PERFORMANCE FOOD GROUP COMPANY The following discussion and analysis of our financial condition and results of operations should be read together with Part II, Item 6. - "Selected Financial Data" and the audited consolidated financial statements and the notes thereto included in Item 8. In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties, including those described in Item 1A. Risk Factors of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" in this Form 10-K. The following includes a comparison of our consolidated results of operations, our segment results and financial position for fiscal years 2020 and 2019. For a comparison of our consolidated results of operations, segment results and financial position for fiscal years 2019 and 2018, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedJune 29, 2019 , filed with theSEC onAugust 16, 2019 . Our Company We market and distribute over 200,000 food and food-related products to customers acrossthe United States from approximately 109 distribution facilities to over 200,000 customer locations in the "food-away-from-home" industry. We offer our customers a broad assortment of products including our proprietary-branded products, nationally branded products, and products bearing our customers' brands. Our product assortment ranges from "center-of-the-plate" items (such as beef, pork, poultry, and seafood), frozen foods, and groceries to candy, snacks, beverages, cigarettes, and other tobacco products. We also sell disposables, cleaning and kitchen supplies, and related products used by our customers. In addition to the products we offer to our customers, we provide value-added services by allowing our customers to benefit from our industry knowledge, scale, and expertise in the areas of product selection and procurement, menu development, and operational strategy. The Company has two reportable segments: Foodservice and Vistar. Our Foodservice segment distributes a broad line of national brands, customer brands, and our proprietary-branded food and food-related products, or "Performance Brands." Foodservice sells to independent and multi-unit "Chain" restaurants and other institutions such as schools, healthcare facilities, business and industry locations, and retail establishments. Our Chain customers are multi-unit restaurants with five or more locations and include some of the most recognizable family and casual dining restaurant chains. Our Vistar segment specializes in distributing candy, snacks, beverages, cigarettes, other tobacco products, and other items nationally to the vending, office coffee service, theater, retail, hospitality, convenience, and other channels. We believe that there are substantial synergies across our segments. Cross-segment synergies include procurement, operational best practices such as the use of new productivity technologies, and supply chain and network optimization, as well as shared corporate functions such as accounting, treasury, tax, legal, information systems, and human resources.
The Company's fiscal year ends on the Saturday nearest to
Key Factors Affecting Our BusinessWe believe that our short-term performance has been and is expected to continue to be affected by the COVID-19 pandemic.
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 across the country, federal, state, and local governments have implemented various means of slowing the spread of the virus. These measures include quarantines, stay-at-home or shelter-in-place orders, school closures, travel restrictions, closure of non-essential businesses, and other means. These measures have already had a significant adverse impact on the economy, but the full scope of the impact of COVID-19 is unknown. As an essential element of the country's food supply chain, the Company has continued to operate all of it distribution centers. Despite the Company's continued operations, mandatory and voluntary containment measures in response to COVID-19 have had a significant impact on the food-away-from-home industry. Many restaurants have closed, are restricting the number of patrons they will serve at one time or are only providing carry-out or delivery options. These restrictions have also impacted businesses throughout the economy, including theaters, retail operations, schools and other businesses we provide products and services to. Additionally, any economic recession in the future will likely have an adverse impact on our industry, as the frequency of purchases and amount spent by consumers for food-away-from-home can impact our customers, and therefore, our sales. 26 -------------------------------------------------------------------------------- At the end of our third quarter of fiscal 2020 and during our fourth quarter of fiscal 2020, we saw the impact of COVID-19 in our operations, including significant decreases in sales. Despite these difficulties, we have taken steps to ensure a strong financial position, including forging new partnerships with grocery locations, supporting restaurant customers with the transition to higher volumes of take-out and delivery, and other means. Actions we have taken with the goal of maintaining financial liquidity and flexibility have included halting non-essential capital expenditure activities, managing costs, suspending our share repurchase program, furloughing or eliminating positions across our organization, and loaning associates to grocery retail partners to help maintain food supply. We have drawn$400.0 million from the Company's$3.0 billion revolving line of credit under the ABL Facility and entered into the First Amendment to the ABL Facility to provide for the$110.0 million Additional Junior Term Loan. Additionally, we issued and sold 15,525,000 shares of the Company's common stock for net proceeds of$337.5 million and issued and sold$275.0 million aggregate principal amount of our Notes due 2025. We continue to assess the economic situation and evaluate measures to lessen the adverse impact of COVID-19 on our operations. However, there is no certainty that such measures, or measures that we have already taken, will be successful in mitigating the risks posed by COVID-19. We expect that COVID-19 will continue to have a material adverse impact on our future reported results. However, the extent to which COVID-19 will affect our operations and results is highly variable and cannot be reasonably estimated at this time. For further discussion of this matter, refer to "Item 1A. Risk Factors" in Part I of this report.
