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 2019 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 because these non-GAAP measures exclude amounts that our management does not consider part of our core operations when assessing our performance and underlying trends. Information regarding reconciliations of and the rationale for these measures is discussed under "Non-GAAP Reconciliations" below. 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 3,000 sales associates manage customer relationships at local, regional, and national levels. Our sales associates are supported by sophisticated marketing and category management capabilities, as well as a sales support team that includes world-class chefs and restaurant operations consultants, new business development managers and others that help us provide more comprehensive service to our customers. Our extensive network of approximately 70 distribution facilities and fleet of approximately 7,000 trucks, along with over 70 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 a novel strain of coronavirus, COVID-19, as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. As ofDecember 28, 2019 , the COVID-19 pandemic had not had a significant impact on our business. However, sincemid-March 2020 , our business has been significantly impacted. InMarch 2020 , many countries, includingthe United States , took steps to restrict travel, temporarily close or enforce capacity restrictions in businesses, schools and other public gathering spaces. Restrictions on public gatherings and attendance at retail or other establishments, including restaurants, and recreational, sporting and other similar venues, continue to evolve and are expected to continue to remain in effect in some capacity until the COVID-19 pandemic has abated. These government mandates have forced many of our customers to seek government support in order to continue operating, to drastically curtail their dining options, to temporarily suspend operations or to cease operations entirely. Currently, there is no vaccine for COVID-19, and it remains unclear when and to what extent the COVID-19 pandemic will fully abate. Impact of COVID-19 on Our Business The COVID-19 pandemic has and will continue to adversely impact our sales and liquidity (in particular, decreases in restaurant, hospitality and education case volume). Inmid-March 2020 , the operations of our restaurant, hospitality and education customers were suddenly and significantly disrupted by the spread of COVID-19 and the corresponding decline in consumer demand for food prepared away from home. Since that time, many of our customers were required by governmental authorities to temporarily close locations or only offer limited dining options such as carryout and delivery in an effort to reduce the spread of COVID-19, while others temporarily closed locations voluntarily or ceased operations entirely due to decreased consumer demand. While many of these government mandates started to loosen in May andJune 2020 to varying degrees, restrictions still remain in place. As a result of the COVID-19 pandemic and measures implemented to mitigate its spread, we have experienced decreased demand for our products, resulting in lower than anticipated net sales and total case volumes beginning inmid-March 2020 through the second quarter of 2020. We have seen some improvement in net sales and total case volumes during the third quarter of 2020, as a result of loosened restrictions and shifts to outdoor dining. However, demand remains lower than 2019 levels and we expect this trend to continue for at least the remainder of 2020. Total case volumes were down approximately 8.9% and 11.4% for the 13 and 39 weeks endedSeptember 26, 2020 , respectively, compared to the prior year. As further described below, our gross profit, net income and Adjusted EBITDA also decreased on a year over year basis as the Company worked to adjust its cost structure in line with the reduced level of sales. 26 -------------------------------------------------------------------------------- Recent Activity and Sector Perspectives We are optimistic about the long-term prospects for our business.US Foods operates in a large and essential industry with a highly diversified set of end consumers. While some of our core customer groups (such as restaurants, hospitality and education) have been more significantly affected by the effects of the COVID-19 pandemic, other customer groups (such as healthcare, government, retail and cash and carry) have been less significantly affected. Although the timetable for returning to normalcy is unknown, we believe that our case volumes will increase over time as the effects of the COVID-19 pandemic slowly dissipate, consumer demand for food prepared away from home increases, educational institutions resume in-person learning, and the hospitality industry recovers. As one of the larger companies in our industry, we believe we are well positioned for long-term success as the fragmented nature of our industry and the current environment create new opportunities for companies with the size and resources ofUS Foods . We believe we are differentiated from many of our competitors on a number of fronts including our national footprint, diversified omni-channel platform, strong technology capabilities and value-added service offerings, all of which have allowed us to continue to serve our customers under these unprecedented conditions. During these difficult times, we are proactively supporting our customers by helping our restaurant and hospitality customers adapt to social distancing restrictions with tools and resources to build and manage carryout and delivery capabilities. In light of the COVID-19 pandemic, we have developed additional innovative services, such as customer education webinars on the CARES Act (defined below), assistance with