US Foods Holding Corp. (USFD) FY 2022 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 the U.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 2021 and 2020. For a comparison of our consolidated results of operations for fiscal years 2020 and 2019, 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 ended January 2, 2021, filed with the SEC on February 16, 2021.

COVID-19

Our operations, our industry and the U.S. economy continue to be disrupted by the COVID-19 pandemic and related supply chain disruptions and labor shortages. The timing and extent of the economic recovery from the COVID-19 pandemic is dependent upon many factors, including the rate of vaccination, the emergence and severity of COVID-19 variants, the continued effectiveness of the vaccines against those variants, the frequency of booster vaccinations and the duration and implications of continued restrictions and safety measures.

Impact of COVID-19 on Our Business

We continue to actively monitor the impacts of the COVID-19 pandemic on all aspects of our business including related actions taken by government authorities. We saw improvement in Net sales and total case volumes during fiscal year 2021 coinciding with declining infection rates and loosening of indoor dining restrictions and other safety measures. Overall demand started to return to pre-COVID-19 levels at times during 2021; however, full year case volumes remained lower than pre-COVID-19 levels.

Economic and operating conditions for our business have improved in each quarter of 2021 as compared to the fourth quarter of 2020. However, uncertainty around the pandemic persists and, as a result, we and the industry may continue to face pandemic-related challenges, such as the recent Omicron variant and related case increases, as the recovery continues, such as constraints on the availability of product supply, increased product and logistics costs, labor shortages, inflation and shifts in the buying patterns of our customers. Therefore, we are unable to predict the duration and extent to which the pandemic will continue to impact our results of operations. We are 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.

As one of the largest 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 of US Foods. We believe we are differentiated from many of our competitors on a number of fronts including our national footprint, multi-channel platform, strong technology capabilities and value-added service offerings, all of which allowed us to continue to serve our customers during the challenges created by the COVID-19 pandemic. Our product development efforts continue to deliver product innovations that resonate with our customers.

Operating Metrics

Case growth—Case growth, by customer type (e.g., independent restaurants) is reported as of a point in time. Customers periodically are reclassified, based on changes in size or other characteristics, and when those changes occur, the respective customer’s historical volume follows its new classification.

Organic growth—Organic growth includes growth from operating business that has been reflected in our results of operations for at least 12 months.

Fiscal Year 2021 Highlights

Financial Highlights—Total case volume increased 16.9% and independent restaurant case volume increased 28.0% in fiscal year 2021. Excluding the impact of the extra week in fiscal year 2020, total case volume increased 18.8% and independent restaurant case volume increased 30.2% in fiscal year 2021. Net sales increased $6,602 million, or 28.8%, in fiscal year 2021 primarily due to volume improvements commensurate with easing of COVID-19 restrictions on our customers, year-over-year inflation in multiple product categories, and the acquisition of Smart Foodservice. The increase in Net sales due to the contributions from the Smart Foodservice acquisition, which was acquired on April 24, 2020, contributed Net sales of $1,183 million and $759 million for fiscal years 2021 and 2020, respectively.

Gross profit increased $936 million, or 25.2%, to $4,655 million in fiscal year 2021, primarily as a result of the increase in Net sales, pricing optimization, inflation in multiple categories, and the acquisition of Smart Foodservice. These increases in gross profit were

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partially offset by unfavorable year-over-year last-in first-out (“LIFO”) adjustments. As a percentage of Net sales, gross profit was 15.8% in fiscal year 2021, compared to 16.3% in fiscal year 2020.

Total operating expenses increased $435 million, or 11.5%, to $4,231 million in fiscal year 2021. The increase was primarily due to higher supply chain labor costs and increased non-labor distribution costs related to increased sales volume due to the recovery. The increase in total operating expenses was also due to the inclusion of operating expenses from the Smart Foodservice acquisition.