We believe that our long-term performance is principally affected by the following key factors:
• Changing demographic and macroeconomic trends. The share of consumer
spending captured by the food-away-from-home industry increased steadily
for several decades and paused during the recession that began in 2008.
Following the recession, the share has again increased as a result of
increasing employment, rising disposable income, increases in the number
of restaurants, and favorable demographic trends, such as smaller
household sizes, an increasing number of dual income households, and an
aging population base that spends more per capita at foodserviceestablishments. The foodservice distribution industry is also sensitive to
national and regional economic conditions, such as changes in consumer
spending, changes in consumer confidence, and changes in the prices of
certain goods.
• Food distribution market structure. The food distribution market consists
of a wide spectrum of companies ranging from businesses selling a single
category of product (e.g., produce) to large national and regional
broadline distributors with many distribution centers and thousands of
products across all categories. We believe our scale enables us to invest
in our Performance Brands, to benefit from economies of scale in
purchasing and procurement, and to drive supply chain efficiencies thatenhance our customers' satisfaction and profitability. We believe that the
relative growth of larger foodservice distributors will continue to
outpace that of smaller, independent players in our industry.
• Our ability to successfully execute our segment strategies, strategic
acquisitions and implement our initiatives. Our performance will continue
to depend on our ability to successfully execute our segment strategies
and to implement our current and future initiatives. The key strategies
include focusing on independent sales and Performance Brands, pursuing new
customers for all three of our reportable segments, expansion of
geographies, utilizing our infrastructure to gain further operating and
purchasing efficiencies, and making strategic acquisitions.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures. The key measures used by our management are
discussed below. The percentages on the results presented below are calculated
based on rounded numbers.
Net Sales Net sales is equal to gross sales; plus, excise taxes; minus sales returns; minus sales incentives that we offer to our customers, such as rebates and discounts that are offsets to gross sales; and certain other adjustments. Our net sales are driven by changes in case volumes, product inflation that is reflected in the pricing of our products and mix of products sold.
Gross Profit
Gross profit is equal to our net sales minus our cost of goods sold. Cost of
goods sold primarily includes inventory costs (net of supplier consideration)
and inbound freight. Cost of goods sold generally changes as we incur higher or
lower costs from our suppliers and as our customer and product mix changes.
27
--------------------------------------------------------------------------------EBITDA and Adjusted EBITDA
Management measures operating performance based on our EBITDA, defined as net income before interest expense, interest income, income taxes, and depreciation and amortization. EBITDA is not defined underU.S. generally accepted accounting principles ("U.S. GAAP") and is not a measure of operating income, operating performance, or liquidity presented in accordance withU.S. GAAP and is subject to important limitations. Our definition of EBITDA may not be the same as similarly titled measures used by other companies. We believe that the presentation of EBITDA enhances an investor's understanding of our performance. We use this measure to evaluate the performance of our segments and for business planning purposes. We present EBITDA in order to provide supplemental information that we consider relevant for the readers of our consolidated financial statements included elsewhere in this report, and such information is not meant to replace or supersedeU.S. GAAP measures. In addition, our management uses Adjusted EBITDA, defined as net income before interest expense, interest income, income and franchise taxes, and depreciation and amortization, further adjusted to exclude certain items that we do not consider part of our core operating results. Such adjustments include certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items permitted in calculating covenant compliance under our credit ABL Facility and indentures (other than certain pro forma adjustments permitted under our ABL Facility and indentures governing the Notes due 2024 (as defined below under "-Financing Activities"), Notes due 2025 and Notes due 2027 relating to the Adjusted EBITDA contribution of acquired entities or businesses prior to the acquisition date). Under our ABL Facility and indentures, our ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and making restricted payments is tied to ratios based on Adjusted EBITDA (as defined in our ABL Facility and indentures). Our definition of Adjusted EBITDA may not be the same as similarly titled measures used by other companies. Adjusted EBITDA is not defined underU.S. GAAP and is subject to important limitations. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties, including our lenders under our ABL Facility and holders of our Notes due 2024, Notes due 2025 and Notes due 2027, in their evaluation of the operating performance of companies in industries similar to ours. In addition, targets based on Adjusted EBITDA are among the measures we use to evaluate our management's performance for purposes of determining their compensation under our incentive plans. EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported underU.S. GAAP. For example, EBITDA and Adjusted EBITDA:
• exclude certain tax payments that may represent a reduction in cash
available to us;
• do not reflect any cash capital expenditure requirements for the assets
being depreciated and amortized that may have to be replaced in the
future;
• do not reflect changes in, or cash requirements for, our working capital
needs; and
• do not reflect the significant interest expense, or the cash requirements,
necessary to service our debt.