recovery plans for location re-openings, and the creation of unique pantry kits to allow restaurants to continue servicing consumers. Our product development efforts remain in full force and we continue to deliver product innovations that resonate with our customers. In addition, we are working with many of our customers to provide them with repayment plans to enable them to continue to purchase products from us as they pay down their balances on outstanding invoices. In response to the COVID-19 pandemic and ensuing decrease in total case volume, we have evolved our business focus and cost structure. We have taken a number of steps to secure new customer relationships and expand our market share, reduce fixed and variable operating costs on a temporary and permanent basis, and strengthen our liquidity position. We also have the ability to take further cost reduction actions on a temporary basis depending upon the duration of the COVID-19 pandemic and its impact on our business, results of operations and financial condition. Even so, there is no certainty that such measures, or any additional actions that we may take in the future, will be successful in mitigating the impact of the pandemic on our business, results of operations or financial condition. OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, includes provisions relating to deferment of employer-side social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, technical corrections to tax depreciation methods for qualified improvement property and federally backed loans to qualifying small-businesses.US Foods has benefited from certain provisions under the aforementioned CARES Act and many of our customers are benefiting from the federally backed small business loan program. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict the extent to which our business, results of operations or financial condition will ultimately be impacted. In particular, we cannot predict the extent to which the COVID-19 pandemic will affect our business, results of operation or financial condition in the long term because the duration and severity of the pandemic and its negative impact on the economy (including our customers) is unclear. The impact of the COVID-19 pandemic on us will also be dependent on: the resiliency of the restaurant and hospitality industry and consumer spending more broadly; actions taken by national, state and local governments to contain the disease or treat its impact, including travel restrictions and bans, social distancing requirements, required closures of non-essential businesses and aid and economic stimulus efforts; and any prolonged economic recession resulting from the pandemic. If our customers, particularly independent restaurants, continue to experience adverse business consequences due to the COVID-19 pandemic, some may shut down or discontinue their operations permanently, which would impact the demand for our services and have a material adverse effect on our business and results of operations. While economic and operating conditions for our business improved in the third quarter compared to the second quarter, we do not expect to see pre-COVID-19 levels of operation until all government restrictions are lifted and consumers are once again willing and able to resume consumption of food away from home, travel and attend sporting and other events on a regular basis. This recovery may not occur until well after the pandemic abates and the broader economy begins to improve. As expected, the COVID-19 pandemic impacted our financial performance for the 39 weeks endedSeptember 26, 2020 . The first quarter of 2020 was not significantly impacted, as the impact of the pandemic only manifested itself during the last two to three weeks of the first quarter. The second quarter of 2020 was the most significantly impacted by the pandemic, as government mandates on our customers to temporarily close or limit dining options occurred during the second quarter. The third quarter of 2020 showed signs of recovery as compared to the second quarter, as government restrictions were loosened to various degrees in certain states during the third quarter. However, we expect the pandemic and its effects to continue to have a significant adverse impact on our business, financial condition and results of operations for the duration of the pandemic and, if the subsequent economic recovery is slow and gradual, throughout substantial portions of that recovery. 27 --------------------------------------------------------------------------------
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 endedSeptember 26, 2020 decreased 8.9% and 11.4%, respectively, and independent restaurant case volume decreased 6.8% and 13.7%, respectively, for those same periods. Net sales decreased$683 million , or 10.5%, and$2,258 million , or 11.9% for the 13 weeks and 39 weeks endedSeptember 26, 2020 , respectively. The negative impact of COVID-19 on case volumes was partially offset by contributions from theFood Group and Smart Foodservice acquisitions. Contributions to aggregate net sales from theFood Group and Smart Foodservice acquisitions were$876 million and$2,262 million for the 13 weeks and 39 weeks endedSeptember 26, 2020 , respectively. Net sales for theFood Group and Smart Foodservice were also impacted by the COVID-19 pandemic, albeit to different degrees. Gross profit decreased$182 million , or 15.7%, to$974 million for the 13 weeks endedSeptember 26, 2020 and decreased$639 million , or 19.1%, to$2,711 million for the 39 weeks endedSeptember 26, 2020 , primarily as a result of the negative impact of COVID-19 on case volume, and product donations and inventory adjustments, partially offset by contributions from theFood Group and Smart Foodservice acquisitions. As a percentage of net sales, gross profit was 16.7% for the 13 weeks endedSeptember 26, 2020 , compared