UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 333-185732

LOGO

US FOODS, Inc.

(Exact name of registrant as specified in its charter)

Delaware

36-3642294

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

9399 W. Higgins Road, Suite 500

Rosemont, IL 60018

(847) 720-8000

(Address, including Zip Code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The registrant is a privately held corporation and its equity shares are not publicly traded. At March 31, 2016, 1,000 shares of the registrant’s common stock were outstanding, all of which were owned by US Foods Holding Corp.

LOGO

US Foods, Inc.

Annual Report on Form 10-K

TABLE OF CONTENTS


			Page No.
PART I.

	Item 1.	Business		1

	Item 1A.	Risk Factors		19

	Item 1B.	Unresolved Staff Comments		37

	Item 2.	Properties		38

	Item 3.	Legal Proceedings		38

	Item 4.	Mine Safety Disclosures		39

PART II

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		39

	Item 6.	Selected Financial Data		40

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		43

	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		57

	Item 8.	Financial Statements and Supplementary Data		57

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		107

	Item 9A.	Controls and Procedures		107

	Item 9B.	Other Information		108

PART III

	Item 10.	Directors, Executive Officers and Corporate Governance		109

	Item 11.	Executive Compensation		114

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		152

	Item 13.	Certain Relationships and Related Transactions, and Director Independence		153

	Item 14.	Principal Accounting Fees and Services		155

PART IV

	Item 15.	Exhibits, Financial Statement Schedules		156

	Signatures			157

	Exhibit Index			158

Item 1:

BUSINESS

US Foods, Inc. and its consolidated subsidiaries (referred to herein as “we,” “our,” “us,” the “Company,” or “USF”) is a wholly owned subsidiary of US Foods Holding Corp. (“US Foods” or “parent”), a Delaware corporation formed and controlled by investment funds associated with or designated by Clayton, Dubilier & Rice, LLC (“CD&R”) and Kohlberg Kravis Roberts & Co., L.P. (“KKR”), collectively the “Sponsors”.

Our Company

We are among America’s great food companies and one of only two foodservice distributors with a national footprint in the United States. With net sales of $23 billion in the fiscal year ended January 2, 2016, we are the second largest foodservice distributor in the United States with a 2015 market share of approximately 9%. The U.S. foodservice distribution industry is large, fragmented and growing, with total industry sales of $268 billion in 2015.

Our mission is to be First In Food. We strive to inspire and empower chefs and foodservice operators to bring great food experiences to consumers. This mission is supported by our strategy of Great Food. Made Easy. It centers on providing a broad and innovative offering of high-quality products to our customers, as well as a comprehensive suite of industry-leading e-commerce, technology and business solutions. Our scale gives us the ability to serve customers nationwide with a highly efficient distribution network and centralized business processes. As we say on our trucks, we are Keeping Kitchens Cooking across America.

We supply approximately 250,000 customer locations nationwide. They include independently owned single and multi-unit restaurants, regional restaurant concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. We provide over 400,000 fresh, frozen, and dry food SKUs, as well as non-food items, sourced from over 5,000 suppliers. Our more than 4,000 sales associates manage customer relationships at local, regional, and national levels. They 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. Our extensive network of 61 distribution facilities and a fleet of approximately 6,000 trucks provide an efficient operating model, allowing us to offer high levels of customer service. This operating model allows us to leverage our nationwide scale and footprint while executing locally.

Built through organic growth and acquisitions, we trace our roots back over 150 years to a number of heritage companies with rich legacies in food innovation and customer service. These include Monarch Foods (established in 1853), Sexton (1883), PYA (1903), Rykoff (1911) and Kraft Foodservice (1976). US Foodservice was organized as a corporation in Delaware in 1989. In 2007, the Sponsors acquired US Foodservice from Royal Ahold N.V. In November 2011, we rebranded from “US Foodservice” to “US Foods.” This change reflected an important shift in our strategy: to differentiate our company through a superior and innovative food offering and an easy customer service experience.

In December 2013, US Foods entered into an agreement (“Acquisition Agreement”) to merge with Sysco Corporation (“Acquisition”). Following the failure to obtain regulatory approvals, the Acquisition Agreement was subsequently terminated on June 26, 2015. This 18-month period was challenging for our business. Sales growth slowed as many potential new customers were hesitant to switch their business to us during this period of uncertainty. During this time, we remained focused on our strategy by bringing innovative products to market, expanding our portfolio of business solutions for our customers and driving advancements in technology. As it became apparent that obtaining regulatory approval would be more challenging than expected, we began to see a recovery of sales momentum, particularly with our independent restaurant customers. Following the termination of the Acquisition Agreement, this momentum has continued to build.

Since our 2007 acquisition by CD&R and KKR, we have made significant changes to our business and demonstrated resilient financial performance. During the economic downturn between fiscal 2007 and fiscal 2011, we made a number of far-reaching structural changes to our operating model. These included standardizing and centralizing certain business processes and moving to a common technology infrastructure. Despite the challenging market, net sales expanded at a 0.8% CAGR during this four year period. After rebranding as US Foods in 2011, we unveiled a new strategy focused on establishing a leadership position in our industry centered

on a superior and innovative food offering and easy customer service experience. To build industry-leading capabilities, we made large investments in merchandising, marketing, e-commerce and our selling organization. As a result of these investments, between fiscal 2011 and fiscal 2013, our net sales increased at a CAGR of 4.7%. From fiscal 2013 to fiscal 2015, our net sales growth slowed to a CAGR of 1.8%, reflecting the short-term negative effects of the impending and ultimately terminated Acquisition.

Annual Net Sales ($ in millions)

LOGO

For the fiscal year ended January 2, 2016, we generated $23.1 billion in net sales, $875 million in Adjusted EBITDA, and a $98 million net loss. With our plan firmly in place, the Acquisition uncertainty behind us, and our capabilities expanded through initiatives and investment, we believe we are in a strong position to successfully execute our strategy.

Our Industry

The U.S. foodservice distribution industry is large, fragmented, and resilient with a long history of growth. It continues to benefit from increases in consumer spending on food-away-from-home. This spending has risen steadily from 29% of total food expenditures in 1975 to 43% in 2015, according to the BEA, and it currently accounts for $707 billion in the food-away-from-home market according to Technomic. For 33 consecutive months, the National Restaurant Association’s RPI has indicated that restaurant operators expect the industry to continue to expand. We believe that favorable trends in employment, disposable income and consumer sentiment also support continued growth in food-away-from-home spending. The U.S. foodservice distribution industry grew at an average real CAGR of 1.3% between 2010 and 2015 and is projected to grow at a real CAGR of 2.4% from 2015 to 2020, adding $34 billion to total annual foodservice distribution industry sales, according to Technomic.

Share of Food Expenditures

By Type

U.S. Foodservice Distribution Industry Sales

($ billions)

LOGO

Source: BEA (2015)

LOGO

Source: Technomic (February 2016)

The U.S. foodservice distribution industry is highly fragmented with over 15,000 local and regional competitors. Foodservice distributors typically fall into three categories representing differences in customer focus, product offering and supply chain:

•

Broadline distributors who offer a “broad line” of products and services

•

System distributors who carry products specified for large chains

•

Specialized distributors focused on specific product categories or customer types (e.g., meat or produce)

A number of adjacent competitors also serve the U.S. foodservice distribution industry, including cash-and- carry retailers, commercial wholesale outlets and warehouse clubs, commercial website outlets, and grocery stores.

There is a high degree of customer overlap, particularly across the broadline, specialized and cash-and-carry categories, as many customers purchase from multiple distributors concurrently. Given our mix of products and services, we classify ourselves as a broadline distributor.

U.S. Broadline Sales of Top 10 Foodservice Distributors

LOGO

Source: Technomic estimate, subject to revision by Technomic

The U.S. foodservice distribution industry is comprised of different customer types of varying sizes, growth profiles and product and service requirements:

•

Independent restaurants/small chains and regional chains. U.S. foodservice distribution sales to independent restaurants and small chains were estimated to be $64 billion in 2015 and are projected to grow at a real CAGR of 3.2% over the next five years. Regional chains were estimated to represent $15 billion in foodservice distribution sales in 2015 and are projected to grow at a 1.2% real CAGR over the next five years. Independent restaurants and small chains typically differentiate themselves in the market on the dining experience they provide to consumers and on the quality and diversity of their menu. They value business solutions that help them attract diners, improve the effectiveness of their menu offering and drive efficiency in their operations. We believe there are significant opportunities to provide additional solutions to these customers that would be otherwise difficult for them to access, given their more limited size and resources.

•

Healthcare customers. Healthcare customers were estimated to comprise $13 billion in foodservice distribution sales in 2015 and are projected to grow at a 3.5% real CAGR over the next five years. These customers generally fall into either acute care (e.g., hospital systems) or senior living (e.g., nursing homes and long-term care facilities). Healthcare customers have complex foodservice needs given their scale, need for menu diversity and logistics considerations. Food is also not as central to their overall business as it is for a restaurant, but it is a key contributor to patient satisfaction. As a result, some healthcare providers utilize third-party contract management companies to operate their foodservice facilities. Many use Group Purchasing Organization as intermediaries in order to gain procurement scale. In our experience, healthcare customers purchasing directly, through GPOs or through contract foodservice operators value strong relationships with their foodservice partners, particularly those that bring national scale, a broad product offering and strong transactional and logistics capabilities.

•

Hospitality customers. This customer type was estimated to represent $18 billion in foodservice distribution sales in 2015 and is projected to grow at a 3.5% real CAGR over the next five years. They are a diverse group, ranging from large hotel chains and conference centers to local banquet halls, country clubs, casinos and entertainment and sports complexes. Food is a key contributor to guest

satisfaction for these customers, and they value solutions related to menu planning and efficiency improvements in their kitchens and restaurants. With complex foodservice needs, hospitality customers value streamlined purchasing processes and expect high service levels in fulfilling their orders. Hospitality customers also use GPOs as intermediaries in order to gain procurement scale.

•

National restaurant chains. The top 100 national restaurant chains were estimated to generate $75 billion in U.S. foodservice distribution industry purchases in 2015. They are projected to grow at a 1.7% real CAGR over the next five years. These customers tend to in-source most activities except distribution, where they often rely on system distributors primarily for freight and logistics.

We believe that a broad array of value-added solutions offered by foodservice distributors makes customers more effective and efficient and can help foodservice distributors profitably grow their businesses. These services require distributors to invest in their capabilities, resulting in a higher cost-to-serve. When customers benefit from product and service solutions, they purchase a more attractive and profitable mix of items and tend to have stronger commercial relationships and loyalty.

We believe that the customer types that we target (as highlighted on the following chart) have greater growth prospects and/or benefit from value-added solutions to a greater extent than other customer types. This highlighted group is projected to grow at a combined real CAGR of 3.0% compared to the overall industry CAGR of 2.4% over the next five years, according to Technomic.

Customer Types in Foodservice Distribution

LOGO

Source for expected growth and market size in the above text and chart: Technomic (February 2016). US Foods utilizes Technomic definitions of Restaurant and Bars as proxies for specific customer types: “Small Chains & Independents” as Independent Restaurants, “101-500 Chains” as Regional Chains and “Top 100 Chains” as National Restaurant Chains. The Company’s “All Other” category is the “Military, Corrections and All Other” Technomic definition.

There are several important dynamics affecting the industry.

•

Evolving consumer tastes and preferences. Consumers demand healthy and authentic food alternatives with fewer artificial ingredients, and they value locally harvested and sustainably manufactured products. In addition, many ethnic food offerings are becoming more mainstream as consumers show a greater willingness to try new flavors and cuisines. Changes in consumer preferences create opportunities for new and innovative products and for unique food-away-from-home destinations. This, in turn, is expected to create growth, margin expansion and better customer retention opportunities for those distributors with the flexibility to balance national scale and local preferences.

•

Generational shifts with millennials and baby boomers. Given their purchasing power, millennials and baby boomers will continue to significantly influence food consumption and the food-away-from-home market. According to a 2014 U.S. Census Bureau survey, there are 83 million individuals between the ages of 13 and 33 in the United States. That makes these millennials the largest demographic cohort. They are key to driving growth in the broader U.S. food industry as their disposable income increases. Baby boomers continue to shape the industry as they remain in the workplace longer, prolonging their contribution to food-away-from-home expenditures.

•

Growing importance of e-commerce. We see significant future growth in e-commerce and in the adoption of mobile technology solutions by foodservice operators. E-commerce solutions increase customer retention. They also deepen the relationship between foodservice distributors and customers, creating new insights and services that can make both more efficient. We think deeper, technology-enabled relationships with customers will accelerate the adoption of new products and increase customer loyalty. As a result, distributors that have invested in creating these capabilities will have a competitive edge. We believe this trend will accelerate, as millennials become key influencers and decision-makers within the industry, particularly at the customer level.

We believe that we have the scale, foresight and agility required to proactively address these trends and, in turn, benefit from higher growth, greater customer retention and improved profitability.

Our Business Strategy

While we serve all customer types, our strategy focuses on independent restaurants, small chains, and regional chains, and healthcare and hospitality customers. These customers generated approximately 66%, 65%, and 64% of our net sales in fiscal 2015, fiscal 2014, and fiscal 2013, respectively. Their expected growth, mix of product and category purchases, adoption of value-added solutions and other factors make them attractive to us strategically and financially.

Our mission to be First in Food is brought to life by our strategy of Great Food. Made Easy. We offer innovative products and services that help chefs and operators succeed. Our e-commerce tools and mobile solutions make it easier for customers to do business with us. We execute on these elements of our strategy while delivering on the fundamental requirements that are important to all of our customers. This strategy is supported by a series of capabilities and initiatives depicted in the following pyramid.

Great Food. Made Easy.

Strategic Priorities and Supporting Initiatives

LOGO

•

“Great Food.” Food leadership means meeting the needs of a diverse and growing customer base and providing a broad product portfolio. This offering includes items from leading manufacturers under their own brands and from our private brands. Our unique product innovation capabilities keep us at the forefront of emerging food trends. We work with suppliers to bring new items and concepts to market that are relevant and in line with consumer preferences. Locally harvested and sustainable products are a recent example. The Great Food element of our strategy, while relevant for all customers, is especially important to our core independent and regional restaurant customers. They particularly value food quality, menu diversity and insights into emerging trends in consumer preferences.

•

“Made Easy.” An easy customer experience means providing the broadest and most relevant e-commerce and business support tools in the U.S. foodservice distribution industry. We combine a consultative selling approach with data-driven customer insights, and industry leading e-commerce technology. Our mobile and e-commerce capabilities allow customers to easily place orders, track shipments, quickly and efficiently view product information, and verify orders at delivery for invoice accuracy. Our knowledge of consumer trends and innovative food offerings, coupled with a deep understanding of our customers’ operations, allows us to bring opportunities for growth and efficiency to our customers. These efficiencies include menu planning solutions and labor-saving products. We are also expanding our capabilities with analytical tools that yield additional insights from our transactional and operational data. These tools are particularly valued by independent and regional restaurants as well as our healthcare and hospitality customers, who seek easier ways to transact.

•

Flawless Fundamentals. We strive to be flawless when we interact with our customers every day. They value product quality, food safety, product price, and variety, as well as dependable and accurate transactions and delivery. We believe that we outperform most of our competitors in many of these areas, as evidenced by the results of customer surveys. We understand the importance of flawless execution across all touch-points from ordering to delivery to billing. Our people continuously seek to improve this experience, which we believe will further strengthen our customer relationships and widen the performance gap between us and our competitors.

•

Foundational Excellence. We focus on people, processes, infrastructure, and insights from analytics. This begins with a commitment to our approximately 25,000 employees: developing their talents and maintaining a strong and vibrant culture. We have significant scale in our operating network, coupled with leading supply chain management capabilities and standardized business processes. This includes a common technology infrastructure supporting transactional, operating, and financial activities, which results in a streamlined organizational model that supports local leadership with centralized capabilities.

Research using the NPS¹ indicates that our strategy resonates with customers. Results show that we have higher NPS scores than our primary competitors. In addition, we measure our performance relative to competitors on a variety of dimensions that are important to customers in our industry, including quality, innovation, ease of transactions, on-time delivery, and food safety. Here, we also outperform our competition on most attributes exemplified in our 2015 satisfaction scores across key attributes (in the chart below). Our outperformance on the attributes that are central to our strategy, such as product innovation, being easy to do business with, and easy online ordering, allow us to win with our key target customer types.


Net Promoter Score Trends vs. Competitors		2015 Customer Satisfaction Scores Across Key Attributes

Source: Datassential		Source: Datassential

¹	The Net Promoter Score methodology is calculated using responses to a single question, on a 0-10 scale: How likely is it that you would recommend US Foods to a friend or colleague?

Respondents are grouped as follows:

Promoters (score 9-10) are loyal enthusiasts who will keep buying and referring others, fueling growth.

Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.

Detractors (score 0-6) are unhappy customers who can damage the brand and impede growth through negative word-of-mouth.

The Net Promoter Score is calculated by subtracting the percentage of Detractors from the percentage of Promoters. The Net Promoter Score can range from a low of -100 (if every customer is a Detractor) to a high of 100 (if every customer is a Promoter).

We believe our strategy has enabled us to grow with target customers. From our 2011 rebranding through the end of fiscal 2015, we have increased the volume of business, as measured by cases shipped, with our independent and regional restaurants and our healthcare and hospitality customers at a combined CAGR of 1.8%. Our volume growth with independent restaurant customers has also seen a recovery in recent quarters to levels consistent with what we had experienced prior to the announcement of the Acquisition.

Year Over Year Growth in Cases Shipped to Independent Restaurants

LOGO

Source: Company results and calculations.

What Makes Us Different

We are one of two national players in a large, resilient and fragmented industry. We believe a number of factors differentiate us from competitors in the eyes of customers: our innovative product offering, leading e-commerce platform, superior customer selling approach, functionalized operating model, and experienced management team.

Innovative products. We believe we provide one of the most innovative food offerings in the industry. Since 2011, we have launched over 330 new products (out of an estimated 2,000 items evaluated) that have generated approximately $900 million in incremental cumulative net sales. Our dedicated product development and innovation team includes food scientists, chefs, and packaging engineers. They search the world for new and forward thinking food concepts and work collaboratively with leading suppliers and co-packers to develop products based on these insights.

For example, our Chef’s Line Pat LaFrieda Angus Beef Burger is a custom beef patty developed exclusively for our customers by renowned New York butcher Pat LaFrieda. It features Angus short rib and chuck prepared with LaFrieda’s proprietary chopped technology versus a traditional grind. Our Chef’s Line All Natural Ready-to-Cook Turkey Roast is an all-natural turkey breast developed with Butterball and DuPont Film. It is wrapped in film rather than traditional foil, which reduces cook time, eliminates cross-contamination and enhances taste, texture, and appearance. Our Monarch Mirepoix Blend is a blend of onions, carrots, and celery that comes peeled and chopped, which can save up to two hours of back-of-the-house labor per case while reducing waste.

Our company has been certified by the Marine Stewardship Council Chain of Custody across all of our distribution centers, demonstrating our commitment to sourcing from certified sustainable fisheries. We plan to launch or rebrand a line of over 250 sustainable products in 2016. We also are in the process of removing artificial ingredients from our premium private brands by substituting all natural alternatives for what we call the “US Foods Unpronounceables List.”

We launch products nationally under proprietary marketing campaigns called The Scoop. Each Scoop launch features 20 to 30 new US Foods products. The campaign, occurring several times a year, is coordinated with local sales teams across the country. Their efforts are supported by a variety of marketing tools ranging from print and digital promotions, food shows and customer tasting events, and social media. Prior to each Scoop launch, sales associates receive rigorous training on each new item. We use proprietary analytic tools to identify

high-potential target customers and direct our selling efforts accordingly. 57.5% of our customers have purchased Scoop items in fiscal 2015 and those customers represent $17.2 billion in net sales attributable to their purchases of both Scoop and non-Scoop items. Approximately 40% of our customers purchase Scoop items when offered at a new Scoop launch. Additionally, Scoop customers have 15% higher case growth and up to 7% higher retention rates than non-Scoop customers.

Broad product offering, including a leading private brand program. To address the needs of our target customers, we provide a wide product assortment of over 400,000 fresh, frozen and dry food SKUs and non-food items sourced from over 5,000 suppliers. We believe we have industry-leading category management capabilities that capitalize on our procurement scale while allowing for local customization.

Our leading private brand program includes an extensive and growing assortment of over 14,000 products across over 20 brands. These contributed $7.3 billion (representing 32%) in net sales in fiscal 2015. Since 2013, our private brand offering has grown by almost 1,200 products. We believe the depth and quality of our tiered private brand offering gives us an advantage. Many of our competitors use private brands primarily as a lower price point option for their customers. We offer private brand products that extend across a broad spectrum of “good, better, best” tiers based on price and quality.

The “best” tier offers products not often provided by our competitors. For example, our Metro Deli line was the first comprehensive private brand line of all natural deli products offered by a broadline distributor. It has displaced a leading national brand at many locations due to its quality, value, and all-natural attributes. Our Chef’s Line brand is based on the premise of “making food as good as your own if you had the time.” These products are pre-made using high-caliber ingredients to create labor savings and reduce waste without sacrificing quality. Our Rykoff Sexton brand is built on a 130-year legacy of providing uncompromised quality ingredients. The “better” tier offers products that are equal or superior to the quality of comparable manufacturer brands. The “good” tier, our value brands, offers a variety of lower cost products for customers who demand consistent quality and lower price points. Our private brand products typically have higher gross margins compared to similar manufacturer-branded offerings. They are generally priced below comparable manufacturer brands, where available, which we believe drives preference and loyalty with customers.

Leading e-commerce and mobile technology solutions. We believe we were the first in our industry to offer e-commerce and mobile technology solutions to customers. These solutions allow customers to more easily place orders, track shipments, analyze food costs, analyze trends based upon transactional history over time, manage inventory, make payments and quickly view product information. They also enable our sales associates to spend more quality time with customers, focusing on consultative selling and presenting value-adding services rather than doing order entry. In our surveys and benchmarking studies, customers continue to rate our functionality and ease of use as better than competitors. Customer adoption of our e-commerce platform continues to grow, as illustrated in the following charts.

LOGO

In fiscal 2015, $15 billion in net sales was generated through e-commerce platforms, representing 66.7% of our total net sales. Our mobile application has been downloaded over 160,000 times since its launch in 2013. We continuously extend its functions and features and, in its current form, it has over 100 functions ranging from day-to-day transactions to product research to recommendations and promotions. We believe our sales from e-commerce orders are the highest in the industry, and they rank in the top 10 for all business-to-business companies, according to 2016 B2B E-Commerce 300. This high level of penetration reflects the importance of e-commerce to our customers.

E-commerce adoption has significant benefits for customers and drives incremental growth and profit for us. For example, our independent restaurant customers who use e-commerce to place orders have up to 7% higher retention rates, 5% higher purchase volumes and an approximately 600 bps higher NPS score than those that do not. When customers place their own orders using e-commerce tools, this significantly improves sales force productivity, allowing our sales associates to focus on growing the business versus “taking orders.”

Many e-commerce customers are engaged in social media, providing additional channels for us to build strong and enduring relationships with them. We have more Twitter followers and 3.5-times more Facebook likes than our five largest competitors combined.

Superior team-based selling approach. Over the last several years our sales associates have made significantly more sales per associate, which we believe exemplifies our efficient and effective selling approach. This is supported by a team approach to customers, proprietary tools that help our sales force better understand their customers, and a set of business solutions that help operators compete.

•

Robust front-line selling capabilities driving local “touch” with customers. Our selling organization has over 4,000 sales associates engaged in a team-based selling approach. Our selling teams are supported on the street by chefs, restaurant operations consultants and product specialists, and customer service representatives in a seamless and team-based manner. Together this team provides cohesive support including menu planning, recipe ideas, product selection, and pricing strategies. We believe this approach is unique in our industry. At many competitors, sales associates view themselves

as independent sales representatives managing their own book of business. Our sales associates, in contrast, represent the entire US Foods brand, giving them a local touch while bringing the expertise of our entire organization to each customer opportunity. We believe this concerted effort results in our receiving a higher share of our customers’ purchases and better customer retention.

•

Data-driven insights and predictive analytics to guide the selling team. We have proprietary analytical capabilities, which we call “CookBook.” This enables us to apply predictive analytics to customer data to generate actionable insights for our selling organization. These insights inform and optimize day-to-day activities such as pricing, sales planning and cross-selling offers. The effectiveness and productivity gains from these tools allow our sales associates to deepen customer relationships and explore new opportunities for mutual growth. We also leverage this capability for market insights relevant to our suppliers. One example of how we use this capability is that our sales associates receive an alert if a customer is at risk of deviating from historical purchasing patterns, allowing the sales associate to quickly address the situation. Our predictive analytical capabilities also extend to the way we make targeted offers to our customers. Our “My Kitchen” marketing campaigns, which occur several times a year, are an example of how analytic insights can drive a unique value proposition for customers. My Kitchen enables “one-to-one” promotions for selected customers. We use predictive analytics to provide tailored offers and product recommendations that are likely to be important to customers. Every customer sees its name printed on high quality marketing material and a set of offers that are unique and tailored to them. These promotions are highly relevant and impactful for our customers, and they drive a greater share of purchases, new product adoption and profitable growth for us.

•

Solutions that help customers operate more profitably. Our “Menu Profit Pro” application takes purchase data across the entire supplier base of a given customer and matches this data with actual sales data to allow a customer to better understand the relative profitability of different items on their menu. In addition, our customers also have access to a variety of transactional data that allows them to better understand their operations for improved forecasting, inventory management and productivity.

•

Grass roots, value-added marketing through “Food Fanatics.” Launched in 2012, “Food Fanatics” is a marketing program that combines local events with national media. We have a team of 42 in-house culinary experts around the country, which we expect to expand to our major markets during 2016, known as our “Food Fanatics Chefs.” They are imbedded in local markets and provide advice to our customers and our sales associates. We host “Food Fanatics Live” events in local markets across the country. These events bring customers, vendors and sales associates together to discuss food and technology trends of interest to customers in a local market. In fiscal 2015, we held fourteen shows in fourteen cities with approximately 1,600 attendees at each “Food Fanatics Live” event. Local efforts are supported by our award-winning “Food Fanatics” magazine, which is distributed to existing and potential customers. This magazine, which is free and primarily funded through advertising, includes third-party content on food trends, food people and ideas to increase profitability for our customers.

Functionalized operating model and business culture. We operate as one business with standardized business processes, shared systems infrastructure and an organizational model that optimizes national scale with local execution, which we believe is a key differentiator from our competition. We have centralized activities where scale matters and our local field structure focuses on customer facing activities. For example, our product innovation and research and development efforts, brand marketing, e-commerce initiatives, national vendor negotiations and other aspects of our supply chain are managed centrally, and we have shared services and a common information technology platform across our entire organization. However, activities that are closer to the customer such as pricing to local customers, product replenishment and local business development efforts are managed locally with support provided by regional leaders and our corporate office organized by function.

Taken as a whole, our functionalized model balances the advantages of scale and flexibility. The result is a more responsive and lower cost operating model, which improves our time-to-market. This model also has

enabled us to achieve a much greater consistency in our offering and execution, which is important to both regional and national customers.

In 2016, we are further leveraging this model by moving to a multi-site approach to management, consolidating local back-office support functions from 61 distribution centers into 26 area hubs with broader geographic scope. In addition to generating significant cost savings, we believe this initiative will enable better network and route optimization, and more efficient integration of acquisitions.

One of only two national broadline players in a highly fragmented industry with resilient growth. We are the second-largest distributor, as measured by sales, in the $268 billion U.S. foodservice distribution industry. This makes us about three times the size of the average regional competitor. The industry is highly fragmented with an estimated 77% of industry sales represented by local and regional distributors that lack a national distribution footprint. In contrast, our national footprint enables us to serve large regional or multi-regional customers who want a more seamless experience across their own geographies. In addition, our scale provides several advantages versus regional or local distributors. We achieve volume savings from purchases on everything from cost-of-goods to fleet and fuel. We are able to achieve greater efficiencies of scale for our basic centralized administrative support functions, such as accounting, payroll and tax, resulting in a lower unit cost for these services. We also have greater flexibility to invest in initiatives requiring significant capital and talent, such as product development, e-commerce, marketing and other areas that support our Great Food. Made Easy. strategy.

An experienced and invested management team. Our leadership team has extensive experience and proven success in the foodservice industry. The eleven members of our leadership team have over 110 years of combined expertise in the foodservice industry, which we believe has been an important factor in our past successes. In addition to foodservice, these executives bring deep experience from related industries, including retail, manufacturing and other types of distribution. Our management and field leadership team, including our regional and area presidents, has invested personal funds in our equity. Substantially all of management’s incentive compensation is tied to achieving growth and profitability targets.

Our Growth Strategy

Our growth strategy gives us an opportunity to outpace the projected growth of the U.S. foodservice distribution industry. We intend to do so by increasing our revenue with our target customers, continuing to drive greater cost savings and efficiencies and making opportunistic acquisitions as described below:

Grow our revenue and gross profit with our target customers. We are taking the following actions to further expand our net sales and profitability:

•

Increase our share with new and existing customers. We anticipate growing our share with our target customers, which include independent and regional restaurants, hospitality, and healthcare customers, by providing the most compelling combination of products, services and analytical tools coupled with the ease of online transactions. Our internal studies show customers increasingly prefer our innovation, product offering and convenient mobile and e-commerce solutions. We have also seen significantly lower rates of customer churn for those using our innovative products and online platforms.