In calculating Adjusted EBITDA, we add back certain non-cash, non-recurring, and other adjustment items as permitted or required by our ABL Facility and indenture. Adjusted EBITDA among other things:
• does not include non-cash stock-based employee compensation expense and
certain other non-cash charges; and
• does not include acquisition, restructuring, and other costs incurred to
realize future cost savings and enhance our operations.
We have included the calculations of EBITDA and Adjusted EBITDA for the periods presented.
28
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Results of Operations, EBITDA, and Adjusted EBITDA
The following table sets forth a summary of our results of operations, EBITDA,
and Adjusted EBITDA for the periods indicated (dollars in millions, except per
share data):
Fiscal Year Ended Fiscal 2020 Fiscal 2019
June 27, 2020 June 29, 2019 June 30, 2018 Change % Change %
Net sales $ 25,086.3 $ 19,743.5 $ 17,619.9 $ 5,342.8 27.1 2,123.6 12.1
Cost of goods sold 22,217.1 17,230.5 15,327.1 4,986.6 28.9 1,903.4 12.4
Gross profit 2,869.2 2,513.0 2,292.8 356.2 14.2 220.2 9.6
Operating expenses 2,968.2 2,229.7 2,039.3 738.5 33.1 190.4 9.3
Operating (loss) profit (99.0 ) 283.3 253.5 (382.3 ) (134.9 ) 29.8 11.8
Other expense, net
Interest expense 116.9 65.4 60.4 51.5 78.7 5.0 8.3
Other, net 6.3 (0.4 ) (0.5 ) 6.7 1,675.0 0.1 20.0
Other expense, net 123.2 65.0 59.9 58.2 89.5 5.1 8.5
(Loss) income before
income taxes (222.2 ) 218.3 193.6 (440.5 ) (201.8 ) 24.7 12.8
Income tax (benefit)
expense (108.1 ) 51.5 (5.1 ) (159.6 ) (309.9 ) 56.6 NM
Net (loss) income $ (114.1 ) $ 166.8 $ 198.7 $ (280.9 ) (168.4 ) (31.9 ) (16.1 )
EBITDA $ 171.0 $ 438.7 $ 384.1 $ (267.7 ) (61.0 ) 54.6 14.2
Adjusted EBITDA $ 405.5 $ 475.5 $ 426.7 $ (70.0 ) (14.7 ) 48.8 11.4
Weighted-average common
shares outstanding:
Basic 113.0 103.8 102.0 9.2 8.9 1.8 1.8
Diluted 113.0 105.2 104.6 7.8 7.4 0.6 0.6
(Loss) earnings per
common share:
Basic $ (1.01 ) $ 1.61 $ 1.95 $ (2.62 ) (162.7 ) $ (0.34 ) (17.4 )
Diluted $ (1.01 ) $ 1.59 $ 1.90 $ (2.60 ) (163.5 ) $ (0.31 ) (16.3 )
29
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We believe that the most directly comparable
Fiscal year ended
June 27, 2020 June 29, 2019 June 30, 2018
(In millions)
Net (loss) income $ (114.1 ) $ 166.8 $ 198.7
Interest expense 116.9 65.4 60.4
Income tax (benefit) expense (108.1 ) 51.5 (5.1 )
Depreciation 178.5 116.2 100.3
Amortization of intangible assets 97.8 38.8 29.8
EBITDA 171.0 438.7 384.1
Non-cash items (1) 24.8 19.8 23.2
Acquisition, integration and reorganization
(2) 182.8 11.8 5.0
Productivity initiatives and other adjustment
items (3) 26.9 5.2 14.4
Adjusted EBITDA $ 405.5 $ 475.5 $ 426.7
(1) Includes adjustments for non-cash charges arising from stock-based
compensation and gain/loss on disposal of assets. Stock-based compensation
cost was
fiscal 2019 and fiscal 2018, respectively.
(2) Includes professional fees and other costs related to completed and abandoned
acquisitions, costs of integrating certain of our facilities, facility
closing costs, advisory fees and offering fees. Fiscal 2020 includes
million of contingent consideration accretion expense related to the
acquisition of
technology projects the Company is no longer pursuing as a result of the
Reinhart acquisition.
(3) Consists primarily of professional fees and related expenses associated with
productivity initiatives, amounts related to fuel collar derivatives, certain
financing transactions, lease amendments, legal settlements and franchise tax
expense, and other adjustments permitted by our ABL Facility. This line item
includes development costs of
for fiscal 2018 related to certain productivity initiatives the Company is no
longer pursuing.