to 17.7% for the prior year period and was 16.2% for the 39 weeks endedSeptember 26, 2020 , compared to 17.6% for the prior year period. Total operating expenses decreased$72 million , or 7.4%, to$896 million for the 13 weeks endedSeptember 26, 2020 . The decrease was primarily due to the negative impact of COVID-19 on case volume and the related impact of cost actions put in place at the end ofMarch 2020 and a$17 million gain on the sale of excess land. Additionally, during the 13 weeks endedMarch 28, 2020 , the Company recorded an incremental reserve of$170 million for the provision for doubtful accounts, of which,$30 million was reversed during the third quarter of 2020, in addition to the$75 million that was reversed during the second quarter of 2020, based on better than anticipated collection of our pre-COVID-19 accounts receivable. These decreases were partially offset by the inclusion of operating expenses from theFood Group and Smart Foodservice acquisitions,$14 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and$9 million of asset impairment charges on certain trade names related to theFood Group acquisition. Total operating expenses decreased$19 million , or 0.7%, to$2,818 million for the 39 weeks endedSeptember 26, 2020 . The decrease was primarily due to the negative impact of COVID-19 on case volume and the related impact of costs actions put in place at the end ofMarch 2020 . These decreases were partially offset by a higher provision for doubtful accounts due to the impact of COVID-19, operating expenses from theFood Group and Smart Foodservice acquisitions,$30 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and$9 million of asset impairment charges on certain trade names related to theFood Group acquisition. Smart Foodservice Acquisition-OnApril 24, 2020 , USF completed the acquisition of Smart Foodservice. Total consideration paid at the closing of the acquisition was$973 million (net of cash acquired), and is subject to certain customary post-closing adjustments. The acquisition of Smart Foodservice expands 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. 28 --------------------------------------------------------------------------------
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 28, September 26, September 28,
2020 2019 2020 2019
Consolidated Statements of Operations Data:
Net sales $ 5,848 $ 6,531 $ 16,747 $ 19,005
Cost of goods sold 4,874 5,375 14,036 15,655
Gross profit 974 1,156 2,711 3,350
Operating expenses:
Distribution, selling and administrative costs 873 968 2,779 2,837
Restructuring and asset impairment charges 23 - 39 -
Total operating expenses 896 968 2,818 2,837
Operating income (loss) 78 188 (107) 513
Other (income) expense-net (6) 1 (16) (3)
Interest expense-net 63 43 178 127
Income (loss) before income taxes 21 144 (269) 389
Income tax provision (benefit) 13 39 (53) 97
Income (loss) from continuing operations 8 105 (216) 292
Income from discontinued operations - 1 - 1
Net income (loss) $ 8 $ 106 $ (216) $ 293
Percentage of Net Sales :
Gross profit 16.7 % 17.7 % 16.2 % 17.6 %
Operating expenses 15.3 % 14.8 % 16.8 % 14.9 %
Operating income (loss) 1.3 % 2.9 % (0.6) % 2.7 %
Net income (loss) 0.1 % 1.6 % (1.3) % 1.5 %
Adjusted EBITDA(1) 3.6 % 4.7 % 2.8 % 4.5 %
Other Data:
Cash flows-operating activities $ (237) $ 165 $ 533 $ 559
Cash flows-investing activities 9 (1,875) (1,087) (1,977)
Cash flows-financing activities (429) 1,711 1,475 1,411
Capital expenditures 23 47 154 157
EBITDA(1) 193 275 225 777
Adjusted EBITDA(1) 209 307 474 859
Adjusted net income available to common
shareholders(1) 32 143 10 378
Free cash flow(2) (260) 118 379 402
(1) EBITDA is defined as net (loss) income, plus interest expense-net, income
tax provision, and depreciation and amortization. Adjusted EBITDA is defined as
EBITDA adjusted for: (1) restructuring and asset impairment charges; (2)
share-based compensation expense; (3) the non-cash impact of LIFO reserve
adjustments; (4) business transformation costs; and (5) other gains, losses, or
charges as specified in the agreements governing our indebtedness. Adjusted net
income available to common shareholders 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 and Series A Convertible
Preferred Stock dividends. EBITDA, Adjusted EBITDA, and Adjusted net income
available to common shareholders as presented in this Quarterly Report are
supplemental measures of our performance that are not required by, or presented
in accordance with, GAAP. These 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 capital expenditures. Free cash flow as presented in this Quarterly Report
is a supplemental measure of our liquidity that is not required by, or presented
in accordance with, GAAP. It is not a measurement 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.
29
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Non-GAAP Reconciliations
We provide EBITDA, Adjusted EBITDA, Adjusted net income available to common
shareholders 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 these measures exclude
amounts that we do not consider part of our core operating results when
assessing our performance.
We believe that Adjusted net income available to common shareholders 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, income taxes and Series A Convertible Preferred Stock
dividends on a consistent basis from period to period. We believe that Adjusted
net income available to common shareholders 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 these measures 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 available to common shareholders
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 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 available to common shareholders,
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 available to common shareholders 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.
