US Foods Holding Corp. 10-Q

Item 1. Financial Statements US FOODS HOLDING CORP. CONSOLIDATED BALANCE SHEETS (In millions, except par value) June 27, 2020 December 28, 2019 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,668 $ 90 Accounts receivable, less allowances of $120 and $30 1,089 1,455 Vendor receivables, less allowances of $7 and $4 150 143 Inventories—net 1,332 1,432 Prepaid expenses 137 109 Assets held for sale 20 1 Other current assets 26 32 Total current assets 4,422 3,262 Property and equipment—net 2,121 2,075 Goodwill 5,629 4,728 Other intangibles—net 943 967 Deferred tax assets 9 — Other assets 405 256 Total assets $ 13,529 $ 11,288 LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft liability $ 147 $ 222 Accounts payable 1,914 1,460 Accrued expenses and other current liabilities 515 538 Current portion of long-term debt 149 142 Total current liabilities 2,725 2,362 Long-term debt 6,065 4,594 Deferred tax liabilities 284 308 Other long-term liabilities 464 315 Total liabilities 9,538 7,579 Commitments and contingencies (Note 22) Mezzanine equity: Series A convertible preferred stock, $0.01 par value—25 shares authorized; 0.5 and 0.0 issued and outstanding as of June 27, 2020 and December 28, 2019 491 — Shareholders’ equity: Common stock, $0.01 par value—600 shares authorized; 220 issued and outstanding as of June 27, 2020 and December 28, 2019 2 2 Additional paid-in capital 2,871 2,845 Retained earnings 686 916 Accumulated other comprehensive loss ( 59 ) ( 54 ) Total shareholders’ equity 3,500 3,709 Total liabilities, mezzanine equity and shareholders' equity $ 13,529 $ 11,288 See Notes to Consolidated Financial Statements (Unaudited). 1 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In millions, except per share data) 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Net sales $ 4,560 $ 6,443 $ 10,899 $ 12,474 Cost of goods sold 3,889 5,301 9,162 10,280 Gross profit 671 1,142 1,737 2,194 Operating expenses: Distribution, selling and administrative costs 714 948 1,906 1,869 Restructuring costs 16 — 16 — Total operating expenses 730 948 1,922 1,869 Operating (loss) income ( 59 ) 194 ( 185 ) 325 Other income—net ( 4 ) ( 2 ) ( 10 ) ( 4 ) Interest expense—net 63 42 115 84 (Loss) income before income taxes ( 118 ) 154 ( 290 ) 245 Income tax (benefit) provision ( 26 ) 38 ( 66 ) 58 Net (loss) income ( 92 ) 116 ( 224 ) 187 Other comprehensive (loss) income—net of tax: Changes in retirement benefit obligations 1 1 1 2 Unrecognized loss on interest rate swaps — ( 8 ) ( 6 ) ( 14 ) Comprehensive (loss) income $ ( 91 ) $ 109 $ ( 229 ) $ 175 Net (loss) income $ ( 92 ) $ 116 $ ( 224 ) $ 187 Series A convertible preferred stock dividends 5 — 5 — Net (loss) income available to common shareholders $ ( 97 ) $ 116 $ ( 229 ) $ 187 Net (loss) income per share: Basic $ ( 0.44 ) $ 0.53 $ ( 1.05 ) $ 0.86 Dilutive $ ( 0.44 ) $ 0.53 $ ( 1.05 ) $ 0.85 Weighted-average common shares outstanding Basic 220 218 219 218 Diluted 220 219 219 219 See Notes to Consolidated Financial Statements (Unaudited). 2 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (In millions) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity Shares Amount BALANCE—December 28, 2019 220 $ 2 $ 2,845 $ 916 $ ( 54 ) $ 3,709 Share-based compensation expense — — 7 — — 7 Proceeds from employee stock purchase plan — — 6 — — 6 Exercise of stock options — — 1 — — 1 Tax withholding payments for net share-settled equity awards — — ( 2 ) — — ( 2 ) Unrecognized loss on interest rate swaps, net of income tax — — — — ( 6 ) ( 6 ) Adoption of ASU 2016-13 (Note 2 and 7) — — — ( 1 ) — ( 1 ) Net loss — — — ( 132 ) — ( 132 ) BALANCE—March 28, 2020 220 2 2,857 783 ( 60 ) 3,582 Share-based compensation expense — — 12 — — 12 Proceeds from employee stock purchase plan 1 — 5 — — 5 Tax withholding payments for net share-settled equity awards — — ( 3 ) — — ( 3 ) Series A convertible preferred stock dividends — — — ( 5 ) — ( 5 ) Changes in retirement benefit obligations, net of income tax — — — — 1 1 Net loss — — — ( 92 ) — ( 92 ) BALANCE—June 27, 2020 221 $ 2 $ 2,871 $ 686 $ ( 59 ) $ 3,500 Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity Shares Amount BALANCE—December 29, 2018 217 $ 2 $ 2,780 $ 531 $ ( 84 ) $ 3,229 Share-based compensation expense — — 6 — — 6 Proceeds from employee stock purchase plan — — 5 — — 5 Exercise of stock options 1 — 6 — — 6 Tax withholding payments for net share-settled equity awards — — ( 2 ) — — ( 2 ) Changes in retirement benefit obligations, net of income tax — — — — 1 1 Unrecognized loss on interest rate swaps, net of income tax — — — — ( 6 ) ( 6 ) Net income — — — 71 — 71 BALANCE—March 30, 2019 218 2 2,795 602 ( 89 ) 3,310 Share-based compensation expense — — 9 — — 9 Proceeds from employee stock purchase plan — — 5 — — 5 Exercise of stock options 1 — 5 — — 5 Tax withholding payments for net share-settled equity awards — — ( 3 ) — — ( 3 ) Changes in retirement benefit obligations, net of income tax — — — — 1 1 Unrecognized loss on interest rate swaps, net of income tax — — — — ( 8 ) ( 8 ) Net income — — — 116 — 116 BALANCE—June 29, 2019 219 $ 2 $ 2,811 $ 718 $ ( 96 ) $ 3,435 See Notes to Consolidated Financial Statements (Unaudited). 3 US FOODS HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) 26 Weeks Ended June 27, 2020 June 29, 2019 Cash flows from operating activities: Net (loss) income $ ( 224 ) $ 187 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 207 173 Loss (gain) on disposal of property and equipment—net 1 ( 1 ) Amortization of deferred financing costs 9 2 Deferred tax benefit ( 44 ) ( 7 ) Share-based compensation expense 19 15 Provision for doubtful accounts 106 10 Changes in operating assets and liabilities: Decrease (increase) in receivables 257 ( 118 ) Decrease in inventories—net 142 2 (Increase) decrease in prepaid expenses and other assets ( 12 ) 1 Increase in accounts payable and cash overdraft liability 375 164 Decrease in accrued expenses and other liabilities ( 66 ) ( 34 ) Net cash provided by operating activities 770 394 Cash flows from investing activities: Acquisition of businesses—net of cash ( 973 ) — Proceeds from sales of assets 7 — Proceeds from sales of property and equipment 1 8 Purchases of property and equipment ( 131 ) ( 110 ) Net cash used in investing activities ( 1,096 ) ( 102 ) Cash flows from financing activities: Proceeds from debt borrowings 3,645 2,006 Principal payments on debt and financing leases ( 2,206 ) ( 2,318 ) Net proceeds from issuance of Series A convertible preferred stock 491 — Debt financing costs and fees ( 33 ) ( 4 ) Proceeds from employee stock purchase plan 11 10 Proceeds from exercise of stock options 1 11 Tax withholding payments for net share-settled equity awards ( 5 ) ( 5 ) Net cash provided by (used in) financing activities 1,904 ( 300 ) Net increase (decrease) in cash, cash equivalents and restricted cash 1,578 ( 8 ) Cash, cash equivalents and restricted cash—beginning of period 98 105 Cash, cash equivalents and restricted cash—end of period $ 1,676 $ 97 Supplemental disclosures of cash flow information: Interest paid—net of amounts capitalized $ 89 $ 90 Income taxes paid—net 2 73 Property and equipment purchases included in accounts payable 14 19 Leased assets obtained in exchange for financing lease liabilities 60 57 Leased assets obtained in exchange for operating lease liabilities 13 2 Cashless exercise of stock options — 1 See Notes to Consolidated Financial Statements (Unaudited). 4 US FOODS HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in tables in millions, except per share data, unless otherwise noted) 1. OVERVIEW AND BASIS OF PRESENTATION US Foods Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to in these consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods Holding Corp. conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (“USF”) and its subsidiaries. All of the Company’s indebtedness, as further described in Note 13, Debt, is a direct obligation of USF and its subsidiaries. Business Description —The Company, through USF, operates in one business segment in which it markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the U.S. 