Consolidated Results of Operations
Fiscal year ended
Net sales growth is primarily a function of case growth, pricing (which is primarily based on product inflation/deflation), and a changing mix of customers, channels, and product categories sold. Net sales increased$5,342.8 million , or 27.1%, in fiscal 2020 compared to fiscal 2019. The increase in net sales was primarily attributable to recent acquisitions. The acquisition ofEby-Brown contributed an additional$4,223.7 million to net sales in fiscal 2020, including an additional$909.8 million related to tobacco excise taxes, as compared to the prior year. Since its acquisition date, Reinhart contributed$2,525.0 million of net sales in fiscal 2020. Case volume increased 7.6% in fiscal 2020 compared to fiscal 2019. Excluding the impact of the Reinhart andEby-Brown acquisitions, case volume declined 10.0% in fiscal 2020 compared to fiscal 2019 due primarily to the effects of COVID-19.
Gross Profit
Gross profit increased$356.2 million , or 14.2%, for fiscal 2020 compared to fiscal 2019. The acquisition of Reinhart contributed an increase of$316.8 million in gross profit for fiscal 2020 while the acquisition ofEby-Brown contributed an increase of$203.2 million for fiscal 2020 as compared to the prior year. Gross profit for fiscal 2020 was negatively impacted by the decline in organic case volume and increases in inventory write-offs. For fiscal 2020, the Company recorded a total of$54.5 million of inventory write-offs as a result of the impact of COVID-19 on our operations, which is a$30.4 million increase compared to fiscal 2019. Gross profit as a percentage of net sales was 11.4% for fiscal 2020 compared to 12.7% for fiscal 2019 as a result ofEby-Brown's lower margins.
Operating Expenses
Operating expenses increased$738.5 million , or 33.1%, for fiscal 2020 compared to fiscal 2019. The increase in operating expenses was primarily driven by recent acquisitions. The acquisition of Reinhart resulted in an increase in operating expenses excluding depreciation and amortization of$327.5 million for fiscal 2020, while the acquisition ofEby-Brown resulted in an increase in operating expenses excluding depreciation and amortization of$179.0 million for fiscal 2020 as compared to fiscal 2019. 30 -------------------------------------------------------------------------------- Operating expenses also increased in fiscal 2020 as a result of an increase in professional fees of$39.0 million related primarily to acquisitions and an increase in theEby-Brown contingent consideration accretion expense of$108.6 million . In fiscal 2020, the Company recorded$78.0 million of reserves related to expected credit losses for customer receivables, which is an increase of$68.3 million compared to the prior year. These increases were partially offset by a$47.2 million decrease in bonus expense for fiscal 2020. Depreciation and amortization of intangible assets increased from$155.0 million in fiscal 2019 to$276.3 million in fiscal 2020, an increase of 78.3%. These increases are primarily attributable to recent acquisitions. Total depreciation and amortization related to the acquisition of Reinhart was$96.0 million for fiscal 2020, of which approximately$16.4 million of accelerated amortization related to customer relationships and trade names was recorded as a result of the impact of COVID-19 on the expected future net sales to Reinhart customers.
Net (Loss) Income
The net loss of$114.1 million for fiscal 2020 compared to net income of$166.8 million for fiscal 2019 was due to the impact of COVID-19 on our operations, the increase in operating expenses discussed above, and an increase in interest expense. The increase in interest expense was primarily the result of an increase in borrowings during fiscal 2020 compared to fiscal 2019. The Company reported an income tax benefit of$108.1 million for fiscal 2020 compared to income tax expense of$51.5 million for fiscal 2019. Our effective tax rate in fiscal 2020 was 48.6% compared to 23.6% in fiscal 2019. The effective tax rate for fiscal 2020 increased from the prior year period primarily due to the$46.3 million benefit from a federal net operating loss carryback at a rate higher than the current statutory tax rate, state tax credits generated, and an increase of non-deductible expenses and discrete items as a percentage of book income, which is significantly lower than the book income for the same period of fiscal 2019.
Segment Results
Corporate & All Other is comprised of unallocated corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of our internal logistics unit responsible for managing and allocating inbound logistics revenue and expense.
