairment each year, or 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 as of the beginning of 32 --------------------------------------------------------------------------------
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.
For goodwill, the reporting unit used in assessing impairment is the Company's one business segment as described in Note 24, Business Information, in our consolidated financial statements. Our fiscal year 2022 assessment for impairment of goodwill was performed using a qualitative approach to determine, as of the date of the assessment, whether it was more likely than not that the fair value of goodwill was less than its carrying value. In performing the qualitative assessment, we identified and considered the significance of relevant key factors, events, and circumstances that affect the fair value of goodwill. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. Based on our qualitative fiscal year 2022 annual impairment analysis for goodwill, we concluded that it is more likely than not that the fair value of goodwill exceeded its carrying value. Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a relief from royalty method, including key assumptions such as the long-term growth rates of future revenues, the royalty rate for such revenue, and a discount rate. The fair value of each intangible asset is determined for comparison to the corresponding carrying value. If the carrying value of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on our fiscal year 2022 annual impairment analysis for indefinite-lived intangible assets, we concluded that the fair value of our trademark indefinite-lived intangible asset and brand name indefinite-lived intangible asset exceeded their respective carrying values by substantial margins. These margins would not be materially impacted by a 5% increase in the discount rate. The recoverability of our indefinite-lived intangible assets could be impacted if estimated future cash flows are not achieved. During fiscal year 2021, the Company implemented rebranding initiatives related to the integration of a trade name acquired as part of an earlier acquisition. As a result of the rebranding initiatives, the Company recognized an impairment charge of$7 million , which was included in restructuring costs and asset impairment charges in the Company's Consolidated Statements of Comprehensive Income. 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. Due to the many variables inherent in estimating fair value and the relative size of the indefinite-lived intangible assets, differences in assumptions could have a material effect on the results of the Company's impairment analysis in future periods. Vendor Consideration We participate in various rebate and promotional incentives with our suppliers, primarily through purchase-based programs. The amount and timing of recognition of consideration under these incentives requires management judgment and estimates. Consideration under these incentives is estimated during the year based on historical and forecasted purchasing activity, as our 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. Historically, adjustments to our estimates for vendor consideration or related allowances have not been significant, and we do not expect adjustments to our estimates for vendor consideration or related allowances to be significant in the next 12 months. 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. 33 -------------------------------------------------------------------------------- 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. The Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to$15 million in the next 12 months as a result of the completion of various tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. Our uncertain tax positions contain uncertainties because management is required to make assumptions and to apply judgment in estimating the exposures associated with our various filing positions. We believe that the judgments and estimates discussed herein are reasonable; however, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which an uncertain tax position has been established, or pay amounts in excess of recorded positions, our effective income tax rate could be materially affected. An unfavorable tax settlement would generally require use of our cash and may result in an increase in our effective tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 3, Recent Accounting Pronouncements, in our consolidated financial statements.
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