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 or 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. Fiscal year 2020 is a 53-week fiscal year. Fiscal year 2019 was a 52-week fiscal year. The consolidated financial statements included in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included in this Quarterly Report are adequate to make the information presented not misleading. These interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the 2019 Annual Report. The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for the full fiscal year. 2. RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04- Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance is currently effective prospectively for all entities through December 31, 2022 when the reference rate replacement activity is expected to have completed. The Company adopted the provisions of this standard on a prospective basis at the beginning of the second quarter of fiscal year 2020 with no impact to the Company’s financial position or results of operations. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this standard on a prospective basis at the beginning of fiscal year 2020. The Company's adoption of the provisions of the new standard did not materially affect its financial position or results of operations. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires entities to use a forward-looking, expected loss model to estimate credit losses. It also requires entities to consider additional disclosures related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. ASU 2016-13 was further amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 236, Financial Instrument-Credit Losses . This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this standard on a modified retrospective basis at the beginning of fiscal year 2020, which resulted in the recording of a cumulative-effect adjustment to retained earnings of $ 1 million . The adoption of the provision of the new standard did not materially affect the Company's 5 financial position or results of operations. See Note 7, Allowance For Doubtful Accounts, for further discussion over the Company's allowance for doubtful accounts. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of the provisions of the new standard to materially affect its financial position or results of operations. 3. REVENUE RECOGNITION The Company recognizes revenue when the performance obligation is satisfied, which occurs when a customer obtains control of the promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services. The Company generates substantially all of its revenue from the distribution and sale of food and food-related products and recognizes revenue when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of revenue at the time the revenue is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales. Shipping and handling costs are treated as fulfillment costs and included in distribution, selling and administrative costs. The Company did not have any material outstanding performance obligations, contract liabilities or capitalized contract acquisition costs as of June 27, 2020 and December 28, 2019 . Customer receivables, which are included in accounts receivable, less allowances in the Company’s Consolidated Balance Sheets, were $ 1.1 billion and $ 1.5 billion as of June 27, 2020 and December 28, 2019 , respectively. The Company has certain customer contracts under which incentives are paid upfront to its customers. These payments have become industry practice and are not related to financing any customer’s business, nor are they associated with any distinct good or service to be received from any customer. These incentive payments are capitalized in prepaid expenses and other assets and amortized as a reduction of revenue over the life of the contract or as goods or services are transferred to the customer. The Company’s contract assets for these upfront payments were $ 29 million and $ 35 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of June 27, 2020 and December 28, 2019 , respectively, and $ 34 million and $ 39 million included in other assets in the Company’s Consolidated Balance Sheets as of June 27, 2020 and December 28, 2019 , respectively. The following table presents the disaggregation of revenue for each of the Company’s principal product categories: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Meats and seafood $ 1,694 $ 2,340 $ 3,920 $ 4,497 Dry grocery products 782 1,094 1,874 2,154 Refrigerated and frozen grocery products 688 1,034 1,735 2,022 Dairy 454 661 1,102 1,266 Equipment, disposables and supplies 501 618 1,130 1,194 Beverage products 223 348 567 677 Produce 218 348 571 664 Net sales $ 4,560 $ 6,443 $ 10,899 $ 12,474 4. BUSINESS ACQUISITIONS Smart Foodservice Acquisition —On April 24, 2020, USF completed the acquisition of Smart Stores Holding Corp., a Delaware corporation (“Smart Foodservice”), from funds managed by affiliates of Apollo Global Management, Inc. Total consideration paid at the closing of the acquisition (net of cash acquired) was $ 973 million , and is subject to certain customary post-closing adjustments. Smart Foodservice operates 70 small-format cash and carry stores across California, Idaho, Nevada, Montana, Oregon, Washington and Utah that serve small and mid-sized restaurants and other food business customers. The acquisition of Smart Foodservice expands the Company’s cash and carry business into the West and Northwest parts of the U.S. 6 USF financed the acquisition with a new $ 700 million incremental senior secured term loan facility under its existing term loan credit agreement, as further described in Note 13, Debt, and with cash on hand. The assets, liabilities and results of operations of Smart Foodservice have been included in the Company’s consolidated financial statements since the date the acquisition was completed. The following table summarizes the preliminary purchase price allocation recognized for the Smart Foodservice acquisition based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The preliminary purchase price allocation is subject to further adjustment as additional information becomes available and final valuations are completed. There can be no assurances that these final valuations and additional analyses and studies will not result in significant changes to the preliminary estimates of fair value set forth below. Preliminary Purchase Price Allocation Accounts receivable $ 5 Inventories 43 Other current assets 20 Property and equipment 80 Goodwill (1) 898 Other intangibles (2) 14 Other assets 145 Accounts payable ( 39 ) Accrued expenses and other current liabilities ( 32 ) Deferred income taxes ( 12 ) Other long-term liabilities, including financing leases ( 149 ) Cash paid for acquisition $ 973 (1) Goodwill recognized is primarily attributable to expected synergies from the combined company, as well as intangible assets that do not qualify for separate recognition. The acquired goodwill is not deductible for U.S. federal income tax purposes. (2) Other intangibles consist of a trade name of $ 14 million with an estimated useful life of 1.5 years . Net sales and net income for Smart Foodservice, which have been included in the Company’s Consolidated Statements of Comprehensive Income since the date the acquisition was completed, were $ 208 million and $ 11 million , respectively, during both the 13 weeks and 26 weeks ended June 27, 2020 . Smart Foodservice acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $ 10 million and $ 20 million for the 13 weeks and 26 weeks ended June 27, 2020 , respectively. Food Group Acquisition —On September 13, 2019, USF completed the $ 1.8 billion acquisition of five foodservice companies (the “Food Group”) from Services Group of America, Inc.: Food Services of America, Inc., Systems Services of America, Inc., Amerifresh, Inc., Ameristar Meats, Inc. and GAMPAC Express, Inc. USF financed the acquisition with a new $ 1.5 billion incremental senior secured term loan facility under its existing term loan credit agreement, as further described in Note 13, Debt, and with borrowings under its revolving credit facilities. The assets, liabilities and results of operations of the Food Group have been included in the Company’s consolidated financial statements since the date the acquisition was completed. As a condition to receiving regulatory clearance for the acquisition from the Federal Trade Commission, USF divested three Food Group distribution facilities (the "Divested Assets"). 