The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):
Net Sales Fiscal Year Ended Fiscal 2019 Fiscal 2018 June 27, 2020 June 29, 2019 June 30, 2018 Change % Change % Foodservice$ 16,740.5 $ 15,095.1 $ 14,273.1 $ 1,645.4 10.9$ 822.0 5.8 Vistar 8,339.4 4,641.8 3,341.0 3,697.6 79.7 1,300.8 38.9 Corporate & All Other 345.8 291.6 254.8 54.2 18.6 36.8 14.4 Intersegment Eliminations (339.4 ) (285.0 ) (249.0 ) (54.4 ) (19.1 ) (36.0 ) (14.5 ) Total net sales$ 25,086.3 $ 19,743.5 $ 17,619.9 $ 5,342.8 27.1$ 2,123.6 12.1 EBITDA Fiscal Year Ended Fiscal 2019 Fiscal 2018 June 27, June 29, June 30, 2020 2019 2018 Change % Change % Foodservice$ 336.3 $ 428.0 $ 411.4 $ (91.7 ) (21.4 )$ 16.6 4.0 Vistar 38.5 165.6 133.1 (127.1 ) (76.8 ) 32.5 24.4 Corporate & All Other (203.8 ) (154.9 ) (160.4 ) (48.9 ) (31.6 ) 5.5 3.4 Total EBITDA$ 171.0 $ 438.7 $ 384.1 $ (267.7 ) (61.0 )$ 54.6 14.2 Segment Results-Foodservice
Fiscal year ended
Net sales for Foodservice increased$1,645.4 million , or 10.9%, from fiscal 2019 to fiscal 2020. The increase in net sales was driven by the Reinhart acquisition. Since its acquisition date, Reinhart contributed$2,525.0 million of net sales during fiscal 2020. 31 -------------------------------------------------------------------------------- The Reinhart acquisition also expanded business with independent customers, resulting in independent case growth of approximately 9.9% in fiscal 2020 compared to the prior year. Excluding the impact of Reinhart, independent cases declined 5.1% in fiscal 2020 compared to the prior year. The decline in independent cases in fiscal 2020 was driven by the impact of COVID-19 on the restaurant industry. For fiscal 2020, independent sales as a percentage of total segment sales, including Reinhart, were 33.6%.
EBITDA
EBITDA for Foodservice declined$91.7 million , or 21.4%, from fiscal 2019 to fiscal 2020. This decline was the result of an increase in operating expenses excluding depreciation and amortization, partially offset by an increase in gross profit. Gross profit increased by 11.0% in fiscal 2020 compared to the prior fiscal year, driven by the Reinhart acquisition which contributed an increase in gross profit of$316.8 million for fiscal 2020. This increase was partially offset by the decline in case volume and net sales discussed above. For fiscal 2020, Foodservice recorded$38.9 million of inventory write-offs primarily due to the impact of COVID-19, which is an increase of$17.3 million over the prior year. Operating expenses excluding depreciation and amortization for Foodservice increased by$303.2 , or 20.4%, from fiscal 2019 to fiscal 2020. Operating expenses increased primarily as a result of the acquisition of Reinhart which contributed$304.3 million of operating expenses for fiscal 2020. In fiscal 2020, Foodservice recorded a total of$63.1 million of reserves related to expected credit losses for customer receivables as a result of the current economic environment due to COVID-19, which represents a$55.7 million increase over the prior year. These increases were partially offset by a decrease in bonus expense of$19.8 million for fiscal 2020 compared to the prior year. Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from$91.8 million in fiscal 2019 to$197.7 million in fiscal 2020. Depreciation of fixed assets and amortization of intangible assets increased as a result of the acquisition of Reinhart. Total depreciation and amortization related to the acquisition of Reinhart was$92.7 million for fiscal 2020, of which approximately$16.4 million of accelerated amortization related to customer relationships and trade names was recorded as a result of the impact of COVID-19 on the expected future net sales to Reinhart customers.
Segment Results-Vistar
Fiscal year ended
Net sales for Vistar increased$3,697.6 million , or 79.7%, from fiscal 2019 to fiscal 2020. This increase was driven by recent acquisitions. Due to the restrictions implemented by governments to slow the spread of COVID-19, there have been significant declines in the theater, office coffee service, office supply, hospitality, and travel channels for fiscal 2020, which are likely to remain as long as social distancing guidelines and stay home orders remain in place. The acquisition ofEby-Brown contributed an additional$4,223.7 million to net sales in fiscal 2020, including an additional$909.8 million related to tobacco excise taxes, as compared to the prior year.
EBITDA
EBITDA for Vistar decreased$127.1 million , or 76.8%, from fiscal 2019 to fiscal 2020. This decline was the result of an increase in operating expenses excluding depreciation and amortization, partially offset by an increase in gross profit. Gross profit dollar growth of$144.5 million for fiscal 2020 compared to fiscal 2019, was driven by recent acquisitions. The acquisition ofEby-Brown contributed an increase in gross profit of$203.2 million for fiscal 2020 as compared to the prior year. For fiscal 2020, Vistar recorded$15.6 million of inventory write-offs as result of the current economic environment due to COVID-19, which is an increase of$13.1 million compared to the prior year. On occasion, the Company may earn a higher gross profit on cigarette inventory and excise tax stamp quantities when manufacturers increase their prices or when jurisdictions increase their excise tax rates. During fiscal 2020, the Company recognized$5.6 million of gross profit related to increases in excise tax rates. Additionally, there was an increase in procurement gains that impacted this segment. Gross profit as a percentage of net sales declined from 12.4% for fiscal 2019 to 8.7% for fiscal 2020 as a result ofEby-Brown's lower margins.