30
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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income
available to common shareholders 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 28, September 26, September 28,
2020 2019 2020 2019
Net (loss) income available to common
shareholders $ (2) $ 106 $ (231) $ 293
Series A Convertible Preferred Stock dividends
(see Note 18) 10 - 15 -
Net income (loss) 8 106 (216) 293
Interest expense-net 63 43 178 127
Income tax provision (benefit) 13 39 (53) 97
Depreciation expense 88 75 257 228
Amortization expense 21 12 59 32
EBITDA 193 275 225 777
Adjustments:
Restructuring and asset impairment charges(1) 23 - 39 -
Share-based compensation expense(2) 10 7 29 22
LIFO reserve change(3) 3 1 9 13
Business transformation costs(4) - 3 8 6
COVID-19 bad debt (benefit) expense(5) (30) - 65 -
COVID-19 product donations and inventory
adjustments(5) - - 40 -
COVID-19 other related expenses(5) 4 - 15 -
Income from discontinued operations(6) - (1) - (1)
Business acquisition and integration related
costs and other(7) 6 22 44 42
Adjusted EBITDA 209 307 474 859
Depreciation expense (88) (75) (257) (228)
Interest expense-net (63) (43) (178) (127)
Income tax provision, as adjusted(8) (16) (46) (14) (126)
Series A Convertible Preferred Stock dividends
(see Note 18) (10) - (15) -
Adjusted net income available to common
shareholders $ 32 $
143 $ 10
$ (237) $ 165 $ 533 $ 559 Capital expenditures (23) (47) (154) (157) Free cash flow$ (260) $ 118 $ 379 $ 402 (1) Consists primarily of severance and related costs, organizational realignment costs and asset impairment charges. (2) Share-based compensation expense for stock and option awards and discounts provided under employee stock purchase plan. (3) Represents the non-cash impact of LIFO reserve adjustments. (4) Consists primarily of costs related to significant process and systems redesign across multiple functions. (5) Includes COVID-19 related gains, losses or costs as specified under the agreements governing our indebtedness. (6) Consists of income net of income taxes from the Divested Assets. (7) Includes: (i) Smart Foodservice acquisition and integration related costs of less than$1 million and$20 million for the 13 weeks and 39 weeks endedSeptember 26, 2020 , respectively; (ii)Food Group acquisition and integration related costs of$4 million and$23 million for the 13 weeks and 39 weeks endedSeptember 26, 2020 , respectively, and$17 million and$35 million for the 13 weeks and 39 weeks endedSeptember 28, 2019 , respectively; and (iii) gains, losses or costs as specified under the agreements governing our indebtedness. (8) Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted net income available to common shareholders 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 corporate income tax rate after considering the impact of permanent differences and valuation allowances. 31 --------------------------------------------------------------------------------
A reconciliation between the GAAP income tax (benefit) provision and the income tax provision, as adjusted, is as follows:
13 Weeks Ended 39 Weeks Ended
September 26, September 28, September 28,
2020 2019 September 26, 2020 2019
GAAP income tax provision (benefit)
$ 97
Tax impact of pre-tax income adjustments 3 10 72 27
Discrete tax items - (3) (5) 2
Income tax provision, as adjusted $ 16 $ 46 $ 14 $ 126
Comparison of Results
13 Weeks Ended September 26, 2020 and September 28, 2019
Highlights
•Total case volume decreased 8.9% and independent restaurant case volume
decreased 6.8%, reflecting the negative impact of COVID-19 on case volumes,
partially offset by contributions from the Food Group and Smart Foodservice in
2020.
•Net sales decreased $683 million , or 10.5%, to $5,848 million in 2020.
•Operating income decreased $110 million , or 58.5%, to $78 million in 2020.
•Net income decreased $98 million , or 92.5%, to $8 million in 2020.
•Adjusted EBITDA decreased $98 million , or 31.9%, to $209 million in 2020. As a
percentage of net sales, Adjusted EBITDA was 3.6% in 2020, compared to 4.7% in
2019.
Net Sales
Total case volume decreased 8.9% in 2020. The negative impact of COVID-19 on
case volumes was partially offset by contributions from the Food Group and Smart
Foodservice acquisitions. Organic case volume decreased 22.2% and organic
independent restaurant case volume decreased 20.0%.