7 The following table summarizes the preliminary Food Group purchase price allocation recognized for the acquisition based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. Adjustments to the preliminary purchase price allocation in the second quarter of fiscal year 2020, including working capital adjustments to acquired and divested assets and liabilities and adjustments to asset valuations, were immaterial to the Company's consolidated financial statements. The preliminary purchase price allocation is subject to further adjustment as additional information becomes available and final valuations are completed. There can be no assurances that these final valuations and additional analyses and studies will not result in significant changes to the preliminary estimates of fair value set forth below. Preliminary Purchase Price Allocation Accounts receivable $ 145 Inventories 165 Assets of discontinued operations 130 Other current assets 7 Property and equipment 210 Goodwill (1) 764 Other intangibles (2) 695 Other assets 47 Accounts payable ( 200 ) Accrued expenses and other current liabilities ( 69 ) Liabilities of discontinued operations ( 19 ) Other long-term liabilities, including financing leases ( 43 ) Cash paid for acquisition $ 1,832 (1) Goodwill recognized is primarily attributable to expected synergies from the combined company, as well as intangible assets that do not qualify for separate recognition. The acquired goodwill is deductible for U.S. federal income tax purposes. (2) Other intangibles consist of customer relationships of $ 656 million with estimated useful lives of 15 years and indefinite-lived brand names and trademarks of $ 39 million . Food Group acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $ 4 million and $ 8 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively, and $ 19 million and $ 18 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. Pro Forma Financial Information — The following table presents the Company’s unaudited pro forma consolidated net sales, net income and earnings per share (“EPS”) for the 13 weeks and 26 weeks ended June 27, 2020 and June 29, 2019 . The unaudited pro forma financial information presents the combined results of operations as if the acquisitions and related financings of Smart Foodservice and the Food Group had occurred as of December 30, 2018 and December 31, 2017, respectively, which dates represent the first day of the Company’s fiscal year prior to their respective acquisition dates. 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Pro forma net sales $ 4,647 $ 7,484 $ 11,272 $ 14,436 Pro forma net (loss) income available to common shareholders $ ( 95 ) $ 132 $ ( 202 ) $ 193 Pro forma net (loss) income per share: Basic $ ( 0.43 ) $ 0.61 $ ( 0.92 ) $ 0.89 Diluted $ ( 0.43 ) $ 0.60 $ ( 0.92 ) $ 0.88 8 The unaudited pro forma financial information presented above excludes the results of operations related to the Food Group Divested Assets, as the results of operations related to the Divested Assets were reflected as discontinued operations. Unaudited pro forma net sales, net income and net income per share related to the Divested Assets for the 13 weeks and 26 weeks ended June 29, 2019 were as follows: 13 Weeks Ended 26 Weeks Ended June 29, 2019 June 29, 2019 Pro forma net sales $ 135 $ 258 Pro forma net income $ 3 $ 4 Pro forma net income per share: Basic $ 0.02 $ 0.02 Diluted $ 0.01 $ 0.01 The unaudited pro forma financial information above includes adjustments for: (1) incremental depreciation expense related to fair value increases of certain acquired property and equipment, (2) amortization expense related to the fair value of intangible assets acquired, (3) interest expense related to the incremental senior secured term loan facilities and revolving credit facilities used to finance the acquisitions, (4) the elimination of acquisition-related costs that were included in the Company’s historical results, and (5) adjustments to the income tax provision based on pro forma results of operations. No effect has been given to potential synergies, operating efficiencies or costs arising from the integration of Smart Foodservice and the Food Group with our previously existing operations or the standalone cost estimates and estimated costs that were incurred by their former respective parent companies. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the Company’s future consolidated results of operations following the acquisitions. 5. RESTRICTED CASH Restricted cash primarily consists of cash on deposit with financial institutions as collateral for certain letters of credit. Cash, cash equivalents and restricted cash as presented in the Company's Consolidated Statements of Cash Flows as of June 27, 2020 and December 28, 2019 consisted of the following: June 27, 2020 December 28, 2019 Cash and cash equivalents $ 1,668 $ 90 Restricted cash—included in other assets 8 8 Total cash, cash equivalents and restricted cash $ 1,676 $ 98 6. INVENTORIES The Company’s inventories, consisting mainly of food and other food-related products, are primarily considered finished goods. Inventory costs include the purchase price of the product, freight costs to deliver it to the Company’s distribution and retail facilities, 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 primarily using the last-in, first-out (“LIFO”) method, except for Smart Foodservice, which uses the retail method of inventory accounting. For our LIFO based inventories, 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. LIFO reserves in the Company’s Consolidated Balance Sheets were $ 158 million and $ 152 million as of June 27, 2020 and December 28, 2019 , respectively. As a result of changes in LIFO reserves, cost of goods sold increased $ 19 million and $ 14 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively, and increased $ 6 million and $ 12 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. Additionally, during the 13 weeks ended June 27, 2020 , due to the impact that the COVID-19 pandemic (as further described in Note 7) had on our business, the Company incurred charges of $ 40 million related to inventory adjustments and product donations recorded in cost of goods sold. 9 7. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. The Company maintains an allowance for doubtful accounts, which is based upon historical experience, future expected losses, as well as specific customer collection issues that have been identified. 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 primarily over specified periods. Recent Events In March 2020, the World Health Organization characterized a novel strain of coronavirus (“COVID-19”) as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. As of December 28, 2019, the outbreak of COVID-19 had not had a significant impact on our business. However, since mid-March 2020, our business has been significantly impacted. Beginning in mid-March 2020, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions in businesses, schools and other public gathering spaces. Restrictions on public gatherings and attendance at retail or other establishments, including indoor restaurants, and recreational, sporting and other similar venues, continue to evolve and are expected to continue to remain in effect in some capacity for the near-term. It remains unclear when and to what extent the COVID-19 pandemic will fully abate. Since mid-March 2020, the operations of our restaurant, hospitality and education customers (and our operations that are dependent upon these customers) have been significantly disrupted by the spread of COVID-19 and the corresponding sudden and significant decline in consumer demand for food prepared away from home. Due to the impact that the COVID-19 pandemic had on our customers, particularly our restaurant and hospitality customers, we significantly increased our allowance for doubtful accounts by $ 170 million during the 13 weeks ended March 28, 2020, of which, $ 75 million was reversed during the 13 weeks ended June 27, 2020 based on better than anticipated collection of our accounts receivable. A summary of the activity in the allowance for doubtful accounts for the 26 weeks ended June 27, 2020 was as follows: Balance as of December 28, 2019 $ 30 Charged to costs and expenses 106 Adoption of ASU 2016-13 1 Customer accounts written off—net of recoveries ( 17 ) Balance as of June 27, 2020 $ 120 This table excludes the vendor receivable related allowance for doubtful accounts of $ 7 million and $ 4 million as of June 27, 2020 and December 28, 2019 , respectively. 