The Company still has a risk for unreserved inventory related to our major theater customers within the Vistar segment. These customers' contracts include provisions whereby the customer reimburses the Company for any inventory losses. Additionally, should the theaters fully reopen in fiscal 2021, the Company expects to utilize the inventory.
Operating expenses excluding depreciation and amortization increased$271.6 million , or 65.9%, for fiscal 2020 compared to the prior year. Operating expenses increased primarily as a result of the acquisition ofEby-Brown , which contributed an increase in operating expenses of$179.0 million for fiscal 2020. Additionally, Vistar operating expenses increased due to the increase in theEby-Brown contingent consideration accretion expense of$108.6 million . In fiscal 2020, Vistar recorded a total of$14.7 million of bad 32 -------------------------------------------------------------------------------- debt expense related to expected credit losses for customer receivables due to the impact of COVID-19, which represents an increase of$12.4 million compared to the prior year. These increases were partially offset by a decrease in bonus expense of$14.0 million for fiscal 2020 compared to the prior year. Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from$39.2 million in fiscal 2019 to$50.0 million in fiscal 2020. Depreciation of fixed assets and amortization of intangible assets increased as a result of accelerated amortization of certain customer relationships.
Segment Results-Corporate & All Other
Fiscal year ended
Net sales for Corporate & All Other increased$54.2 million from fiscal 2019 to fiscal 2020. The increase was primarily attributable to an increase in logistics services provided to our other segments.
EBITDA
EBITDA for Corporate & All Other was a negative$203.8 million for fiscal 2020 compared to a negative$154.9 million for fiscal 2019. This decline in EBITDA was primarily driven by the additional corporate operating expenses, excluding depreciation and amortization of$23.2 million associated with the acquisition of Reinhart, which included the disposal of information technology assets of$9.3 million related to projects the Company is no longer pursuing following the acquisition. Additionally, operating expenses increased$38.5 million in fiscal 2020 as compared to the prior year due to professional and legal fees related primarily to acquisitions. These increases were partially offset by a decrease in bonus expense of$13.4 million in fiscal 2020 as compared to the prior year. Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from$24.0 million in fiscal 2019 to$28.6 million in fiscal 2020 as a result of the acquisition of Reinhart and recent capital outlays for information technology. Quarterly Results and Seasonality Historically, the food-away-from-home and foodservice distribution industries are seasonal, with lower profit in the first and third quarters of each calendar year. Consequently, we typically experience lower operating profit during our first and third fiscal quarters, depending on the timing of acquisitions, if any.
Financial information for each quarter of fiscal 2020 and fiscal 2019 is set forth below:
Fiscal Year Ended June 27, 2020
(In millions, except per share data) Q1 Q2 Q3 Q4
Net sales $ 6,243.0 $ 6,068.6 $ 7,000.7 $ 5,774.0
Cost of goods sold 5,531.6 5,357.4 6,193.2 5,134.9
Gross profit 711.4 711.2 807.5 639.1
Operating expenses 647.9 630.7 824.9 864.7
Operating profit (loss) 63.5 80.5 (17.4 ) (225.6 )
Other expense, net:
Interest expense 17.3 26.4 35.2 38.0
Other, net - (0.2 ) 7.9 (1.4 )
Other expense, net 17.3 26.2 43.1 36.6
Income (loss) before taxes 46.2 54.3 (60.5 ) (262.2 )
Income tax expense (benefit) 10.1 13.1 (20.3 ) (111.0 )
Net income (loss) $ 36.1 $ 41.2 $ (40.2 ) $ (151.2 )
Weighted-average common shares outstanding:
Basic 104.0 104.3 115.9 127.6
Diluted 105.6 106.4 115.9 127.6
Earnings (loss) per common share:
Basic $ 0.35 $ 0.39 $ (0.35 ) $ (1.19 )
Diluted $ 0.34 $ 0.39 $ (0.35 ) $ (1.19 )
33
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Fiscal Year Ended June 29, 2019
(In millions, except per share data) Q1 Q2 Q3 Q4
Net sales $ 4,539.7 $ 4,615.7 $ 4,689.0 $ 5,899.1
Cost of goods sold 3,946.1 4,001.1 4,084.3 5,199.0
Gross profit 593.6 614.6 604.7 700.1
Operating expenses 543.0 541.6 545.5 599.6
Operating profit 50.6 73.0 59.2 100.5
Other expense, net:
Interest expense 15.6 16.0 16.5 17.3
Other, net (0.2 ) 0.7 (1.0 ) 0.1
Other expense, net 15.4 16.7 15.5 17.4
Income before taxes 35.2 56.3 43.7 83.1
Income tax expense 7.0 13.2 11.4 19.9
Net income $ 28.2 $ 43.1 $ 32.3 $ 63.2
Weighted-average common shares outstanding:
Basic 103.5 103.9 103.8 103.8
Diluted 105.1 104.9 105.1 105.4
Earnings per common share:
Basic $ 0.27 $ 0.41 $ 0.31 $ 0.61
Diluted $ 0.27 $ 0.41 $ 0.31 $ 0.60
34
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Liquidity and Capital Resources
We have historically financed our operations and growth primarily with cash
flows from operations, borrowings under our credit facility, operating and
capital leases, and normal trade credit terms. We have typically funded our
acquisitions with additional borrowings under our credit facility. Our working
capital and borrowing levels are subject to seasonal fluctuations, typically
with the lowest borrowing levels in the third and fourth fiscal quarters and the
highest borrowing levels occurring in the first and second fiscal quarters. We
borrow under our credit facility or pay it down regularly based on our cash
flows from operating and investing activities. Our practice is to minimize
interest expense while maintaining reasonable liquidity.