Smart Foodservice Acquisition—On April 24, 2020, USF completed the acquisition of Smart Foodservice. Total consideration paid at the closing of the acquisition was $972 million (net of cash acquired). The acquisition of Smart Foodservice expanded the Company’s cash and carry business in the West and Northwest parts of the U.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.

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Results of Operations

The following table presents selected consolidated results of operations of our business for fiscal years 2021, 2020 and 2019:

(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 non-cash impact of LIFO reserve adjustments; (4) loss on extinguishment of debt; (5) pension settlements; (6) business transformation costs; and (7) other gains, losses, or costs as specified in the agreements governing our indebtedness. Adjusted net income is defined as net income excluding the items used to calculate Adjusted EBITDA listed above and further adjusted for the tax effect of the exclusions and discrete tax items. EBITDA, Adjusted EBITDA, and Adjusted net income as presented 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.

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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 net income and Free cash flow as supplemental measures to GAAP financial measures regarding our operating performance and liquidity. These non-GAAP financial measures, as defined above, exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP.

We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because they exclude amounts that we do not consider part of our core operating results when assessing our performance.

We believe that Adjusted net income is a useful measure of operating performance for both management and investors because it excludes items that are not reflective of our core operating performance and provides an additional view of our operating performance including depreciation, interest expense and income taxes on a consistent basis from period to period. We believe that Adjusted net income may be used by investors, analysts and other interested parties to facilitate period-over-period comparisons and provides additional clarity as to how factors and trends impact our operating performance.

Management uses these non-GAAP financial measures (1) to evaluate our historical and prospective financial performance as well as our performance relative to our competitors as they assist in highlighting trends, (2) to set internal sales targets and spending budgets, (3) to measure operational profitability and the accuracy of forecasting, (4) to assess financial discipline over operational expenditures, and (5) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used in connection with certain covenants and activity restrictions under the agreements governing our indebtedness. We also believe these and similar non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry. EBITDA, Adjusted EBITDA and Adjusted net income are not measurements of our performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP.

We use Free cash flow as a supplemental measure to GAAP financial measures regarding the liquidity of our operations. We measure Free cash flow as cash flows provided by operating activities less cash capital expenditures. We believe that Free cash flow is a useful financial metric to assess our ability to pursue business opportunities and investments. Free cash flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows provided by operating activities or any other liquidity measures derived in accordance with GAAP.

We caution readers that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, Adjusted net income, and Free cash flow may not be the same as similar measures used by other companies. Not all companies and analysts calculate EBITDA, Adjusted EBITDA, Adjusted net income or Free cash flow in the same manner. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by presenting the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.

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The following table reconciles EBITDA, Adjusted EBITDA, Adjusted net income and Free cash flow to the most directly comparable GAAP financial performance and liquidity measures for the periods indicated:

(1)    Consists primarily of severance and related costs, organizational realignment costs and asset impairment charges.

(2)    Share-based compensation expense for expected vesting of stock awards and employee stock purchase plan.

(3)    Represents the non-cash impact of LIFO reserve adjustments.

(4)    Includes early redemption premium and the write-off of certain pre-existing debt issuance costs. See Note 11, Debt, in our consolidated financial statements for additional information.

(5)    Consists of settlement costs resulting from payments to settle benefit obligations with participants in our defined benefit pension plan. See Note 18, Retirement Plans, in our consolidated financial statements for a further description of the pension settlement costs for fiscal year 2019.

(6)    Consists primarily of costs related to significant process and systems redesign across multiple functions.

(7)    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.

(8) Includes COVID-19 related expenses related to inventory adjustments and product donations.

(9) Includes COVID-19 related costs that we are permitted to add back under certain agreements governing our indebtedness.

(10)    Includes: (i) aggregate acquisition and integration related costs of $22 million, $45 million and $52 million for fiscal years 2021, 2020 and 2019, respectively; (ii) favorable legal settlement recoveries of $29 million for fiscal year 2021; and (iii) other gains, losses or costs that we are permitted to add back for purposes of calculating Adjusted EBITDA under certain agreements governing our indebtedness.

(11)    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.