8. FORMER ACCOUNTS RECEIVABLE FINANCING PROGRAM Pursuant to a since-terminated accounts receivable financing facility (the “ABS Facility”), USF sold, on a revolving basis, eligible receivables to a wholly owned, special purpose, bankruptcy remote subsidiary (the “Receivables Company”). While the ABS Facility was in effect, the Company consolidated the Receivables Company and, consequently, the transfer of the eligible receivables was a transaction internal to the Company, and the eligible receivables held by the Receivables Company were previously not derecognized from the Company’s Consolidated Balance Sheet. Included in the Company’s accounts receivable balance as of December 28, 2019 was approximately $ 1.0 billion of eligible receivables held by the Receivables Company as collateral in support of amounts borrowed under the ABS Facility. On May 1, 2020, USF repaid all outstanding borrowings under the ABS Facility in full and terminated the ABS Facility, as further discussed in Note 13, Debt, and as a result, the Company's eligible receivables are no longer transferred to or held by the Receivables Company. 9. ASSETS HELD FOR SALE The Company classifies its vacant land and 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 while the Company continues to actively market the facilities. 10 The change in assets held for sale for the 26 weeks ended June 27, 2020 was as follows: Balance as of December 28, 2019 $ 1 Transfers in 19 Balance as of June 27, 2020 $ 20 Land previously held for future use and an excess warehouse facility were transferred to assets held for sale during the 26 weeks ended June 27, 2020 . The Company sold the land on June 30, 2020 and received cash proceeds from the sale of $ 32 million , resulting in a gain on sale of $ 17 million . 10. 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 3 to 40 years . Property and equipment under financing leases and leasehold improvements are amortized on a straight-line basis over the remaining terms of the related leases or the estimated useful lives of the assets, if reasonably assured the Company will purchase the assets at the end of the lease terms. As of June 27, 2020 and December 28, 2019 , property and equipment-net included accumulated depreciation of $ 2,431 million and $ 2,298 million , respectively. Depreciation expense was $ 87 million and $ 81 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively and $ 169 million and $ 153 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. 11. GOODWILL AND OTHER INTANGIBLES Goodwill includes the cost of acquired businesses in excess of the fair value of the tangible and other intangible net assets acquired. Other intangible assets include customer relationships, an amortizable trade name, noncompete agreements, the brand names 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, but are subject to impairment assessments as described below. Customer relationships, the amortizable trade name and noncompete agreements are intangible assets with definite lives and are carried at the acquired fair value, less accumulated amortization. Customer relationships, the amortizable trade name and noncompete agreements are amortized over the estimated useful lives (which are 1.5 to 15 years ). Amortization expense was $ 19 million and $ 10 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively and $ 38 million and $ 20 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. 11 Goodwill and other intangibles—net consisted of the following: June 27, 2020 December 28, 2019 Goodwill $ 5,629 $ 4,728 Other intangibles—net Customer relationships—amortizable: Gross carrying amount $ 740 $ 789 Accumulated amortization ( 102 ) ( 115 ) Net carrying value 638 674 Trade name—amortizable: Gross carrying amount $ 14 — Accumulated amortization ( 2 ) — Net carrying value 12 — Noncompete agreements—amortizable: Gross carrying amount 3 3 Accumulated amortization ( 2 ) ( 2 ) Net carrying value 1 1 Brand names and trademarks—not amortizing 292 292 Total other intangibles—net $ 943 $ 967 The increase in goodwill and the amortizable trade name as of June 27, 2020 is attributable to the Smart Foodservice acquisition, as described in Note 4, Business Acquisitions. The net decrease in the gross carrying amount of customer relationships as of June 27, 2020 is attributable to the write-off of fully amortized intangible assets related to certain 2016 business acquisitions. The Company assesses goodwill and other 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 as of the beginning of each fiscal third quarter. For intangible assets with definite lives, the Company assesses for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. The Company completed its most recent annual impairment assessment for goodwill and indefinite-lived intangible assets as of June 30, 2019, the first day of the third quarter of fiscal year 2019, with no impairments noted. 12. FAIR VALUE MEASUREMENTS The Company follows the accounting standards for fair value, under which 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 for 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 at 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. 12 The Company’s assets and liabilities measured at fair value on a recurring basis as of June 27, 2020 and December 28, 2019 , aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows: June 27, 2020 Level 1 Level 2 Level 3 Total Assets Money market funds $ 1,509 $ — $ — $ 1,509 Liabilities Interest rate swaps $ — $ 9 $ — $ 9 December 28, 2019 Level 1 Level 2 Level 3 Total Liabilities Interest rate swaps $ — $ 1 $ — $ 1 There were no significant assets or liabilities in the Company's Consolidated Balance Sheets measured at fair value on a nonrecurring basis for the periods presented above. Recurring Fair Value Measurements Money Market Funds Money market funds include highly liquid investments with an original 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. Derivative Financial Instruments The Company uses interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements in connection with its variable-rate Initial Term Loan Facility (as defined in Note 13, Debt). USF has entered into four-year interest rate swap agreements expiring July 31, 2021, which collectively have a notional value of $ 733 million , reducing to $ 550 million on July 31, 2020. The Company pays an aggregate effective rate of 3.45 % on the notional amount of the Initial Term Loan Facility covered by the interest rate swap agreements, comprised of a rate of 1.70 % plus a spread of 1.75 % (see Note 13, Debt). 13 The Company records its interest rate swaps in its Consolidated Balance Sheets at fair value, based on projections of cash flows and future interest rates. The determination of fair value includes the consideration of any credit valuation adjustments necessary, giving consideration to the creditworthiness of the respective counterparties and the Company. The following table presents the balance sheet location and fair value of the interest rate swaps as of June 27, 2020 and December 28, 2019 : Fair Value Balance Sheet Location June 27, 2020 December 28, 2019 Derivatives designated as hedging instruments Interest rate swaps Accrued expenses and other current liabilities $ 8 $ — Interest rate swaps Other long-term liabilities 1 1 Total liabilities $ 9 $ 1 Gains and losses on the interest rate swaps are initially recorded in accumulated o ther comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affects income. The following table presents the effect of the Company’s interest rate swaps in its Consolidated Statements of Comprehensive Income f or the 26 weeks ended June 27, 2020 and June 29, 2019 : Derivatives in Cash Flow Hedging Relationships Amount of Loss Recognized in Accumulated Other Comprehensive Loss, net of tax Location of Amounts Reclassified from Accumulated Other Comprehensive Loss Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss to Income, net of tax For the 13 weeks ended June 27, 2020 Interest rate swaps $ ( 2 ) Interest expense—net $ 2 For the 13 weeks ended June 29, 2019 Interest rate swaps $ ( 7 ) Interest expense—net $ ( 1 ) For the 26 weeks ended June 27, 2020 Interest rate swaps $ ( 8 ) Interest expense—net $ 2 For the 26 weeks ended June 29, 2019 Interest rate swaps $ ( 11 ) Interest expense—net $ ( 3 ) During the next twelve months, the Company estimates that $ 8 million will be reclassified from accumulated other comprehensive loss to income. Other Fair Value Measurements The carrying value of cash, accounts receivable, cash overdraft liability, accounts payable and accrued expenses approximate their fair values due to their short-term maturities. The fair value of the Company’s total debt approximated $ 6.0 billion , compared to its carrying value of $ 6.2 billion as of June 27, 2020 . The fair value of the Company’s total debt approximated its carrying value of $ 4.7 billion as of December 28, 2019 . The fair value of the Company’s 6.25 % newly issued senior secured notes due April 15, 2025 (the “Secured Notes”) was $ 1.0 billion as of June 27, 2020 . The fair value of the Company’s 5.875 % unsecured Senior Notes due June 15, 2024 (the “Unsecured Senior Notes”), was $ 589 million and $ 619 million as of June 27, 2020 and December 28, 2019 , respectively. Fair value of both the Secured Notes and the Unsecured Senior Notes is based upon the closing market prices on the respective dates, and is classified under Level 2 of the fair value hierarchy. The fair value of the balance of the Company’s debt is primarily 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. 