As market conditions warrant, we may from time to time seek to repurchase our
securities or loans in privately negotiated or open market transactions, by
tender offer or otherwise. Any such repurchases may be funded by incurring new
debt, including additional borrowings under our credit facility. In addition,
depending on conditions in the credit and capital markets and other factors, we
will, from time to time, consider other financing transactions, the proceeds of
which could be used to refinance our indebtedness, make investments or
acquisitions or for other purposes. Any new debt may be secured debt.
COVID-19
The unprecedented impact of COVID-19 has grown throughout the world, including inthe United States , and governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, quarantines, shelter in place orders, shutdowns, and social distancing requirements. These measures have adversely affected and may further adversely affect the Company's workforce and operations and the operations of its customers and suppliers. We and our distribution centers have experienced instances of reduced operations, including reduced operating hours, and in markets where governments have imposed restrictions on travel outside of the home, or where customers are practicing social distancing, many of our customers, including restaurants, schools, hotels, movie theaters, and business and industry locations, have reduced or discontinued operations, which has and is expected to continue to adversely affect demand in the foodservice industry, including demand for our products and services. We have focused and are continuing to focus on financial measures to enhance our liquidity profile, as we believe the reduced or discontinued operations of many of our customers will continue to adversely affect demand for our products and services for an inherently uncertain period of time. Actions we have taken with the goal of maintaining financial liquidity and flexibility have included halting non-essential capital expenditure activities, managing costs, suspending our share repurchase program, furloughing or eliminating positions across our organization and loaning associates to grocery retail partners to help maintain food supply. Given the uncertainties associated with the severity and duration of the outbreak, we have also drawn$400.0 million on the revolving line of credit under our ABL Facility, entered the First Amendment to provide the$110.0 million Additional Junior Term Loan, issued and sold shares of common stock for net proceeds of$337.5 million , and issued and sold$275.0 million aggregate principal of the Notes due 2025. We may explore more opportunities to raise additional funds and further strengthen our liquidity. Such financings may be in the form of secured or unsecured loans or issuances of debt securities, and there can be no assurance as to the timing, amount or mix of financing alternatives, or whether we will obtain financing on terms favorable to us, or at all. We believe that our cash flows from operations, available borrowing capacity, and the actions noted above will be sufficient both to meet our anticipated cash requirements over at least the next 12 months and to maintain sufficient liquidity for normal operating purposes. AtJune 27, 2020 , our cash balance totaled$431.8 million , including restricted cash of$11.1 million , as compared to a cash balance totaling$25.4 million , including restricted cash of$10.7 million , atJune 29, 2019 . This increase in cash during fiscal 2020 was attributable to net cash provided by operating activities of$623.6 million .