(12) Effective as of the first quarter 2021, we have presented Adjusted net income. Previously, we presented Adjusted net income (loss) available to common shareholders.

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A reconciliation between the GAAP income tax provision (benefit) and the income tax provision, as adjusted, is as follows:

Comparison of Results

Fiscal Years Ended January 1, 2022 and January 2, 2021

Highlights

•Total case volume increased 16.9% and independent restaurant case volume increased 28.0% in fiscal year 2021. Excluding the impact of the extra week in fiscal year 2020, total case volume increased 18.8% and independent restaurant case volume increased 30.2% in fiscal year 2021.

•Net sales increased $6,602 million, or 28.8% compared to $29,487 million in fiscal year 2021.

•Operating income was $424 million in fiscal year 2021, compared to an operating loss of $77 million in fiscal year 2020. As a percentage of net sales, operating income was 1.4% in fiscal year 2021, and operating loss was 0.3% in fiscal year 2020.

•Net income was $164 million in fiscal year 2021, compared to a net loss of $226 million in fiscal year 2020.

•Adjusted EBITDA increased $409 million, or 63.1%, to $1,057 million in fiscal year 2021. As a percentage of net sales, Adjusted EBITDA was 3.6% in fiscal year 2021, as compared to 2.8% in fiscal year 2020.

Net Sales

Total case volume increased 16.9% and independent restaurant case volume growth of 28.0% in fiscal year 2021. Excluding the impact of the extra week in fiscal year 2020, total case volume increased 18.8% in fiscal year 2021. Organic case volume increased 14.8% and organic independent restaurant case volume increased 25.1% in fiscal year 2021. Excluding the impact of the extra week in fiscal year 2020, organic case volume increased 16.6% and organic independent restaurant case volume increased 27.1% in fiscal year 2021. The organic case volume increases were primarily driven by increased leisure and business travel and increased restaurant traffic due to eased Covid-19 related restrictions on our customers. Overall case volume increases were also due to the impact of the Smart Foodservice acquisition.

Net sales increased $6,602 million, or 28.8%, to $29,487 million in fiscal year 2021, comprised of a $3,876 million, or 16.9%, increase in total case volume and a $2,726 million, or 11.9%, 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 8.9% in multiple product categories including poultry, beef, disposables and pork, as well as favorable changes in our product mix. The year-over-year increase in inflation benefited Net sales since a significant portion of our Net sales is based on a pre-established markup over product cost. Organic sales of private brands represented approximately 34% of Net sales in both 2021 and 2020. The increase in Net sales was also due to contributions from the Smart Foodservice acquisition. Smart Foodservice contributed Net sales of $1,183 million in 2021 compared to $759 million in 2020.

Gross Profit

Gross profit increased $936 million, or 25.2%, to $4,655 million in fiscal year 2021, primarily as a result of the increase in Net sales, pricing optimization, inflation in multiple categories, and $50 million of COVID-19 related product donations and inventory adjustments in fiscal year 2020. These increases in gross profit were partially offset by unfavorable year-over-year LIFO adjustments primarily due to inflation. Our LIFO method of inventory costing resulted in expense of $165 million in fiscal year 2021, compared to expense of $25 million in fiscal year 2020. Gross profit as a percentage of net sales was 15.8% in fiscal year 2021, compared to 16.3% in fiscal year 2020, primarily driven by our increase in LIFO expense in fiscal year 2021 as compared to fiscal year 2020.

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Operating Expenses

Operating expenses, comprised of distribution, selling and administrative costs and restructuring costs and asset impairment charges, increased $435 million, or 11.5%, to $4,231 million in fiscal year 2021. Operating expenses as a percentage of net sales were 14.3% in fiscal year 2021, compared to 16.6% in fiscal year 2020. The increase in operating expenses is primarily due to higher supply chain labor costs and non-labor distribution costs, attributable to increased sales volume and wage inflation as compared to the prior year period. These increases in operating expenses were partially offset by an $87 million lower provision for doubtful accounts during fiscal year 2021, cost savings initiated in 2020 and favorable legal settlement recoveries of $29 million in fiscal year 2021.