14 13. DEBT Total debt consisted of the following: Debt Description Maturity Interest Rate as of June 27, 2020 June 27, 2020 December 28, 2019 ABL Facility May 31, 2024 1.43 % $ 400 $ — ABS Facility (1) — — — 190 Initial Term Loan Facility (net of $3 and $4 of unamortized deferred financing costs, respectively) June 27, 2023 1.92 % 2,114 2,125 2019 Incremental Term Loan Facility (net of $33 and $35 of unamortized deferred financing costs, respectively) September 13, 2026 3.07 % 1,460 1,465 2020 Incremental Term Loan Facility (net of $12 of unamortized deferred financing costs) April 24, 2025 4.25 % 288 — Senior Secured Notes (net of $14 of unamortized deferred financing costs) April 15, 2025 6.25 % 986 — Unsecured Senior Notes (net of $4 of unamortized deferred financing costs) June 15, 2024 5.875 % 596 596 Obligations under financing leases 2020–2030 1.63% - 6.17% 362 352 Other debt 2021–2031 3.12% - 4.99% 8 8 Total debt 6,214 4,736 Current portion of long-term debt (2) ( 149 ) ( 142 ) Long-term debt $ 6,065 $ 4,594 (1) The ABS Facility was paid in full on May 1, 2020 and subsequently terminated as further discussed below. (2) The current portion of long-term debt as of June 27, 2020 and December 28, 2019 for the Initial Term Loan Facility, the 2019 Incremental Term Loan Facility and the 2020 Incremental Term Loan Facility includes five principal payments due to the Company's 53-week fiscal year 2020. As of June 27, 2020 , after considering interest rate swaps that fixed the interest rate on $ 733 million of principal of the Initial Term Loan Facility described below, approximately 58 % of the Company’s total debt bears interest at a floating rate. ABL Facility On May 4, 2020, USF entered into an amendment to its asset based senior secured revolving credit facility (the “ABL Facility”). Pursuant to this amendment, the total aggregate amount of commitments under the ABL Facility was increased from $ 1,600 million to $ 1,990 million . Extensions of credit under the ABL Facility are subject to availability under a borrowing base comprised of various percentages of the value of eligible accounts receivable, eligible inventory, eligible transportation equipment and certain unrestricted cash and cash equivalents, which, along with other assets, also serve as collateral for borrowings under the ABL Facility. As discussed below, on May 1, 2020 USF terminated the ABS Facility and transitioned the accounts receivable that secured the ABS Facility to the collateral pool that secures the ABL Facility. This transition increases the size of the borrowing base under the ABL Facility. The ABL Facility is scheduled to mature on May 31, 2024, subject to a springing maturity date in the event that more than $ 300 million of aggregate principal amount of earlier maturing indebtedness under either USF’s senior secured term loan facility or Unsecured Senior Notes remains outstanding on a date that is sixty (60) days prior to the maturity date for such senior secured term loan facility or Unsecured Senior Notes, respectively. Borrowings under the ABL Facility bear interest, at USF's periodic election, at a rate equal to the sum of an alternative base rate (“ABR”), as described under the ABL Facility, plus a margin ranging from 0.00 % to 0.50 % , or the sum of LIBOR plus a margin ranging from 1.00 % to 1.50 % , in each case based on USF’s excess availability under the ABL Facility. The margin under the ABL Facility as of June 27, 2020 was 0.25 % for ABR loans and 1.25 % for LIBOR loans. The ABL Facility also carries a commitment fee of 0.25 % per annum on the average unused amount of the commitments under the ABL Facility. USF incurred $ 3 million of third-party costs in connection with the ABL Facility amendment which were capitalized as deferred financing costs. These deferred financing costs, along with $ 5 million of unamortized deferred financing costs related to the former asset based senior secured revolving credit facility, will be amortized through May 31, 2024, the ABL Facility maturity date. USF had $ 400 million of outstanding borrowings, and had issued letters of credit totaling $ 252 million , under the ABL Facility as of June 27, 2020 , Outstanding letters of credit included: (1) $ 217 million issued in favor of certain commercial insurers to secure USF’s obligations with respect to its self-insurance program, (2) $ 34 million issued to secure USF’s obligations with respect to 15 certain real estate leases, and (3) $ 1 million issued for other obligations. There was available capacity of $ 1,275 million under the ABL Facility as of June 27, 2020 . ABS Facility On May 1, 2020, USF repaid in full all $ 542 million principal amount of borrowings then outstanding under the ABS Facility using cash on hand and subsequently terminated the ABS Facility. The accounts receivable that secured the ABS Facility were transitioned to the collateral pool that secures the ABL Facility. The Company recorded a debt extinguishment loss of $ 1.3 million in interest expense, consisting of a write-off of unamortized debt costs associated with the ABS Facility of $ 1.1 million , as well as $ 0.2 million of third-party costs associated with the termination of the ABS Facility. Term Loan Facilities Under its term loan credit agreement, USF has entered into an initial senior secured term “B” loan facility in an aggregate principal amount of $ 2.2 billion (the “Initial Term Loan Facility”), an incremental senior secured term “B” loan facility in an aggregate principal amount of $ 1.5 billion (the “2019 Incremental Term Loan Facility”), and an incremental senior secured term loan facility in an aggregate principal amount of $ 700 million (the "2020 Incremental Term Loan Facility"). Borrowings under the 2019 Incremental Term Loan Facility were used to pay a portion of the purchase price for the acquisition of the Food Group and related fees and expenses, and borrowings under the 2020 Incremental Term Loan Facility were used to pay a portion of the purchase price for the acquisition of Smart Foodservice and related fees and expenses (see Note 4). The Initial Term Loan Facility had a carrying value of $ 2.1 billion , net of $ 3 million of unamortized deferred financing costs as of June 27, 2020 . The table above reflects the interest rate on the unhedged portion of the Initial Term Loan Facility as of June 27, 2020 . The effective interest rate of the portion of the Initial Term Loan Facility subject to interest rate hedging agreements was 3.45 % as of June 27, 2020 . The Initial Term Loan Facility is scheduled to mature on June 27, 2023. The 2019 Incremental Term Loan Facility entered into to finance a portion of the Food Group acquisition, had a carrying value of $ 1,460 million , net of $ 33 million of unamortized deferred financing costs as of June 27, 2020 . Borrowings under the Incremental Term Loan Facility bear interest at a rate per annum equal to, at USF’s option, either the sum of LIBOR plus a margin of 2.00 % , or the sum of an alternative base rate, determined in accordance with the term loan credit agreement, plus a margin of 1.00 % . The 2019 Incremental Term Loan Facility