•

Grow our share in center-of-plate and produce. Center-of-plate proteins and produce categories account for a significant portion of total industry sales. These categories are often provided by a number of specialty distributors that have deep category knowledge but lack scale. Our objective is to be our customer’s “first choice” in these categories. We expect this will drive additional revenue and gross profit from current customers, as they shift business from specialty distributors to US Foods. We have seen higher growth in markets where we are using this strategy, which includes industry-leading training for our sales force. We are strengthening our offering by expanding our Stock Yards manufacturing footprint. Stock Yards provides high-quality meat and seafood, custom cut and packaged to a customer’s specifications.

•

Expand our private brand program. We are committed to supporting our private brands, which offer a differentiated positioning and product selection, better price points, and higher gross margins than manufacturer-branded products. We intend to continue leveraging our scale to further reduce the cost of goods for our private brand offerings and enhance incentives for our sales force to drive private brand growth. We believe these efforts will increase profitability and customer loyalty.

Continue to reduce our operating expenses. We are taking the following actions to further increase our productivity:

•

Optimize our network and increase distribution productivity. We expect to drive productivity savings through a combination of network consolidation, continuous improvement, and better alignment of compensation and productivity. For example, in 2015 we announced the potential closure of our Baltimore distribution center, and we closed our Lakeland, Florida distribution center as part of a program to improve the effectiveness and efficiency of our distribution network. We also opened two highly efficient distribution facilities to serve growing markets. We are implementing tools and processes for more efficient route optimization and slotting in our warehouses and aligning employee incentives and standards with productivity across the network. These are selected examples of broader initiatives that will continue to improve efficiencies across our distribution network and reduce supply chain costs.

•

Increase the efficiency of our sales organization. We have increased our net sales dollars per sales associate by over 30%, from $4.0 million in 2012 to $5.4 million in fiscal 2015. We expect that our sales associates will continue to achieve higher productivity levels, enabled by a combination of our e-commerce tools and our team-based selling approach.

•

Use a lower-cost standard organization model and common systems infrastructure. We are targeting cost savings from further streamlining our overhead and shared services. This involves moving from individual support centers at each of our distribution centers to a multi-site model where several distribution centers are served by a hub. This allows us to reduce the number of reporting regions and streamline our operating infrastructure. We are also consolidating our spending across our indirect spend categories, which is fragmented today. Our goal is to capture additional savings from leveraging our scale in aggregating purchasing, modifying internal practices and improving vendor compliance.

Pursue opportunistic acquisitions for accelerated growth. Our company has a strong record of identifying, completing and integrating accretive acquisitions. From fiscal 2010 through 2013, we completed twelve acquisitions. These have either been broadline distributors with local strength or specialty distributors with distinct capabilities across ethnic food, center-of-plate and produce categories. In December 2015, we acquired a leading broadline distributor in the Milwaukee market with over $100 million in annual sales and a high concentration of independent restaurant customers and in March 2016 we acquired Cara Donna Provision Co., a broadline foodservice distributor in the Boston area. Due to the level of fragmentation in the U.S. foodservice distribution industry, we believe there are plenty of attractive acquisition opportunities for us. We intend to identify and make selective synergistic acquisitions to enhance our growth.

Customers and Products

Our sales force of more than 4,000 sales representatives serves a diverse group of customers. Our customers include independently-owned single and multi-unit restaurants, regional restaurant concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. In fiscal 2015, no single customer represented more than 4% of our total customer sales. Sales to our top 50 customers/GPOs represented approximately 43% of our net sales in fiscal 2015.

Customers rely on us for support in many areas, including product development and innovation, assortment expertise and selection, menu preparation, recipe ideas, restaurant operations consulting, and pricing strategies.

They also benefit from nationally branded and private brand products, value-added offerings, such as menu engineering and marketing services, and customer service. Customers typically purchase products from multiple foodservice distributors.

We have relationships with GPOs that act as agents for their members in negotiating pricing, delivery and other terms. Some customers who are members of GPOs purchase their products directly from us under the terms negotiated by their GPOs. In fiscal 2015, this accounted for about 23% of our total customer purchases. GPOs primarily focus on healthcare, hospitality, education, government/military and restaurant chains.

This table presents the sales mix for our principal product categories for the fiscal years ended January 2, 2016, December 27, 2014, and December 28, 2013.


	2015			2014			2013
Meats and seafood		36	%		36	%		34	%
Dry grocery products		18	%		18	%		19	%
Refrigerated and frozen grocery products		15	%		15	%		16	%
Equipment, disposables and supplies		9	%		9	%		10	%
Dairy		11	%		11	%		10	%
Beverage products		6	%		6	%		6	%
Produce		5	%		5	%		5	%

		100	%		100	%		100	%

Product Brands and Other Intellectual Property

We have a broad assortment of categories and brands to meet customers’ needs. In many categories, we offer products under our own private brands and trademarks.

We have registered the trademarks US Foods, Food Fanatics and Chef’s Store in connection with our overall US Foods brand strategy and with our retail outlets. We have also registered or applied to register the following trademarks in the United States in connection with our brand portfolio: for our best tier lines: Chef’s Line, Rykoff Sexton, Stock Yards and Metro Deli; for our better tier products: Monarch, Monogram, Molly’s Kitchen and Glenview Farms, among others; and for our good tier offerings: Valu+Plus and Harvest Value.

Other than the US Foods trademark, and the trademarks for our brand portfolio, we do not believe that trademarks, patents or copyrights are material to our business.

Merchandising

Our Merchandising Group manages procurement and our portfolio of products for both our private and national brands. The group is responsible for setting and executing product and category strategies and then working with each area to implement our category vision. The professionals in this group also use extensive food safety and quality assurance resources to ensure consistency, integrity and high standards of excellence in the products we distribute.

The group concentrates on optimizing product assortment by leveraging our purchasing scale. We implemented a strategic vendor management process to ensure our suppliers provide the most effective combination of quality, service and price over the long term. This allows us to use a national marketing calendar to more effectively reach our diverse customer base.

The Merchandising Group’s test kitchen facilitates product research and development. A team of chefs and product developers works closely with our category managers and suppliers to create products that only are available from us. This product innovation and marketing program is a centerpiece of our strategy of Great Food. Made Easy.

Suppliers

We purchase from over 5,000 individual suppliers, none of which accounted for more than 5% of our aggregate purchases in fiscal 2015. Our suppliers generally are large corporations, selling private brand products. Additionally, regional suppliers support targeted geographic initiatives, and private label programs requiring regional distribution. We generally negotiate supplier agreements on a centralized basis.

Logistics

Our logistics function is responsible for all company-managed inbound freight and freight optimization. This group includes both national operations at our company headquarters in Rosemont, Illinois and a field-based logistics team.

The national logistics team handles the building, tracking and execution of inbound transportation loads, using our Transportation Management System. The national logistics team also manages broader strategic initiatives associated with overall network optimization as well as carrier and vendor relationships, such as the inbound freight component of a vendor relationship (versus the product cost component, which is managed by our Merchandising Group).

The field-based support team works with field operations and replenishment to identify savings associated with inbound freight optimization in a specific location.

Competition

Foodservice distribution is competitive. It is a fragmented industry, filled with various types and sizes of distributors, as well as adjacent competition (such as cash and carry and club stores and new market entrants). In addition, the market is sensitive to national and regional conditions and has low margins.

Over 15,000 foodservice distributors participate in the food-away-from-home marketplace. Competition consists of one other national distributor, and many regional and local distributors. Smaller companies align themselves with other local and regional players through purchasing cooperatives and marketing groups. This allows them to expand their geographic markets, private label offerings, and overall purchasing power, and their ability to meet customers’ distribution requirements.

There are few barriers to market entry. A number of adjacent competitors also serve the commercial foodservice market. These include cash and carry operations, commercial wholesale outlets (such as Restaurant Depot), club stores (such as Sam’s Club and Costco) and grocery stores. Because there are few barriers to entry, we have begun to experience competition from online direct food wholesalers, including e-commerce companies such as Amazon.com.

Our customers purchase from multiple suppliers. Most buying decisions are based on the type of product, its quality and price, plus a distributor’s ability to completely and accurately fill orders and provide timely deliveries. Customers can choose from many broadline foodservice distributors, specialty distributors that focus on specific categories (such as produce, meat or seafood), club stores, grocery stores and a myriad of new online retailers. Since switching costs are low, customers can make supplier and channel changes quickly. Existing foodservice competitors can extend their shipping distances, and add truck routes and warehouses relatively quickly to serve new markets or customers.

We differentiate ourselves from the competition by providing an innovative food offering and an easy customer service experience. We serve a diverse customer base with a salesforce of more than 4,000 associates who are well equipped to meet the evolving demands of our customers. We have increased our category management capabilities while remaining focused on innovation and differentiation in our exclusive brand portfolio. Our intention is to leverage our investment in information technology to make the customer experience easy.

Government Regulation

As a marketer and distributor of food products in the United States, we must comply with various laws and regulations from federal, state and local regulatory agencies. Our policy is to comply with all applicable laws and regulations. A summary of certain laws and regulations is described below.

Food Holding

We are subject to the Federal Food, Drug and Cosmetic Act; the Bioterrorism Act; and regulations created by the U.S. Food and Drug Administration (“FDA”). The FDA regulates manufacturing and holding requirements for foods, specifies the standards of identity for certain foods and prescribes the format and content of certain information that must appear on food product labels.

The recently published and pending rules under the FDA Food Safety Modernization Act (“FSMA”) will significantly expand our food safety requirements. Among other things, we will be required to establish and maintain comprehensive, prevention-based controls across the food supply chain that are both verified and validated. The FSMA further regulates food products imported into the United States and provides the FDA with mandatory recall authority. The Act’s pending rules, including the rule on the sanitary transportation of food, may require us to enhance our systems to ensure that we meet new standards for maintaining the safety of food during transportation.

For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Country of Origin Labeling Act, and regulations from the U.S. Department of Agriculture (“USDA”). The USDA imposes standards for product quality and sanitation, including the inspection and labeling of meat and poultry products, and the grading and commercial acceptance of produce shipments from our vendors.

Our company and products are also subject to state and local regulation. This includes measures such as the licensing of our facilities, enforcement of standards for our products and facilities by state and local health agencies, and regulation of our trade practices in connection with selling products.

Our processing and distribution facilities must be registered with the FDA biennially and are subject to periodic government agency inspections. Our facilities are generally inspected at least annually by federal and/or state authorities. We also must establish communication programs to transmit information about the hazards of certain chemicals present in some of the products we distribute.

Our customers include several departments of the federal government, including the Department of Defense and Department of Veterans Affairs facilities, as well as certain state and local entities. These customer relationships subject us to additional regulations applicable to government contractors.

Trade

For the purchase of products manufactured outside of the United States, and for the shipment of products to customers located outside of the United States, we are subject to customs laws regarding the import and export of shipments. Our activities, including working with customs brokers and freight forwarders, are subject to regulation by U.S. Customs and Border Protection, part of Homeland Security.

Anticorruption

Because we are organized under the laws of a state in the U.S. and its principal place of business is in the U.S., it is considered a “domestic concern” under the Foreign Corrupt Practices Act and is covered by the anti-bribery provisions of the Act. The anti-bribery provisions of the FCPA prohibit any domestic concern and any officer, director, employee, or agent, acting on behalf of the domestic concern from paying or authorizing payment of anything of value to (i) influence any act or decision by a foreign official; (ii) induce a foreign official to do or omit to do any act in violation of his/her lawful duty; (iii) secure any improper advantage; or (iv) induce a foreign official to use his/her influence to assist the payor in obtaining or retaining business, or directing business to another person.

Ground Transportation

The U.S. Department of Transportation and its agencies, the Surface Transportation Board, the Federal Highway Administration, the Federal Motor Carrier Safety Administration, and the National Highway Traffic Safety Administration regulate our trucking operations through the regarding the regulation of operations, safety, insurance and hazardous materials. We must comply with the safety and fitness regulations promulgated by the Federal Motor Carrier Safety Administration, including those relating to drug and alcohol testing and hours-of service. Such matters as weight and dimension of equipment also fall under federal and state regulations.

Environmental

Our operations are also subject to a broad range of federal, state, and local environmental laws and regulations. Our operations are also subject to zoning and building regulations. The environmental laws and regulations cover a variety of procedures, including appropriately managing wastewater and stormwater; complying with clean air laws, including those governing vehicle emissions; properly handling and disposing of solid and hazardous wastes; protecting against and appropriately investigating and remediating spills and releases; and monitoring and maintaining underground and aboveground storage tanks for diesel fuel and other petroleum products.

A number of our facilities have ammonia or Freon-based refrigeration systems, which could cause injury or environmental damage if accidently released. In addition, many of our facilities have propane and battery powered forklifts. Proposed or recently enacted legal requirements, such as those requiring the phase-out of certain ozone-depleting substances, and proposals for the regulation of greenhouse gas emissions, may require us to upgrade or replace equipment, or may increase our transportation or other operating costs.

Employment

The U.S. Department of Labor and its agencies, the Employee Benefits Security Administration, the Occupational Safety & Health Administration and the Office of Federal Contract Compliance, regulate our employment practices and standards for workers. We are also subject to laws that prohibit discrimination in employment based on non-merit categories, including Title VII of the Civil Rights Act and the Americans with Disabilities Act, and other laws relating to accessibility and the removal of barriers. Our workers’ compensation self-insurance is subject to regulation by the jurisdictions in which we operate.

Our facilities are subject to inspections under the Occupational Safety and Health Act to ensure our compliance with certain manufacturing, health and safety standards to protect our employees from accidents. We are also subject to the National Labor Relations Act (NLRA) which governs the process for collective bargaining between employers and employees and protects the rights of both employers and employees in the workplace.

Compliance

We believe that we comply with the regulatory requirements relating to our operations. Failing to comply with applicable regulatory requirements could result in a number of adverse situations. These could include administrative, civil, or criminal penalties or fines; mandatory or voluntary product recalls; warning or untitled letters; cease and desist orders against operations that are not in compliance; closing facilities or operations; the loss, revocation, or modification of any existing licenses, permits, registrations, or approvals; and the failure to get additional licenses, permits, registrations, or approvals in new jurisdictions where we intend to do business. Any of these could have a material adverse effect on our business, financial condition, or results of operations. These laws and regulations may change in the future, and we may incur material costs to comply with them, or any required product recalls.

Employees

As of January 2, 2016, we had approximately 25,000 employees located in 48 states. Our approximately 16,000 non-exempt employees (that is, employees who are entitled to overtime pay under the Fair Labor Standards Act) are primarily warehouse workers and drivers. Roughly 4,700 employees are members of local unions associated with the International Brotherhood of Teamsters and other labor organizations. In fiscal year 2015, we renegotiated eleven agreements with labor unions, covering about 700 employees. In fiscal year 2016, fourteen CBAs covering approximately 1,600 employees will be subject to renegotiation. We believe we do extensive contingency planning in advance of all negotiations with a goal of ensuring we can continue to operate our facilities that may be affected by work stoppages.

A labor agreement covering approximately 200 employees in our Phoenix, Arizona distribution center expired in October 2015. Negotiations to reach a new agreement with the local union bargaining committee have been unsuccessful to date and, in February 2016, members of the Teamsters Local 104 went on strike at this facility. Employees at Teamsters-represented distribution centers in Los Angeles, San Diego, and Corona, California, joined in sympathy strikes. Notwithstanding that the initial strike by Teamsters Local 104 and the sympathy strikes have ended, we have not entered into a new labor agreement with Teamsters Local 104, so there is a risk of additional strikes and sympathy strikes in the future. We continue to make ourselves available to negotiate in good faith with the local bargaining committee in Phoenix with respect to this matter.

While we have experienced work stoppages in the past, we believe we have generally good relations with both union and non-union employees, and we believe we are well-regarded in the communities in which we operate.

Available Information

You may read and copy any documents that we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. You may call the SEC at 1-800-SEC-0330 to obtain further information about the public reference room. In addition, the SEC maintains an Internet website (www.sec.gov) that contains reports, proxy and information statements and other information about issuers that file electronically with the SEC, including US Foods, Inc. The SEC’s website address is included in this Annual Report on Form 10-K as an inactive textual reference only. We also maintain a website, www.usfood.com, which does not contain investor information at this time due, but does provide additional information about our locations, products and services, brands, and leadership and provides additional contact information for US Foods, Inc.

We have agreed under the terms of the indenture governing our Senior Notes that from the time we first became subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act, and for so long as any of our Senior Notes remain outstanding, we will file with the SEC (unless such filing is not permitted under the Exchange Act or by the SEC), the annual reports, information, documents and other reports that we are required to file with the SEC pursuant to such Section 13(a) or Section 15(d), or would be so required to file if we were subject to the filing requirements of Section 13(a) or Section 15(d).

You may also obtain a copy of this Annual Report on Form 10-K and other information that we file with the SEC at no cost by calling us or writing to us at the following address: US Foods, Inc., 9399 W. Higgins Road, Suite 600, Rosemont, IL 60018, (847) 720-8000.

Item 1A.

Risk Factors

We are subject to many risks and uncertainties including, without limitation, our results of operations and cash flows. Some of these risks and uncertainties may cause our financial performance, business or operations to vary, or they may materially or adversely affect our financial performance. These are discussed below. The risks and uncertainties described in this Annual Report on Form 10-K are not the only ones we face. Others—which are not currently known to us, or that we believe are immaterial—also may adversely affect our financial performance, business or operations.

Risks Relating to Our Business and Industry

Ours is a low-margin business, and our profitability is directly affected by cost deflation or inflation, commodity volatility and other factors.

Foodservice distribution is characterized by relatively high inventory turnover with relatively low profit margins. Volatile commodity costs have a direct impact on our industry. We make a significant portion of our sales at prices that are based on the cost of products we sell, plus a percentage margin. As a result, our profit levels may be negatively affected during periods of product cost deflation, even though our gross profit percentage may remain relatively constant. Prolonged periods of product cost inflation also may reduce our profit margins and earnings, if product cost increases cannot be passed on to customers because they resist paying higher prices. In addition, periods of rapid inflation may have a negative effect on our business. There may be a lag between the time of the price increase and the time at which we are able to pass it along, as well as the impact it may have on discretionary spending by consumers.

Competition in our industry is intense, and we may not be able to compete successfully.

Foodservice distribution is highly competitive. One of our competitors has greater financial and other resources than we do. Furthermore, there are a large number of local and regional distributors. These companies often align themselves with other smaller distributors through purchasing cooperatives and marketing groups. The goal is to enhance their geographic reach, private label offerings, overall purchasing power, cost efficiencies, and ability to meet customer distribution requirements. These suppliers also rely on local presence as a source of competitive advantage, and they may have lower costs and other competitive advantages due to geographic proximity. Additionally, adjacent competition, such as cash and carry operations, commercial wholesale outlets, club stores and grocery stores, continue to serve the commercial foodservice market. We also experience competition from online direct food wholesalers, such as Amazon.com. We generally do not have exclusive service agreements with our customers, and they may switch to other suppliers that offer lower prices, differentiated products or customer service that is perceived to be superior. The cost of switching suppliers is very low as are the barriers to entry into the U.S. foodservice distribution industry. We believe most purchasing decisions in the U.S. foodservice distribution industry are based on the quality and price of the product, plus a distributor’s ability to completely and accurately fill orders and provide timely deliveries.

Increased competition has caused the U.S. foodservice distribution industry to change, as distributors seek to lower costs, further increasing pressure on the industry’s profit margins. Heightened competition among our suppliers, significant pricing initiatives or discount programs established by competitors, new entrants, and trends toward vertical integration could create additional competitive pressures that reduce margins and adversely affect our business, financial condition and results of operations.

We rely on third-party suppliers, and our business may be affected by interruption of supplies or increases in product costs.

We get substantially all of our foodservice and related products from third-party suppliers. We typically do not have long-term contracts with suppliers. Although our purchasing volume can provide leverage when dealing with suppliers, they may not provide the foodservice products and supplies we need in the quantities and at the prices requested. We do not control the actual production of the products we sell. This means we are also subject to delays caused by interruption in production and increases in product costs based on conditions outside our control. These conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers; severe weather; crop conditions; product recalls; transportation interruptions; unavailability of fuel or increases in fuel costs; competitive demands; and natural disasters or other catastrophic events (including, but not limited to, the outbreak of food-borne illnesses in the United States). Our inability to obtain adequate supplies of foodservice and related products because of any of these or other factors could mean that we could not fulfill our obligations to our customers and, as a result, our customers may turn to other distributors.

A change in our relationships with Group Purchasing organizations (“GPOs”) could negatively affect our relationships with customers, which could reduce our profitability.

No single customer represented more than 4% of our total net sales in fiscal 2015. However, some of our customers purchase their products under arrangements with GPOs. GPOs act as agents on behalf of their members by negotiating pricing, delivery, and other terms with us. Our customers who are members of GPOs purchase products directly from us on the terms negotiated by their GPO. GPOs use the combined purchasing power of their members to lower the prices paid by their members, and we have experienced some pricing pressure from customers who associate with GPOs. Approximately 23% of our net sales in fiscal 2015 were made by customers under terms negotiated by GPOs. To the extent our customers, for example, independent restaurants who do not typically negotiate directly with GPOs, are able to independently negotiate competitive pricing or become members of GPOs, we may be forced to lower our prices so they will remain customers, which would negatively affect operating margins. In addition, if we are unable to maintain our relationships with GPOs, or if GPOs are able to negotiate more favorable terms for their members with our competitors, we could lose some or all of that business. This could adversely affect our future operating profits.

Our relationships with key long-term customers and GPOs may be materially diminished or terminated.

We have long-standing relationships with a number of our customers and GPOs, many of whom could unilaterally terminate their relationship with us or materially reduce the amount of business they conduct with us at any time. Market competition, customer requirements, customer financial condition and customer consolidation through mergers or acquisitions also could adversely affect our ability to continue or expand these relationships. There is no guarantee that we will be able to retain or renew existing agreements, maintain relationships with any of our customers or GPOs on acceptable terms or at all or collect amounts owed to us from insolvent customers. Our customer and GPO agreements are generally terminable upon advance written notice (typically ranging from 30 days to six months) by either us or the customer or GPO, which provides our customers or GPOs with the opportunity to renegotiate their contracts with us or to award more business to our competitors. The loss of one or more of our major customers or GPOs could adversely affect our business, financial condition and results of operations.

If we fail to increase or maintain our sales to independent restaurant customers, our profitability may suffer.

Our most profitable customers are independent restaurants. We tend to work closely with these customers, providing them access to our customer value added tools and as a result are able to earn a higher operating margin on sales to them. Our ability to continue to gain market share of independent restaurant customers is critical to achieving increased operating profits. Changes in the buying practices of independent restaurant customers, including their ability to require us to sell to them at discounted rates, or decreases in our sales to this type of customer could have a material negative impact on our profitability.

We must consummate and effectively integrate the businesses we acquire.

Historically, a portion of our growth has come through acquisitions. If we are unable to find, consummate, and integrate acquired businesses successfully or realize anticipated economic, operational and other benefits and synergies in a timely manner, our profitability may decrease. Integrating acquired businesses may be more difficult in a region or market in which we have limited expertise. A significant expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and/or operational resources. Significant acquisitions may also require incurring additional debt. This could increase our interest expense and make it difficult for us to get favorable financing for other acquisitions or capital investments in the future.

We may be unable to achieve some or all of the benefits that we expect from our cost savings initiatives.

We may not be able to realize some or all of our expected cost savings in the future. A variety of factors could cause us not to realize some of the expected cost savings. These include, among others, delays in the anticipated timing of activities related to our cost savings initiatives, lack of sustainability in cost savings over time, and unexpected costs associated with operating our business. All of these factors could negatively affect our results of operations and financial condition, including by failing to offset any decreases in our profitability.

Significant increases in fuel costs could hurt our business.

The high cost of fuel can negatively affect consumer confidence and discretionary spending. As a result, this reduces the frequency and amount spent by consumers for food prepared away from home. In addition, the high cost of fuel can also increase the price we pay for products, as well as the costs we incur to deliver products to our customers. These factors, in turn, negatively affect our sales, margins, operating expenses and operating results. Additionally, from time to time, we enter into forward purchase commitments for some of our fuel requirements at prices equal to the then-current market price. If fuel prices decrease significantly, these forward purchases may prove ineffective and result in us paying higher than market costs for part of our fuel. As of January 2, 2016, we had diesel fuel forward purchase commitments totaling $132 million through June 2017, which locked in approximately 65% of our projected diesel fuel purchase needs for the contracted period. Our remaining fuel purchase needs will occur at market rates. Using published market price projections for diesel and estimated fuel consumption needs, a 10% unfavorable change in diesel prices from the projected market prices could result in approximately $10 million additional fuel cost on such uncommitted volumes.

An economic downturn, or other factors affecting consumer confidence, could reduce the amount of food prepared and consumed away from home, which could harm our business.

The foodservice market is sensitive to national and regional economic conditions. In recent years, the uneven level of general U.S. economic activity in recent years, the uncertainty in the financial markets, and slow job growth has affected consumer confidence and discretionary spending. A renewed decline in economic activity, other factors affecting consumer confidence, and the frequency and amount spent by consumers for food prepared away from home may reduce our sales and operating results in the future. Additionally, prolonged periods of product cost inflation may have a negative impact on our profit margins and earnings, if the product cost increases cannot be passed on to customers who resist paying higher prices or negatively affect consumer spending. There can be no assurance that one or more of these factors will not reduce future operating results.

We may be subject to or affected by liability claims related to products we distribute.

As any seller of food, we may be exposed to liability claims in the event that the products we sell cause injury or illness. We believe we have sufficient primary or excess umbrella liability insurance to cover product liability claims. However, our current insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying products to us. But this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If we do not have adequate insurance or contractual indemnification available, the liability related to defective products could adversely affect our results of operations.

Any negative media exposure or other event that harms our reputation could hurt our business.

Maintaining a good reputation is critical to our business, particularly in selling our private label products.

Any event that damages our reputation, justified or not, could quickly affect our revenues and profits. This includes adverse publicity about the quality, safety or integrity of our products. Reports, whether or not they are true, of food-borne illnesses (such as e. coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering could severely injure our reputation. If patrons of our national chain and regional restaurant customers become ill from food-borne illnesses, the customers could be forced to temporarily close restaurant locations and our sales would correspondingly decrease. In addition, instances of food-borne illnesses or food tampering or other health concerns, even those unrelated to our products, can result in negative publicity about the foodservice distribution industry and dramatically reduce our sales.

We face risks related to labor relations and the availability of qualified labor.

As of January 2, 2016, we had approximately 25,000 employees, of which approximately 4,700 are members of local unions associated with the International Brotherhood of Teamsters and other labor organizations. In fiscal year 2015, eleven collective bargaining agreements (“CBAs”) covering approximately 700 employees were renegotiated. In fiscal year 2016, fourteen CBAs covering approximately 1,600 employees will be subject to renegotiation. If we fail to effectively renegotiate any CBAs, this could result in work stoppages and we may, from time to time, be subject to increased efforts to subject us to a multi-location labor dispute as individual labor agreements expire or labor disputes arise. This would place us at greater risk of being unable to continue to operate one or more facilities, delaying deliveries, possibly causing customers to seek alternative suppliers, or otherwise being materially adversely affected by labor disputes. For example, in 2016, members of the Teamsters Local 104 went on strike at our Phoenix, Arizona distribution center following our inability to effectively negotiate a new labor agreement governing those members. Moreover, employees at Teamsters-represented distribution centers in Los Angeles, San Diego, and Corona, California joined in sympathy strikes. Notwithstanding that the initial strike by Teamsters Local 104 and the sympathy strikes have ended, we have not entered into a new labor agreement with Teamsters Local 104, so there is a risk of additional strikes and sympathy strikes in the future. While we believe we have generally satisfactory relationships with our employees, including the unions that represent some of our employees, a work stoppage due to our failure to renegotiate union contracts could have a significant negative effect on us.

Additionally, we risk a shortage of qualified labor. Recruiting and retention efforts, and actions to increase productivity, may not be successful, and we could encounter a shortage of qualified labor in the future. Such a shortage could potentially increase labor costs, reduce profitability and/or decrease our ability to effectively serve customers. Moreover, because our labor costs are, as a percentage of net sales, higher than many other industries, we may be more acutely affected by labor cost increases.

Further, potential changes in labor legislation could result in currently non-union portions of our workforce, such as our warehouse and delivery personnel, being subjected to greater organized labor influence. Should additional portions of our workforce be subject to CBAs, this could result in increased costs of doing business as we may be subject to mandatory, binding arbitration of labor scheduling, costs and standards and we may therefore have reduced operating flexibility.

We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of net sales, higher than many other industries, even if we are able to negotiate agreements and avoid work stoppages, we may be significantly harmed by labor cost increases. In addition, labor is a significant cost of many of our customers in the U.S. food-away-from-home industry. Any increase in their labor costs, including any increases in costs as a result of increases in minimum wage requirements, could reduce the profitability of our customers and reduce demand for our products.