Operating Income (Loss)

Our operating income was $424 million in fiscal year 2021, compared to an operating loss of $77 million in fiscal year 2020. Operating income as a percentage of Net sales was 1.4% in fiscal year 2021, while operating loss as a percentage of Net sales was 0.3% in fiscal year 2020. The increase 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 benefit costs (credits), exclusive of the service cost component associated with our defined benefit and other postretirement plans. We recognized other income—net of $26 million and $21 million fiscal years 2021 and 2020, respectively. The increase in other income—net in 2021 is primarily due to the improved funded status of our defined benefit pension plan compared to fiscal year 2020.

Interest Expense—Net

Interest expense—net decreased $25 million in fiscal year 2021, primarily due to a decrease in outstanding debt and reduced interest rates in fiscal year 2021 compared to fiscal year 2020.

Income Taxes

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.

Our effective income tax rate for fiscal year 2020 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 a tax expense of $2 million primarily related to an increase in an unrecognized tax benefit and a tax expense of $1 million, primarily related to a tax benefit shortfall associated with share-based compensation.

Net Income (Loss)

Our net income was $164 million in fiscal year 2021, compared to a net loss of $226 million in fiscal year 2020. 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 of January 1, 2022, the Company had approximately $1.9 billion in cash and available liquidity.

Indebtedness

The aggregate carrying value of our indebtedness was $5,011 million, net of $56 million of unamortized deferred financing costs, as of January 1, 2022.

On February 4, 2021, we issued $900 million aggregate principal amount of 4.75% Senior Notes due 2029 (the “Unsecured Senior Notes due 2029”), the proceeds of which were used, together with cash on hand, to (i) redeem all of the Company's then outstanding 5.875% Unsecured Senior Notes due 2024 (the “Unsecured Senior Notes due 2024”), (ii) repay all of the then outstanding borrowings under the incremental senior secured term loan maturing on April 24, 2025 (the “2020 Incremental Term Loan”) and (iii) pay related fees and expenses. The Unsecured Senior Notes due 2029 had an outstanding balance of $892 million, net of $8 million of unamortized deferred financing costs, as of January 1, 2022.

On November 22, 2021, we (i) issued $500 million aggregate principal amount of 4.625% Senior Notes due 2030 (the “Unsecured Senior Notes due 2030”) and (ii) entered into a new incremental senior secured term “B” loan facility in an aggregate principal amount

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of $900 million (the “2021 Incremental Term Loan Facility”) pursuant to a Ninth Amendment to the Amended and Restated Term Loan Credit Agreement, dated as of June 27, 2016 (as amended, the “Term Loan Credit Agreement”). The net proceeds from the Unsecured Senior Notes due 2030, together with the borrowings under the 2021 Incremental Term Loan Facility and approximately $400 million of cash on hand were used to repay the senior secured term loan maturing on June 27, 2023 (the “Initial Term Loan Facility”) and to pay related fees and expenses. The Unsecured Senior Notes due 2030 had an outstanding balance of $495 million, net of $5 million of unamortized deferred financing costs, as of January 1, 2022. The 2021 Incremental Term Loan Facility had a carrying value of $893 million, net of $7 million of unamortized deferred financing costs, as of January 1, 2022.

We had no outstanding borrowings and had issued letters of credit totaling $268 million under the ABL Facility as of January 1, 2022. There was remaining capacity of $1,722 million under the ABL Facility based on our borrowing base as of January 1, 2022.

The incremental senior secured term loan borrowed in September 2019 (the “2019 Incremental Term Loan Facility”) had a carrying value of $1,442 million, net of $25 million of unamortized deferred financing costs, as of January 1, 2022.

The Company’s 6.25% senior secured notes due April 15, 2025 (the “Secured Notes”) had a carrying value of $989 million, net of $11 million of unamortized deferred financing costs, as of January 1, 2022. We also had $292 million of obligations under financing leases for transportation equipment and building leases as of January 1, 2022.