is scheduled to mature on September 13, 2026. On April 24, 2020, USF entered into the “2020 Incremental Term Loan Facility” and used the proceeds to fund, in part, the Smart Foodservice acquisition. On April 28, 2020, USF repaid $ 400 million of the principal amount of the 2020 Incremental Term Loan Facility with a portion of the proceeds from the senior secured notes offering further discussed below. In connection with the 2020 Incremental Term Loan Facility repayment, the Company applied debt extinguishment accounting and recorded a debt extinguishment loss of $ 2 million in interest expense, consisting of a write-off of debt issuance costs associated with the $ 400 million in principal amount of the 2020 Incremental Term Loan Facility that was repaid. Lender fees and third-party costs incurred of $ 15 million associated with the remaining $ 300 million in principal amount of the 2020 Incremental Term Loan Facility were capitalized as deferred financing costs and will be amortized through April 24, 2025, which is the 2020 Incremental Term Loan Facility maturity date. Borrowings under the 2020 Incremental Term Loan Facility will bear interest at a rate per annum equal to, at USF’s option, either LIBOR plus a margin of 3.25 % (subject to a LIBOR “floor” of 1.00 % ), or an alternative base rate plus a margin of 2.25 % . The interest rate margins on the 2020 Incremental Term Loan Facility will increase by 0.50 % on each of April 28, 2021, April 28, 2022, April 28, 2023 and April 28, 2024, respectively. USF’s obligations under the Initial Term Loan Facility, the 2019 Incremental Term Loan Facility and the 2020 Incremental Term Loan Facility are guaranteed by certain of USF’s subsidiaries, and those obligations and guarantees are secured by substantially all of the non-real estate assets of USF and the subsidiary guarantors. Senior Secured Notes On April 28, 2020, USF completed a private offering of $ 1.0 billion aggregate principal amount of its 6.25 % Secured Notes due April 15, 2025. USF used the net proceeds of the Secured Notes to repay $ 400 million in principal amount of the 2020 Incremental Term Loan Facility and the balance of the net proceeds has been and will be used for general corporate purposes. The Secured Notes had a carrying value of $ 986 million , net of $ 14 million of unamortized deferred financing costs, as of June 27, 2020 . The Secured Notes mature April 15, 2025. On or after April 15, 2022, the Secured Notes are redeemable, at USF’s option, in whole or in part at a price of 103.13 % of the remaining principal, plus accrued and unpaid interest, if any, to the redemption date. On or after April 15, 2023 and April 15, 2024, the optional redemption price for the Secured Notes declines to 101.56 % and 100.00 % , respectively, of the remaining principal amount, plus accrued and unpaid interest, if any, to the redemption date. 16 Debt Covenants The agreements governing our indebtedness contain customary covenants. These include, among other things, covenants that restrict our ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends, or engage in mergers or consolidations. USF had $ 1.3 billion of restricted payment capacity under these covenants, and approximately $ 2.7 billion of its net assets were restricted considering the net deferred tax assets and intercompany balances that eliminate in consolidation as of June 27, 2020 . 14. RESTRUCTURING LIABILITIES From time to time, the Company may implement initiatives or close or consolidate facilities in an effort to reduce costs and improve operating effectiveness. In connection with these activities, the Company may incur various costs including severance and other employee-related separation costs. In order to reduce its operating expenses in line with the decrease in sales volume caused by the COVID-19 pandemic, the Company reduced its sales force and incurred a net charge of $ 16 million for severance and related costs during the 13 weeks ended June 27, 2020 . The following table summarizes the changes in the restructuring liabilities for the 26 weeks ended June 27, 2020 : Restructuring Liabilities Balance at December 28, 2019 $ 1 Current period charges 16 Payments and usage—net of accretion ( 13 ) Balance at June 27, 2020 $ 4 15. LEASES The Company leases certain distribution and warehouse facilities, office facilities, fleet vehicles, and office and warehouse equipment. The Company determines if an arrangement is a lease at inception and recognizes a financing or operating lease liability and right-of-use (“ROU”) asset in the Company’s Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term as of commencement date. For the Company’s leases that do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate based on the information available as of commencement date in determining the present value of future payments. The lease terms may include options to extend, terminate or buy out the lease. When it is reasonably certain that the Company will exercise these options, they are included in ROU assets and the estimated lease liabilities. Leases with an initial term of 12 months or less are not recorded in the Company's Consolidated Balance Sheets. The Company recognizes lease expense for leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. For office and warehouse equipment leases, the Company accounts for the lease and non-lease components as a single lease component. Variable lease payments that do not depend on an index or a rate, such as insurance and property taxes, are excluded from the measurement of the lease liability and are recognized as variable lease cost when the obligation for that payment is incurred. 17 The following table presents the location of the ROU assets and lease liabilities in the Company’s Consolidated Balance Sheet as of June 27, 2020 and December 28, 2019 : Leases Consolidated Balance Sheet Location June 27, 2020 December 28, 2019 Assets Operating Other assets $ 288 $ 145 Financing Property and equipment-net (1) 345 333 Total leased assets $ 633 $ 478 Liabilities Current: Operating Accrued expenses and other current liabilities $ 47 $ 40 Financing Current portion of long-term debt 94 95 Noncurrent: Operating Other long-term liabilities 252 131 Financing Long-term debt 268 257 Total lease liabilities $ 661 $ 523 (1) Financing lease assets are recorded net of accumulated amortization of $ 243 million and $ 269 million as of June 27, 2020 and December 28, 2019 , respectively. T he following table presents the location of lease costs in the Company's Consolidated Statements of Comprehensive Income: 13 Weeks Ended 26 Weeks Ended Lease Cost Statement of Comprehensive Income Location June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Operating lease cost Distribution, selling and administrative costs $ 17 $ 7 $ 26 $ 14 Financing lease cost: Amortization of leased assets Distribution, selling and administrative costs 20 22 41 39 Interest on lease liabilities Interest expense-net 3 3 6 6 Variable lease cost Distribution, selling and administrative costs 3 2 6 3 Net lease cost $ 43 $ 34 $ 79 $ 62 Future lease payments under lease agreements as of June 27, 2020 were as follows: Maturity of Lease Liabilities Operating Leases Financing Leases Total Remainder of 2020 $ 28 $ 57 $ 85 2021 60 93 153 2022 56 69 125 2023 51 67 118 2024 33 49 82 2025 32 30 62 After 2025 166 24 190 Total lease payments 426 389 815 Less amount representing interest ( 127 ) ( 27 ) ( 154 ) Present value of lease liabilities $ 299 $ 362 $ 661 Future minimum lease payments in effect as of December 28, 2019 under noncancelable lease arrangements were as follows: 18 Future Minimum Lease Payments Operating Leases Financing Leases Total 2020 $ 48 $ 106 $ 154 2021 38 84 122 2022 33 62 95 2023 30 58 88 2024 12 41 53 After 2024 42 29 71 Total lease payments 203 380 583 Less amount representing interest ( 32 ) ( 28 ) ( 60 ) Present value of minimum lease payments $ 171 $ 352 $ 523 Other information related to lease agreements for the 26 weeks ended June 27, 2020 and June 29, 2019 was as follows: 26 Weeks Ended Cash Paid For Amounts Included In Measurement of Liabilities June 27, 2020 June 29, 2019 Operating cash flows from operating leases $ 21 $ 6 Operating cash flows from financing leases 6 3 Financing cash flows from financing leases 50 21 Lease Term and Discount Rate June 27, 2020 June 29, 2019 Weighted-average remaining lease term (years): Operating leases 8.05 5.87 Financing leases 4.25 5.61 Weighted-average discount rate: Operating leases 6.1 % 4.6 % Financing leases 3.2 % 3.6 % 19 16. RETIREMENT PLANS The Company sponsors a defined benefit pension plan and a 401(k) plan for eligible employees, and provides certain postretirement health and welfare benefits to eligible retirees and their dependents. In connection with the Smart Foodservice acquisition, the Company assumed a defined benefit pension plan with net liabilities of approximately $ 20 million . The components of net periodic pension benefit costs (credits) for Company sponsored defined benefit plans were as follows: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Components of net periodic pension benefit costs (credits) Service cost $ — $ — $ 1 $ 1 Interest cost 8 9 15 18 Expected return on plan assets ( 13 ) ( 12 ) ( 26 ) ( 24 ) Amortization of net loss 1 1 1 2 Net periodic pension benefit credits ( 4 ) ( 2 ) $ ( 9 ) $ ( 3 ) Other postretirement benefit costs were de minimis for both the 13 weeks and 26 weeks ended June 27, 2020 and June 29, 2019 . The service cost component of net periodic benefit credits is included in distribution, selling and administrative costs, while the other components of net periodic benefit credits are included in other income—net, respectively, in the Company's Consolidated Statements of Comprehensive Income. The Company does not expect to make significant contributions to its defined benefit pension plan in fiscal year 2020 . Certain employees are eligible to participate in the Company's 401(k) plan. The Company made employer matching contributions to the 401(k) plan of $ 9 million and $ 12 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively, and $ 23 million and $ 25 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. The Company is also required to contribute to various multiemployer pension plans under the terms of collective bargaining agreements that cover certain of its union-represented employees. The Company’s contributions to these plans were $ 10 million and $ 9 million for the 13 weeks ended June 27, 2020 and June 29, 2019 , respectively, and $ 22 million and $ 18 million for the 26 weeks ended June 27, 2020 and June 29, 2019 , respectively. 17. EARNINGS PER SHARE The Company computes EPS in accordance with ASC 260, Earnings per Share . Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed using the weighted average number of shares of common stock, plus the effect of potentially dilutive securities. The Company applies the treasury method to calculate the dilution impact of share-based awards—stock options, non-vested restricted shares with forfeitable dividend rights, restricted stock units, and employee stock purchase plan deferrals. The Company applies the if-converted method to calculate the dilution impact of the Series A convertible preferred stock. For the 13 weeks ended June 27, 2020 and June 29, 2019 , share-based awards representing 9 million and 1 million underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. For the 26 weeks ended June 27, 2020 and June 29, 2019 , share-based awards representing 9 million and 2 million underlying common shares, respectively, were not included in the computation because the effect would have been anti-dilutive. For the 13 weeks and 26 weeks ended June 27, 2020 , convertible preferred stock representing 14 million and 7 million of underlying common shares, respectively, was not included in the computation because the effect would have been anti-dilutive. 20 The following table sets forth the computation of basic and diluted EPS: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Numerator: Net (loss) income $ ( 92 ) $ 116 $ ( 224 ) $ 187 Series A convertible preferred stock dividends (1) 5 — 5 — Net (loss) income available to common shareholders $ ( 97 ) $ 116 $ ( 229 ) $ 187 Denominator: Weighted-average common shares outstanding 220 218 219 218 Effect of dilutive securities — 1 — 1 Effect of dilutive underlying shares of the Series A convertible preferred stock — — — — Weighted-average dilutive shares outstanding $ 220 $ 219 $ 219 $ 219 Net (loss) income per share: Basic $ ( 0.44 ) $ 0.53 $ ( 1.05 ) $ 0.86 Diluted $ ( 0.44 ) $ 0.53 $ ( 1.05 ) $ 0.85 (1) Preferred stock dividends were declared on June 19, 2020 and were paid in kind on June 30, 2020. 18. CONVERTIBLE PREFERRED STOCK On May 6, 2020 (the “Issuance Date”), pursuant to the terms of an Investment Agreement (the "Investment Agreement") with KKR Fresh Aggregator L.P., a Delaware limited partnership (“KKR”), the Company issued and sold 500,000 shares of the Company’s Series A Convertible Preferred Stock, par value $ 0.01 per share (the “Series A Preferred Stock”) to KKR for an aggregate purchase price of $ 500 million , or $ 1,000 per share (the “Issuance”). The Company used the net proceeds from the Issuance for working capital and general corporate purposes. On June 30, 2020, the Company paid a dividend (the “Dividend”) on the shares of the Series A Preferred Stock in the form of 5,288 shares of Series A Preferred Stock plus a de minimis amount in cash in lieu of fractional shares in accordance with the terms of the Certificate of Designations for the Series A Preferred Stock (the "Certificate of Designations"). The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $ 0.01 per share (the “Common Stock”), with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has a liquidation preference of $ 1,000 per share. Holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7.0 % per annum. If the Company does not declare and pay a dividend on the Series A Preferred Stock, the dividend rate will increase by 3.0 % to 10.0 % per annum until all accrued but unpaid dividends have been paid in full. Dividends are payable in kind through the issuance of additional shares of Series A Preferred Stock for the first four dividend payments following the Issuance Date, and thereafter, in cash or in kind, or a combination of both, at the option of the Company. The Series A Preferred Stock is convertible at the option of the holders thereof at any time into shares of Common Stock at an initial conversion price of $ 21.50 per share and an initial conversion rate of 46.5116 shares of Common Stock per share of Series A Preferred Stock, subject to certain anti-dilution adjustments set forth in the Certificate of Designations. At any time after the third anniversary of the Issuance Date, if the volume weighted average price of the Common Stock exceeds $ 43.00 per share, as may be adjusted pursuant to the Certificate of Designations, for at least 20 trading days in any period of 30 consecutive trading days, at the election of the Company, all of the Series A Preferred Stock will be convertible into the relevant number of shares of Common Stock. At any time following the fifth anniversary of the Issuance Date, the Company may redeem some or all of the Series A Preferred Stock for a per share amount in cash equal to: (i) the sum of (x) 100 % of the liquidation preference thereof, plus (y) all accrued and unpaid dividends, multiplied by (ii) (A) 105 % if the redemption occurs at any time after the fifth anniversary of the Issuance Date and prior to the sixth anniversary of the Issuance Date, (B) 103 % if the redemption occurs at any time after the sixth anniversary of the Issuance Date and prior to the seventh anniversary of the Issuance Date, and (C) 100 % if the redemption occurs at any time after the seventh anniversary of the Issuance Date. Upon certain change of control events involving the Company, the holders of the Series A Preferred Stock must either (i) convert their shares of Series A Preferred Stock into Common Stock at the then-current conversion price or (ii) cause the Company to redeem their shares of Series A Preferred Stock for an amount in cash equal to 100 % of the liquidation preference thereof plus all accrued but unpaid dividends. If any such change of control event occurs on or before the fifth anniversary of the Issuance Date, the Company will also be required to pay the holders of the Series A Preferred Stock a “make-whole” premium of 5 % . 