Changes in industry pricing practices could negatively affect our profitability.

Promotional allowances have traditionally generated a significant percentage of foodservice distribution gross margins. These payments from suppliers are based upon the efficiencies that the distributor provides by volume purchasing, and marketing and merchandising expertise. Promotional allowances are a standard industry practice and represent a significant source of profitability for our competitors and us. Any change in industry practices that reduced or eliminated purchasing allowances without corresponding increases in sales margin could be disruptive to us and the industry as a whole, and could have a material negative effect on our profitability.

If our competitors implement a lower cost structure, they may be able to offer reduced prices to customers. We may be unable to adjust our cost structure to compete profitably.

Over the last several decades, the food retail industry has undergone a significant change. Companies such as Wal-Mart and Costco have developed a lower cost structure, so they can provide their customers with an everyday low-cost product offering. In addition, commercial wholesale outlets, such as Restaurant Depot, offer an additional low-cost option in the markets they serve. As a large-scale foodservice distributor, we have similar strategies to remain competitive in the marketplace by reducing our cost structure. However, to the extent more of our competitors adopt an everyday low price strategy, we would potentially be pressured to lower prices to our customers. That would require us to achieve additional cost savings to offset these reductions. We may be unable to change our cost structure and pricing practices rapidly enough to successfully compete in that environment.

Most of our customers are not obligated to continue purchasing products from us.

Most of our customers buy from us pursuant to individual purchase orders, and we often do not enter into long-term agreements with these customers. Because such customers are not obligated to continue purchasing products from us, we cannot assure you that the volume and/or number of our customers’ purchase orders will remain constant or increase or that we will be

able to maintain our existing customer base. Significant decreases in the volume and/or number of our customers’ purchase orders or our inability to retain or grow our current customer base may have a material adverse effect on our business, financial condition, or results of operations.

Our business may be subject to significant environmental, health and safety costs.

Our operations face a broad range of federal, state and local laws and regulations relating to the protection of the environment or health and safety. These laws govern numerous issues, including discharges to air, soil and water; the handling and disposal of hazardous substances; the investigation and remediation of contamination resulting from the release of petroleum products and other hazardous substances; employee health and safety; and fleet safety. In the course of our operations, we operate and maintain vehicle fleets, we use and dispose of hazardous substances, and we store fuel in on-site aboveground and underground storage tanks. At several current and former facilities, we are investigating and remediating known or suspected contamination from historical releases of fuel and other hazardous substances. Although the known or suspected contamination at these facilities is not currently the subject of any administrative or judicial proceeding, we cannot provide assurance that we will not be the subject of administrative or judicial proceedings in the future for contamination related to releases of fuel or other hazardous substances. Further, we cannot be sure that compliance with, or liability under, existing or future environmental, health and safety laws, such as those related to remediation obligations, will not adversely affect our future operating results.

Some jurisdictions in which we operate have laws that affect the composition and operation of truck fleets, such as limits on diesel emissions and engine idling. A number of our facilities have ammonia or Freon-based refrigeration systems, which could cause injury or environmental damage if accidentally released. In addition, many of our distribution centers have propane and battery powered forklifts. Proposed or recently enacted legal requirements, such as those requiring the phase-out of certain ozone-depleting substances, and proposals for the regulation of greenhouse gas emissions, may require us to upgrade or replace equipment, or may increase our transportation or other operating costs.

If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.

We are subject to governmental regulation at the federal, state and local levels in many areas of our business, including food safety and sanitation, wage and hour, employment discrimination, immigration, trade and import, and human health and safety. A more detailed discussion of some of the laws and regulations that we are subject to can be found in “Business—Government Regulation.”

Additionally, due to contracts we have with governmental entities, from time to time, state governmental agencies have conducted audits of our pricing practices as part of investigations of providers of services under governmental contracts, or otherwise. We also receive requests for information from governmental agencies in connection with these audits.

While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations.

If we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, prohibitions, seizures or debarments from contracting with the government. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require us to incur substantial increases in costs in order to comply with such laws and regulations.

We rely heavily on technology, and any disruption in existing technology or delay in implementing new technology could adversely affect our business.

Our ability to control costs and maximize profits, as well as to serve customers most effectively, depends on the reliability of our information technology systems and related data entry processes in our transaction intensive business. We rely on software and other information technology to manage significant aspects of our business. These include to make purchases, process orders, manage our warehouses, load trucks in the most efficient manner, and optimize the use of storage space. Any disruption to this information technology could negatively affect our customer service, decrease the volume of our business, and result in increased costs. We have invested and continue to invest in technology security initiatives, business continuity, and disaster recovery plans. However, these measures cannot fully insulate us from technology disruption that could impair operations and profits. Information technology evolves rapidly. To compete effectively, we are required to integrate new technologies in a timely and cost-effective manner. If competitors implement new technologies before we do, allowing them to provide lower priced or enhanced services of superior quality compared to those we provide, our operations and profits could be affected.

A cybersecurity incident and other technology disruptions could negatively affect our business and our relationships with customers.

We rely upon information technology networks and systems to process, transmit and store electronic information, to process online credit card payments, and to manage or support virtually all of our business processes and activities. We also use mobile devices, social networking and other online activities to connect with our employees, suppliers, business partners and our customers. These uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft, online platform hijacking that could redirect online credit card payments to another credit card processing website, and inadvertent or unauthorized release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers’ personal information, private information about employees, and financial and strategic information about us and our business partners. Further, we are also expanding and improving

our information technologies, resulting in a larger technological presence and corresponding increase in exposure to cybersecurity risk. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage.

Our retirement benefits could give rise to significant expenses and liabilities in the future.

We sponsor defined benefit pension and other postretirement plans. Pension and postretirement obligations give rise to significant expenses that are dependent on assumptions discussed in Note 17, Retirement Plans, to our consolidated financial statements for the fiscal year ended January 2, 2016.

The amount by which the present value of projected benefit obligations of our pension and other postretirement plans exceeded the market value of plan assets of our plans, as of January 2, 2016, was $128 million. Our pension and postretirement cost for fiscal 2015 was $32 million. We review our pension and postretirement plan assumptions regularly. We also participate in various “multiemployer” pension plans administered by labor unions representing some of our employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. In the event that we withdraw from participating in one of these plans, then-applicable law could require us to make additional withdrawal liability payments to the plan, and we would have to reflect such payments on our balance sheet. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits.

We also announced our tentative decision to close our Baltimore, Maryland distribution facility. We are currently engaged in discussions with the unions representing certain employees regarding this tentative decision. A final decision regarding our Baltimore facility will be made once negotiations with the unions are concluded. In anticipation of a potential closure of the Baltimore facility, we accrued $50 million of estimated multiemployer pension withdrawal liabilities. The estimated multiemployer pension liability was based on the latest available information received from the respective plans’ administrator and represents an estimate for a calendar year 2015 withdrawal. Due to the lack of current information, including changes in market conditions, and funded status of the related multiemployer pension plans, the settlement of these multiemployer pension withdrawal liabilities could materially differ from this estimate. At January 2, 2016, we also had $36 million of multiemployer pension withdrawal liabilities relating to facilities closed prior to 2015. None of these withdrawal liabilities are impacted by the Central States Teamsters Union Pension Plan (“Central States”) settlement.

In December 2015, we reached a settlement with Central States which included a $97 million cash payment. The settlement allowed us to stop participation in the “legacy” Central States pension plan and to begin participation in the “Hybrid” Central States Plan, which adopted an alternative method for determining an employer’s unfunded obligation. The settlement also settled the residual withdrawal liability related to the Eagan, Minnesota and Fairfield, Ohio

closed facilities, and resolved the outstanding litigation related to the Eagan Labor Dispute. In addition, we agreed to future annual minimum contribution payments through 2023 of no less than 90% of the 2015 contributions for the ongoing operations under the related facilities’ union contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Retirement Plans.”

In the ordinary course of our renegotiation of CBAs with labor unions that maintain these plans, we could decide to discontinue participation in a plan. In that event, we could face a withdrawal liability. We could also be treated as withdrawing from participation in one of these plans, if the number of our employees participating in these plans is reduced to a certain degree over certain periods of time. Such reductions in the number of employees participating in these plans could occur as a result of changes in our business operations, such as facility closures or consolidations. Some multiemployer plans, including ones in which we participate, are reported to have significant underfunded liabilities. Such underfunding could increase the size of our potential withdrawal liability. For a detailed description of our retirement plans, see Note 17, Retirement Plans, to our consolidated financial statements for the fiscal year ended January 2, 2016.

Extreme weather conditions and natural disasters may interrupt our business, or our customers’ businesses, which could have a material adverse effect on our business, financial condition, or results of operations.

Some of our facilities and our customers’ facilities are located in areas that may be subject to extreme, and occasionally prolonged, weather conditions, including, but not limited to, hurricanes, tornadoes, blizzards, and extreme cold. Such extreme weather conditions may interrupt our operations and reduce the number of consumers who visit our customers’ facilities in such areas. Furthermore, such extreme weather conditions may interrupt or impede access to our customers’ facilities, all of which could have a material adverse effect on our business, financial condition, or results of operations.

Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit our ability to operate our business.

In the normal course of our business, we are involved in various legal proceedings. The outcome of these proceedings cannot be predicted. If any of these proceedings were to be determined adversely to us or a settlement involving a payment of a material sum of money were to occur, it could materially and adversely affect our profits or ability to operate our business. Additionally, we could become the subject of future claims by third parties, including our employees, suppliers, customers, and other counterparties, our investors, or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business. Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third parties may fail to fulfill their contractual obligations.

Changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations.

Changes in consumer eating habits (such as a decline in consuming food away from home, a decline in portion sizes, or a shift in preferences toward restaurants that are not our customers) could reduce demand for our products. Consumer eating habits could be affected by a number of factors, including changes in attitudes regarding diet and health or new information regarding the health effects of consuming certain foods. There is a growing consumer preference for sustainable, organic and locally grown products. Changing consumer eating habits also occur due to generational shifts. Millennials, the largest demographic group in terms of spend, seek new and different as well as more ethnic menu options and menu innovation. Millennials also value diversity. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio, and we may experience higher costs associated with the implementation of those changes. Changing consumer eating habits may reduce the frequency with which consumers purchase meals outside of the home. Additionally, changes in consumer eating habits may result in the enactment or amendment of laws and regulations that impact the ingredients and nutritional content of our food products, or laws and regulations requiring us to disclose the nutritional content of our food products. Compliance with these laws and regulations, as well as others regarding the ingredients and nutritional content of our food products, may be costly and time-consuming. We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or resulting new laws or regulations or to adapt our menu offerings to trends in eating habits.

We rely on trademarks, trade secrets, and other forms of intellectual property protections, however, these protections may not be adequate.

We rely on a combination of trademark, trade secret and other intellectual property laws in the United States. We have applied in the United States and in certain countries for registration of a limited number of trademarks, some of which have been registered or issued. We cannot guarantee that our applications will be approved by the applicable governmental authorities, or that third parties will not seek to oppose or otherwise challenge our registrations or applications. We also rely on unregistered proprietary rights, including common law trademark protection. However, third parties may use trademarks identical or confusingly similar to ours, or independently develop trade secrets or know-how similar or equivalent to ours. If our proprietary information is divulged to third parties, including our competitors, or our intellectual property rights are otherwise misappropriated or infringed, our competitive position could be harmed.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or potentially prevent us from selling our products.

We cannot be certain that our products do not and will not infringe intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of intellectual property rights of third parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our management and

personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and to cease making or selling certain products. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products.

Risks Relating to Our Substantial Indebtedness

We have substantial debt, which could adversely affect our financial health and our ability to raise capital or obtain financing in the future, react to changes in our business, and make payments on our debt.

We are highly leveraged. As of January 2, 2016, we had $4,733 million of indebtedness, net of $25 million of unamortized deferred financing costs. In addition, we had $393 million of outstanding letters of credit under our ABL facility.

Our substantial debt could have important consequences to us, including the following:

•

our ability to obtain additional financing or use our cash flows for working capital, capital expenditures, acquisitions, debt service requirements or general corporate purposes, and our ability to satisfy our obligations with respect to our indebtedness may be impaired in the future;

•

a substantial portion of our cash flows from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes (for example, approximately $346 million was dedicated to the payment of interest in fiscal 2015);

•

we are exposed to the risk of increased interest rates because a substantial portion of our borrowings are at variable rates of interest;

•

it may be more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness;

•

we may be more vulnerable to general adverse economic and industry conditions;

•

we may be at a competitive disadvantage compared to our competitors with less debt or comparable debt at more favorable interest rates and they, as a result, may be better positioned to withstand economic downturns;

•

our ability to refinance indebtedness may be limited or the associated costs may increase; and

•

our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, or we may be prevented from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business.

Despite our indebtedness levels, we and our subsidiaries may be able to incur substantially more debt, including secured debt. This could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. As of January 2, 2016, we had commitments for additional borrowings under our asset-based senior secured revolving loan ABL Facility and our 2012 ABS Facility of $1,121 million (of which approximately $983 million was available based on our borrowing base). On January 8, 2016, borrowing commitments and availability were reduced to $807 million and $669 million, respectively due to additional borrowings that funded a distribution to our parent, US Foods Holding Corp. See Note 24, Subsequent Events, in our consolidated financial statements.

The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business.

Our credit facilities and indenture contain covenants that, among other things, restrict our ability to do the following:

•

dispose of assets;

•

incur additional indebtedness (including guarantees of additional indebtedness);

•

pay dividends and make certain payments;

•

create liens on assets;

•

make investments (including joint ventures);

•

engage in mergers, consolidations or sales of all or substantially all of our assets;

•

engage in certain transactions with affiliates;

•

change the business conducted by us; and

•

amend specific debt agreements.

In addition, if borrowing availability under the ABL Facility, plus the amount of unrestricted cash and cash equivalents held by us, falls below a specified threshold of $118 million, the borrowers under such facility, which are our subsidiaries, are required to comply with a minimum fixed charge coverage ratio of 1.0 : 1.0. In addition, if our borrowing availability under the ABL Facility falls below $130 million and, solely with respect to the ABL Facility, certain cash management covenants are breached or a payment default occurs, additional reporting responsibilities are triggered under the ABL Facility and the 2012 ABS Facility.

Our ability to comply with these provisions in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these provisions in future periods will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy.

The restrictions under the terms of our credit facilities and indenture may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.

Our ability to comply with the covenants and restrictions contained in our credit facilities and indenture may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants or restrictions could result in a default under our credit facilities and indenture that would permit the applicable lenders or note holders, as the case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. In any such case, we may be unable to borrow under and may not be able to repay the amounts due under our credit facilities. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

Our ability to generate the significant amount of cash needed to pay interest and principal on our debt facilities and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.

Our ability to make scheduled payments on, or to refinance our obligations under our debt will depend on our financial and operating performance. This, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business factors, many of which may be beyond our control, as described under “–We have substantial debt, which could adversely affect our financial health and our ability to raise additional capital or obtain financing in the future, react to changes in our business and make payments on our debt” and “–The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business” above.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. In the future, our cash flows and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

The 2012 ABS Facility will mature in 2018. The ABL Facility will mature on the earlier of: (1) October 20, 2020, which is the amended ABL Facility maturity date; (2) April 1, 2019, if the Senior Notes have more than $300 million of principal outstanding at that date and the maturity date of the Senior Notes has not been extended to later than October 20, 2020; or (3) December 31, 2018, if the Amended 2011 Term Loan has more than $300 million of principal outstanding at that date and the maturity date of the Amended 2011 Term Loan has not been extended to later than October 20, 2020. The Amended 2011 Term Loan will mature in 2019. The CMBS Fixed Facility will mature in 2017. The Senior Notes will mature in 2019. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, as well as prevailing market conditions. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities and indenture restrict our ability to dispose of assets and use the proceeds from any such dispositions. As a result, we cannot assure you we will be able to consummate those sales, or, if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet the debt service obligations when due.

An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

A significant portion of our outstanding debt bears interest at variable rates. As a result, an increase in interest rates, whether because of an increase in market interest rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.

Other Risks

Any failure to maintain financial controls could result in our financial statements becoming unreliable.

Pursuant to contractual obligations in certain instruments governing our debt, we file periodic reports as a voluntary filer. As a voluntary filer we comply with the rules and regulations of the SEC, including periodic and current reporting requirements under the Securities Exchange Act of 1934, as amended, including Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations.

Our management reports on the effectiveness of our internal control over financial reporting. As we test our internal controls in connection with the Section 404 requirements, we could, as part of that documentation and testing, identify material weaknesses, significant deficiencies or other areas for further attention or improvement. Any failure to maintain the adequacy of internal control over financial reporting, or any consequent inability to produce

accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to assist in detecting fraud.

The Sponsors control us and their interests may conflict with ours in the future.

As of January 2, 2016, the Sponsors collectively own approximately 98.5% of the common stock of our parent. As a result, the Sponsors have the ability to elect all of the members of the board of directors of our parent and thereby control our policies and operations, including the appointment of management, issuances of common stock or other securities, the payment of dividends, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with our interests. In addition, the Sponsors may have an interest in pursuing acquisitions, divestitures, and other transactions that, in their respective judgment, could enhance their investment, even though such transactions might involve risks to us. For example, the Sponsors could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. Additionally, in certain circumstances, acquisitions of debt at a discount by purchasers that are related to a debtor can give rise to cancellation of indebtedness income to such debtor for U.S. federal income tax purposes.

Additionally, our parent is party to a stockholders agreement with the Sponsors pursuant to which each Sponsor has agreed to vote in favor of nominees to our parent’s board of directors nominated by the other Sponsor. The stockholders agreement also grants the Sponsors special governance rights, including approval rights over certain corporate and other transactions, and certain rights regarding the appointment and removal of our Chief Executive Officer. The Sponsors will retain these rights so long as they maintain certain specified minimum levels of stockholdings in our parent.

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal,” or similar expressions. The statements are based on assumptions that we have made, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we think are appropriate. We believe these judgments are reasonable. However, you should understand that these statements are not guarantees of performance or results. Our actual results could differ materially from those expressed in the forward-looking statements.

There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Such risks, uncertainties, and other important factors include, among others, the risks, uncertainties, and factors set forth in Item 1A—Risk Factors in Part I of this Annual Report on Form 10-K and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10-K, and the following risks, uncertainties, and factors:

•

Our ability to remain profitable during times of cost inflation, commodity volatility, and other factors

•

Industry competition and our ability to successfully compete

•

Our reliance on third-party suppliers, including the impact of any interruption of supplies or increases in product costs

•

Any change in our relationships with GPOs

•

Any change in our relationships with long-term customers

•

Our ability to increase sales to independent customers

•

Our ability to successfully consummate and integrate future acquisitions

•

Our ability to achieve the benefits that we expect from our cost savings programs

•

Shortages of fuel and increases or volatility in fuel costs

•

Any declines in the consumption of food prepared away from home, including as a result of changes in the economy or other factors affecting consumer confidence

•

Liability claims related to products we distribute

•

Our ability to maintain a good reputation

•

Costs and risks associated with labor relations and the availability of qualified labor

•

Changes in industry pricing practices

•

Changes in competitors’ cost structures

•

Our ability to retain customers not obligated by long-term contracts to continue purchasing products from us

•

Environmental, health and safety costs

•

Costs and risks associated with government laws and regulations, including environmental, health, safety, food safety, transportation, labor and employment, laws and regulations, and changes in existing laws or regulations

•

Technology disruptions and our ability to implement new technologies

•

Costs and risks associated with a potential cybersecurity incident

•

Our ability to manage future expenses and liabilities associated with our retirement benefits

•

Disruptions to our business caused by extreme weather conditions

•

Costs and risks associated with litigation

•

Changes in consumer eating habits

•

Costs and risks associated with our intellectual property protections

•

Risks associated with potential infringements of the intellectual property of others

•

Risks related to our indebtedness, including our substantial amount of debt, our ability to incur substantially more debt, and increases in interest rates

In light of these risks, uncertainties and assumptions, the forward-looking statements in this report might not prove to be accurate, and you should not place undue reliance on them. All forward-looking statements attributable to us—or people acting on our behalf—are expressly qualified in their entirety by the cautionary statements above. All of these statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

As of January 2, 2016, we maintained 77 primary operating facilities used in our distribution centers. About 77% were owned and 23% were leased. Our real estate includes general corporate facilities in Rosemont, Illinois and Tempe, Arizona. Both of these are leased. The portfolio also includes a number of local sales offices, truck “drop-sites” and vacant land. In addition, there is a minimal amount of surplus owned or leased property. Leases on these facilities expire at various dates from 2016 to 2026, excluding the options for renewal.

The following table sets out our distribution facilities by state and their aggregate square footage. The table reflects single distribution centers that may contain multiple locations or buildings. It does not include retail sales locations, such as cash and carry or US Foods Culinary Equipment & Supply outlet locations, closed locations, vacant properties or ancillary use owned and leased properties, such as temporary storage, remote sales offices or parking lots. In addition, the table shows the square footage of our Rosemont headquarters and Tempe shared services center:


Location	Number of Facilities		Square Feet
Alabama		1		371,744
Arizona		3		329,431
Arkansas		1		135,009
California		5		1,261,588
Colorado		1		314,883
Connecticut		1		239,899
Florida		4		1,146,718
Georgia		2		691,017
Illinois		3		558,743
Indiana		1		233,784
Iowa		1		114,250
Kansas		1		350,859
Maryland		1		363,304
Michigan		1		276,003
Minnesota		3		414,963
Mississippi		1		287,356
Missouri		3		602,947
Nebraska		1		112,070
Nevada		4		941,001
New Hampshire		1		533,237
New Jersey		3		1,073,375
New Mexico		1		133,486
New York		3		388,683
North Carolina		3		954,736
North Dakota		2		221,314
Ohio		2		404,815
Oklahoma		1		308,307
Pennsylvania		6		1,179,319
South Carolina		2		1,134,399
Tennessee		3		690,886
Texas		4		927,453
Utah		1		267,180
Virginia		2		629,318
Washington		2		228,500
West Virginia		1		137,337
Wisconsin		2		354,127

Total		77		18,312,041

		Owned		14,089,360	77	%

		Leased		3,877,444	23	%

Headquarters: Rosemont, IL				297,944

Shared Services Center: Tempe, AZ				133,225

Item 3.

Legal Proceedings

Florida State Pricing Subpoena

In May 2011, the State of Florida Department of Financial Services issued a subpoena to us requesting a broad range of information regarding vendors, logistics/freight as well as pricing, allowances, and rebates that we obtained from the sale of products and services for the term of the contract. The subpoena focused on all pricing and rebates earned during this period relative to the Florida

Department of Corrections. In 2011, the Company learned of two qui tam suits, filed in Florida state court, against us, one of which was filed by a former official in the Florida Department of Corrections. In April 2015, we and the State of Florida agreed in principle to a settlement under which we would pay $16 million, and the State of Florida would dismiss all complaints, including the two qui tam suits. In June 2015, the parties finalized the settlement agreement and payment was made to the Florida Department of Financial Services.

Eagan Labor Dispute

In 2008, we closed our Eagan, Minnesota and Fairfield, Ohio distribution centers, and recorded a liability of approximately $40 million for the related multiemployer pension withdrawal liability, which was payable in monthly installments through November 2023. During the fiscal third quarter of 2011, we were assessed an additional $17 million multiemployer pension withdrawal liability for the Eagan facility, the final payment of which was made on April 1, 2015. As further discussed in Note 17, Retirement Plans, to our consolidated financial statements we settled these items, among others, on December 30, 2015.

Other Legal Proceedings

We and our subsidiaries are parties to a number of other legal proceedings arising from the normal course of business. These legal proceedings—whether pending, threatened or unasserted, if decided adversely to or settled by us—may result in liabilities material to its financial position, results of operations, or cash flows. We recognized provisions with respect to the proceedings where appropriate. These are reflected in our Consolidated Balance Sheets. It is possible that we could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, we believe that the ultimate resolution of these proceedings will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. It is our policy to expense attorney fees as incurred.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

We are a wholly owned subsidiary of US Foods Holding Corp. (“US Foods”). US Foods was formed and controlled by investment funds associated with or managed by Clayton, Dubilier & Rice, Inc. (“CD&R”), and Kohlberg Kravis Roberts & Co, (“KKR”) (collectively the “Sponsors” ), which own substantially all of the outstanding common stock of US Foods. There is no established public trading market of our common stock. See Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for additional information about US Foods ownership.

Item 6.

Selected Financial Data

We operate on a 52-53 week fiscal year, with all periods ending on Saturday. When a 53-week fiscal year occurs, we report the additional week in the fiscal fourth quarter. Fiscal 2015 ended on January 2, 2016 and was comprised of 53 weeks. Fiscal 2014, 2013, 2012 and 2011 included 52 weeks and ended on December 27, 2014, December 28, 2013, December 29, 2012 and December 31, 2011, respectively.

The following tables set forth our selected financial data for the periods and as of the dates indicated:


	Fiscal Year
	2015			2014			2013			2012			2011
	(In millions)
Consolidated Statements of Operations Data:
Net sales	$	23,127		$	23,020		$	22,297		$	21,665		$	20,345
Cost of goods sold		19,114			19,222			18,474			17,972			16,840

Gross profit		4,013			3,798			3,823			3,693			3,505
Operating expenses:
Distribution, selling and administrative costs		3,663			3,546			3,494			3,350			3,194
Restructuring and tangible asset impairment charges		173			—			8			9			72


Total operating expenses		3,836			3,546			3,502			3,359			3,266


Operating income		177			252			321			334			239
Interest expense—net		285			289			306			312			307
Loss on extinguishment of debt		—			—			42			31			76


Loss before income taxes		(108	)		(37	)		(27	)		(9	)		(144	)
Income tax (benefit) provision		(10	)		36			30			42			(42	)


Net loss	$	(98	)	$	(73	)	$	(57	)	$	(51	)	$	(102	)


Other Data:
Cash flows—operating activities	$	255		$	402		$	322		$	316		$	419
Cash flows—investing activities		(271	)		(118	)		(187	)		(380	)		(338	)
Cash flows—financing activities		(110	)		(120	)		(197	)		103			(301	)
Capital expenditures		187			147			191			293			304
EBITDA^(a)		576			664			667			659			506
Adjusted EBITDA^(a)		875			866			845			841			812

Balance Sheet Data:
Cash and cash equivalents	$	218		$	344		$	180		$	242		$	203
Total assets^(b)		8,946			9,023			9,138			9,208			8,857
Total debt^(b)		4,745			4,714			4,722			4,759			4,582

(a)

EBITDA and Adjusted EBITDA are measures used by management to measure operating performance. 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) Sponsor fees; 2) Restructuring and tangible asset impairment charges; 3) Share-based compensation expense; 4) the non-cash impact of net LIFO reserve adjustments; 5) Loss on extinguishment of debt; 6) Pension settlements; 7) Business transformation costs; 8) Acquisition-related costs; and 9) Other gains, losses, or charges as specified in our debt agreements. EBITDA and Adjusted EBITDA as presented in this report, are supplemental measures of our performance that are not required by—or presented in accordance with— accounting principles generally accepted in the United States of America (“GAAP”). They are not measurements of our performance under GAAP and should not be considered as alternatives to Net income (loss) or any other performance measures derived in accordance with GAAP.

For additional information, see Non-GAAP Reconciliations below.

(b)	Prior year amounts have been reclassified to reflect our retrospective adoption of ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

Non-GAAP Reconciliations

We provide EBITDA and Adjusted EBITDA as supplemental measures to GAAP regarding the Company’s operational performance. These financial measures 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. Examples of items excluded from Adjusted EBITDA include Restructuring and tangible asset impairment charges, Loss on extinguishment of debt, Sponsor fees, Share-based compensation expense, Pension settlements, Business transformation costs (costs associated with the redesign of systems and processes), Acquisition-related costs, and other items as specified in our debt agreements.

Management uses these non-GAAP financial measures (a) to evaluate the Company’s historical and prospective financial performance as well as its performance relative to its competitors as they assist in highlighting trends, (b) to set internal sales targets and spending budgets, (c) to measure operational profitability and the accuracy of forecasting, (d) to assess financial discipline over operational expenditures, and (e) as an important factor in determining variable compensation for management and employees. EBITDA and Adjusted EBITDA are also used for certain covenants and restricted activities under our debt agreements.

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

The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure for the periods indicated:


	Fiscal Year*
	2015			2014			2013			2012			2011
	(In millions)

Net loss	$	(98	)	$	(73	)	$	(57	)	$	(51	)	$	(102	)
Interest expense—net		285			289			306			312			307
Income tax (benefit) provision		(10	)		36			30			42			(42	)
Depreciation and amortization expense		399			412			388			356			343


EBITDA	$	576		$	664		$	667		$	659		$	506
Adjustments:
Sponsor fees⁽¹⁾		10			10			10			10			10
Restructuring and tangible asset impairment charges⁽²⁾		173			—			8			9			72
Share-based compensation expense⁽³⁾		16			12			8			4			15
Net LIFO reserve change⁽⁴⁾		(74	)		60			12			13			59
Loss on extinguishment of debt⁽⁵⁾		—			—			42			31			76
Pension settlements⁽⁶⁾		—			2			2			18			—
Business transformation costs⁽⁷⁾		46			54			61			75			45
Acquisition related costs⁽⁸⁾		97			38			4			—			—
Other⁽⁹⁾		31			26			31			22			29


Adjusted EBITDA	$	875		$	866		$	845		$	841		$	812

(*)	Amounts may not add due to rounding.