Net sales decreased $683 million , or 10.5%, to $5,848 million in 2020, comprised
of a $584 million , or 8.9%, decrease in case volume and a $99 million , or 1.6%,
decrease in the overall net sales rate per case. The decrease in net sales rate
per case primarily reflects changes in our sales mix partially offset by a
year-over-year inflation of 2.2%. The year-over-year increase in inflation
primarily reflects inflation in multiple product categories including beef,
cheese and disposables, which benefited net sales since a significant portion of
our sales is based on markups over product cost. Sales of private brands
represented approximately 34% and 35% of net sales in 2020 and 2019,
respectively. The Food Group and Smart Foodservice contributed aggregate net
sales of $876 million in 2020.
Gross Profit
Gross profit decreased $182 million , or 15.7%, to $974 million in 2020,
primarily as a result of the negative impact of COVID-19 on case volume, and
unfavorable year-over-year LIFO adjustments, and was partially offset by
contributions from the Food Group and Smart Foodservice acquisitions. Our LIFO
method of inventory costing resulted in an expense of $3 million in 2020
compared to expense of $1 million in 2019. Gross profit as a percentage of net
sales was 16.7% in 2020, compared to 17.7% in 2019.
Operating Expenses
Operating expenses, comprised of distribution, selling and administrative and
restructuring and asset impairment costs, decreased $72 million or 7.4%, to
$896 million in 2020. Operating expenses as a percentage of net sales were 15.3%
in 2020, compared to 14.8% in 2019. The decrease in operating expenses is
primarily due to the negative impact of COVID-19 on case volume and the related
impact of cost actions put in place, and a $30 million reduction in the
provision for doubtful accounts as a result of more favorable than anticipated
collection of our pre-COVID-19 accounts receivable and a $17 million gain on the
sale of excess land. These decreases were partially offset by operating expenses
for the Food Group and Smart Foodservice acquisitions of $140 million in the
aggregate, $14 million of restructuring costs associated with work force
reductions due to the negative impact of COVID-19 on case volume, and $9 million
of asset impairment charges. The $9 million of asset impairment charges relate
to the decline in fair value of certain trade names acquired as part of the Food
Group acquisition primarily due to the adverse impact of COVID-19 on forecasted
earnings and the discount rate utilized in our valuation models. The Food Group
will continue to remain a key focus in expanding our network in the West and
Northwest parts of the United States .
32
--------------------------------------------------------------------------------Operating Income Our operating income was$78 million in 2020, compared to operating income of$188 million in 2019. The decrease in operating income was due to the factors discussed in the relevant sections above. Other Income (Expense)-Net Other income (expense)-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 2020. We recognized other expense-net of$1 million in 2019, including$3 million of non-cash settlement charges resulting from lump sum payments to former participants in our defined benefit pension plan. The increase in other income-net in 2020 is primarily due to the improved funded status of our defined benefit pension plan as ofDecember 28, 2019 . Interest Expense-Net Interest expense-net increased$20 million to$63 million in 2020, primarily due to an increase in our indebtedness to finance theFood Group and Smart Foodservice acquisitions and to strengthen our liquidity position, which were partially offset by a decrease in benchmark interest rates in 2020 compared to 2019. Income Taxes 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. For the 13 weeks endedSeptember 28, 2019 , our effective income tax rate of 27% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of$2 million , primarily related to a change in valuation allowance. Net Income Our net income was$8 million in 2020, compared to net income of$106 million in 2019. The decrease in net income was due to the relevant factors discussed above. 39 Weeks EndedSeptember 26, 2020 andSeptember 28, 2019 Highlights •Total case volume decreased 11.4% and independent restaurant case volume decreased 13.7%, reflecting the negative impact of COVID-19 on case volumes, partially offset by contributions from Smart Foodservice and theFood Group in 2020. •Net sales decreased$2,258 million , or 11.9%, to$16,747 million in 2020. •Operating loss was$107 million in 2020, compared to operating income of$513 million in 2019. •Net loss was$216 million in 2020, compared to net income of$293 million in 2019. •Adjusted EBITDA decreased$385 million , or 44.8%, to$474 million in 2020. As a percentage of net sales, Adjusted EBITDA was 2.8% in 2020, compared to 4.5% in 2019.Net Sales Total case volume decreased 11.4% in 2020. The decrease was due to the negative impact of COVID-19 on case volumes which was partially offset by contributions from theFood Group and Smart Foodservice. Organic case volume decreased 23.5% and organic independent restaurant case volume decreased 24.0%. Net sales decreased$2,258 million , or 11.9%, to$16,747 million in 2020, comprised of a$2,158 million , or 11.4%, decrease in case volume and a$100 million , or 0.5%, decrease in the overall net sales rate per case. The decrease in net sales rate per case primarily reflects changes in our sales mix partially offset by a year-over-year inflation of 1.9%. The year-over-year increase in inflation primarily reflects inflation in multiple product categories including beef, cheese and disposables, which benefited net sales since a significant portion of our sales is based on markups over product cost. Sales of private brands represented approximately 35% of net 33 -------------------------------------------------------------------------------- sales in both 2020 and 2019.The Food Group and Smart Foodservice acquisitions contributed aggregate net sales of$2,262 million in 2020. Gross Profit Gross profit decreased$639 million , or 19.1%, to$2,711 million in 2020, primarily as a result of the negative impact of COVID-19 on case volume and$40 million of product donations and inventory adjustments, and was partially offset by contributions from theFood Group and Smart Foodservice and favorable year-over-year LIFO adjustments. Our LIFO method of inventory costing resulted in an expense of$9 million in 2020 compared to expense of$13 million in 2019. Gross profit as a percentage of net sales was 16.2% in 2020, compared to 17.6% in 2019. Operating Expenses Operating expenses, comprised of distribution, selling and administrative and restructuring and asset impairment costs, decreased$19 million or 0.7%, to$2,818 million in 2020. Operating expenses as a percentage of net sales were 16.8% in 2020, compared to 14.9% in 2019. The decrease in operating expenses is primarily due to the negative impact of COVID-19 on case volume and the related impact of cost actions put into place and a$17 million gain on the sale of excess land. These decreases were partially offset by operating expenses for theFood Group and Smart Foodservice acquisitions of$369 million , a$65 million increase in the provision for doubtful accounts due to the estimated impact of COVID-19 on the collectability of accounts receivable,$30 million of restructuring costs associated with work force reductions due to the negative impact of COVID-19 on case volume, and$9 million of asset impairment charges. The$9 million of asset impairment charges relate to the decline in fair value of certain trade names acquired as part of theFood Group acquisition primarily due to the adverse impact of COVID-19 on forecasted earnings and the discount rate utilized in our valuation models.The Food Group will continue to remain a key focus in expanding our network in the West and Northwest parts ofthe United States . Operating (Loss) Income Our operating loss was$107 million in 2020, compared to operating income of$513 million in 2019. The decrease 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$16 million and$3 million in 2020 and 2019, respectively. The increase in other income-net in 2020 is primarily due to the improved funded status of our defined benefit pension plan as ofDecember 28, 2019 . Interest Expense-Net Interest expense-net increased$51 million to$178 million in 2020, primarily due to an increase in our indebtedness to finance theFood Group and Smart Foodservice acquisitions and to strengthen our liquidity position, which were partially offset by a decrease in benchmark interest rates in 2020 compared to 2019. Income Taxes 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 tax expense of$2 million primarily related to an increase in an unrecognized tax benefit and tax expense of$2 million , primarily related to a tax benefit shortfall associated with share-based compensation. For the 39 weeks endedSeptember 28, 2019 , our effective income tax rate of 25% differed from the 21% federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of$3 million , primarily related to excess tax benefits associated with share-based compensation. Net (Loss) Income Our net loss was$216 million in 2020, compared to net income of$293 million in 2019. The decrease in net income was due to the relevant factors discussed above. 34 -------------------------------------------------------------------------------- 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. In response to the impact of the COVID-19 pandemic, inMarch 2020 we borrowed an aggregate of$300 million under the former ABS Facility and$700 million under the ABL Facility. These borrowings were made for the purpose of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the COVID-19 pandemic. We have taken additional action during the 39 week period endedSeptember 26, 2020 to further strengthen our liquidity. In particular: •onApril 24, 2020 , we borrowed an aggregate principal amount of$700 million under the 2020 Incremental Term Loan Facility, the proceeds of which were used to finance, in part, the Smart Foodservice acquisition; •onApril 28, 2020 , we issued an aggregate principal amount of$1.0 billion of 6.25% Secured Notes due 2025, the proceeds of which were used to repay$400 million in principal amount of the 2020 Incremental Term Loan Facility and the balance of the net proceeds has been and will be used for general corporate purposes; •onMay 1, 2020 , we used$542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility in full and terminated the ABS Facility; in connection with the repayment and termination of the ABS Facility, we transitioned the accounts receivable that secured the ABS Facility to the collateral pool that secures the ABL Facility; •onMay 4, 2020 , we entered into an amendment to the credit agreement governing the ABL Facility pursuant to which certain of our lenders agreed to increase their aggregate commitments by$390 million to a total commitment of$1,990 million ; and •onMay 6, 2020 , we completed the issuance and sale of 500,000 shares of our Series A Preferred Stock to KKR for an aggregate price of$500 million , the proceeds of which were used for working capital and general corporate purposes. After giving effect to the transactions described above, we believe that we will have sufficient liquidity to fund our operations and meet ordinary course obligations through 2021 even if total case volumes decline to the levels seen in April of this year and remained at those levels until the middle of 2021. We cannot, however, assure you that this will be the case. We may pursue additional capital raise transactions at some point in the future if we determine that it would be