21 Holders of the Series A Preferred Stock are entitled to vote with the holders of the Common Stock on an as-converted basis. Holders of the Series A Preferred Stock are also entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series A Preferred Stock, authorization or issuances by the Company of securities that are senior to, or equal in priority with, the Series A Preferred Stock, increases or decreases in the number of authorized shares of Series A Preferred Stock, and issuances of shares of Series A Preferred Stock after the Issuance Date, other than shares issued as in-kind dividends with respect to shares of the Series A Preferred Stock issued after the Issuance Date. 19. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS The following table presents changes in accumulated other comprehensive loss by component for the periods presented: 13 Weeks Ended 26 Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Accumulated other comprehensive loss components Retirement benefit obligations: Balance as of beginning of period (1) $ ( 52 ) $ ( 96 ) $ ( 52 ) $ ( 97 ) Reclassification adjustments: Amortization of net loss (2) (3) 1 1 1 2 Total before income tax 1 1 1 2 Income tax provision — — — — Current period comprehensive income, net of tax 1 1 1 2 Balance as of end of period (1) $ ( 51 ) $ ( 95 ) $ ( 51 ) $ ( 95 ) Interest rate swaps: Balance as of beginning of period (1) $ ( 8 ) $ 7 $ ( 2 ) $ 13 Change in fair value of interest rate swaps ( 2 ) ( 8 ) ( 10 ) ( 14 ) Amounts reclassified to interest expense—net 2 ( 2 ) 2 ( 4 ) Total before income tax — ( 10 ) ( 8 ) ( 18 ) Income tax benefit — ( 2 ) ( 2 ) ( 4 ) Current period comprehensive (loss) income, net of tax — ( 8 ) ( 6 ) ( 14 ) Balance as of end of period (1) $ ( 8 ) $ ( 1 ) $ ( 8 ) $ ( 1 ) Accumulated other comprehensive loss as of end of period (1) $ ( 59 ) $ ( 96 ) $ ( 59 ) $ ( 96 ) (1) Amounts are presented net of tax. (2) Included in the computation of net periodic benefit costs. See Note 16, Retirement Plans, for additional information. (3) Included in other income—net in the Company's Consolidated Statements of Comprehensive Income. 20. RELATED PARTY TRANSACTIONS As described in Note 18, Convertible Preferred Stock, on May 6, 2020 the Company issued and sold 500,000 shares of the Company’s Series A Preferred Stock to KKR for an aggregate purchase price of $ 500 million , or $ 1,000 per share. Assuming conversion of all Series A Preferred Stock, KKR would have held approximately 9.5 % of the Company’s outstanding common stock as of June 27, 2020 . KKR Capital Markets LLC (“KKR Capital Markets”), an affiliate of KKR, received aggregate fees of $ 6 million for services rendered in connection with the 2020 Incremental Term Loan Facility, the Secured Notes and the ABL Facility amendment financings during the 26 weeks ended June 27, 2020 . KKR Capital Markets also received $ 1 million for services rendered in connection with the May 2019 refinancing of the ABL Facility during the 26 weeks ended June 29, 2019 . As reported by the Company’s administrative agent, investment funds managed by an affiliate of KKR held approximately $ 103 million in principal amount of the Company's term loan facilities as of June 27, 2020 . Based solely on information provided in its most recent public filings, FMR LLC and its affiliates held approximately 11 % of the Company’s outstanding common stock as of June 27, 2020 . As reported by the Company’s administrative agent, investment funds managed by an affiliate of FMR LLC held approximately $ 61 million in principal amount of the Company's term loan facilities as of June 27, 2020 . Certain FMR LLC affiliates provide recordkeeping services for the Company’s 401(k) plan and provide 22 administrative services for other Company sponsored employee benefit plans. Fees earned by FMR LLC affiliates are not material to the Company’s consolidated financial statements. 21. INCOME TAXES The determination of the Company’s overall effective income tax rate requires the use of estimates. The effective income 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 income in each jurisdiction. The Company estimated its annual effective income tax rate for the full fiscal year and applied the annual effective income tax rate to the results of the 26 weeks ended June 27, 2020 and June 29, 2019 for purposes of determining its year-to-date tax provision. For the 13 weeks ended June 27, 2020 , the Company's effective income tax rate of 22 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $ 2 million primarily related to an increase in an unrecognized tax benefit. For the 13 weeks ended June 29, 2019 , the Company's effective income tax rate of 25 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $ 2 million , primarily related to excess tax benefits associated with share-based compensation. For the 26 weeks ended June 27, 2020 , the Company's effective income tax rate of 23 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax expense of $ 2 million primarily related to an increase in an unrecognized tax benefit and a tax expense of $ 2 million , primarily related to a tax benefit shortfall associated with share-based compensation. For the 26 weeks ended June 29, 2019 , the Company's effective income tax rate of 24 % differed from the 21 % federal corporate income tax rate primarily as a result of state income taxes and the recognition of various discrete tax items. These discrete tax items included a tax benefit of $ 2 million , primarily related to the reduction of an unrecognized tax benefit following a lapse of the statute of limitations and a tax benefit of $ 3 million , primarily related to excess tax benefits associated with share-based compensation. 22. COMMITMENTS AND CONTINGENCIES Purchase Commitments —The Company enters into purchase orders with vendors and other parties in the ordinary course of business and has a limited number of purchase contracts with certain vendors that require it to buy a predetermined volume of products. The Company had $ 1,551 million of purchase orders and purchase contract commitments to be purchased in the remainder of fiscal year 2020 as of June 27, 2020 and $ 63 million of information technology commitments through December 2024 that are not recorded in the Company's Consolidated Balance Sheets. To minimize fuel price risk, the Company enters into forward purchase commitments for a portion of its projected diesel fuel requirements. The Company had diesel fuel forward purchase commitments totaling $ 88 million through September 2021 , as of June 27, 2020 . Additionally, the Company had electricity forward purchase commitments totaling $ 6 million through November 2023 , as of June 27, 2020 . The Company does not measure its forward purchase commitments for fuel and electricity at fair value, as the amounts under contract meet the physical delivery criteria in the normal purchase exception. Legal Proceedings —The Company is subject to a number of legal proceedings arising in the normal course of business. These legal proceedings, whether pending, threatened or unasserted, if decided adversely to or settled by the Company, may result in liabilities material to its financial position, results of operations, or cash flows. The Company has recognized provisions with respect to the proceedings, where appropriate, in its Consolidated Balance Sheets. It is possible that the Company could be required to make expenditures, in excess of the established provisions, in amounts that cannot be reasonably estimated. However, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows. 23. BUSINESS INFORMATION The Company’s consolidated results represent the results of its one business segment based on how the Company’s chief operating decision maker, the Chief Executive Officer, views the business for purposes of evaluating performance and making operating decisions. The Company markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the U.S. The Company uses a centralized management structure, and its strategies and initiatives are implemented and executed consistently across the organization to maximize value to the organization as a whole. The Company uses shared resources for sales, procurement, and general and administrative activities across each of its distribution facilities and operations. The Company’s distribution facilities form a single network to reach its customers; it is common for a single customer to make purchases from several different distribution facilities. Capital projects, whether for cost savings or generating incremental revenue, are evaluated based on estimated economic returns to the organization as a whole. 23