(1)	Consists of management fees paid to the Sponsors.

(2)	Consists primarily of facility closing costs, including severance and related costs, tangible asset impairment charges, organizational realignment costs, and estimated multiemployer pension withdrawal liabilities.

(3)	Share-based compensation expense represents costs recorded for vesting of US Foods stock option awards, restricted stock and restricted stock units.

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

(5)	Includes fees paid to debt holders, third party costs, early redemption premium, and the write off of unamortized debt issuance costs.

(6)	Consists of charges resulting from lump-sum payment settlements to retirees and former employees participating in several Company-sponsored pension plans.

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

(8)	Consists of costs related to the Acquisition.

(9)	Other includes gains, losses or charges as specified in our debt agreements.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our results includes certain financial measures not required by—or presented in accordance with— accounting principles generally accepted in the United States of America (“GAAP”). We believe these non-GAAP financial measures provide meaningful supplemental information about our operating performance, because they exclude amounts that our management and board of directors do not consider part of core operating results when assessing our performance and underlying trends. More information on the rationale for these measures is discussed in non-GAAP Reconciliations in “Item 6. Selected Financial Data”.

Overview

We supply approximately 250,000 customer locations nationwide consisting of independently owned single and multi-unit restaurants, regional restaurant concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations. We provide over 400,000 fresh, frozen and dry food SKUs and non-food items, including our extensive and growing assortment of private brands that offer uncompromised quality and ingredients, sourced from over 5,000 suppliers. We strive to bring labor savings and waste reduction to the chef without sacrificing quality, all at price points that support our customer competitiveness and offer menu ideas across changing consumer trends and preferences. We employ over 4,000 sales associates, who are supported by marketing, category management and merchandising professionals as well as a sales support team of experienced, world-class chefs and restaurant operations consultants, and e-commerce and analytical tools that enable our customers. We operate a network of 61 distribution facilities and a fleet of approximately 6,000 trucks with an efficient operating model that allows us to execute locally across our nationwide presence.

Termination of Sysco Acquisition Agreement

In December 2013, US Foods entered into an agreement to merge with Sysco Corporation. Following the failure to obtain regulatory approvals, the Acquisition Agreement was subsequently terminated on June 26, 2015. This 18-month period was challenging for our business. Sales growth slowed as many potential new customers were hesitant to switch their business to us during this period of uncertainty. During this time, we remained focused on our strategy by bringing innovative products to market, expanding our portfolio of business solutions for our customers and driving advancements in technology. As it became apparent that obtaining regulatory approval would be more challenging than expected, we began to see a recovery of sales momentum, particularly with our independent restaurant customers. Following the termination of the Acquisition Agreement, this momentum has continued to build.

Business Drivers, Trends and Outlook

General economic trends and conditions, including demographic changes, inflation, deflation, consumer confidence and disposable income, coupled with changing tastes and preferences, influence the amount that consumers spend on food-away-from-home, which can affect our customers and in turn our sales. Additionally, given that a large portion of our business is based on markups over cost, sudden inflation or prolonged deflation can negatively impact our sales and gross margin. Despite these economic conditions, and the 18-month period of uncertainty related to the Acquisition noted above, our sales and case volume have remained strong, with increasing growth to our independently owned single and multi-unit restaurant customers. Our investments in a common technology platform, efficient transactional and operational model, e-commerce and analytic tools that support our team-based selling approach, coupled with merchandising and product innovation, have helped us leverage our costs, maintain our sales, and differentiate us from our competitors.

We are generally performing well in our key customer types despite relatively flat overall sales and profitability during the period of uncertainty related to the Acquisition. Our net sales increased 0.5% in fiscal 2015 as compared to the prior year. Fiscal 2015 includes an additional week of operations because fiscal 2015 was a 53-week fiscal year while the prior fiscal year was a 52-week fiscal year. Excluding the additional week of operations, net sales were down moderately reflecting the deflationary environment through much of fiscal 2015, the aforementioned Acquisition related uncertainty and a decrease in sales primarily to our national chain customers, offset to an extent by an increase in sales to independent restaurants. Sales to our independent restaurant customers, which generally have higher gross margins, account for an increasing proportion of our sales mix. This trend also accelerated on a sequential quarter basis in fiscal 2015. Sales of our private brands, which generally have higher gross margins compared to similar manufacturer-branded offerings, remained steady as compared to the prior fiscal year.

Excluding the increase in gross profit attributable to our last-in, first-out (“LIFO”) inventory cost reflecting product cost deflation in fiscal 2015 compared to inflation in fiscal 2014, our gross profit as a percentage of net sales increased modestly during fiscal 2015. Our favorable sales mix and our merchandising initiatives positively impacted our margins and offset the impact of the deflation on our cost plus contracts and the competitive market conditions. Additionally, fiscal 2015 includes an additional week of operations as discussed above.

Our operating expenses increased in fiscal 2015 relative to fiscal 2014, primarily due to costs incurred related to our strategic initiatives that are designed to optimize our operating model, and investments in our product innovation, analytic sales tools, and e-commerce. The increase in our operating costs was mainly due to restructuring costs including multiemployer pension plan withdrawal liabilities, costs related to the implementation of our new field operational model, and Acquisition related one-time costs. We are actively managing our operating cost base through recent and ongoing initiatives that seek to limit our future pension costs through current settlements and a recent Company-sponsored defined benefit plan freeze, the continued optimization of our distribution facilities and investments in technology that enhances our sales associate productivity. Additionally, during the third quarter of fiscal 2015, we announced our plan to streamline our field operations in connection with a shift toward a more efficient operating cost model that optimizes local agility, while benefiting from center led support activities. We expect to incur additional restructuring charges in fiscal 2016 related to this organizational realignment. Fiscal 2015 includes an additional week of operations as discussed above. Overall our employee-related costs increased marginally in spite of increasing wages and benefit related costs.

Results of Operations

Accounting Periods

We operate on a 52-53 week fiscal year, with all periods ending on Saturday. When a 53-week fiscal year occurs, we report the additional week in the fourth quarter. Fiscal 2015 consisted of 53 weeks while the comparative fiscal years included 52 weeks. The following table presents selected consolidated results of operations of our business for the last three fiscal years:


	Fiscal Year
	2015			2014			2013
	(In millions, except percentages)

Consolidated Statements of Operations:
Net sales	$	23,127		$	23,020		$	22,297
Cost of goods sold		19,114			19,222			18,474


Gross profit		4,013			3,798			3,823
Operating expenses:
Distribution, selling and administrative costs		3,663			3,546			3,494
Restructuring and tangible asset impairment charges		173			—			8


Total operating expenses		3,836			3,546			3,502


Operating income		177			252			321
Interest expense - net		285			289			306
Loss on extinguishment of debt		—			—			42

Loss before income taxes		(108	)		(37	)		(27	)
Income tax (benefit) provision		(10	)		36			30


Net loss	$	(98	)	$	(73	)	$	(57	)


Percentage of Net Sales:
Gross profit		17.4	%		16.5	%		17.1	%
Distribution, selling and administrative costs		15.8	%		15.4	%		15.7	%
Operating expense		16.6	%		15.4	%		15.7	%
Operating income		0.8	%		1.1	%		1.4	%
Net loss		(0.4	%)		(0.3	%)		(0.3	%)
Adjusted EBITDA^(a)		3.8	%		3.8	%		3.8	%

Other Data:
Cash flows—operating activities	$	255		$	402		$	322
Cash flows—investing activities		(271	)		(118	)		(187	)
Cash flows—financing activities		(110	)		(120	)		(197	)
EBITDA^(a)		576			664			667
Adjusted EBITDA^(a)	$	875		$	866		$	845

(a)

EBITDA and Adjusted EBITDA are measures used by management to measure operating performance. 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) Sponsor fees; 2) Restructuring and tangible asset impairment charges; 3) Share-based compensation expense; 4) the non-cash impact of net LIFO reserve adjustments; 5) Loss on extinguishment of debt; 6) Pension settlements; 7) Business transformation costs; 8) Acquisition-related costs; and 9) Other gains, losses, or charges as specified in our debt agreements. EBITDA and Adjusted EBITDA 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.

See additional information for the use of these measures and non-GAAP reconciliations in “Item 6. Selected Financial Data”.

Fiscal Years Ended January 2, 2016 and December 27, 2014

Highlights

•

Net sales for fiscal 2015 increased 0.5% to $23,127 million as compared to $23,020 million in fiscal 2014. Excluding the estimated impact of the 53^rd week in fiscal 2015, Net sales decreased by approximately 1.1%.

•

Operating income for fiscal 2015 was $177 million. As a percentage of Net sales, Operating income decreased to 0.8% for fiscal 2015, as compared to 1.1% in fiscal 2014. Operating income includes $173 million of charges incurred related to initiatives designed to optimize our operating model and to reduce our operating cost base, and Acquisition related costs of $97 million as compared to $38 million in fiscal 2014.

•

Net loss in fiscal 2015 was $98 million as compared to a Net loss of $73 million in fiscal 2014.

•

Adjusted EBITDA in fiscal 2015 was $875 million as compared to $866 million in fiscal 2014. As a percentage of Net sales, Adjusted EBITDA was 3.8% in both the 2015 and 2014 periods.

•

Fiscal 2015 included 53 weeks while fiscal 2014 included 52 weeks. To enhance comparability, the estimated impact of the 53^rd week is noted below.

Net Sales

Net sales increased $107 million, or 0.5%, to $23,127 million in fiscal 2015 as compared to fiscal 2014. Case volume increased 1% in fiscal 2015 as compared to fiscal 2014. The impact of the 53^rd week on Net sales was estimated to be a 1.5% increase in case volume or approximately $350 million. Excluding the estimated impact of the 53^rd week in fiscal 2015, Net sales decreased by 1.1% and case volume declined by 0.5%. Restaurant case volume changes were relatively consistent with total case volume changes; however, within restaurants we experienced a recovery in independent restaurant customer growth as merger uncertainty lifted, offset by declines in national restaurant chain customers partly as a result of our exit from serving certain national restaurant chain customers. Independent restaurant customer case growth, excluding the estimated impact of the 53^rd week in fiscal 2015, was 4.0%. Total case volume was negatively impacted by approximately 1.6% as a result of no longer serving the previously noted national restaurant chain customers. Sales of private brand product represented approximately 30% of total sales in both fiscal 2015 and 2014.

The overall price per case declined 60 bps, reflecting the deflationary environment. Inflation earlier in fiscal 2015 shifted to deflation through much of fiscal 2015. Changes in product cost impact Net sales since a significant portion of our business is based on markups over cost.

Gross Profit

Gross profit increased $215 million, or 5.7%, to $4,013 million in fiscal 2015. As a percentage of Net sales, Gross profit increased by 0.9% to 17.4% in fiscal 2015 from 16.5% in fiscal 2014. Our LIFO inventory costing increased Gross profit by $134 million or 3.5% as compared to the prior year. Fiscal 2015 had a LIFO benefit of $74 million compared to a LIFO charge of $60 million in fiscal 2014, driven by product deflation through much of fiscal 2015 compared to inflation in fiscal 2014. Product categories experiencing cost inflation included beef, while areas of more significant deflation included cheese, pork, and seafood. The impact of the 53^rd week on Gross profit was estimated to be an increase of approximately $60 million. Excluding the estimated impact of the 53^rd week in fiscal 2015, Gross profit increased approximately 4.1%, as compared to fiscal 2014. Additionally, merchandising initiatives, including efforts to reduce product costs through vendor management and other margin improvement initiatives, increased Gross profit by 1.1% over fiscal 2014 while lower sales volume reduced Gross profit by 0.5%, compared to fiscal 2014.

Distribution, Selling and Administrative Costs

Distribution, selling and administrative costs increased $117 million, or 3.3%, to $3,663 million in fiscal 2015. As a percentage of Net sales, Distribution, selling and administrative costs increased 40 bps to 15.8% in fiscal 2015 from 15.4% in fiscal 2014. The increase was due to $59 million of higher Acquisition-related costs, including the $12.5 million termination fee paid by us in connection with the termination of the related asset purchase agreement, a $49 million increase in salaries and wages, an $11 million increase in our

pension and other postretirement benefit costs, which were impacted by the fiscal 2014 year end remeasurement, reflecting lower discount rates and the fiscal 2014 year end mortality table updates related to our Company-sponsored benefit plans (see “Retirement Plans” below), $16 million in legal settlement costs and $16 million of brand re-launch and related marketing costs. These were partially offset by $24 million of lower fuel expenses, driven by declining fuel prices, a $13 million decrease in depreciation and amortization expense, primarily related to information technology and fleet assets, and a net insurance benefit of $11 million related to a prior year facility tornado loss. The impact of the 53^rd week on Distribution, selling and administrative costs is estimated to be approximately $50 million. Excluding the estimated impact of the 53^rd week in fiscal 2015, Distribution, selling and administrative costs increased approximately 1.9% as compared to fiscal 2014.

Restructuring and Tangible Asset Impairment Charges

During fiscal 2015 the following events occurred:

•

We reached a settlement with the Central States Teamsters Union Pension Plan (“Central States”). The settlement relieves the Company’s participation in the “legacy” pool and settled the related legacy multiemployer pension withdrawal liability, and commenced the Company as a new employer status in the “hybrid” pool of the Central States Teamsters Southeast and Southwest Area Pension Fund (“Central States Plan”). The payment also included settlement of certain other Central States multiemployer pension withdrawal liabilities relating to facilities closed prior to fiscal 2015, and the related Eagan, Minnesota labor dispute. The settlement resulted in a restructuring charge of $88 million representing the excess of the $97 million cash payment over the aforementioned prior liabilities related to these previously closed facilities.

•

We announced our plan to streamline our field operational model. A restructuring charge of $30 million was recorded in fiscal 2015 and consisted primarily of employee separation-related costs. We anticipate the reorganization will be completed in fiscal 2016, and we expect to incur additional charges in fiscal 2016 related to this organizational realignment which we estimated to be approximately $7 million.

•

We announced our tentative decision to close the Baltimore, Maryland distribution facility and accrued a $55 million charge, including $50 million for the estimated multiemployer pension plan withdrawal. The estimated multiemployer pension liability was based on the latest available information received from the respective plans’ administrator and represents an estimate for a calendar year 2015 withdrawal. Due to the lack of current information, including changes in market conditions, and funded status of the related multiemployer pension plans, the settlement of these multiemployer pension withdrawal liabilities could materially differ from this estimate. A final decision regarding the Baltimore facility will be made once negotiations with the unions are concluded.

Interest Expense—Net

Interest expense—net decreased $4 million to $285 million in fiscal 2015. The decrease related primarily to certain deferred finance fees associated with our 2007 acquisition being fully amortized during the second quarter of fiscal 2015, partially offset by approximately $5 million of additional interest expense due to the 53^rd week.

Income Taxes

We recorded an Income tax benefit of $10 million and an Income tax provision of $36 million for fiscal 2015 and 2014, respectively. The effective tax rate of 9% for fiscal 2015 was primarily affected by a $28 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles, which are generally not considered a source of support for realization of the net deferred tax asset. The effective tax rate of 97% for fiscal 2014 was primarily affected by a $55 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles and an $8 million increase in deferred tax assets related to additional income tax credits. The difference between the $28 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles in fiscal 2015 as compared to an increase of $55 million in fiscal 2014 was primarily the result of the decrease in Pre-tax income from continuing operations in fiscal 2015, a tax benefit recognized in continuing operations due to the year-to-date gain in Other comprehensive income in fiscal 2015, and an increase in valuation allowance related to the increase in deferred tax assets for additional income tax credits in fiscal 2014. See Note 19, Income Taxes, in our consolidated financial statements for a reconciliation of our effective tax rates to the statutory rate.

Fiscal Years Ended December 27, 2014 and December 28, 2013

Highlights

•

Net sales increased $723 million in fiscal 2014, or 3.2%, to $23,020 million.

•

Operating income, as a percentage of Net sales, was 1.1% in fiscal 2014 as compared to 1.4% in fiscal 2013.

•

Net loss was $73 million in fiscal 2014 as compared to a Net loss of $57 million in fiscal 2013 and reflects an increase of $34 million in Acquisition-related costs.

•

Adjusted EBITDA increased 2.5% or $21 million, to $866 million.

Net Sales

Net sales increased $723 million, or 3.2%, to $23,020 million in fiscal 2014 as compared to $22,297 million in fiscal 2013. Although case volume declined 1.2% as compared to the prior year, the impact of product cost inflation resulted in an overall sales increase as compared to the prior year, because a significant portion of our business is based on markups over cost. The increase in sales was partially offset by the impact of competitive market conditions and lower case volume. Restaurant volume was the primary driver of a decrease in total cases as a result of our exit from serving certain national restaurant chain customers and represents a 1.4% case volume decrease compared to the prior year. Sales of private brand products were approximately 30% of our Net sales in fiscal 2014 representing approximately a 90 bps increase as compared to fiscal 2013.

Gross Profit

Gross profit decreased $25 million, or 0.6%, to $3,798 million in fiscal 2014 from $3,823 million in fiscal 2013. As a percentage of Net sales, Gross profit decreased by 0.6% to 16.5% in fiscal 2014 from 17.1% in fiscal 2013. Our LIFO inventory costing decreased Gross profit by 1.3% or approximately $48 million as compared to the prior year due to higher product cost inflation in fiscal 2014. In addition to the impact of LIFO, lower sales volume reduced Gross profit by 1.3%, compared to last year. Continued competitive market conditions also impacted our ability to pass along year over year product inflation, negatively impacting year over year gross profit. Significant product categories experiencing higher inflation included several center-of-plate products, and cheese and dairy. Merchandising initiatives, including efforts to reduce product costs through vendor management and other margin improvement initiatives partially offset by the impact of higher product costs resulted in a 2.1% increase to Gross profit compared to last year.

Distribution, Selling and Administrative Costs

Distribution, selling and administrative expenses increased $52 million, or 1.5%, to $3,546 million in fiscal 2014 from $3,494 million in fiscal 2013. As a percentage of Net sales, Distribution, selling and administrative costs decreased by 30 bps to 15.4% in fiscal 2014 from 15.7% in fiscal 2013. The fiscal 2014 increase was due primarily to $38 million of costs related to the terminated Acquisition Agreement, and a $24 million increase in depreciation and amortization expense, primarily due to technology and fleet investments. These increases were partially offset by a $9 million decrease in marketing and branding-related costs. Year over year wage inflation increases were offset by lower headcount and a $20 million decrease in pension and other postretirement benefit costs related to our Company-sponsored benefit plans.

Restructuring and Tangible Asset Impairment Charges

Restructuring and tangible asset impairment charges were immaterial in fiscal 2014. During fiscal 2013, we recognized Restructuring and tangible asset impairment charges of $8 million mainly attributable to the decision to close three distribution facilities that ceased operating in fiscal 2014, resulting in $4 million of severance and related costs. The remainder was attributable to impairment charges related to the adjustment to estimated fair value, less costs to sell, of certain Assets held for sale and other severance costs.

Interest Expense-Net

Interest expense—Net decreased $17 million to $289 million in fiscal 2014 from $306 million in fiscal 2013. Lower overall borrowing costs as a result of the fiscal 2013 debt refinancing transactions and a decrease in average borrowings on our revolving credit facility were partially offset by higher interest expense attributable to capital lease additions.

Loss on Extinguishment of Debt

The fiscal 2013 Loss on extinguishment of debt consists of a write-off of unamortized debt issuance costs, as well as loan fees and third party costs relating to the Company’s senior secured term loan (the “Amended 2011 Term Loan”), and an early redemption premium and a write-off of unamortized debt issuance costs relating to the redemption of our 11.25% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes”).

Income Taxes

We recorded Income tax provisions of $36 million and $30 million for fiscal 2014 and 2013, respectively. The effective tax rate of 97% for fiscal 2014 was primarily affected by a $55 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles and an $8 million increase in deferred tax assets related to additional income tax credits. The effective tax rate of 109% for fiscal 2013 was primarily affected by a $32 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles and a $5 million decrease in deferred tax assets for stock awards settled. The difference between the $55 million increase in the valuation allowance and deferred tax liabilities related to indefinite-lived intangibles in fiscal 2014 as compared to an increase of $32 million in fiscal 2013 was primarily the result of additional valuation allowance related to the increase in deferred tax assets for additional income tax credits in fiscal 2014, less valuation allowance for the decrease in deferred tax assets for stock awards settled in fiscal 2013, and a tax benefit recognized in continuing operations due to the year-to-date gain in Other comprehensive income in fiscal 2013. See Note 19, Income Taxes, in our consolidated financial statements for a reconciliation of our effective tax rates to the statutory rate.

Liquidity and Capital Resources

Our operations and strategic objectives require continuing capital investment. Our resources include cash provided by operations, as well as access to capital from bank borrowings, various types of debt, and other financing arrangements.

Indebtedness

We are highly leveraged, with significant scheduled debt maturities during the next five years. A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing costs of operations, working capital and capital expenditures. As of January 2, 2016, we had $4,733 million in aggregate indebtedness outstanding, net of $25 million of unamortized deferred financing costs.

Our primary financing sources for working capital and capital expenditures are our asset-based senior secured revolving loan ABL Facility (the “ABL Facility”) and our accounts receivable financing facility (the “2012 ABS Facility”). As of January 2, 2016, we had aggregate commitments for additional borrowings under the ABL Facility and the 2012 ABS Facility of $1,121 million, of which $983 million was available based on our borrowing base, all of which was secured.

Our ABL Facility was amended in fiscal 2015 to increase the maximum borrowing by $200 million, to $1,300 million; our ABL Tranche A-1 increased from $75 million to $100 million, and the maximum borrowing available under the ABL Tranche A increased by $175 million to $1,200 million. Additionally, the interest rate on outstanding borrowings and letter of credit fees was reduced by 75 basis points. The maturity date was extended from May 11, 2017 to the earlier of (1) October 20, 2020, the amended ABL Facility maturity date; (2) April 1, 2019 if our unsecured senior notes (the “Senior Notes”) have more than $300 million of principal outstanding at that date and the maturity date of the Senior Notes has not been extended to later than October 20, 2020; or (3) December 31, 2018 if our Amended 2011 Term Loan has more than $300 million of principal outstanding at that date and the maturity date of the Amended 2011 Term Loan has not been extended to later than October 20, 2020. The capacity of the ABL Facility is limited by borrowing base calculations. As of January 2, 2016, we had no outstanding borrowings, but had issued letters of credit totaling $393 million under the ABL Facility. There was available capacity on the ABL Facility of $872 million at January 2, 2016, based on the borrowing base calculation.

Under the 2012 ABS Facility, we and, from time to time, certain of our subsidiaries, sell, on a revolving basis, our eligible receivables to a wholly owned, special purpose, bankruptcy remote subsidiary. This subsidiary, in turn, grants to the administrative agent for the benefit of the lenders a continuing security interest in all of its rights, title and interest in the eligible receivables, as defined by the 2012 ABS Facility. See Note 6, Accounts Receivable Financing Program, in our consolidated financial statements. The maximum capacity under the 2012 ABS Facility is $800 million, with its capacity limited by borrowing base calculations. Borrowings under the 2012 ABS Facility were $586 million at January 2, 2016. At our option, we can request additional 2012 ABS Facility borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity under the 2012 ABS Facility of $111 million at January 2, 2016, based on the borrowing base calculation. The 2012 ABS Facility was amended on October 19, 2015, to extend its maturity date to September 30, 2018.

Our Amended 2011 Term Loan had outstanding borrowings, as of January 2, 2016, of $2,038 million, net of $10 million of unamortized deferred financing costs. The Amended 2011 Term Loan bears interest of 4.50%, the London Inter Bank Offered Rate (“LIBOR”) floor plus 3.50%, at January 2, 2016 and matures March 31, 2019.

As of January 2, 2016, we had $1,335 million outstanding of Senior Notes, net of $13 million of unamortized deferred financing costs. The Senior Notes bear interest of 8.50% and mature on June 30, 2019. Prior to June 30, 2016, the Senior Notes are redeemable, at our option, in whole or in part, at a price of 104.250% of their principal amount, plus accrued and unpaid interest, if any, to the relevant redemption date. On or after June 30, 2016 and June 30, 2017, the optional redemption price for the Senior Notes declines to 102.125% and 100.000%, respectively, of the principal amount, plus accrued and unpaid interest, if any, to the relevant redemption date.

As of January 2, 2016, our commercial mortgage-backed securities loan facility (the “CMBS Fixed Facility”) has an outstanding balance of $471 million, net of $1 million of unamortized deferred financing costs and is secured by mortgages on 34 properties, consisting of distribution centers. The CMBS Fixed Facility bears interest of 6.38% and matures on August 1, 2017.

In January 2015, we entered into a self-funded industrial revenue bond agreement providing for the issuance of a maximum of $40 million in Taxable Demand Revenue Bonds (the “TRBs”) that provide certain tax incentives related to the construction of a new distribution facility. As of January 2, 2016, we borrowed $22 million of the TRBs. The TRBs bear interest of 6.25% and mature on January 1, 2030.

As of January 2, 2016, we also had $270 million of obligations under capital leases for transportation equipment and building leases.

Our largest debt facilities mature at various dates, including $500 million in 2017, $700 million in 2018 and $3,400 million in 2019. As economic conditions permit, we will consider further opportunities to repurchase, refinance or otherwise reduce our debt obligations on favorable terms. Any further potential debt reduction or refinancing could require significant use of our liquidity and capital resources. For a detailed description of our indebtedness, see Note 11—Debt, in the consolidated financial statements.

In December 2015, we acquired a broadline foodservice distributor for $69 million, and in March 2016 we acquired another broadline foodservice distributor for $39 million, plus contingent consideration of up to $7 million. See Note 4, Business Acquisitions and Note 24, Subsequent Events, respectively, in our consolidated financial statements. The payments for both transactions were funded in available cash.

In January 2016, we paid a $374 million one-time special cash distribution to our parent, US Foods. The distribution was funded with cash on hand and approximately $314 million of additional borrowings under our credit facilities. US Foods used the proceeds from this distribution, along with cash on hand to fund a $666 million one-time special cash distribution to its shareholders of record as of January 4, 2016.

We believe that the combination of cash generated from operations together with availability under our debt agreements 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.

Our future financial and operating performance, ability to service or refinance our debt, and ability to comply with covenants and restrictions contained in our debt agreements will be subject to: (1) future economic conditions, (2) the financial health of our customers and suppliers, and (3) financial, business and other factors, many of which are beyond our control.

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 lender banks will not be able to comply with the contractual terms of their agreements with us. We continue to monitor the credit markets 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 balance sheet. These actions may include open market repurchases, negotiated repurchases, and other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, will depend on market conditions, our debt trading levels, our cash position, and other considerations. The Sponsors or their affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In these cases, our debt is not retired, and we would continue to pay interest in accordance with the terms of the related debt agreements.

Our credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. As of January 2, 2016, we had $506 million of restricted payment capacity, and $1,108 million of our net assets that were restricted under these covenants. Subsequent to the balance sheet date, our restricted payment capacity was further reduced by $374 million due to the one-time special cash distribution discussed in Note 24, Subsequent Events, in the consolidated financial statements which left $132 million of remaining restricted payment capacity.

Certain debt agreements also contain customary events of default. Those include, without limitation, the failure to pay interest or principal when it is due under the agreements, cross default provisions, the failure of representations and warranties contained in the agreements to be true, and certain insolvency events. If a default event occurs and continues, the principal amounts outstanding, together with all accrued unpaid interest and other amounts owed, may be declared immediately due and payable by the lenders. Were such an event to occur, we would be forced to seek new financing that may not be on as favorable terms as our current facilities. Our ability to refinance our indebtedness on favorable terms, or at all, is directly affected by the current economic and financial conditions. In addition, our ability to incur secured indebtedness (which may enable us to achieve more favorable terms than the incurrence of unsecured indebtedness) depends on the strength of our cash flows, results of operations, economic and market conditions and other factors. As of January 2, 2016, we were in compliance with all of our debt agreements.

On February 9, 2016, our parent, US Foods Holding Corp., filed a registration statement with the SEC, registering the offer and sale of common stock by our parent. The proceeds of the sale of the common stock may be used to repay outstanding debt. Our ability to complete the sale and access the market as a source of liquidity is dependent on investor demand, market conditions and other factors.