advisable to further strengthen our liquidity position. We make no assurance, however, that we will be able to raise any additional capital in the future on satisfactory terms or at all. Our continued access to sources of liquidity depends on multiple factors, including economic conditions, the condition of financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings. A rating agency announced a downgrade to our credit ratings inSeptember 2020 . Our access to additional capital and the cost of any future financing transactions could be negatively impacted by this downgrade or any future downgrade or if financing sources were to ascribe higher credit risk to us or our industry. In addition, the effect of COVID-19 on the capital markets could significantly impact our future cost of borrowing and the availability of additional capital to us. Indebtedness The aggregate carrying value of our indebtedness was$5,787 million , net of$64 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . As discussed above, onMay 1, 2020 we terminated the ABS Facility and transitioned the accounts receivable that secured the ABS Facility to the collateral pool that secures the ABL Facility and, onMay 4, 2020 , we entered into an amendment to our ABL Facility which increased the aggregate commitments by$390 million to a total commitment of$1,990 million . This transition increases the size of the borrowing base under the ABL Facility. We had an aggregate of$274 million of letters of credit outstanding under the ABL Facility as ofSeptember 26, 2020 . There was remaining capacity of$1,716 million under the ABL Facility based on our borrowing base as ofSeptember 26, 2020 . The Initial Term Loan Facility had a carrying value of$2,109 million , net of$3 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . The 2019 Incremental Term Loan Facility had a carrying value of$1,458 million , net of$31 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . The 2020 Incremental Term Loan Facility had a carrying value of$287 million , net of$12 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . The Secured Notes had a carrying value of$986 million , net of$14 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . The Unsecured Senior Notes had a carrying value of$596 million , net of$4 million of unamortized deferred financing costs, as ofSeptember 26, 2020 . We also had$343 million of obligations under financing leases for transportation equipment and building leases as ofSeptember 26, 2020 . 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. 35 -------------------------------------------------------------------------------- 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$1.3 billion of restricted payment capacity under these covenants and approximately$2.7 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as ofSeptember 26, 2020 . Every quarter, we review rating agency changes for all lenders that have provided 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 specific strength of our lender counterparties. See Note 13, 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 28, September 26, 2020 2019 Net (loss) income $ (216) $ 293 Changes in operating assets and liabilities 383 (39) Other adjustments 366 305 Net cash provided by operating activities 533 559 Net cash used in investing activities (1,087) (1,977) Net cash provided by financing activities 1,475 1,411
Net increase (decrease) in cash, cash equivalents and restricted cash
921 (7)
Cash, cash equivalents and restricted cash-beginning of period 98 105
Cash, cash equivalents and restricted cash-end of period $
1,019 $ 98
Operating Activities Our net loss was$216 million in 2020, compared to net income of$293 million in 2019. The decrease in net income was due to the relevant factors discussed above. Cash flows provided by operating activities was$533 million for the 39 weeks endedSeptember 26, 2020 , compared to cash flows provided by operating activities of$559 million for the 39 weeks endedSeptember 28, 2019 . The year-over-year decrease was primarily attributable to the Company's reduced working capital requirements resulting from lower case volume and lower inventories driven by the impact of COVID-19. These working capital improvements were partially offset by the decline in operating results, driven by the impact of COVID-19. Investing Activities Cash flows used in investing activities for the 39 weeks endedSeptember 26, 2020 andSeptember 28, 2019 included the$973 million cash purchase price for the acquisition of Smart Foodservice and the$1.8 billion cash purchase price for the acquisition of theFood Group , respectively. Cash flows used in investing activities in the 39 weeks endedSeptember 26, 2020 andSeptember 28, 2019 included cash expenditures of$154 million and$157 million , respectively, on property and equipment for fleet replacement and investments in information technology, as well as new construction and/or expansion of distribution facilities. Financing Activities 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, proceeds of$1.0 billion from the issuance of the Secured Notes and$491 million of net proceeds from the issuance and sale of 500,000 shares of our Series A Preferred Stock. Cash flows used by financing activities in the 39 weeks endedSeptember 26, 2020 included$105 million of scheduled payments under our non-revolving debt and financing leases. We borrowed an aggregate of$1 billion under our revolving credit facilities 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 COVID-19 pandemic. 