The ABL Facility will mature in 2024. 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.

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 $1.4 billion of restricted payment capacity under these covenants and approximately $2.8 billion of its net assets were restricted after taking into consideration the net deferred tax assets and intercompany balances that eliminate in consolidation as of January 1, 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 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.

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 2021 and 2020:

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Operating Activities

Cash flows provided by operating activities increased $6 million to $419 million in fiscal year 2021. The Company’s working capital requirements increased in fiscal year 2021 in line with the recovery of sales volumes. Net cash provided by operating activities in fiscal year 2020 benefited from a reduction in working capital needs, primarily related to reduced sales volumes caused by the COVID-19 pandemic.

Investing Activities

Cash flows used in investing activities in fiscal years 2021 and 2020 included cash expenditures of $274 million and $189 million, respectively, on investments in information technology, new construction and/or expansion of distribution facilities, and property and equipment for fleet replacement. Cash flows used in investing activities in fiscal year 2020 also included the $972 million cash purchase price for the acquisition of Smart Foodservice.

We expect total cash capital expenditures in fiscal year 2022 to be between $280 million and $300 million, exclusive of approximately $110 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 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 Initial Term Loan Facility. We incurred approximately $18 million of lender fees and third-party costs in connection with our issuance of the Unsecured Notes due 2029, consisting of a $9 million early redemption premium related to the Unsecured Senior Notes due 2024 and $9 million of costs associated with the issuance of the Unsecured Senior Notes due 2029, which were capitalized as deferred financing costs. 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 2020 Incremental Term Loan Facility. 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.

Cash flows provided by financing activities in fiscal year 2020 included aggregate borrowings of $700 million under the 2020 Incremental Term Loan Facility, the proceeds of which were used to finance, in part, the Smart Foodservice acquisition; $1.0 billion of gross proceeds from the issuance of the Secured Notes; and $500 million of proceeds, net of $9 million of related fees, from the issuance and sale of 500,000 shares of our Series A Preferred Stock. Cash flows used by financing activities in fiscal year 2020 included $158 million of scheduled payments under our Term Loan Facilities and financing leases. We borrowed an aggregate of $1.0 billion under the ABL Facility and the former accounts receivable financing facility (the “ABS Facility”) in March 2020 for the purposes of increasing cash on hand and to preserve financial flexibility in light of the current economic and business uncertainty resulting from the onset of the COVID-19 pandemic. We used part of the proceeds from the issuance of the Secured Notes to repay $400 million of borrowings under the 2020 Incremental Term Loan Facility, and we used $542 million of cash on hand to repay all of our outstanding borrowings under the ABS Facility, which we then subsequently terminated. We incurred approximately $33 million of lender fees and third-party costs in connection with the aforementioned financing transactions. Cash flows from financing activities in fiscal year 2020 also included $18 million of proceeds received from stock purchases under our employee stock purchase plan and $3 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 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.

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•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 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 2021 and 2020, and we do not expect to make significant contributions in fiscal year 2022.

Certain employees are eligible to participate in our 401(k) savings plan. We made employer matching contributions to the 401(k) plan of $52 million and $47 million in fiscal years 2021 and 2020, respectively.

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 $43 million and $44 million in fiscal years 2021 and 2020, respectively.

Off-Balance Sheet Arrangements

We had entered into $268 million of letters of credit, primarily in favor of certain commercial insurers to secure obligations with respect to our insurance programs, under the ABL Facility as of January 1, 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, 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

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-

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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 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 2021 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 2021 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.

During fiscal year 2021, the Company implemented rebranding initiatives related to the integration of a trade name acquired as part of the 2019 Food Group 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 2019 Food Group acquisition.

Due to the many variables inherent in estimating fair value and the relative size of the goodwill and 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.

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 $17 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.

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Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 3, Recent Accounting Pronouncements, in our consolidated financial statements.