Cash Flows

For the last three fiscal years, the following table presents condensed highlights from our Consolidated Statements of Cash Flows:


	2015			Fiscal Year 2014			2013
	(in millions)

Net loss	$	(98	)	$	(73	)	$	(57	)
Changes in operating assets and liabilities, net of business acquisitions		(81	)		(11	)		(123	)
Other adjustments		434			486			502

Net cash provided by operating activities		255			402			322
Net cash used in investing activities		(271	)		(118	)		(187	)
Net cash used in financing activities		(110	)		(120	)		(197	)

Net increase (decrease) in cash and cash equivalents		(126	)		164			(62	)
Cash and cash equivalents, beginning of period		344			180			242

Cash and cash equivalents, end of period	$	218		$	344		$	180

Operating Activities

Cash flows provided by operating activities were $255 million in fiscal 2015, as compared to $402 million in fiscal 2014. Cash flows provided by operating activities decreased $147 million in fiscal 2015 from fiscal 2014, primarily due to the increased Net loss and changes in operating assets and liabilities, net of business acquisitions, as lower accounts receivable and higher accrued expenses and other liabilities were more than offset by an increase in inventories and a decrease in accounts payable given our fiscal 2015 year ended on January 2, 2016 while our fiscal 2014 year ended on December 27, 2014 coupled with the impact of customer holiday buying patterns. Accrued expenses and other liabilities increased due to accrued charges related to facility closures and initiatives and payroll related items primarily due to timing. The decrease was partially offset by insurance recoveries of $23 million which resulted in a net benefit of $11 million.

Cash flows provided by operating activities were $402 million in fiscal 2014, as compared to $322 million in fiscal 2013. Cash flows provided by operating activities increased $80 million in fiscal 2014 from fiscal 2013, primarily due to a decrease in inventories related to working capital management, that more than offset higher accounts receivable due to higher year over year sales activity and lower accrued expenses and other liabilities. Additionally, the fiscal 2014 period Cash flows provided by operating activities include $10 million of insurance proceeds related to tornado damage to a distribution facility.

Investing Activities

Cash flows used in investing activities in fiscal 2015 included purchases of property and equipment of $187 million, Proceeds from sales of property and equipment of $5 million, and insurance proceeds of $3 million related to property damaged by a tornado. Cash flows used in investing activities during fiscal 2015 included the acquisition of a broadline foodservice distributor for $69 million in cash. We also purchased $22 million of self-funded industrial revenue bonds. See “—Financing Activities” below for the offsetting cash inflow, and as further discussed in Note 11, Debt, in our consolidated financial statements.

Cash flows used in investing activities in fiscal 2014 included purchases of property and equipment of $147 million, proceeds from sales of property and equipment of $25 million and $4 million of Insurance proceeds related to property damaged by a tornado. Cash flows used in investing activities in fiscal 2013 included purchases of property and equipment of $191 million, and proceeds from sales of property and equipment of $15 million.

Cash flows used in investing activities during fiscal 2013 included the acquisition of one broadline distributor for $14 million in cash, plus a contingent consideration of $2 million, which was paid in fiscal 2014. We also had a purchase price adjustment of $2 million in fiscal 2013 related to two 2012 acquisitions.

Capital expenditures in fiscal 2015, 2014 and 2013 included fleet replacement and investments in information technology to improve our business, as well as new construction and/or expansion of distribution facilities. Additionally, we entered into $110 million, $97 million and $101 million of capital lease obligations in fiscal 2015, 2014 and 2013, respectively. The fiscal 2015 capital lease obligations were for fleet replacement. The fiscal 2014 capital lease obligations included $70 million for fleet replacement and $27 million for a distribution facility addition. The fiscal 2013 capital lease obligations were primarily for fleet replacement.

We expect total capital additions in fiscal 2016 to be approximately $300 million, including $220 million of cash capital expenditures and $80 million of fleet capital leases. We expect to fund our cash capital expenditures with available cash or cash generated from operations.

Financing Activities

Cash flows used in financing activities of $110 million in fiscal 2015 included $109 million of payments on debt and capital leases, including $50 million of net payments on our 2012 ABS Facility and $2 million of Senior Notes repurchased from certain investment funds managed by KKR. Additionally, we repurchased $20 million of US Foods common stock from terminated employees. The shares were acquired pursuant to the management stockholder’s agreement associated with our stock incentive plan.

In January 2015, we entered into a self-funded industrial revenue bond agreement providing for the issuance of a maximum of $40 million in TRBs that provide certain tax incentives related to the construction of a new distribution facility. As of January 2, 2016, we borrowed $22 million of the TRBs. See “—Investing Activities” above for the offsetting cash outflow.

Cash flows used in financing activities of $120 million in fiscal 2014 resulted from $50 million of net payments on our 2012 ABS Facility, $20 million of net payments on our ABL Facility, $24 million of scheduled payments on other debt facilities, $24 million related to capital lease obligations and $2 million of contingent consideration related to a fiscal 2013 business acquisition.

Cash flows used in financing activities of $197 million in fiscal 2013 primarily resulted from net payments on debt facilities, and costs and fees paid related to our fiscal 2013 debt refinancing transactions.

In June 2013, we refinanced our term loan facilities. In January 2013, we used proceeds of $388 million from Senior Notes issuances primarily to redeem $355 million in principal of our previously outstanding Senior Subordinated Notes, plus an early redemption premium of $20 million. We incurred total cash costs of $29 million in connection with the fiscal 2013 debt refinancing transactions, including costs to register our Senior Notes. Additionally, we made net payments on our ABL Facility of $150 million as well as $27 million of scheduled payments on other debt facilities. In fiscal 2013, we paid $6 million of contingent consideration related to 2012 business acquisitions. In fiscal 2013, we paid $8 million to repurchase shares of common stock from terminated employees.

Retirement Plans

We maintain several qualified retirement plans and a nonqualified retirement plan (“Retirement Plans”) that pay benefits to certain employees at retirement, using formulas based on a participant’s years of service and compensation. In addition, we maintain several postretirement and welfare plans for certain employees.

We contributed $49 million annually to the Retirement Plans in fiscal 2015, 2014 and 2013, respectively including the postretirement and welfare plans. We expect to make $36 million total contributions in fiscal 2016.

On August 5, 2015, we announced a plan to freeze non-union participants’ benefits of our sponsored defined benefit pension plan effective September 30, 2015 and enriched our defined contribution 401(k) plan. The freeze and related plan remeasurement resulted in a reduction in the benefit obligation included in Other long term liabilities of approximately $91 million, with a corresponding decrease to Accumulated other comprehensive loss. At the remeasurement date, the plan’s net loss included in Accumulated other comprehensive loss exceeded the reduction in the plan’s benefit obligation and, accordingly, no net curtailment gain or loss was recognized. As a result of the plan freeze, actuarial gains and losses will be amortized over the average remaining life expectancy of inactive participants rather than the average remaining service lives of active participants.

Certain employees are eligible to participate in our defined contribution 401(k) plan. This plan provides that, under certain circumstances, we may make matching contributions of up to 100% of the first 3% of a participant’s compensation and 50% of the next 2% of a participant’s compensation, for a maximum company matching contribution of 4%. We made contributions to this plan of $32 million, $26 million and $25 million in fiscal 2015, 2014 and 2013, respectively. The net impact of these changes to our defined benefit pension plan and 401(k) plan is expected to lower our future benefit costs by approximately $30 million annually subject to changes in discount rates, funded status, and pension asset returns related to the above noted defined benefit plan.

We also contribute to various multiemployer benefit plans under collective bargaining agreements. Our contributions to these plans were $34 million, $32 million and $31 million in fiscal 2015, 2014 and 2013, respectively. We reached a settlement with the Central States multiemployer pension plan consisting of a $97 million cash payment made on December 30, 2015. The Central States settlement relieves the Company of its participation in the “legacy” Central States Plan and its associated legacy off-balance sheet withdrawal liability. It also settled the residual withdrawal liability related to the Eagan, Minnesota and Fairfield, Ohio closed facilities, and resolved the Eagan Labor Dispute, which is described in Note 20, Commitments and Contingencies in our consolidated financial statements. The settlement commences our participation in the “hybrid” Central States Plan, which adopted an alternative method for determining an employer’s unfunded obligation that would limit our funding obligations to the pension fund in the future. Accordingly, we also agreed to future annual minimum contribution payments through 2023 of no less than 90% of the 2015 contributions for the ongoing operations under the related facilities’ union contracts. For a detailed description of the settlement, see Note 17, Retirement Plans in the Notes to our consolidated financial statements. The payment for this transaction was funded with available cash.

At January 2, 2016, we had $36 million of multiemployer pension withdrawal liabilities relating to facilities closed prior to 2015, payable in monthly installments through 2031, at effective interest rates ranging from 5.9% to 6.5%. Additionally, we recognized costs of $50 million reflecting our estimates of withdrawal liabilities for the tentative closure of the Baltimore, Maryland distribution facility. None of these withdrawal amounts are impacted by the Central States settlement.

Florida State Pricing Subpoena

As described in Note 20, Commitments and Contingencies, in our consolidated financial statements, in May 2011 the State of Florida Department of Financial Services issued a subpoena to USF requesting a broad range of information regarding vendors, logistics/freight as well as pricing, allowances, and rebates that we obtained from the sale of products and services for the term of the contract. The subpoena focused on all pricing and rebates earned during this period relative to the Florida Department of Corrections. In 2011, we learned of two qui tam suits, filed in Florida state court, against USF, one of which was filed by a former official in the Florida Department of Corrections. In April 2015, USF and the State of Florida agreed in principle to a settlement under which we would pay $16 million, and the State of Florida would dismiss all complaints, including the two qui tam suits. In June 2015, the parties finalized the settlement agreement and payment was made to the Florida Department of Financial Services.

Insurance Recoveries – Tornado Loss

As described in Note 20, Commitments and Contingencies, in our consolidated financial statements, on April 28, 2014, a tornado damaged a distribution facility and its contents, including building improvements, equipment and inventory. Business from the damaged facility was temporarily transferred to other Company distribution facilities until July 2015, when a new state-of-the-art distribution facility became operational.

We received $26 million and $14 million of cash proceeds in fiscal 2015 and 2014, respectively. In fiscal 2015, we recognized a net recovery benefit of $11 million, as a result of the insurance proceeds. The final insurance settlement is expected in 2016.

We classified $3 million and $4 million of proceeds related to the damaged distribution facility as Cash flows provided by investing activities in fiscal 2015 and 2014, respectively, in our Consolidated Statements of Cash Flows. The remaining $23 million and $10 million of proceeds related to damaged inventory and business interruption costs, have been classified as Cash flows provided by operating activities in fiscal 2015 and 2014, respectively, in our Consolidated Statements of Cash Flows.

Retention and Transaction Bonuses

In connection with the Acquisition Agreement, we offered a maximum of $32 million and $10 million of retention bonuses and transaction bonuses, respectively, to certain employees that were integral to the successful completion of the Acquisition. In February 2015, we approved payment of these transaction and retention bonuses at specific future dates even if the Acquisition was not consummated, and began to accrue compensation costs beginning in February 2015. Approximately $25 million in retention and transaction bonuses were paid in fiscal 2015 and, current employees were eligible to receive approximately $13 million in additional retention bonus payments in the first quarter of 2016.

Contractual Obligations

The following table includes information about our significant contractual obligations as of January 2, 2016 that affect our liquidity and capital needs. The table includes information about payments due under specified contractual obligations and includes the maturity profile of our consolidated debt, operating leases and other long-term liabilities.


			Payments Due by Period (in millions)
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Recorded Contractual Obligations:

Long-term debt, including capital lease obligations	$	4,758	$	63	$	1,215	$	3,409	$	71
Unfunded lease obligation⁽¹⁾		27		2		5		7		13
Self-insured liabilities⁽²⁾		177		57		52		25		43
Multiemployer pension withdrawal obligations⁽³⁾		36		1		3		4		28
Pension plans and other postretirement benefits contributions ⁽⁴⁾		45		36		2		2		5
Unrecorded Contractual Obligations:
Interest payments on debt⁽⁵⁾		786		250		443		89		4
Operating leases		166		32		54		45		35
Multiemployer contractual minimum pension contributions⁽⁶⁾		30		4		7		7		12

Purchase obligations⁽⁷⁾		1,086		818		268		—		—


Total contractual cash obligations	$	7,111	$	1,263	$	2,049	$	3,588	$	211

(1)	Represents installment payments on a distribution facility lease obligation through 2023.

(2)	Represents the estimated undiscounted payments on our self-insurance programs for general, fleet and workers compensation liabilities. Actual payments may differ from these estimates.

(3)	Represents multiemployer pension withdrawal obligations payable in monthly installments through 2031. The amount excludes a $50 million estimated multiemployer pension withdrawal liability related to the tentative closure of a distribution facility.

(4)	Represents estimated contributions and benefit payments on Company sponsored Pension and other postretirement benefit plans. The balance includes a $35 million minimum funding requirement under ERISA guidelines for Company’s defined benefit plans, for which estimates beyond 2016 are not available.

(5)	Represents future interest payments on fixed rate debt, capital leases, an unfunded lease obligation, and $2.6 billion of variable rate debt at interest rates as of January 2, 2016.

(6)	Represents minimum contributions to the Central States Plan through 2023.

(7)	Represents purchase obligations for purchases of product in the normal course of business, for which all significant terms have been confirmed, and forward fuel and electricity purchase obligations.

Other long-term liabilities at January 2, 2016 as disclosed in Note 12, Accrued Expenses and Other Long-Term Liabilities, to our consolidated financial statements, consist primarily of an uncertain tax position liability of $9 million, inclusive of interest and penalties, for which the timing of payment is uncertain, and a $13 million non-cash purchase accounting adjustment for off-market operating leases, each of which has been excluded from the table above.

Off-Balance Sheet Arrangements

We entered into a $73 million letter of credit to secure our obligations with respect to certain facility leases. Additionally, we entered into $317 million in letters of credit in favor of certain commercial insurers securing our obligations with respect to our self-insurance programs, and $3 million in letters of credit for other obligations.

Except as disclosed above, we have no off-balance sheet arrangements that currently have or are reasonably likely to have a material effect on our consolidated financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

We have prepared the financial information in this report in accordance with GAAP. Preparing these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during these reporting periods. We base our estimates and judgments on historical experience and other factors we believe are reasonable under the circumstances. These assumptions form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our most critical accounting policies and estimates pertain to the valuation of goodwill and other intangible assets, vendor consideration, self-insurance programs, income taxes, and share-based compensation.

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 acquisitions. Other intangible assets include customer relationships, the brand names comprising our portfolio of private brands, and trademarks. As required, 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 at the beginning of each fiscal third quarter. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All goodwill is assigned to our consolidated Company as the reporting unit.

For goodwill, the reporting unit used in assessing impairment is our one business segment as described in Note 23, Business Segment Information, in our consolidated financial statements. Our assessment for impairment of goodwill utilized a combination of discounted cash flow analysis, comparative market multiples and comparative market transaction multiples. The results from each of the models are then weighted and combined into a single estimate of fair value for our reporting unit. We use a weighting of 50%, 35% and 15% for the discounted cash flow analysis, comparative market multiples and comparative market transaction multiples, respectively, to determine the fair value of the reporting unit for comparison to the corresponding carrying value. The discounted cash flow approach is given the most weight because it considers the most recent results and financial projections of the Company, which we believe would be significant to a market participant. Comparable market transactions multiples were weighted the least due to the limited observances in the market. If the carrying value of the reporting unit exceeds its fair value, we must then perform a comparison of the implied fair value of goodwill with its carrying value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess.

Our fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a relief from royalty method. Similar to goodwill, the fair value of the intangible asset is determined for comparison to the corresponding carrying value. If the carrying value of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess.

Based on our fiscal 2015 annual impairment analysis for goodwill, the fair value of our reporting unit exceeded its carrying value by a substantial margin. Similarly, the fair value of our trademark indefinite-lived intangible assets exceeded the carrying value by a substantial margin. The fair value of our brand name indefinite-lived intangible assets exceeded the carrying value by less than 10%. However, a 50 basis point increase in the discount rate would still result in a fair value of the brand name intangibles that is in excess of its carrying value. The recoverability of our brand name indefinite-lived intangible assets will be impacted if estimated future cash flows are not achieved.

Vendor Consideration

We participate in various rebate and promotional incentives with our suppliers, primarily through purchase-based programs. Consideration under these incentives is estimated during the year based on 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.

Self-Insurance Programs

We accrue estimated liability amounts for claims covering general, fleet liability, and workers’ compensation. The amounts in excess of certain levels, which range from $1-$3 million per occurrence, are insured as a risk reduction strategy to minimize catastrophic losses. General and fleet liability losses in excess of the Company’s retentions are covered up to approximately $160 million, in the aggregate. We are fully self-insured for group medical claims not covered under collective bargaining agreements. Liabilities associated with these risks include an estimate for claims that are incurred but not reported, and are estimated by considering historical claims experience, severity factors, medical cost trends, and other actuarial assumptions. Differences in the actual future claims experience and severity of claims and significant changes in health care cost trends could cause actual claims to differ from our estimates.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized.

An uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Uncertain tax positions are recorded at the largest amount that is more likely than not to be sustained. We adjust the amounts recorded for uncertain tax positions when our judgment changes as a result of the evaluation of new information not previously available. These differences are reflected as increases or decreases to income tax expense in the period in which they are determined. At this time, we do not believe it is reasonably possible that the liability for unrecognized tax benefits will significantly increase or decrease in the next 12 months as a result of the completion of tax audits or as a result of the expiration of the statute of limitations.

Share-Based Compensation

Certain employees participate in the 2007 Stock Incentive Plan for Key Employees of USF Holding and its Affiliates, as amended (“Stock Incentive Plan”), which allows purchases of shares of US Foods common stock, grants of restricted stock and restricted stock units of US Foods, and grants of options exercisable in US Foods common stock. The Company measures compensation expense for stock-based option awards at fair value at the date of grant, and it recognizes compensation expense over the service period for stock-based awards expected to vest. US Foods contributes shares to the Company for employee purchases and upon exercise of options or grants of restricted stock and restricted stock units.

The fair value of US Foods common stock is determined based on a number of factors. In addition, we obtain third-party valuations of US Foods common stock on a quarterly basis to assist with the determination of the exercise price of our stock option awards and equity appreciation rights as well as the fair value of the common stock underlying all stock-based awards. To determine the fair value of awards at the date of grant, we compute a common stock fair value at the end of each fiscal quarter and use the calculated common stock fair value for all award grants in the subsequent quarter.

Similar to goodwill impairment testing, the third-party valuations utilized a combination of discounted cash flow analysis, comparative market multiples and comparative market transaction multiples. The results from each of the models are then weighted and combined into a single estimate of common stock fair value. During fiscal 2015, we used a weighting of 50%, 35% and 15% for the discounted cash flow analysis, comparative market multiples and comparative market transaction multiples, respectively. The weighting for this fair value computation is similar to the weighting used for the annual goodwill impairment assessment.

During fiscal 2015, the fair value of US Foods common stock calculated was $6.00 per share for the first, second, and third quarters and $6.75 per share for the fourth quarter. The main driver of the increase from $6.00 to $6.75 was the $300 million termination fee received by US Foods from Sysco Corporation in connection with the termination of the Acquisition Agreement. There were no other changes in the fair value of the common stock during fiscal 2015.

On January 8, 2016, US Foods paid a $666 million one-time special cash distribution to existing shareholders of record on January 4, 2016. As a result of this distribution, the calculated fair value of US Foods’ common stock decreased by $1.35 per share to $5.40. In addition, in conjunction with the distribution and according to the anti-dilution protection provisions of the Stock Incentive Plan, US Foods awarded new stock-based awards, and the exercise prices of certain existing stock-based awards were decreased by $1.35 to offset the decrease in common stock fair value.

Recent Accounting Pronouncements

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

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain risks arising from both our business operations and overall economic conditions. We principally manage our exposures to a wide variety of business and operational risks through managing our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding. While we have held derivative financial instruments in the past to assist in managing our exposure to variable interest rate terms on certain of our borrowings, we are not currently party to any interest rate derivative contracts.

Interest Rate Risk

Market risk is the possibility of loss from adverse changes in market rates and prices, such as interest rates and commodity prices. A substantial portion of our debt facilities bear interest at floating rates, based on LIBOR or the prime rate. Accordingly, we will be exposed to fluctuations in interest rates. A 1% change in LIBOR and the prime rate would cause the interest expense on our $2.6 billion of floating rate debt facilities to change by approximately $26 million per year. This change does not consider the LIBOR floor of 1.0% on $2 billion in principal of our variable rate term loan.

Commodity Price Risk

We are also exposed to risk due to fluctuations in the price and availability of diesel fuel. Increases in the cost of diesel fuel can negatively affect consumer spending, raise the price we pay for products, and increase the costs we incur to deliver products to our customers. To minimize fuel cost risk, we enter into forward purchase commitments for a portion of our projected diesel fuel requirements. As of January 2, 2016, we had diesel fuel forward purchase commitments totaling $132 million through June 2017. These locked in approximately 65% of our projected diesel fuel purchase needs for the contracted periods. Our remaining fuel purchase needs will occur at market rates. Using published market price projections for diesel and estimated fuel consumption needs, a 10% unfavorable change in diesel prices from the projected market prices could result in approximately $10 million in additional fuel cost on such uncommitted volumes.

Item 8.

Financial Statements And Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page No.
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		58
Consolidated Balance Sheets as of January 2, 2016 and December 27, 2014		59
Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years Ended January 2, 2016, December 27, 2014 and December 28, 2013		60
Consolidated Statements of Shareholder’s Equity for the Fiscal Years Ended January 2, 2016, December 27, 2014 and December 28, 2013		61
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 2, 2016, December 27, 2014 and December 28, 2013		62
Notes to Consolidated Financial Statements		63

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

US Foods, Inc.

Rosemont, Illinois

We have audited the accompanying consolidated balance sheets of US Foods, Inc. and subsidiaries (the “Company”) as of January 2, 2016 and December 27, 2014, and the related consolidated statements of comprehensive income (loss), shareholder’s equity, and cash flows for each of the three fiscal years in the period ended January 2, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of US Foods, Inc. and subsidiaries as of January 2, 2016 and December 27, 2014, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

April 1, 2016

US FOODS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)


	January 2, 2016			December 27, 2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	217,561		$	343,659
Accounts receivable, less allowances of $22,623 and $24,989		1,233,978			1,252,738
Vendor receivables, less allowances of $1,566 and $2,802		101,449			97,668
Inventories		1,112,967			1,050,898
Prepaid expenses		73,787			57,977
Due from US Foods Holding Corp.		7,193			—
Assets held for sale		5,459			5,360
Other current assets		14,991			11,799

Total current assets		2,767,385			2,820,099
PROPERTY AND EQUIPMENT — Net		1,768,885			1,726,583
GOODWILL		3,875,719			3,835,477
OTHER INTANGIBLES — Net		477,601			602,827
DEFERRED FINANCING COSTS		3,798			1,382
OTHER ASSETS		52,923			36,170

TOTAL ASSETS	$	8,946,311		$	9,022,538

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Bank checks outstanding		191,314			178,912
Accounts payable		1,078,865			1,159,160
Accrued expenses and other current liabilities		469,386			435,638
Current portion of long-term debt		62,639			51,877

Total current liabilities		1,802,204			1,825,587
LONG-TERM DEBT		4,682,149			4,661,697
DEFERRED TAX LIABILITIES		461,194			420,319
OTHER LONG-TERM LIABILITIES		386,913			450,219

Total liabilities		7,332,460			7,357,822

COMMITMENTS AND CONTINGENCIES (Note 20)
SHAREHOLDER’S EQUITY:
Common stock, $1.00 par value — 1,000 shares authorized, issued, and outstanding		1			1
Additional paid-in capital		2,332,868			2,336,528
Accumulated deficit		(612,155	)		(513,772	)
Accumulated other comprehensive loss		(106,863	)		(158,041	)

Total shareholder’s equity		1,613,851			1,664,716

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	8,946,311		$	9,022,538

See Notes to Consolidated Financial Statements.

US FOODS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)


	Fiscal Years Ended
	January 2, 2016			December 27, 2014			December 28, 2013
NET SALES	$	23,127,532		$	23,019,801		$	22,297,178
COST OF GOODS SOLD		19,114,293			19,222,092			18,474,039

Gross profit		4,013,239			3,797,709			3,823,139
OPERATING EXPENSES:
Distribution, selling and administrative costs		3,663,204			3,545,453			3,494,254
Restructuring and tangible asset impairment charges		172,707			—			8,386

Total operating expenses		3,835,911			3,545,453			3,502,640

OPERATING INCOME		177,328			252,256			320,499
INTEREST EXPENSE—Net		285,415			289,202			306,087
LOSS ON EXTINGUISHMENT OF DEBT		—			—			41,796

Loss before income taxes		(108,087	)		(36,946	)		(27,384	)
INCOME TAX (BENEFIT) PROVISION		(9,704	)		35,968			29,822

NET LOSS		(98,383	)		(72,914	)		(57,206	)
OTHER COMPREHENSIVE INCOME (LOSS) – Net of tax:
Changes in retirement benefit obligations, net of income tax		51,178			(155,362	)		122,963
Changes in interest rate swap derivative, net of income tax		—			—			542

COMPREHENSIVE INCOME (LOSS)	$	(47,205	)	$	(228,276	)	$	66,299

See Notes to Consolidated Financial Statements.

US FOODS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(In thousands, except for share data)


											Accumulated Other
											Comprehensive Income (Loss)
	Number of Common Shares		Common Shares at Par Value		Additional Paid-In Capital			Accumulated Deficit			Retirement Benefit Obligation			Interest Rate Swap Derivative			Total			Total Shareholder’s Equity
BALANCE—December 29, 2012		1,000	$	1	$	2,324,391		$	(383,652	)	$	(125,642	)	$	(542	)	$	(126,184	)	$	1,814,556

Proceeds from parent company common stock sales		—		—		1,850			—			—			—			—			1,850
Parent company common stock repurchased		—		—		(9,424	)		—			—			—			—			(9,424	)
Share-based compensation expense		—		—		8,406			—			—			—			—			8,406
Changes in retirement benefit obligations, net of income tax		—		—		—			—			122,963			—			122,963			122,963
Changes in interest rate swap derivative, net of income tax		—		—		—			—			—			542			542			542
Net loss		—		—		—			(57,206	)		—			—			—			(57,206	)

BALANCE—December 28, 2013		1,000		1		2,325,223			(440,858	)		(2,679	)		—			(2,679	)		1,881,687
Proceeds from parent company common stock sales		—		—		197			—			—			—			—			197
Parent company common stock repurchased		—		—		(628	)		—			—			—			—			(628	)
Share-based compensation expense		—		—		11,736			—			—			—			—			11,736
Changes in retirement benefit obligations, net of income tax		—		—		—			—			(155,362	)		—			(155,362	)		(155,362	)
Net loss		—		—		—			(72,914	)		—			—			—			(72,914	)

BALANCE—December 27, 2014		1,000		1		2,336,528			(513,772	)		(158,041	)		—			(158,041	)		1,664,716
Proceeds from parent company common stock sales		—		—		500			—			—			—			—			500
Parent company common stock repurchased		—		—		(19,992	)		—			—			—			—			(19,992	)
Share-based compensation expense		—		—		15,832			—			—			—			—			15,832
Changes in retirement benefit obligations, net of income tax		—		—		—			—			51,178			—			51,178			51,178
Net loss		—		—		—			(98,383	)		—			—			—			(98,383	)

BALANCE—January 2, 2016		1,000	$	1	$	2,332,868		$	(612,155	)	$	(106,863	)	$	—		$	(106,863	)	$	1,613,851

See Notes to Consolidated Financial Statements.

US FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Fiscal Years Ended
	January 2, 2016			December 27, 2014			December 28, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(98,383	)	$	(72,914	)	$	(57,206	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		399,247			411,549			388,188
Gain on disposal of property and equipment, net		(2,010	)		(7,688	)		(1,909	)
Loss on extinguishment of debt		—			—			41,796
Tangible asset impairment charges		6,293			1,580			1,860
Amortization of deferred financing costs		13,261			18,014			18,071
Amortization of Senior Notes original issue premium		(3,330	)		(3,330	)		(3,330	)
Insurance proceeds related to operating activities		23,243			—			—
Insurance benefit in net loss		(20,083	)		—			—
Deferred tax (benefit) provision		(9,478	)		35,803			29,603
Share-based compensation expense		15,832			11,736			8,406
Provision for doubtful accounts		12,103			18,559			19,481
Changes in operating assets and liabilities, net of business acquisitions:
Decrease (increase) in receivables		9,600			(47,347	)		(26,581	)
(Increase) decrease in inventories		(55,047	)		105,256			(65,427	)
(Increase) decrease in prepaid expenses and other assets		(27,909	)		1,016			(16,486	)
Decrease in accounts payable and bank checks outstanding		(71,448	)		(35,649	)		(32,411	)
Increase (decrease) in accrued expenses and other liabilities		63,636			(34,395	)		18,197

Net cash provided by operating activities		255,527			402,190			322,252

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses—net of cash		(69,481	)		—			(11,369	)
Proceeds from sales of property and equipment		5,048			25,054			14,608
Purchases of property and equipment		(187,409	)		(147,094	)		(191,131	)
Insurance proceeds related to investing activities		2,771			4,000			—
Purchase of industrial revenue bonds		(22,139	)		—			—

Net cash used in investing activities		(271,210	)		(118,040	)		(187,892	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt refinancing		—			—			854,485
Proceeds from other borrowings		22,139			898,450			1,644,000
Payment for debt financing costs and fees		(3,573	)		(421	)		(29,376	)
Principal payments on debt and capital leases		(109,489	)		(1,016,033	)		(2,278,311	)
Repurchase of senior subordinated notes		—			—			(375,144	)
Contingent consideration paid for business acquisitions		—			(1,800	)		(6,159	)
Proceeds from parent company common stock sales		500			197			1,850
Parent company common stock repurchased		(19,992	)		(628	)		(8,418	)

Net cash used in financing activities		(110,415	)		(120,235	)		(197,073	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(126,098	)		163,915			(62,713	)
CASH AND CASH EQUIVALENTS—Beginning of year		343,659			179,744			242,457

CASH AND CASH EQUIVALENTS—End of year	$	217,561		$	343,659		$	179,744

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized)	$	345,732		$	278,474		$	298,915
Income taxes paid (refunded)—net		7,861			(30	)		209
Property and equipment purchases included in accounts payable		26,885			26,620			19,719
Capital lease additions		110,097			96,756			100,804
Contingent consideration payable for business acquisitions		—			—			1,800
Payable for repurchase of parent company common stock		—			—			1,006

See Notes to Consolidated Financial Statements.

US FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	OVERVIEW AND BASIS OF PRESENTATION

US Foods, Inc. and its consolidated subsidiaries are referred to here as “we,” “our,” “us,” the “Company,” or “USF” is a wholly owned subsidiary of US Foods Holding Corp. (“US Foods” or “parent”), a Delaware corporation formed and controlled by investment funds associated with Clayton, Dubilier & Rice, LLC (“CD&R”) and Kohlberg Kravis Roberts & Co., L.P. (“KKR”), collectively the “Sponsors”.

Terminated Acquisition by Sysco—On December 8, 2013, US Foods entered into an agreement and plan of merger (the “Acquisition Agreement”) with Sysco Corporation (“Sysco”); Scorpion Corporation I, Inc., a wholly owned subsidiary of Sysco (“Merger Sub One”); and Scorpion Company II, LLC, a wholly owned subsidiary of Sysco (“Merger Sub Two”), through which Sysco would have acquired US Foods (the “Acquisition”) on the terms and subject to the conditions set forth in the Acquisition Agreement. The closing of the Acquisition was subject to customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

On February 2, 2015, US Foods, USF and certain of its subsidiaries, and Sysco entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Performance Food Group, Inc. (“PFG”), through which PFG agreed to purchase, subject to the terms and conditions of the Asset Purchase Agreement, eleven USF distribution centers and related assets and liabilities, in connection with (and subject to) the closing of the Acquisition.

On February 19, 2015, the U.S. Federal Trade Commission (the “FTC”) voted by a margin of 3-2 to seek to block the proposed Acquisition by filing a federal district court action in the District of Columbia for a preliminary injunction. The preliminary injunctive hearing in federal district court commenced on May 5, 2015 and, on June 23, 2015, the federal district court granted the FTC’s request for a preliminary injunction to block the proposed Acquisition.

On June 26, 2015, US Foods, Sysco, Merger Sub One and Merger Sub Two entered into an agreement to terminate the Acquisition Agreement. Upon the termination of the Acquisition Agreement, the Asset Purchase Agreement automatically terminated and the indenture with respect to the 8.5% unsecured Senior Notes due June 30, 2019 (the “Senior Notes”) reverted to its prior form as if the amendments that modified certain definitions in such indenture had never become operative. Sysco paid a termination fee of $300 million to US Foods in connection with the termination of the Acquisition Agreement. USF paid a termination fee of $12.5 million to PFG pursuant to the terms of the Asset Purchase Agreement.

Business Description—USF markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the United States. These customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations.

Basis of Presentation—The Company operates on a 52-53 week fiscal year, with all periods ending on a Saturday. When a 53-week fiscal year occurs, the Company reports the additional week in the fiscal fourth quarter. The fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 are also referred to herein as fiscal years 2015, 2014 and 2013, respectively. The Company’s fiscal year 2015 is a 53-week fiscal year.

Public Filer Status—During the fiscal second quarter of 2013, the Company completed the registration of $1,350 million aggregate principal amount of outstanding Senior Notes and became subject to rules and regulations of the Securities and Exchange Commission (“SEC”), including periodic and current reporting requirements under the Securities Exchange Act of 1934, as amended. The Company did not receive any proceeds from the registration of the Senior Notes. Presently, the Company files periodic reports as a voluntary filer pursuant to contractual obligations in the indenture governing the Senior Notes.

US Foods Holding Corp. Initial Public Offering—In February 2016, our parent, US Foods filed a registration statement on Form S-1 with the SEC relating to a proposed initial public offering of its common stock. The number of shares to be offered and the price range for the offering have not been determined. US Foods intends to use a portion of the net proceeds from the proposed offering to repay certain Company indebtedness and use the remaining proceeds, if any, received from the offering for general corporate purposes.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—Consolidated financial statements include the accounts of USF and its 100% owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Use of Estimates—Consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The most critical estimates used in the preparation of the Company’s consolidated financial statements pertain to the valuation of goodwill and other intangible assets, vendor consideration, self-insurance programs, income taxes, and share-based compensation.

Cash and Cash Equivalents—The Company considers all highly liquid investments purchased with a maturity of three or fewer months to be cash equivalents.

Accounts Receivable—Accounts receivable represent amounts due from customers in the ordinary course of business and are recorded at the invoiced amount and do not bear interest. Receivables are presented net of the allowance for doubtful accounts in the accompanying Consolidated Balance Sheets. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. When we are aware of a customer’s inability to meet its financial obligation, a specific allowance for doubtful accounts is recorded, reducing the receivable to the net amount we reasonably expect to collect. In addition, allowances are recorded for all other receivables based on historic collection trends, write-offs and the aging of receivables. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due over specified periods.

Vendor Consideration and Receivables—The Company participates in various rebate and promotional incentives with its suppliers, primarily through purchase-based programs. Consideration earned under these incentives is estimated during the year, based on purchasing activity, as the Company’s obligations under the programs are fulfilled primarily when products are purchased. Changes in the estimated amount of incentives earned are treated as changes in estimates and are recognized in the period of change.

Vendor consideration is typically deducted from invoices or collected in cash within 30 days of being earned. Vendor receivables represent the uncollected balance of the vendor consideration. Due to the process of primarily deducting the consideration from the amounts due to the vendor, the Company does not experience significant collectability issues. The Company evaluates the collectability of its vendor receivables based on specific vendor information and vendor collection history.

Inventories—The Company’s inventories—consisting mainly of food and other foodservice-related products—are considered finished goods. Inventory costs include the purchase price of the product, freight charges to deliver it to the Company’s warehouses, and depreciation and labor related to processing facilities and equipment, and are net of certain cash or non-cash consideration received from vendors. The Company assesses the need for valuation allowances for slow-moving, excess and obsolete inventories by estimating the net recoverable value of such goods based upon inventory category, inventory age, specifically identified items, and overall economic conditions.

The Company records inventories at the lower of cost or market using the last-in, first-out (“LIFO”) method. The base year values of beginning and ending inventories are determined using the inventory price index computation method. This “links” current costs to original costs in the base year when the Company adopted LIFO. During 2014, inventory quantities were reduced resulting in the liquidation of certain quantities carried at lower costs in prior years. As a result of this LIFO liquidation, cost of sales decreased $7 million in 2014. There were no LIFO inventory liquidations in 2015 and 2013.

At January 2, 2016 and December 27, 2014, the LIFO balance sheet reserves were $134 million and $208 million, respectively. As a result of net changes in LIFO reserves, cost of goods sold decreased $74 million in fiscal year 2015 and increased $60 million and $12 million in fiscal years 2014 and 2013, respectively. The $60 million increase in cost of goods sold in 2014 is net of the $7 million decrease in cost of goods sold resulting from the LIFO liquidation.

Property and Equipment—Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to 40 years. Property and equipment under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the remaining term of the related lease or the estimated useful lives of the assets.

Routine maintenance and repairs are charged to expense as incurred. Applicable interest charges incurred during the construction of new facilities or development of software for internal use are capitalized as one of the elements of cost and are amortized over the useful life of the respective assets.

Property and equipment held and used by the Company are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. For purposes of evaluating the recoverability of property and equipment, the Company compares the carrying value of the asset or asset group to the estimated, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. If the future cash flows do not exceed the carrying value, the carrying value is compared to the fair value of such asset. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess.

The Company also assesses the recoverability of its closed facilities actively marketed for sale. If a facility’s carrying value exceeds its fair value, less an estimated cost to sell, an impairment charge is recorded for the excess. Assets held for sale are not depreciated.

Impairments are recorded as a component of Restructuring and tangible asset impairment charges in the Consolidated Statements of Comprehensive Income (Loss), as well as in a reduction of the asset’s carrying value in the Consolidated Balance Sheets.

Goodwill and Other Intangible Assets—Goodwill and Other intangible assets include the cost of the acquired business in excess of the fair value of the net tangible assets acquired. Other intangible assets include customer relationships, the brand names comprising our portfolio of exclusive brands, and trademarks. As required, we assess Goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if events occur that indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, our policy is to assess for impairment at the beginning of each fiscal third quarter. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All Goodwill is assigned to the consolidated Company as the reporting unit.

Self-Insurance Programs—The Company accrues estimated liability amounts for claims covering general, fleet and workers’ compensation. The amounts in excess of certain levels, which range from $1 – 3 million per occurrence, are insured as a risk reduction strategy, to minimize catastrophic losses. We are fully self-insured for group medical claims not covered under collective bargaining agreements. The Company accrues its estimated liability for the self-insured medical insurance program, including an estimate for incurred but not reported claims, based on known claims and past claims history. The amounts accrued are discounted, except for self-insured medical liabilities, as the amount and timing of cash payments related to those accruals are reliably determinable given the nature of benefits and the level of historical claim volume to support the actuarial assumptions and judgments used to derive the expected loss payment pattern. Substantially all of the discounting pertains to workers compensation, as it makes up approximately 80% of the total liability as of January 2, 2016. The amounts accrued are discounted using an interest rate that approximates the US. Treasury rate consistent with the duration of the liabilities. However, the inherent uncertainty of future loss projections could cause actual claims to differ from our estimates. These accruals are included in Accrued expenses and Other long-term liabilities in the Consolidated Balance Sheets.

Share-Based Compensation—Certain employees participate in the 2007 Stock Incentive Plan for Key Employees of USF Holding Corp. and its Affiliates, as amended (“Stock Incentive Plan”), which allows purchases of US Foods shares of common stock, grants of restricted stock and restricted stock units of US Foods and grants of options exercisable in US Foods common stock. The Company measures compensation expense for stock-based option awards at fair value at the date of grant, and it recognizes compensation expense over the service period for stock-based awards expected to vest. US Foods contributes shares to the Company for employee purchases and upon exercise of options or grants of restricted stock and restricted stock units. To determine the fair value of awards at the date of grant, the Company computes a common stock fair value at the end of each fiscal quarter and uses the calculated common stock fair value for all grants in the subsequent quarter.

Business Acquisitions—The Company accounts for business acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the acquisition date. The operating results of the acquired companies are included in the Company’s consolidated financial statements from the date of acquisition.

Revenue Recognition—The Company recognizes revenue from the sale of product when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company grants certain customers sales incentives —such as rebates or discounts—and treats these as a reduction of sales at the time the sale is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from Net sales.

Cost of Goods Sold—Cost of goods sold includes amounts paid to vendors for products sold—net of vendor consideration and the cost of transportation necessary to bring the products to the Company’s distribution facilities. Depreciation related to processing facilities and equipment is presented in cost of goods sold. Because the majority of the Inventories are finished goods, depreciation related to warehouse facilities and equipment is presented in Distribution, selling and administrative costs. See Inventories section above for discussion of LIFO impact on Cost of goods sold.

Shipping and Handling Costs—Shipping and handling costs—which include costs related to the selection of products and their delivery to customers— are presented in Distribution, selling and administrative costs. Shipping and handling costs were $1.5 billion for each of the 2015, 2014 and 2013 fiscal years.

Income Taxes—The Company accounts for income taxes under the asset and liability method. This requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income during the period that includes the enactment date. Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized.

Derivative Financial Instruments—The Company has used interest rate swap agreements in the past to manage its exposure to interest rate movements on its variable-rate term loan obligation. It is not currently party to any interest rate swap agreements.

In the normal course of business, the Company enters into forward purchase agreements to procure fuel, electricity and product commodities related to its business. These agreements often meet the definition of a derivative. However, the Company does not measure its forward purchase commitments at fair value as the amounts under contract meet the physical delivery criteria in the normal purchase exception under GAAP guidance.

Concentration Risks—Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. The Company’s cash equivalents are invested primarily in money market funds at major financial institutions. Credit risk related to accounts receivable is dispersed across a larger number of customers located throughout the United States. The Company attempts to reduce credit risk through initial and ongoing credit evaluations of its customers’ financial condition. There were no receivables from any one customer representing more than 5% of our consolidated gross accounts receivable at January 2, 2016 and December 27, 2014.

3.	RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-2, Leases (Topic 842), which supersedes ASC 840, Leases. This ASU, based on the principle that entities should recognize assets and liabilities arising from leases, does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The ASU’s primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term of operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2018, with early adoption permitted. The Company is currently reviewing the provisions of the new standard.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This ASU requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2016, with early adoption permitted on either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The prospective adoption of this guidance in the fiscal fourth quarter of 2015 did not materially affect the Company’s financial position, results of operations or cash flows. Prior periods were not retrospectively adjusted.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustment. This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments for business combinations. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2015. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier adoption permitted for financial statements that have not been issued. The Company does not expect the adoption of this guidance in fiscal year 2016 to materially affect its financial position, results of operations or cash flows.

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2015, with early adoption permitted. The amendments should be applied retrospectively. The retrospective adoption of this guidance for disclosures relating to the Company’s pension plan assets in the fiscal fourth quarter of 2015 did not affect the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-04, Compensation —Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. This ASU gives an employer whose fiscal year-end does not coincide with a calendar month-end—e.g., an entity that has a 52-week or 53-week fiscal year— the ability, as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year-end. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance in connection with the remeasurement and curtailment accounting in the fiscal third quarter of 2015 did not materially affect the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2015, with early adoption permitted. As a result of the retrospective adoption of this guidance in the fiscal fourth quarter of 2015, deferred financing costs of $25 million and $35 million at January 2, 2016 and December 27, 2014, respectively, are netted against the carrying values of certain debt obligations. Additionally, in accordance with ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, issued in August 2015, the Company will continue to present debt issuance costs related to its line-of-credit arrangements as an asset and amortize them ratably over the term of the related facilities.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This guidance is effective for fiscal years—and interim periods within those fiscal years—beginning after December 15, 2016, with early adoption permitted. The Company is currently reviewing the provisions of the new standard.

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers, which will be introduced into the FASB’s Accounting Standards Codification as Topic 606. Topic 606 replaces Topic 605, the previous revenue recognition guidance. The new standard core principle is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration—that is, payment—to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The new standard will be effective for the Company in the fiscal first quarter of 2018, with early adoption permitted in the fiscal first quarter of 2017. The new standard permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years, and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact of this ASU and has not yet selected an implementation approach.

4.	BUSINESS ACQUISITIONS

On December 31, 2015, the Company purchased a broadline distributor for cash of $69 million. During 2013, the Company purchased a foodservice distributor for cash of $14 million, plus contingent consideration of $2 million that was paid in 2014. The Company also received a $2 million purchase price adjustment in 2013 related to 2012 business acquisitions. The acquisitions, made in order to expand the Company’s presence in certain geographic areas, are integrated into the Company’s foodservice distribution network. There were no business acquisitions in 2014.

The following table summarizes the purchase price allocations for the 2015 and 2013 business acquisitions as follows (in thousands):


	2015			2013
Accounts receivable	$	6,724		$	3,894
Inventories		7,022			3,638
Other current assets		702			—
Property and equipment		7,200			125
Goodwill		40,242			—
Other intangible assets		21,200			8,348
Accounts payable		(3,290	)		(2,120	)
Accrued expenses and other current liabilities		(1,554	)		(130	)
Deferred income taxes		(8,765	)		—

Cash paid for acquisitions	$	69,481		$	13,755

The 2015 and 2013 acquisitions did not materially affect the Company’s results of operations or financial position. Actual net sales and operating earnings of the businesses acquired in both periods represent less than 2% of the Company’s consolidated results and, therefore, pro forma information has not been provided.

5.	ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of the activity in the allowance for doubtful accounts for the last three fiscal years is as follows (in thousands):


	2015			2014			2013
Balance at beginning of year	$	24,989		$	25,151		$	25,606
Charged to costs and expenses		12,103			18,559			19,481
Customer accounts written off—net of recoveries		(14,469	)		(18,721	)		(19,936	)

Balance at end of year	$	22,623		$	24,989		$	25,151

This table excludes the vendor receivable related allowance for doubtful accounts of $2 million, $3 million and $3 million at January 2, 2016, December 27, 2014 and December 28, 2013, respectively.

6.	ACCOUNTS RECEIVABLE FINANCING PROGRAM

Under its accounts receivable financing program and the related financing facility (the “2012 ABS Facility”), the Company and from time to time its subsidiaries sells—on a revolving basis—their eligible receivables to a wholly owned, special purpose, bankruptcy remote subsidiary (the “Receivables Company”). The Receivables Company, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders —as defined in the 2012 ABS Facility. The Company consolidates the Receivables Company and, consequently, the sale of the receivables is a transaction internal to the Company and the receivables have not been derecognized from the Company’s Consolidated Balance Sheets. On a daily basis, cash from accounts receivable collections is remitted to the Company as additional eligible receivables are sold to the Receivables Company. If, on a weekly settlement basis, there are not sufficient eligible receivables available as collateral, the Company is required to either provide cash collateral or, in lieu of providing cash collateral, it can pay down its borrowings on the 2012 ABS Facility to cover the shortfall. Due to sufficient eligible receivables available as collateral, no cash collateral was held at January 2, 2016 or December 27, 2014. Included in the Company’s Accounts receivable balance as of January 2, 2016 and December 27, 2014 was $933 million and $941 million, respectively, of receivables held as collateral in support of the 2012 ABS Facility. See Note 11, Debt for a further description of the 2012 ABS Facility.

7.	ASSETS HELD FOR SALE

The Company classifies its closed facilities as Assets held for sale at the time management commits to a plan to sell the facility, the facility is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain facilities may be classified as Assets held for sale for more than one year as the Company continues to actively market the facilities at reasonable prices.

The changes in Assets held for sale for fiscal years 2015 and 2014 were as follows (in thousands):


	2015			2014
Balance at beginning of year	$	5,360		$	14,554
Transfers in		2,594			6,700
Assets sold		(1,377	)		(14,314	)
Tangible asset impairment charges		(1,118	)		(1,580	)

Balance at end of the year	$	5,459		$	5,360

During fiscal year 2015, the Company closed a distribution facility and reclassified it to Assets held for sale. Two facilities classified as Assets held for sale were sold during fiscal year 2015 for proceeds of $3 million.

During fiscal year 2014, four distribution facilities were closed and reclassified to Assets held for sale. Five facilities classified as Assets held for sale were sold during fiscal year 2014 for proceeds of $19 million.

Certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in tangible asset impairment charges of $1 million and $2 million in fiscal years 2015 and 2014, respectively. See Note 10, Fair Value Measurements.

8.	PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):


	January 2, 2016			December 27, 2014			Range of Useful Lives
Land	$	301,924		$	291,871
Buildings and building improvements		1,156,914			1,055,936			10–40 years
Transportation equipment		745,399			651,184			5–10 years
Warehouse equipment		332,018			300,760			5–12 years
Office equipment, furniture and software		690,430			622,296			3–7 years
Construction in process		58,849			117,125

		3,285,534			3,039,172
Less accumulated depreciation and amortization		(1,516,649	)		(1,312,589	)

Property and equipment—net	$	1,768,885		$	1,726,583

Transportation equipment included $260 million and $163 million of capital lease assets at January 2, 2016, and December 27, 2014, respectively. Buildings and building improvements included $98 million and $33 million of capital lease assets at January 2, 2016 and December 27, 2014, respectively. Accumulated amortization of capital lease assets was $68 million and $36 million at January 2, 2016 and December 27, 2014, respectively. Interest capitalized was $2 million in fiscal years 2015 and 2014.

Depreciation and amortization expense of property and equipment—including amortization of capital lease assets—was $253 million, $261 million and $240 million for the fiscal years 2015, 2014 and 2013, respectively.

9.	GOODWILL AND OTHER INTANGIBLES

Goodwill and Other intangible assets include the cost of acquired businesses in excess of the fair value of the tangible net assets acquired. Other intangible assets include customer relationships, noncompete agreements, the brand names and trademarks comprising the Company’s portfolio of exclusive brands and trademarks. Brand names and trademarks are indefinite-lived intangible assets and, accordingly, are not subject to amortization.

Customer relationship intangible assets have definite lives and are carried at the acquired fair value less accumulated amortization. Customer relationship intangible assets are amortized over the estimated useful lives—four to ten years. Amortization expense was $146 million, $151 million and $147 million for fiscal years 2015, 2014 and 2013, respectively. The weighted-average remaining useful life of all customer relationship intangibles was approximately two years at January 2, 2016. Amortization of these customer relationship assets is estimated to be $146 million in fiscal year 2016, $68 million in fiscal year 2017, and $5 million in fiscal years 2018 and 2019.

Goodwill and Other intangibles consisted of the following (in thousands):


	January 2, 2016			December 27, 2014
Goodwill	$	3,875,719		$	3,835,477

Customer relationships—amortizable:
Gross carrying amount	$	1,373,920		$	1,376,094
Accumulated amortization		(1,149,572	)		(1,026,680	)

Net carrying value		224,348			349,414

Noncompete agreements—amortizable:
Gross carrying amount		800			800
Accumulated amortization		(347	)		(187	)

Net carrying value		453			613

Brand names and trademarks—not amortizing		252,800			252,800

Total Other intangibles—net	$	477,601		$	602,827

The 2015 increase in Goodwill is attributable to a 2015 broadline distributor acquisition. The 2015 decrease in the gross carrying amount of customer relationships is attributable to the write-off of fully amortized customer relationship intangible assets of $23 million, offset by intangible assets acquired related to the 2015 business acquisition of $21 million.

As required, the Company assesses Goodwill and intangible assets with indefinite lives for impairment annually, or more frequently, if events occur that indicate an asset may be impaired. For Goodwill and indefinite-lived intangible assets, the Company’s policy is to assess for impairment at the beginning of each fiscal third quarter. For intangible assets with definite lives, the Company assesses impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. All Goodwill is assigned to the consolidated company as the reporting unit. The Company completed its most recent annual impairment assessment of Goodwill and indefinite-lived intangible assets as of June 28, 2015—the first day of the fiscal third quarter of 2015—with no impairments noted.

For Goodwill, the reporting unit used in assessing impairment is the Company’s one business segment as described in Note 23, Business Segment Information. The Company’s assessment for impairment of Goodwill utilized a combination of discounted cash flow analysis, comparative market multiples, and comparative market transaction multiples, weighted 50%, 35% and 15%, respectively, to determine the fair value of the reporting unit for comparison to its corresponding carrying value. If the carrying value of the reporting unit exceeds its fair value, the Company must then perform a comparison of the implied fair value of Goodwill to its carrying value. If the carrying value of the Goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to the excess. Based upon the Company’s fiscal 2015 annual Goodwill impairment analysis, the Company concluded the fair value of its reporting unit exceeded its carrying value.

The Company’s fair value estimates of the brand name and trademark indefinite-lived intangible assets are based on a relief from royalty method. The fair value of these intangible assets is determined for comparison to the corresponding carrying value. If the carrying value of these assets exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based upon the Company’s fiscal 2015 annual impairment analysis, the Company concluded the fair value of the Company’s brand names and trademarks exceeded its carrying value.

10.

FAIR VALUE MEASUREMENTS

The Company follows the accounting standards for fair value, where fair value is a market-based measurement, not an entity-specific measurement. The Company’s fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

•

Level 1—observable inputs, such as quoted prices in active markets

•

Level 2—observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active or inactive markets that are observable either directly or indirectly, or other inputs that are observable or can be corroborated by observable market data

•

Level 3—unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Any transfers of assets or liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy will be recognized as of the end of the reporting period in which the transfer occurs. There were no transfers between fair value levels in any of the periods presented below.

The Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of January 2, 2016 and December 27, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):


Description	Level 1		Level 2		Level 3		Total
Recurring fair value measurements:
Money market funds	$	113,700	$	—	$	—	$	113,700

Balance at January 2, 2016	$	113,700	$	—	$	—	$	113,700

Recurring fair value measurements:
Money market funds	$	231,600	$	—	$	—	$	231,600

Balance at December 27, 2014	$	231,600	$	—	$	—	$	231,600

Nonrecurring fair value measurements:
Assets held for sale	$	—	$	—	$	2,600	$	2,600

Balance at January 2, 2016	$	—	$	—	$	2,600	$	2,600

Nonrecurring fair value measurements:
Assets held for sale	$	—	$	—	$	4,800	$	4,800

Balance at December 27, 2014	$	—	$	—	$	4,800	$	4,800

Recurring Fair Value Measurements

Money Market Funds

Money market funds include highly liquid investments with a maturity of three or fewer months. They are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy.

Nonrecurring Fair Value Measurements

Assets Held for Sale

The Company records Assets held for sale at the lesser of the carrying amount or estimated fair value less cost to sell. Certain Assets held for sale were adjusted to equal their estimated fair value, less cost to sell, resulting in Tangible asset impairment charges of $1 million and $2 million during fiscal years 2015 and 2014, respectively. Management estimates fair value based on comparable sales transactions received from real estate brokers.

The amounts included in the tables above, classified under Level 3 within the fair value hierarchy, represent the estimated fair values of those Assets held for sale that became the new carrying amounts at the time the impairments were recorded.

Other Fair Value Measurements

The carrying value of cash, restricted cash, Accounts receivable, Bank checks outstanding, Accounts payable and accrued expenses approximate their fair values due to their short-term maturities. The carrying value of the self-funded industrial revenue bonds and the corresponding long-term liability approximate their fair values. See Note 11, Debt, for a further description of the industrial revenue bonds.

Excluding the above noted industrial bonds, the fair value of the Company’s total debt approximated $4.8 billion at January 2, 2016 and December 27, 2014, as compared to its aggregate carrying value of $4.7 billion at January 2, 2016 and December 27, 2014. At January 2, 2016 and December 27, 2014, the fair value, estimated at $1.4 billion, of the Senior Notes was classified under Level 2 of the fair value hierarchy, with fair valued based upon the closing market price at the end of the reporting period. The fair value of the balance of the Company’s debt is classified under Level 3 of the fair value hierarchy, with fair value estimated based upon a combination of the cash outflows expected under these debt facilities, interest rates that are currently available to the Company for debt with similar terms, and estimates of the Company’s overall credit risk. See Note 11, Debt for further description of the Company’s debt.

11.

DEBT

The Company’s debt consisted of the following (in thousands):


		Interest Rate at
		January 2,	January 2,			December 27,
	Maturity	2016	2016			2014
Debt Description
ABL Facility	December 31, 2018	—	$	—		$	—
2012 ABS Facility	September 30, 2018	1.40%		586,000			636,000
Amended 2011 Term Loan (net of $9,848 and $14,641 of unamortized deferred financing costs, respectively)⁽¹⁾	March 31, 2019	4.5		2,037,652			2,059,110
Senior Notes (net of $13,441 and $17,439 of unamortized deferred financing costs, respectively) ⁽¹⁾	June 30, 2019	8.5		1,334,835			1,332,561
CMBS Fixed Facility (net of $1,473 and $2,497 of unamortized deferred financing costs, respectively) ⁽¹⁾	August 1, 2017	6.38		470,918			469,894
Obligations under capital leases	2018–2025	3.11 – 6.18		270,406			189,232
Other debt	2018–2031	5.75 – 9.00		33,325			11,795

Total debt				4,733,136			4,698,592
Add unamortized premium				11,652			14,982
Less current portion of long-term debt				(62,639	)		(51,877	)

Long-term debt			$	4,682,149		$	4,661,697

(1)

Prior year amounts have been reclassified to reflect the adoption of ASU 2015-03.

Principal payments to be made on outstanding debt as of January 2, 2016, were as follows (in thousands):


2016	$	62,639
2017		546,585
2018		668,449
2019		3,374,499
2020		34,795
Thereafter		70,931

	$	4,757,898

As of January 2, 2016, $2.1 billion of the Total debt was at a fixed rate.

Revolving Credit Agreement

The Company’s asset backed senior secured revolving loan facility (the “ABL Facility”) provides for loans under its two tranches: ABL Tranche A-1 and ABL Tranche A, with its capacity limited by a borrowing base. During fiscal year 2015, the ABL Facility was amended. The maximum borrowing available was increased $200 million to $1,300 million – ABL Tranche A-1 increased from $75 million to $100 million, and the maximum borrowing available under the ABL Tranche A increased $175 million to $1,200 million. Additionally, the interest rate on outstanding borrowings and letter of credit fees was reduced by 75 basis points. The maturity date was extended to the earlier of (1) October 20, 2020, the amended ABL Facility maturity date; (2) April 1, 2019 if the Company’s Senior Notes have more than $300 million of principal outstanding at that date and the maturity date of the Senior Notes has not been extended to later than October 20, 2020; or (3) December 31, 2018 if the Company’s senior secured term loan (the “Amended 2011 Term Loan”) has more than $300 million of principal outstanding at that date and the maturity date of the Amended 2011 Term Loan has not been extended to later than October 20, 2020. The Company incurred $3 million of lender fees and third party costs to amend the ABL Facility, which was capitalized as Deferred financing costs and amortized to the ABL Facility maturity date.