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 terminated ABS Facility. We incurred approximately$33 million of lender fees and third-party costs in connection with our financing actions. Financing activities 36 -------------------------------------------------------------------------------- for the 39 weeks endedSeptember 26, 2020 also included$15 million of proceeds received from stock purchases under our employee stock purchase plan and$2 million of proceeds 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 equity awards. Cash flows provided by financing activities for the 39 weeks endedSeptember 28, 2019 included aggregate borrowings of$1.5 billion under the Incremental Term Loan Facility and approximately$330 million in borrowings under the ABL Facility and ABS Facility, which were used to finance the acquisition of theFood Group . Cash flows used in financing activities for the 39 weeks endedSeptember 28, 2019 included$3 million of net payments under our revolving credit facilities and$79 million of scheduled payments under our non-revolving debt and financing leases. Financing activities for the 39 weeks endedSeptember 28, 2019 also included$13 million of proceeds received from the exercise of employee stock options and$15 million of proceeds from stock purchases under our employee stock purchase plan, which were partially offset by$5 million of employee tax withholdings paid in connection with the vesting of equity awards. Retirement Plans See Note 16, Retirement Plans, in our consolidated financial statements for a description of our retirement plans. Off-Balance Sheet Arrangements We had entered into$274 million of letters of credit, primarily in favor of certain commercial insurers to secure obligations with respect to our self-insurance programs, under the ABL Facility as ofSeptember 26, 2020 . Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial position, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations The following table presents information about our significant contractual obligations as ofSeptember 26, 2020 that affect our liquidity and capital needs. The table includes information about payments due under specified contractual obligations and the maturity profile of our consolidated debt, operating leases and other long-term liabilities. The table reflects the impact of our financing actions and the acquisition of the Smart Foodservice onApril 24, 2020 on our contractual obligations as ofSeptember 26, 2020 . Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years Recorded Contractual Obligations: Debt, including financing lease obligations$ 5,850 $ 138 $ 2,276 $ 1,982 $ 1,454 Operating lease obligations 416 57 112 74 173 Self-insured liabilities(1) 181 48 49 23 61 Pension plans and other postretirement benefits contributions(2) 7 1 2 2 2 Unrecorded Contractual Obligations: Interest payments on debt(3) 1,038 246 458 283 51 Multiemployer contractual minimum pension contributions(4) 14 4 8 2 - Purchase obligations(5) 1,258 1,195 53 10 - Total contractual cash obligations$ 8,764 $ 1,689
(1) Represents the estimated undiscounted payments on our self-insurance programs for general, fleet and workers compensation liabilities. Actual payments may differ from these estimates. (2) Represents estimated contributions and benefit payments for Company sponsored pension and other postretirement benefit plans. Estimates beyond fiscal year 2020 are not available for the Company's defined benefit pension plan. (3) Represents future interest payments on fixed rate debt, financing leases and$3.3 billion of variable rate debt at interest rates as ofSeptember 26, 2020 . The amounts shown in the table include interest payments under interest rate swap agreements. (4) Represents minimum contributions to the Central States Teamsters Southeast andSouthwest Area Pension Fund through 2023. (5) Represents purchase obligations for purchases of product in the normal course of business, for which all significant terms have been confirmed, information technology commitments and forward fuel and electricity purchase obligations. The balance does not include fiscal year 2020 capital additions. 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 37 -------------------------------------------------------------------------------- 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 2019 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 endedSeptember 26, 2020 . 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. During fiscal year 2017, we 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 risks from 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. After considering interest rate swaps that fixed the interest rate on$550 million of the principal amounts of our Initial Term Loan Facility, approximately 57% of the principal amount of our debt bore interest at floating rates based on LIBOR or ABR, as ofSeptember 26, 2020 . 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 13, Debt, in our consolidated financial statements). As was announced inJuly 2017 , the use of LIBOR is intended to be phased out by the end of 2021. 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 using fuel surcharges. We also enter into forward purchase commitments for a portion of our projected diesel fuel requirements. We had diesel fuel forward purchase commitments totaling$71 million throughDecember 2021 as ofSeptember 26, 2020 . These lock in approximately 64% of our projected diesel fuel purchase needs for the contracted periods. 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$4 million in additional fuel cost on such uncommitted volumes throughDecember 2021 . 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 38 -------------------------------------------------------------------------------- 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 ofSeptember 26, 2020 . Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the fiscal quarter endedSeptember 26, 2020 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 endedSeptember 26, 2020 excluded internal control over financial reporting for theFood Group , which was acquired onSeptember 13, 2019 , and Smart Foodservice, which was acquired onApril 24, 2020 . 39
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