As of January 2, 2016, the Company had no outstanding borrowings, but had issued letters of credit totaling $393 million under the ABL Facility. Outstanding letters of credit included: (1) $73 million issued to secure the Company’s obligations related to certain facility leases, (2) $317 million issued in favor of certain commercial insurers securing the Company’s obligations related to its self-insurance program and (3) $3 million for other obligations of the Company. There was available capacity on the ABL Facility of $872 million at January 2, 2016. As of January 2, 2016, on Tranche A-1 borrowings, the Company can periodically elect to pay interest at an alternative base rate (“ABR”), as defined in the Company’s credit agreements, plus 1.50% or the London Inter Bank Offered Rate (“LIBOR”) plus 2.50%. On Tranche A borrowings, the Company can periodically elect to pay interest at ABR plus 0.25% or LIBOR plus 1.25%. The ABL Facility also carries letter of credit fees of 1.25% and an unused commitment fee of 0.25%. The weighted-average interest rate for the ABL Facility was 3.69% for fiscal year 2014. The Company did not borrow on the ABL Facility in 2015.

As discussed in Note 24, Subsequent Events, the Company borrowed approximately $239 million on the ABL Facility that partially funded the January 8, 2016 one-time special cash distribution to US Foods, the Company’s parent.

Accounts Receivable Financing Program

Under the 2012 ABS Facility, the Company and from time to time its subsidiaries sells—on a revolving basis—their eligible receivables to the Receivables Company. The Receivables Company, in turn, grants a continuing security interest in all of its rights, title and interest in the eligible receivables to the administrative agent for the benefit of the lenders as defined in the 2012 ABS Facility. See Note 6, Accounts Receivable Financing Program.

The maximum capacity under the 2012 ABS Facility is $800 million. Borrowings under the 2012 ABS Facility were $586 million and $636 million at January 2, 2016 and December 27, 2014, respectively. The Company, at its option, can request additional borrowings up to the maximum commitment, provided sufficient eligible receivables are available as collateral. There was available capacity on the 2012 ABS Facility of $111 million at January 2, 2016 based on eligible receivables as collateral. The portion of the 2012 ABS Facility held by the lenders who fund the 2012 ABS Facility with commercial paper bears interest at the lender’s commercial paper rate, plus any other costs associated with the issuance of commercial paper, plus 1.00%, and an unused commitment fee of 0.35%. The portion of the 2012 ABS Facility held by lenders that do not fund the 2012 ABS Facility with commercial paper bears interest at LIBOR plus 1.00%, and an unused commitment fee of 0.35%. The weighted-average interest rate for the 2012 ABS Facility was 1.41% and 1.43% for fiscal year 2015 and 2014, respectively. On October 19, 2015, the 2012 ABS Facility was amended whereby the maturity date was again extended from August 5, 2016 to September 30, 2018. There were no other significant changes to the 2012 ABS Facility. The Company incurred $1 million of lender fees and third party costs related to the 2012 ABS Facility amendment, which was capitalized as Deferred financing costs and amortized to the 2012 ABS Facility maturity date.

As discussed in Note 24, Subsequent Events, the Company borrowed $75 million on the 2012 ABS Facility that partially funded the January 8, 2016 one-time special cash distribution to US Foods, the Company’s parent.

Term Loan Agreement

The Amended 2011 Term Loan had outstanding borrowings of $2,038 million and $2,059 million, net of $10 million and $15 million of unamortized deferred financing costs at January 2, 2016 and December 27, 2014, respectively. The facility bears interest equal to ABR plus 2.50%, with an ABR floor of 2.00%, or LIBOR plus 3.50%, with a LIBOR floor of 1.00%, based on a periodic election of the interest rate by the Company. Principal repayments of $5 million are payable quarterly with the balance at maturity. The Amended 2011 Term Loan may require mandatory repayments if certain assets are sold, or based on excess cash flow generated by the Company, as defined in the debt agreement. The interest rate for all borrowings on the Amended 2011 Term Loan was 4.50%—the LIBOR floor of 1.00% plus 3.50%— at January 2, 2016. At January 2, 2016, investment funds or accounts managed or advised by an affiliate of KKR held a portion of the Amended 2011 Term Loan debt. See Note 14, Related Party Transactions.

The term loan agreement was amended during 2013. See “Debt Refinancing Transactions” discussed below.

Senior Notes

The Senior Notes, with outstanding principal of $1,335 million and $1,333 million at January 2, 2016 and December 27, 2014, net of $13 million and $17 million, respectively of unamortized deferred financing costs, bear interest at 8.50%. Prior to June 30, 2016, the Senior Notes are redeemable, at the Company’s option, in whole or in part at a price of 104.25% of their principal, plus accrued and unpaid interest, if any, to the relevant redemption date. On or after June 30, 2016 and 2017, the optional redemption price for the Senior Notes declines to 102.13% and 100.0%, respectively, of their principal amount, plus accrued and unpaid interest, if any, to the relevant redemption date. There was unamortized issue premium associated with the Senior Notes issuances of $12 million and $15 million at January 2, 2016 and December 27, 2014. The premium is amortized as a decrease to Interest expense-net over the remaining life of the debt facility. In February 2015, the Company repurchased $2 million of the Senior Notes held by the entities affiliated with KKR, as further discussed in Note 14, Related Party Transactions.

CMBS Fixed Facility

The CMBS Fixed Facility with outstanding balances of $471 million and $470 million, net of $1 million and $2 million of unamortized deferred financing costs as of January 2, 2016 and December 27, 2014, is secured by mortgages on 34 properties, consisting of distribution centers. The CMBS Fixed Facility bears interest at 6.38%. Security deposits and escrow amounts related to certain properties collateralizing the CMBS Fixed Facility of $6 million at January 2, 2016 and December 27, 2014 are included in Other assets in the Consolidated Balance Sheets.

Other Debt

Obligations under capital leases consist of amounts due for transportation equipment and building leases. Other debt of $33 million and $12 million at January 2, 2016 and December 27, 2014, respectively, consists primarily of various state industrial revenue bonds. To obtain certain tax incentives related to the construction of a new distribution facility, in January 2015, the Company and a wholly owned subsidiary entered into an industrial revenue bond agreement with a state for the issuance of a maximum of $40 million in Taxable Demand Revenue Bonds (the “TRBs”). The TRBs are self-funded as the Company’s wholly owned subsidiary purchases the TRBs, and the state loans the proceeds back to the Company. The TRBs, which mature January 1, 2030, can be prepaid without penalty one year after issuance. Interest on the TRBs and the loan is 6.25%. At January 2, 2016, $22 million has been drawn on TRBs and recorded as a $22 million long-term asset and a corresponding long-term liability in the Consolidated Balance Sheet.

Deferred Financing Costs

Deferred financing costs of $25 million and $35 million at January 2, 2016 and December 27, 2014, respectively, are netted in the above carrying values of the Company’s Amended 2011 Term Loan, Senior Notes and CMBS Fixed Facility debt obligations.

2013 Debt Refinancing Transactions

In 2013, the Company entered into transactions to refinance debt facilities and extend debt maturity dates, including the following:

•

In June 2013, the Company refinanced its term loan agreements. The aggregate principal outstanding of the 2011 Term Loan was increased to $2,100 million, and the maturity date of the loan facility was extended from March 31, 2017 to March 31, 2019.

•

In January 2013, the Company redeemed the remaining $355 million in aggregate principal amount of its 11.25% Senior Subordinated Notes (“Senior Subordinated Notes”) due June 30, 2017 from an affiliate of CD&R. This was done at a price equal to 105.63% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest to the redemption date. To fund the redemption of these notes, the Company issued $375 million in principal amount of its Senior Notes at a price equal to 103.50% of the principal amount, for gross proceeds of $388 million.

The 2013 refinancing resulted in a Loss on extinguishment of debt of $42 million that consisted of a $20 million Senior Subordinated Notes early redemption premium, a write-off of $13 million of unamortized debt issuance costs related to the old debt facilities, and $9 million of lender fees and third party costs related to these transactions. Unamortized debt issuance costs of $6 million related to the portion of the term loan refinancing accounted for as a debt modification were carried forward as Deferred financing costs and amortized to the Amended 2011 Term Loan maturity date. The Company incurred transaction costs of $29 million related to the 2013 debt refinancing transactions. Transaction costs primarily consisted of loan fees, arrangement fees, rating agency fees and legal fees.

Security Interests

Substantially all of the Company’s assets are pledged under the various debt agreements. Debt under the 2012 ABS Facility is secured by certain designated receivables and, in certain circumstances, by restricted cash. The ABL Facility is secured by certain other designated receivables not pledged under the 2012 ABS Facility, inventories, and tractors and trailers owned by the Company. The CMBS Fixed Facility is collateralized by mortgages on 34 properties. The Company’s obligations under the Amended 2011 Term Loan are secured by all of the capital stock of its subsidiaries, each of the direct and indirect wholly owned domestic subsidiaries—as defined in the agreements—and are secured by substantially all assets of the Company and its subsidiaries not pledged under the 2012 ABS Facility or the CMBS Fixed Facility. The Amended 2011 Term Loan has priority over certain collateral securing the ABL Facility and it has second priority to collateral securing the ABL Facility. As of January 2, 2016, nine properties remain in a special purpose, bankruptcy remote subsidiary, and are not pledged as collateral under any of the Company’s debt agreements.

Restrictive Covenants

The Company’s credit facilities, loan agreements and indentures contain customary covenants. These include, among other things, covenants that restrict the Company’s ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends (see Note 24, Subsequent Events) or engage in mergers or consolidations. As of January 2, 2016, the Company had $506 million of restricted payment capacity, and $1,108 million of its net assets that were restricted under these covenants. Subsequent to the balance sheet date, $374 million of restricted payment capacity was further utilized for the one-time special cash distribution discussed in Note 24, Subsequent Events, leaving $132 million of remaining restricted payment capacity.

Certain debt agreements also contain customary events of default. Those include, without limitation, the failure to pay interest or principal when it is due under the agreements, cross default provisions, the failure of representations and warranties contained in the agreements to be true, and certain insolvency events. If a default event occurs and continues, the principal amounts outstanding—together with all accrued unpaid interest and other amounts owed—may be declared immediately due and payable by the lenders. Were such an event to occur, the Company would be forced to seek new financing that may not be on as favorable terms as its current facilities. The Company’s ability to refinance its indebtedness on favorable terms—or at all—is directly affected by the current economic and financial conditions. In addition, the Company’s ability to incur secured indebtedness (which may enable it to achieve more favorable terms than the incurrence of unsecured indebtedness) depends in part on the value of its assets. This, in turn, relies on the strength of its cash flows, results of operations, economic and market conditions and other factors.

12.

ACCRUED EXPENSES AND OTHER LONG-TERM LIABILITIES

Accrued expenses and other long-term liabilities consisted of the following (in thousands):


	January 2, 2016		December 27, 2014
Accrued expenses and other current liabilities:
Salary, wages and bonus expenses	$	174,333	$	129,887
Operating expenses		61,528		46,845
Workers’ compensation, general and fleet liability		56,077		45,264
Group medical liability		22,220		20,183
Customer rebates and other selling expenses		73,543		65,052
Restructuring		33,500		9,792
Property and sales tax		24,299		19,224
Interest payable		2,780		69,465
Deferred tax liabilities		—		10,079
Other		21,106		19,847

Total accrued expenses and other current liabilities	$	469,386	$	435,638

Other long-term liabilities:
Workers’ compensation, general and fleet liability	$	116,166	$	115,640
Accrued pension and other postretirement benefit obligations		126,448		227,106
Restructuring		85,344		47,089
Unfunded lease obligation		29,180		31,422
Other		29,775		28,962

Total Other long-term liabilities	$	386,913	$	450,219

Self-Insured Liabilities—The Company is self-insured for general liability, fleet liability and workers’ compensation claims. Claims in excess of certain levels are insured. The self-insurance liabilities, included in the table above under “Workers’ compensation, general and fleet liability,” are recorded at present value. This table summarizes self-insurance liability activity for the last three fiscal years (in thousands):


	2015			2014			2013
Balance at beginning of the year	$	160,904		$	153,568		$	159,469
Charged to costs and expenses		77,242			65,025			56,526
Payments		(65,903	)		(57,689	)		(62,427	)

Balance at end of the year	$	172,243		$	160,904		$	153,568

Discount rate		0.82	%		0.60	%		0.56	%

Estimated future payments for self-insured liabilities are as follows (in thousands):


2016	$	57,078
2017		30,927
2018		21,519
2019		14,559
2020		10,076
Thereafter		42,444

Total self-insured liability payments		176,603
Less amount representing interest		(4,360	)

Present value of self-insured liability payments	$	172,243

13.

RESTRUCTURING LIABILITIES

The following table summarizes the changes in the restructuring liabilities for the last three fiscal years (in thousands):


	Severance and Related Costs			Facility Closing Costs			Total
Balance at December 29, 2012	$	74,121		$	3,177		$	77,298
Current period charges		7,308			328			7,636
Change in estimate		(480	)		(630	)		(1,110	)
Payments and usage—net of accretion		(11,877	)		(729	)		(12,606	)

Balance at December 28, 2013		69,072			2,146			71,218
Current period charges		106			—			106
Change in estimate		(584	)		(1,152	)		(1,736	)
Payments and usage—net of accretion		(12,144	)		(563	)		(12,707	)

Balance at December 27, 2014		56,450			431			56,881
Current period charges		175,749			36			175,785
Change in estimate		(4,196	)		—			(4,196	)
Payments and usage—net of accretion		(109,369	)		(257	)		(109,626	)

Balance at January 2, 2016	$	118,634		$	210		$	118,844

The Company periodically closes distribution facilities, because it has built new ones or to consolidate operations. Additionally, the Company continues to implement initiatives in its ongoing efforts to reduce costs and improve operating efficiencies.

During fiscal year 2015, the Company announced its plan to streamline its field operational model. The Company anticipates the reorganization will be completed in fiscal year 2016. A restructuring charge of $30 million was recorded in fiscal year 2015 and consisted primarily of employee separation related costs.

During the second quarter of 2015, the Company announced its tentative decision to close the Baltimore, Maryland distribution facility. The Company is currently engaged in discussions with unions representing certain employees regarding this tentative decision. A final decision regarding the Baltimore facility will be made once negotiations with the unions are concluded. In anticipation of a potential closure of the Baltimore facility, the Company accrued a restructuring charge of $55 million, including $50 million of estimated multiemployer pension withdrawal liabilities. The estimated multiemployer pension liability was based on the latest available information received from the respective plans’ administrator and represents an estimate for a calendar year 2015 withdrawal. Due to the lack of current information, including changes in market conditions, and funded status of the related multiemployer pension plans, the settlement of these multiemployer pension withdrawal liabilities could materially differ from this estimate.

As further discussed in Note 17, Retirement Plans, in December 2015, the Company reached a settlement with the Central States Teamsters Union Pension Plan (“Central States”). The settlement relieves the Company’s participation in the “legacy” pool and settled the related legacy multiemployer pension withdrawal liability, and commenced the Company as a new employer status in the “hybrid” pool of the Central States Teamsters Southeast and Southwest Area Pension Fund (“Central States Plan”). The payment also included the settlement of certain other Central States multiemployer pension withdrawal liabilities relating to facilities closed prior to 2015, and the related Egan Minnesota labor dispute. The settlement resulted in a restructuring charge of $88 million representing the excess of the $97 million cash payment over the aforementioned liabilities related to these previously closed facilities.

The $119 million Severance and Related Costs balance as of January 2, 2016, also includes $36 million of multiemployer pension withdrawal liabilities relating to facilities closed prior to 2015 unrelated to Central States. These are payable in monthly installments through 2031 at effective interest rates ranging from 5.9% to 6.5%.

14.

RELATED PARTY TRANSACTIONS

The Company is party to consulting agreements with each of the Sponsors pursuant to which each Sponsor provides the Company with ongoing consulting and management advisory services and receives fees and reimbursements of related out of pocket expenses. For each of the fiscal years 2015, 2014 and 2013, the Company recorded $10 million in consulting fees in the aggregate, reported as Distribution, selling and administrative costs in the Consolidated Statements of Comprehensive Income (Loss).

During the fiscal year 2013, the Company purchased $12 million of food products from a former affiliate of KKR. The Company made payments to KKR Capital Markets LLC, an affiliate of KKR, of $2 million for services rendered in connection with certain 2013 debt refinancing transactions.

As discussed in Note 11, Debt, at January 2, 2016, investment funds or accounts managed or advised by an affiliate of KKR held less than 5% of the Company’s outstanding debt. In February 2015, the Company repurchased $2 million of Senior Notes held by investment funds managed by KKR.

The Company files a consolidated federal income tax return together with US Foods, its parent. US Foods’ federal and state income taxes are paid by the Company and settled with US Foods pursuant to a tax sharing agreement. The Company recorded a $7 million receivable from US Foods related to its tax sharing agreement. See Note 19, Income Taxes.

15.

SHARE-BASED COMPENSATION AND US FOODS COMMON STOCK ISSUANCES

The Stock Incentive Plan, as amended (“Stock Incentive Plan”) provides for the sale of US Foods common stock to named executive officers and other key employees and directors. It also grants 1) stock options to purchase shares of common stock, 2) stock appreciation rights, and 3) restricted stock and restricted stock units of US Foods to certain individuals. The Board of Directors of US Foods or the Compensation Committee of the Board of US Foods is authorized to select the officers, employees and directors eligible to participate in the Stock Incentive Plan. Either the US Foods Board of Directors or the Compensation Committee may determine the specific number of shares to be offered, or options, stock appreciation rights or restricted stock to be granted to an employee or director.

In May 2013, the Stock Incentive Plan was amended to, among other things, increase the number of shares of common stock of US Foods available for grant—from approximately 31.5 million shares to approximately 53.2 million shares. US Foods contributes shares to the Company for employee purchases, and upon exercise of options or grants of restricted shares and restricted stock units.

Employee Put Option—Each participant in the Stock Incentive Plan has the right to require the Company to repurchase all of his or her restricted shares or shares issued or issuable pursuant to their awards in the event of a termination of employment due to death or disability.

Once it is probable that a put becomes exerciseable, it is accounted for as an award modification and is required to be liability-classified. The Company records an incremental expense measured as the excess, if any, of the fair value of the modified award over the amount previously recognized when the award retained equity classification. These liability awards are remeasured at their fair market value, or redemption value, as of each reporting period through the date of settlement, which is generally the first fiscal quarter following termination. There were no 2015 terminations that triggered the put right and, therefore, met the criteria for liability treatment. As such, there was no impact on current fiscal year stock-based compensation costs.

Parent Call Option—The Company also has the right—but not the obligation—to require employees to sell purchased shares back to the Company when they terminate employment. If the Company determines it is likely to exercise the call right prior to an employee bearing the risks and rewards of ownership for a reasonable period of time, generally six months, the awards that have been vested for less than six months (“immature shares”) are required to be liability-classified. The Company records an incremental expense measured as the excess, if any, of the fair value of the liability award over the amount previously recognized when the award retained equity classification. These liability awards are remeasured at their fair market value, or redemption value, as of each reporting period through the date of settlement, which is generally the first fiscal quarter following termination. There was one 2015 termination for which it was probable that the Company would exercise its call right and, therefore, met the criteria for liability treatment with minimum impact on the current fiscal year stock-based compensation expense.

The Company measures compensation expense for share-based equity awards at fair value at the date of grant, and it recognizes compensation expense over the service period for share-based awards expected to vest. Total compensation expense related to share-based payment arrangements was $16 million, $12 million and $8 million for fiscal years 2015, 2014 and 2013, respectively. No share-based compensation cost was capitalized as part of the cost of an asset during those years. The total income tax benefit recorded in the Consolidated Statement of Comprehensive Income (Loss) was $6 million, $4 million and $3 million during fiscal years 2015, 2014 and 2013, respectively.

US Foods Common Stock Issuances—Certain USF employees have purchased shares of US Foods common stock, pursuant to a management stockholder’s agreement associated with the Stock Incentive Plan. These shares are subject to the terms and conditions (including certain restrictions) of each management stockholder’s agreement, other documents signed at the time of purchase, as well as transfer limitations under

the applicable law. The related shares and net proceeds of the employee share purchases are contributed to the Company by US Foods. The Company measures fair value of US Foods shares on a quarterly basis, using the combination of a market approach and an income approach. The share price determined for a particular quarter end is the price at which employee purchases and company repurchases are made for the following quarter.

In fiscal year 2015, employees bought US Foods common stock at $6.00 per share. In fiscal year 2014, there were no employee purchases or Company repurchases of US Foods common stock held by employees. In fiscal year 2013, employees bought stock at $6.00 per share. At January 2, 2016, there were 5 million shares of US Foods held by employees for net proceeds of $25 million.

Stock Option Awards—The Company granted to certain employees Time Options and Performance Options (collectively the “Options”) to purchase common shares of US Foods. These Options are subject to the restrictions set forth in the Stock Option Agreements. Shares purchased pursuant to option exercises would be governed by the restrictions in the Stock Incentive Plan and management stockholder’s agreements.

The Time Options vest and become exercisable ratably over periods of four to five years. This happens either on the anniversary date of the grant or the last day of each fiscal year, beginning with the fiscal year issued. In fiscal 2015, 2014, and 2013, the Company recognized $3 million, $3 million, and $2 million, respectively in compensation expense related to Time Options.

The Performance Options also vest and become exercisable ratably over four to five years, either on the anniversary date of the grant or the last day of each fiscal year (beginning with the fiscal year issued), provided that the Company achieves an annual operating performance target as defined in the applicable stock option agreements (“Stock Option Agreements”). The Stock Option Agreements also provide for “catch-up vesting” of the Performance Options, if an annual operating performance target is not achieved, but a cumulative operating performance target is achieved. During fiscal year 2012, the Company changed its policy for granting Performance Options. The award agreements no longer included performance targets for all years covered by the agreement. Instead, the Company established annual and cumulative targets for each year at the beginning of each respective fiscal year. In this case, the grant date under GAAP is not determined until the performance target for the related options is known.

The Company achieved the annual and cumulative performance targets in fiscal year 2015 and recorded a compensation charge of $5 million for the Performance Options. The charge consisted of $3 million relating to fiscal year 2015 and $2 million related Performance Options granted in fiscal years 2013, 2012 and 2011, which met cumulative performance targets in 2015. The Company achieved the annual performance target in fiscal year 2014 and recorded a compensation charge of $4 million for the Performance Options relating to fiscal year 2014. The Company did not achieve the annual performance target in fiscal year 2013. The fiscal year 2012 annual operating performance target was modified in fiscal year 2013, and the Company recorded a compensation charge of $2 million in fiscal year 2013 for the Performance Options relating to fiscal year 2012.

The Options are nonqualified options, with exercise prices equal to the estimated value of a share of US Foods’s stock at the date of the grant. The Options have exercise prices of $4.50 to $6.75 per share and generally have a 10-year life. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option-pricing model.

The weighted-average assumptions for options granted in fiscal years 2015 and 2013 are included in the following table. No options were granted in fiscal year 2014.


	2015			2013
Expected volatility		36.6	%		35.0	%
Expected dividends		—			—
Risk-free interest rate		1.6	%		1.0	%
Expected term (in years)		4.8			6.3

Expected volatility is calculated based on the historical volatility of public companies similar to US Foods. The risk-free interest rate is the implied zero-coupon yield for U.S. Treasury securities having a maturity

approximately equal to the expected term, as of the grant dates. The assumed dividend yield is zero, because the Company has not historically paid dividends and does not have any current plans to pay dividends. Due to a lack of relevant historical data, the simplified approach was used to determine the expected term of the options.

The summary of options outstanding and changes during fiscal year 2015 are presented below.


	Time Options			Performance Options			Total Options			Weighted- Average Fair Value		Weighted- Average Exercise Price		Weighted - Average Remaining Contractual Years
Outstanding at December 27, 2014		12,292,713			10,149,146			22,441,859		$	1.89	$	5.13
Granted		2,393,585			1,865,671			4,259,256		$	2.56	$	6.40
Exercised		(2,088,980	)		(1,843,884	)		(3,932,864	)	$	1.85	$	5.03
Forfeited		(763,520	)		(824,100	)		(1,587,620	)	$	2.11	$	5.85

Outstanding at January 2, 2016		11,833,798			9,346,833			21,180,631		$	2.02	$	5.47		5.3

Vested and exercisable at January 2, 2016		8,461,277			7,895,792			16,394,569		$	1.87	$	5.04		4.3

The weighted-average grant date fair value of options granted in fiscal years 2015 and 2013 was $2.56 and $2.22, respectively. There were no options granted in fiscal year 2014. In fiscal years 2015, 2014 and 2013, the Company recorded $8 million, $7 million and $4 million, respectively, in compensation expense related to the Options. The stock compensation expense—representing the fair value of stock options vested during the year—is reflected in our Consolidated Statements of Comprehensive Income (Loss) in Distribution, selling and administrative costs. During fiscal year 2015, 2,088,980 Time Options and 1,843,884 Performance Options were exercised by terminating employees for a cash outflow of $6 million, representing the excess of fair value over exercise price. During fiscal year 2014, 12,000 Time Options and 10,000 Performance Options were exercised by terminating employees for a minimal cash outflow, representing the excess of fair value over exercise price. During fiscal year 2013, 1,233,972 Time Options and 1,233,972 Performance Options were exercised by terminating employees for a cash outflow of $2 million, representing the excess of fair value over exercise price.

As of January 2, 2016, there was $8 million of total unrecognized compensation costs related to 5 million nonvested options expected to vest under the Stock Option Agreements. That cost is expected to be recognized over a weighted-average period of three years.

The December 27, 2014 Performance Options presented in the prior table have been recast to conform to the current year presentation of options which have reached a grant date. As of January 2, 2016, there were 2 million Performance Options that have been promised to employees for which performance targets have not been set.

Restricted Shares—No Restricted Shares (“Restricted Shares”) were issued in fiscal year 2015 or 2014. Certain employees of the Company received 375,001 Restricted Shares of US Foods in fiscal year 2013. These shares were granted under the Stock Incentive Plan and contain non-forfeitable dividend rights. Restricted Shares vest and become exercisable ratably over periods of primarily two to five years.

The summary of nonvested Restricted Shares outstanding and changes during fiscal year 2015 is presented below:


	Restricted Shares			Weighted- Average Fair Value
Nonvested at December 27, 2014		175,390		$	5.82
Granted		—		$	—
Vested		(132,556	)	$	5.77
Forfeited		(23,834	)	$	5.92

Nonvested at January 2, 2016		19,000		$	6.00

The weighted-average grant date fair value for Restricted Shares granted in 2013 was $6.00. Expense of $1 million and $3 million related to the Restricted Shares was recorded in Distribution, selling and administrative costs during fiscal years 2015 and 2013, respectively. The 2014 expense related to the Restricted Shares of $1 million was offset by an adjustment of prior year expense.

At January 2, 2016, there was $0.1 million of unrecognized compensation cost related to the Restricted Shares that we expect to recognize over a weighted-average period of one year.

Restricted Stock Units—Beginning in 2013, certain employees of the Company received Time Restricted Stock Units and Performance Restricted Stock Units of US Foods (collectively the “RSUs”) granted pursuant to the Stock Incentive Plan.

Time RSUs generally vest and become exercisable ratably over four years, starting on the anniversary date of grant. In fiscal years 2015, 2014, and 2013, the Company recognized $3 million, $2 million, and $1 million, respectively in compensation expense related to Time RSU’s.

Performance RSUs also vest and become exercisable ratably over four years either on the anniversary date of the grant or the last day of each fiscal year (beginning with the fiscal year issued), provided that the Company achieves an annual operating performance target as defined in the applicable restricted stock unit agreements (“Restricted Stock Unit Agreements”). The Restricted Stock Unit Agreements also provide for “catch-up vesting” of the Performance RSU’s if an annual operating performance target is not achieved, but a cumulative operating performance target is achieved. Similar to options, the RSU award agreements do not include performance targets for all years covered by the agreement. Instead, the Company established annual targets for each year at the beginning of each fiscal year. In this case, the grant date under GAAP is not determined until the performance target for the related Performance RSU is known.

The Company achieved the annual and cumulative operating performance targets in 2015 and recorded a compensation charge of $4 million. The charge consisted of $3 million relating to fiscal year 2015 and $1 million related to Performance RSUs granted in 2013 which met cumulative performance targets in 2015. The Company achieved the annual operating performance target in 2014 and recorded a compensation charge of $3 million in 2014 for the Performance RSU’s. The Company did not achieve the annual operating performance target for 2013 and, accordingly, did not record a compensation charge for the Performance RSU’s in 2013. Prior to 2013, there were no RSUs issued or outstanding under the Stock Incentive Plan.

The summary of nonvested Restricted Stock Units as of January 2, 2016, and changes during the fiscal year then ended presented below.


	Time Restricted Stock Units			Performance Restricted Stock Units			Total Restricted Stock Units			Weighted- Average Fair Value
Nonvested at December 27, 2014		1,106,365			515,354			1,621,719		$	6.00
Granted		977,152			502,056			1,479,208		$	6.62
Vested		(577,438	)		(244,104	)		(821,542	)	$	6.00
Forfeited		(148,604	)		(139,542	)		(288,146	)	$	6.04

Nonvested at January 2, 2016		1,357,475			633,764			1,991,239		$	6.45

The weighted-average grant date fair values for Restricted Stock Units granted in fiscal year 2015 was $6.62. Expense of $7 million, $5 million and $1 million related to the Restricted Stock Units was recorded in Distribution, selling and administrative costs during fiscal years 2015, 2014 and 2013, respectively.

At January 2, 2016, there was $8 million of unrecognized compensation cost related to 2 million Restricted Stock Units that we expect to recognize over a weighted-average period of three years.

The December 27, 2014 Performance RSU’s presented in the prior table have been recast to conform to the current year presentation of units which have reached a grant date. As of January 2, 2016, there were 1 million Performance RSUs that have been promised to employees for which performance targets have not been set.

Equity Appreciation Rights—The Company has an Equity Appreciation Rights (“EAR”) Plan for certain employees. Each EAR represents one phantom share of US Foods common stock. The EARs become vested and payable, primarily at the time of a qualified public offering of equity shares, involuntary termination, or a change in control. EARs are forfeited upon voluntary termination of the participant’s employment with the Company. The EARs will be settled in cash upon vesting and, accordingly, are considered liability instruments. No EARs were granted during fiscal years 2015, 2014 and 2013. As of January 2, 2016, there were a total of 1,385,300 EARs outstanding with a weighted average exercise price of $4.98 per share.

As the EARs are liability instruments, the fair value of the awards is re-measured each reporting period until the award is settled. Since vesting is contingent upon performance conditions currently not considered probable, no compensation costs have been recorded to date for outstanding EARs.

16.

LEASES

The Company leases various warehouse and office facilities and certain equipment under operating and capital lease agreements that expire at various dates and in some instances contain renewal provisions. The Company expenses operating lease costs, including any scheduled rent increases, rent holidays or landlord concessions—on a straight-line basis over the lease term. The Company also has an unfunded lease obligation on a distribution facility through 2023.

Future minimum lease payments under the above mentioned noncancelable lease agreements, together with contractual sublease income, as of January 2, 2016, are as follows (in thousands):


	Unfunded Lease			Capital			Operating		Sublease			Net
	Obligation			Leases			Leases		Income			Net
2016	$	4,269		$	51,022		$	31,922	$	(1,026	)	$	86,187
2017		4,269			51,121			29,146		(884	)		83,652
2018		4,269			68,996			24,603		(6	)		97,862
2019		4,663			47,334			24,099		—			76,096
2020		4,809			38,784			20,469		—			64,062
Thereafter		14,428			46,348			35,397		—			96,173

Total minimum lease payments (receipts)		36,707			303,605		$	165,636	$	(1,916	)	$	504,032

Less amount representing interest		(9,704	)		(33,199	)

Present value of minimum lease payments	$	27,003		$	270,406

Total operating lease expense, included in Distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income (Loss) was $44 million in each of the fiscal years 2015, 2014 and 2013.

17.

RETIREMENT PLANS

The Company has defined benefit and defined contribution retirement plans for its employees. Also, the Company contributes to various multiemployer plans under collective bargaining agreements and provides certain health care benefits to eligible retirees and their dependents.

Company Sponsored Defined Benefit Plans—The Company maintains several qualified retirement plans and a nonqualified retirement plan (“Retirement Plans”) that pay benefits to certain employees at retirement, using formulas based on a participant’s years of service and compensation. In addition, the Company maintains postretirement health and welfare plans for certain employees, of which components are included in the tables below under Other postretirement plans. Amounts related to defined benefit plans recognized in the consolidated financial statements are determined on an actuarial basis.

The components of net pension and other postretirement benefit costs (credits) for the last three fiscal years were as follows (in thousands):


	Pension Benefits
	2015			2014			2013
Components of net periodic pension cost:
Service cost	$	32,582		$	27,729		$	32,773
Interest cost		39,628			37,468			33,707
Expected return on plan assets		(54,881	)		(47,396	)		(42,036	)
Amortization of prior service cost		195			198			198
Amortization of net loss		10,394			2,294			13,288
Settlements		3,358			2,370			1,778
Special termination benefit		422			—			—

Net periodic pension costs	$	31,698		$	22,663		$	39,708


	Other Postretirement Plans
	2015			2014			2013
Components of net periodic postretirement benefit costs:
Service cost	$	37		$	79		$	153
Interest cost		264			318			431
Amortization of prior service credit		(62	)		(334	)		—
Amortization of net loss (gain)		14			(75	)		112
Curtailment gain		—			(2,096	)		—

Net periodic other postretirement benefit costs (credits)	$	253		$	(2,108	)	$	696

Net periodic pension costs for fiscal years 2015, 2014 and 2013 includes $3 million, $2 million and $2 million, respectively, of settlement charges resulting from lump-sum payments to former employees participating in several Company sponsored pension plans. The net periodic other postretirement benefit credits for fiscal year 2014 includes a $2 million curtailment gain resulting from a labor negotiation that eliminated postretirement medical coverage for substantially all active participants in one plan.

Changes in plan assets and benefit obligations recorded in Other comprehensive income (loss) for pension and Other postretirement benefits for the last three fiscal years were as follows (in thousands):


	Pension Benefits
	2015			2014			2013
Changes recognized in other comprehensive income (loss):
Actuarial (loss) gain	$	(3,171	)	$	(160,345	)	$	112,816
Curtailment		73,191			—			—
Amortization of prior service cost		195			198			198
Amortization of net loss		10,394			2,294			13,288
Settlements		3,358			2,370			1,778

Net amount recognized	$	83,967		$	(155,483	)	$	128,080


	Other Postretirement Plans
	2015			2014			2013
Changes recognized in other comprehensive income (loss):
Actuarial gain (loss)	$	1,035		$	(986	)		2,198
Prior service (cost) credit		(1,291	)		3,612			—
Amortization of prior service credit		(62	)		(334	)		—
Amortization of net loss (gain)		14			(75	)		112
Curtailment		—			(2,096	)		—

Net amount recognized	$	(304	)	$	121		$	2,310

The funded status of the defined benefit plans for the last three fiscal years was as follows (in thousands):


	Pension Benefits
	2015			2014			2013
Change in benefit obligation:
Benefit obligation at beginning of period	$	970,469		$	733,752		$	795,989
Service cost		32,582			27,729			32,773
Interest cost		39,628			37,468			33,707
Actuarial (gain) loss		(73,282	)		199,807			(98,962	)
Curtailment		(73,191	)		—			—
Settlements		(15,287	)		(11,517	)		(13,186	)
Special termination benefit		422			—			—
Benefit disbursements		(18,455	)		(16,770	)		(16,569	)

Benefit obligation at end of period		862,886			970,469			733,752

Change in plan assets:
Fair value of plan assets at beginning of period		749,166			641,749			566,768
Return on plan assets		(21,572	)		86,857			55,890
Employer contribution		48,489			48,847			48,846
Settlements		(15,287	)		(11,517	)		(13,186	)
Benefit disbursements		(18,455	)		(16,770	)		(16,569	)

Fair value of plan assets at end of period		742,341			749,166			641,749

Net amount recognized	$	(120,545	)	$	(221,303	)	$	(92,003	)


	Other Postretirement Plans
	2015			2014			2013
Change in benefit obligation:
Benefit obligation at beginning of period	$	6,789		$	9,375		$	11,357
Service cost		37			79			153
Interest cost		264			318			431
Employee contributions		209			215			219
Actuarial (gain) loss		(1,035	)		986			(2,198	)
Curtailment		—			(3,612	)		—
Plan amendment		1,291			—			—
Benefit disbursements		(581	)		(572	)		(587	)

Benefit obligation at end of period		6,974			6,789			9,375

Change in plan assets:
Fair value of plan assets at beginning of period		—			—			—
Employer contribution		372			357			369
Employee contributions		209			215			219
Benefit disbursements		(581	)		(572	)		(587	)

Fair value of plan assets at end of period		—			—			—

Net amount recognized	$	(6,974	)	$	(6,789	)	$	(9,375	)

Effective September 30, 2015, non-union participants’ benefits of a Company sponsored defined benefit pension plan were frozen, resulting in a reduction in the benefit obligation included in Other long term liabilities of approximately $91 million, including a $73 million curtailment, with a corresponding decrease to Accumulated other comprehensive loss. At the

remeasurement date, the plan’s net loss included in Accumulated other comprehensive loss exceeded the reduction in the plan’s benefit obligation and, accordingly, no net curtailment gain or loss was recognized. As a result of the plan freeze, actuarial gains and losses will be amortized over the average remaining life expectancy of inactive participants rather than the average remaining service lives of active participants.

For the defined benefit pension plans, the fiscal year 2015 actuarial gain of $73 million was primarily due to an increase in the discount rates.


	Pension Benefits
	2015			2014			2013
Amounts recognized in the consolidated balance sheets consist of the following:
Accrued benefit obligation—current	$	(546	)	$	(453	)	$	(401	)
Accrued benefit obligation—noncurrent		(119,999	)		(220,850	)		(91,602	)

Net amount recognized in the consolidated balance sheets	$	(120,545	)	$	(221,303	)	$	(92,003	)

Amounts recognized in Accumulated other comprehensive loss consist of the following:
Prior service cost	$	(438	)	$	(634	)	$	(832	)
Net loss		(147,675	)		(231,446	)		(75,765	)

Net loss recognized in Accumulated other comprehensive loss	$	(148,113	)	$	(232,080	)	$	(76,597	)

Additional information:
Accumulated benefit obligation	$	854,858		$	888,937		$	679,225
Unfunded prepaid (accrued) pension cost		27,568			10,777			(15,406	)

	Other Postretirement Plans
	2015			2014			2013
Amounts recognized in the consolidated balance sheets consist of the following:
Accrued benefit obligation—current	$	(525	)	$	(533	)	$	(583	)
Accrued benefit obligation—noncurrent		(6,449	)		(6,256	)		(8,792	)

Net amount recognized in the consolidated balance sheets	$	(6,974	)	$	(6,789	)	$	(9,375	)

Amounts recognized in Accumulated other comprehensive loss consist of the following:
Net gain	$	1,064		$	1,368		$	1,247

Net gain recognized in Accumulated other comprehensive income	$	1,064		$	1,368		$	1,247

Additional information—unfunded accrued benefit cost	$	(8,038	)	$	(8,157	)	$	(10,622	)


	Pension Benefits		Other Postretirement Benefits
Amounts expected to be amortized from Accumulated other comprehensive loss in the next fiscal year:
Net loss (gain)	$	7,210	$	(71	)
Prior service cost		157		6

Net expected to be amortized	$	7,367	$	(65	)

Weighted average assumptions used to determine benefit obligations at period-end and net pension costs for the last three fiscal years were as follows:


	Pension Benefits
	2015			2014			2013
Benefit obligation:
Discount rate		4.64	%		4.25	%		5.19	%
Annual compensation increase		3.60	%		3.60	%		3.60	%
Net cost:
Discount rate		4.25	%		5.19	%		4.29	%
Expected return on plan assets		7.00	%		7.25	%		7.25	%
Annual compensation increase		3.60	%		3.60	%		3.60	%

	Other Postretirement Plans
	2015			2014			2013
Benefit obligation—discount rate		4.40	%		4.05	%		4.80	%
Net cost—discount rate		4.05	%		4.80	%		3.90	%

The measurement dates for the pension and other postretirement benefit plans were December 31, 2015, December 27, 2014 and December 28, 2013.

A health care cost trend rate is used in the calculations of postretirement medical benefit plan obligations. The assumed healthcare trend rates for the last three fiscal years were as follows:


	2015			2014			2013
Immediate rate		7.40	%		7.10	%		7.30	%
Ultimate trend rate		4.50	%		4.50	%		4.50	%
Year the rate reaches the ultimate trend rate		2038			2028			2028

A 1% change in the rate would result in a change to the postretirement medical plan obligation of less than $1 million. Retirees covered under these plans are responsible for the cost of coverage in excess of the subsidy, including all future cost increases.

In determining the discount rate, the Company determines the implied rate of return on a hypothetical portfolio of high-quality fixed-income investments, for which the timing and amount of cash outflows approximates the estimated pension plan payouts. The discount rate assumption is reviewed annually and revised as appropriate.

The expected long-term rate of return on plan assets is derived from a mathematical asset model. This model incorporates assumptions on the various asset class returns, reflecting a combination of historical performance analysis and the forward-looking views of the financial markets regarding the yield on long-term bonds and the historical returns of the major stock markets. The rate of return assumption is reviewed annually and revised as deemed appropriate.

The investment objective for our Company sponsored plans is to provide a common investment platform. Investment managers—overseen by our Retirement Administration Committee—are expected to adopt and maintain an asset allocation strategy for the plans’ assets designed to address the Retirement Plans’ liability structure. The Company has developed an asset allocation policy and rebalancing policy. We review the major asset classes, through consultation with investment consultants, at least quarterly to determine if the plan assets are performing as expected. The Company’s 2015 strategy targeted a mix of 50% equity securities and 50% long-term debt securities and cash equivalents. The actual mix of investments at January 2, 2016, was 51% equity securities and 49% long-term debt securities and cash equivalents. The Company plans to manage the actual mix of investments to achieve its target mix.

The Company has retrospectively adopted ASU No. 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. The three-tier fair value hierarchy now excludes certain investments which are valued using net asset value as a practical expedient. See Note 10, Fair Value Measurements for a detailed description of the three-tier fair value hierarchy.

The following table (in thousands) sets forth the fair value of our defined benefit plans’ assets by asset fair value hierarchy level.


	Asset Fair Value as of January 2, 2016
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	4,576	$	—	$	—	$	4,576
Mutual funds:
Domestic equities		33,033		—		—		33,033
International equities		26,760		—		—		26,760
Long-term debt securities:
Corporate debt securities:
Domestic		—		181,973		—		181,973
International		—		18,000		—		18,000
U.S. government securities		—		143,904		—		143,904
Government agencies securities		—		7,789		—		7,789
Other		—		3,216		—		3,216

	$	64,369	$	354,882	$	—		419,251

Common collective trust funds:
Cash equivalents								5,272
Domestic equities								264,534
International equities								53,284

Total investments measured at NAV as a practical expedient								323,090

Total defined benefit plans’ assets							$	742,341


	Asset Fair Value as of December 27, 2014
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	5,800	$	—	$	—	$	5,800
Mutual funds:
Domestic equities		32,348		—		—		32,348
International equities		23,199		—		—		23,199
Long-term debt securities:
Corporate debt securities:
Domestic		—		199,500		—		199,500
International		—		25,633		—		25,633
U.S. government securities		—		136,048		—		136,048
Government agencies securities		—		10,270		—		10,270
Other		—		4,070		—		4,070

	$	61,347	$	375,521	$	—		436,868

Common collective trust funds:
Cash equivalents								3,897
Domestic equities								259,627
International equities								48,774

Total investments measured at NAV as a practical expedient								312,298

Total defined benefit plans’ assets							$	749,166

A description of the valuation methodologies used for assets measured at fair value is as follows:

•

Cash and cash equivalents are valued at original cost plus accrued interest.

•

Common collective trust funds are valued at the net asset value of the shares held at the end of the reporting period. This class represents investments in actively managed, common collective trust funds that invest primarily in equity securities, which may include common stocks, options and futures. Investments are valued at the net asset value per share, multiplied by the number of shares held as of the measurement date.

•

Mutual funds are valued at the closing price reported on the active market on which individual funds are traded.

•

Long-term debt securities are valued at the estimated price a dealer will pay for the individual securities.

Estimated future benefit payments, under Company sponsored plans as of January 2, 2016, were as follows (in thousands):


	Pension Benefits		Postretirement Plans
2016	$	35,998	$	525
2017		37,885		540
2018		37,339		555
2019		41,060		553
2020		42,313		544
Subsequent five years		221,289		2,599

Estimated required and discretionary contributions expected to be contributed by the Company to the Retirement Plans in fiscal year 2016 total $36 million.

Other Company Sponsored Benefit Plans—Employees are eligible to participate in a defined contribution 401(k) Plan which provides that under certain circumstances the Company may make matching contributions. In fiscal years 2013 and 2014 and through the fiscal third quarter of 2015, Company matching contributions were 50% of the first 6% of a participant’s compensation. Effective the first day of the Company’s fiscal fourth quarter of 2015, the 401(k) Plan was amended to provide for Company matching contributions of 100% of the first 3% of a participant’s compensation and 50% of the next 2% of a participant’s compensation, for a maximum Company matching contribution of 4%.The Company’s contributions to this plan were $32 million, $26 million and $25 million in fiscal years 2015, 2014 and 2013, respectively. The Company, at its discretion, may make additional contributions to the 401(k) Plan. The Company made no discretionary contributions under the 401(k) plan in fiscal years 2015, 2014 and 2013.

Multiemployer Pension Plans—The Company contributes to numerous multiemployer pension plans under the terms of collective bargaining agreements that cover certain of its union-represented employees. The Company does not administer these multiemployer pension plans.

The risks of participating in multiemployer pension plans differ from traditional single-employer defined benefit plans as follows:

•

Assets contributed to a multiemployer pension plan by one employer may be used to provide benefits to the employees of other participating employers.

•

If a participating employer stops contributing to a multiemployer pension plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

•

If the Company elects to stop participation in a multiemployer pension plan, it may be required to pay a withdrawal liability based upon the underfunded status of the plan.

The Company’s participation in multiemployer pension plans for the year ended January 2, 2016, is outlined in the tables below. The Company considers significant plans to be those plans to which the Company contributed more than 5% of total contributions to the plan in a given plan year, or for which the Company believes its estimated withdrawal liability—should it decide to voluntarily withdraw from the plan—may be material to the Company. For each plan that is considered individually significant to the Company, the following information is provided:

•

The EIN/Plan Number column provides the Employee Identification Number (“EIN”) and the three-digit plan number (“PN”) assigned to a plan by the Internal Revenue Service.

•

The most recent Pension Protection Act (“PPA”) zone status available for 2015 and 2014 is for the plan years beginning in 2015 and 2014, respectively. The zone status is based on information provided to participating employers by each plan and is certified by the plan’s actuary. A plan in the red zone has been determined to be in critical status, based on criteria established under the Internal Revenue Code (the “Code”), and is generally less than 65% funded. A plan in the yellow zone has been determined to be in endangered status, based on criteria established under the Code, and is generally less than 80% but more than 65% funded. A plan in the green zone has been determined to be neither in critical status nor in endangered status, and is generally at least 80% funded.

•

The FIP/RP Status Pending/Implemented column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. In addition to regular plan contributions, participating employers may be subject to a surcharge if the plan is in the red zone.

•

The Surcharge Imposed column indicates whether a surcharge has been imposed on participating employers contributing to the plan.

•

The Expiration Dates column indicates the expiration dates of the collective-bargaining agreements to which the plans are subject.

Pension Fund

EIN/

Plan Number

PPA

Zone Status

FIP/RP Status
Pending/
Implemented

Surcharge
Imposed

Expiration Dates

2015

2014

Central States, Southeast and Southwest Areas Pension Fund

36-6044243/001

Red

Implemented

2/28/16 ⁽¹⁾ to 3/31/20

Western Conference of Teamsters Pension Trust Fund

91-6145047/001

Green

N/A

10/01/15⁽¹⁾ to 09/30/20

Minneapolis Food Distributing Industry Pension Plan

41-6047047/001

Green

Implemented

4/1/17

Teamster Pension Trust Fund of Philadelphia and Vicinity

23-1511735/001

Yellow

Implemented

2/10/18

Truck Drivers & Helpers Local 355 Pension Fund

52-6043608-001

Yellow

Implemented

3/15/15⁽²⁾

Local 703 I.B. of T. Grocery and Food Employees’ Pension Plan

36-6491473/001

Green

N/A

6/30/18

United Teamsters Trust Fund A

13-5660513/001

Yellow

Implemented

5/30/19

Warehouse Employees Local 169 and Employers Joint Pension Fund

23-6230368/001

Red

Implemented

2/10/18

Warehouse Employees Local No. 570 Pension Fund

52-6048848/001

Green

N/A

3/15/15⁽²⁾

Local 705 I.B. of T. Pension Trust Fund

36-6492502/001

Red

Implemented

12/29/18

(1)	The collective bargaining agreement for this pension fund is operating under terms of the old agreement or an extension.

(2)	The Company is currently engaged in discussions with unions representing certain employees regarding its tentative decision to close a distribution facility. The collective bargaining agreement for these pension funds are operating under terms of the old agreements.

The following table provides information about the Company’s contributions to its multiemployer pension plans. For plans that are not individually significant to the Company, the total amount of USF contributions is aggregated.


							USF Contributions
							Exceed 5% of
	USF Contribution⁽¹⁾⁽²⁾						Total Plan Contributions⁽³⁾
	(in thousands)
	2015		2014		2013		2014	2013
Pension Fund
Central States, Southeast and Southwest Areas Pension Fund	$	4,115	$	3,930	$	3,908	No	No
Western Conference of Teamsters Pension Trust Fund		10,227		9,761		9,249	No	No
Minneapolis Food Distributing Industry Pension Plan		5,200		5,026		4,565	Yes	Yes
Teamster Pension Trust Fund of Philadelphia and Vicinity		3,461		3,163		2,939	No	No
Truck Drivers and Helpers Local 355 Pension Fund		1,321		1,373		1,428	Yes	Yes
Local 703 I.B. of T. Grocery and Food Employees’ Pension Plan		1,366		1,282		1,036	Yes	Yes
United Teamsters Trust Fund A		1,554		1,537		1,816	Yes	Yes
Warehouse Employees Local 169 and Employers Joint Pension Fund		897		907		981	Yes	Yes
Warehouse Employees Local No. 570 Pension Fund		908		863		929	Yes	Yes
Local 705 I.B. of T. Pension Trust Fund		2,729		2,479		2,189	No	No
Other Funds		1,852		1,723		1,818	—	—

	$	33,630	$	32,044	$	30,858

(1)	Contributions made to these plans during the Company’s fiscal year, which may not coincide with the plans’ fiscal years.

(2)	Contributions do not include payments related to multiemployer pension withdrawals as described in Note 13, Restructuring Liabilities.

(3)	Indicates whether the Company was listed in the respective multiemployer plan Form 5500 for the applicable plan year as having made more than 5% of total contributions to the plan.

The Company reached a settlement with Central States consisting of a $97 million cash payment made on December 30, 2015. This Central States settlement relieves the Company of its participation in the “legacy” Central States plan and its associated legacy off balance sheet withdrawal liability. It also settled the residual withdrawal liability related to the Eagan, Minnesota and Fairfield, Ohio closed facilities, and resolved the outstanding litigation related to the Eagan Labor Dispute, as further discussed in Note 21, Commitments and Contingencies. This settlement commenced the Company’s participation in the “Hybrid” Central States Plan, which adopted an alternative method for determining an employer’s unfunded obligation that would limit USF’s funding obligations to the pension fund in the future. Accordingly, the Company agreed to future annual minimum contribution payments through 2023 of no less than 90% of the 2015 contributions for the ongoing operations under the related facilities’ union contracts.

If the Company elected to voluntarily withdraw from further multiemployer pension plans, it would be responsible for its proportionate share of the plan’s unfunded vested liability. Based on the latest information available from plan administrators, the Company estimates its aggregate withdrawal liability from the multiemployer pension plans in which it participates to be approximately $105 million as of January 2, 2016. This estimate excludes $86 million of multiemployer pension plan withdrawal liabilities recorded in the Company’s Consolidated Balance Sheet as of January 2, 2016 (unaffected by the Central States Settlement), including $50 million for the tentative closure of the Baltimore facility and $36 million for facilities closed prior to 2015—See Note 13, Restructuring Liabilities. Actual withdrawal liabilities incurred by the Company—if it were to withdraw from one or more plans—could be materially different from the estimates noted here, based on better or more timely information from plan administrators or other changes affecting the respective plan’s funded status.

18.

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents changes in Accumulated Other Comprehensive Income (Loss) by component for the last three fiscal years, (in thousands):


	2015			2014			2013
Accumulated Other Comprehensive Loss Components
Defined benefit retirement plans:
Balance at beginning of period⁽¹⁾	$	(158,041	)	$	(2,679	)	$	(125,642	)

Other comprehensive income (loss) before reclassifications		(2,136	)		(161,331	)		115,014
Current year prior service (cost) credit		(1,291	)		3,612			—
Amortization of prior service cost (credit) ^{(2) (3)}		133			(136	)		198
Amortization of net loss^{(2) (3)}		10,408			2,219			13,400
Settlements^{(2) (3)}		3,358			2,370			1,778
Curtailment ⁽⁴⁾		73,191			(2,096	)		—

Total before income tax		83,663			(155,362	)		130,390
Income tax provision		32,485			—			7,427

Current period comprehensive income (loss), net of tax		51,178			(155,362	)		122,963

Balance at end of period⁽¹⁾	$	(106,863	)	$	(158,041	)	$	(2,679	)

Interest rate swap derivative cash flow hedge⁽⁵⁾:
Balance at beginning of period⁽¹⁾	$	—		$	—		$	(542	)

Other comprehensive loss before reclassifications		—			—			(653	)
Amounts reclassified from Other comprehensive income⁽⁶⁾		—			—			2,042

Total before income tax		—			—			1,389
Income tax provision		—			—			847

Current period comprehensive income, net of tax		—			—			542

Balance at end of period⁽¹⁾	$	—		$	—		$	—

(1)	Amounts are presented net of tax.

(2)	Included in the computation of net periodic benefit costs. See Note, 17 Retirement Plans for additional information.

(3)	Included in Distribution, selling and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss).

(4)	The fiscal year 2015 curtailment is due to freeze of non-union participants’ benefits of a Company sponsored defined benefit pension plan. See Note, 17, Retirement Plans.

(5)	The interest rate swap derivative expired in January 2013.

(6)	Included in Interest Expense-Net in the Consolidated Statements of Comprehensive Income (Loss).

19.

INCOME TAXES

USF is a member of US Foods’ consolidated group, and as a result the Company’s operations are included in the consolidated income tax return of US Foods. The Company has computed the components of its tax provision under the “separate return” approach. Under this approach, the Company’s financial statements recognize the current and deferred income tax consequences that result from the Company’s activities as if the Company were a separate taxpayer rather than a member of US Foods’ consolidated group.

The Income tax (benefit) provision for the last three fiscal years consisted of the following (in thousands):


	2015			2014			2013
Current:
Federal	$	(93	)	$	(146	)	$	(64	)
State		(133	)		311			283

Current Income tax (benefit) provision		(226	)		165			219

Deferred:
Federal		(8,765	)		34,168			28,824
State		(713	)		1,635			779

Deferred Income tax (benefit) provision		(9,478	)		35,803			29,603

Total Income tax (benefit) provision	$	(9,704	)	$	35,968		$	29,822

The Company’s effective income tax rates for the fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013 and were 9%, 97% and 109%, respectively. The determination of the Company’s overall effective tax rate requires the use of estimates. The effective tax rate reflects the income earned and taxed in U.S. federal and various state jurisdictions based on enacted tax law, permanent differences between book and tax items, tax credits and the Company’s change in relative contribution to income by each jurisdiction.

The reconciliation of the (benefit) provision for income taxes from continuing operations at the U.S. federal statutory income tax rate of 35% to the Company’s income taxes for the last three fiscal is shown below (in thousands). Certain prior period amounts were reclassified to conform to the current period presentation.


	2015			2014			2013
Federal income tax benefit computed at statutory rate	$	(37,831	)	$	(12,931	)	$	(9,585	)
State income taxes—net of federal income tax benefit		(3,299	)		(1,532	)		(2,415	)
Stock-based compensation		438			131			5,342
Non-deductible expenses		2,911			2,592			2,153
Change in the valuation allowance for deferred tax assets		28,275			54,571			32,445
Net operating loss expirations		2,975			2,019			1,653
Tax credits		—			(8,179	)		—
Change in unrecognized tax benefit reserve and liability		(2,048	)		(1,003	)		158
Other		(1,125	)		300			71

Total Income tax (benefit) provision	$	(9,704	)	$	35,968		$	29,822

Temporary differences and carryforwards that created significant deferred tax assets and liabilities were as follows (in thousands):


	January 2, 2016		December 27, 2014
Deferred tax assets:
Allowance for doubtful accounts	$	9,368	$	10,794
Accrued employee benefits		33,232		30,689
Restructuring reserves		52,548		29,500
Workers’ compensation, general liability and auto liabilities		64,936		62,493
Deferred income		211		539
Deferred financing costs		7,751		9,466
Pension liability		33,576		72,747
Net operating loss carryforwards		229,429		217,960
Other accrued expenses		29,286		25,300

Total gross deferred tax assets

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

US FOODS, INC. 10-K