Operating Activities
Fiscal year ended
During fiscal 2020 and fiscal 2019, our operating activities provided cash flow of$623.6 million and$317.4 million , respectively. The increase in cash flows provided by operating activities in fiscal 2020 compared to fiscal 2019 was largely driven by improvements in net working capital, partially offset by higher interest paid. Our net working capital, which includes accounts receivable, inventories, accounts payable and outstanding checks in excess of deposits, generally fluctuates with our sales growth. Due to the economic impacts of COVID-19, we have worked with customers to improve collections and reduce inventory to further improve net working capital. 35 --------------------------------------------------------------------------------
Investing Activities
Cash used in investing activities totaled$2,146.0 million in fiscal 2020 compared to$349.4 million in fiscal 2019. These investments consisted primarily of capital purchases of property, plant, and equipment of$158.0 million and$139.1 million for fiscal years 2020 and 2019, respectively, and payments for business acquisitions of$1,989.0 million and$211.6 million for fiscal years 2020 and 2019, respectively. In fiscal 2020, purchases of property, plant, and equipment primarily consisted of outlays for warehouse expansion and improvements, as well as warehouse equipment and information technology. The following table presents the capital purchases of property, plant, and equipment by segment: Year Ended (Dollars in millions) June 27, 2020 June 29, 2019 June 30, 2018 Foodservice $ 57.8 $ 90.6 $ 99.9 Vistar 72.0 24.9 18.4 Corporate & All Other 28.2 23.6 21.8 Total capital purchases of property, plant and equipment $ 158.0 $ 139.1 $ 140.1
As of
Financing Activities
During fiscal 2020, net cash provided by financing activities was$1,928.8 million , which consisted primarily of$1,060.0 million in cash received from the issuance and sale of the Notes due 2027,$275.0 million in cash received from the issuance and sale of the Notes due 2025,$828.1 million in net proceeds from the issuance of common stock, and$110.0 million in borrowings under the Additional Junior Term Loan, partially offset by$259.0 million in net payments under our ABL Facility.
During fiscal 2019, net cash provided by financing activities was
The following describes our financing arrangements as of
ABL Facility:PFGC, Inc. ("PFGC"), a wholly-owned subsidiary of the Company, is a party to the Fourth Amended and Restated Credit Agreement datedDecember 31, 2019 (the "ABL Facility"). The ABL Facility matures onDecember 30, 2024 and has an aggregate principal amount of$3.0 billion . PerformanceFood Group, Inc. , a wholly-owned subsidiary of PFGC, is the lead borrower under the ABL Facility, which is jointly and severally guaranteed by, and secured by the majority of the assets of, PFGC and all material domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). Availability for loans and letters of credit under the ABL Facility is governed by a borrowing base, determined by the application of specified advance rates against eligible assets, including trade accounts receivable, inventory, owned real properties, and owned transportation equipment. The borrowing base is reduced quarterly by a cumulative fraction of the real properties and transportation equipment values. Advances on accounts receivable and inventory are subject to change based on periodic commercial finance examinations and appraisals, and the real property and transportation equipment values included in the borrowing base are subject to change based on periodic appraisals. Audits and appraisals are conducted at the direction of the administrative agent for the benefit and on behalf of all lenders. The First Amendment to the ABL Facility was effectiveApril 29, 2020 and increased the aggregate principal amount to$3.11 billion , of which$110 million is a 364-day maturity Additional Junior Term Loan. The Second Amendment to the ABL Facility temporarily expands the definition of eligible accounts receivable and is effective only until delivery of the first Borrowing Base Certificate (as defined in the ABL Facility) afterNovember 30, 2020 . Borrowings under the ABL Facility bear interest, atPerformance Food Group, Inc.'s option, at (a) the Base Rate (defined as the greater of (i) the Federal Funds Rate in effect on such date plus 0.5%, (ii) the Prime Rate on such day, or (iii) one month LIBOR plus 1.0%) plus a spread or (b) LIBOR plus a spread. The ABL Facility also provides for an unused commitment fee rate of 0.25% per annum. Borrowings under the Additional Junior Term Loan bear interest at LIBOR plus 5.0% per annum with respect to any loan which is a LIBOR loan and Prime plus 4.0% per annum with respect to any loan which is a base rate loan. 36 --------------------------------------------------------------------------------
The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:
(Dollars in millions) As of June 27, 2020 As of June 29, 2019 Aggregate borrowings $ 710.0 $ 859.0 Letters of credit under ABL Facility 139.6 89.9 Excess availability, net of lenders' reserves of 1,712.2 1,182.7$64.9 and$38.6 Average interest rate 2.85 % 4.01 % The ABL Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i)$200.0 million and (ii) 10% of the lesser of the borrowing base and the revolving credit facility amount for five consecutive business days. The ABL Facility also contains customary restrictive covenants that include, but are not limited to, restrictions on PFGC's ability to incur additional indebtedness, pay dividends, create liens, make investments or specified payments, and dispose of assets. The ABL Facility provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness. If an event of default occurs and is continuing, amounts due under such agreement may be accelerated and the rights and remedies of the lenders under the ABL Facility may be exercised, including rights with respect to the collateral securing the obligations under such agreement. Senior Notes due 2024: OnMay 17, 2016 ,Performance Food Group, Inc. issued and sold$350.0 million aggregate principal amount of its 5.500% Notes due 2024 (the "Notes due 2024"), pursuant to an indenture dated as ofMay 17, 2016 . The Notes due 2024 are jointly and severally guaranteed on a senior unsecured basis by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The Notes due 2024 are not guaranteed byPerformance Food Group Company . The proceeds from the Notes due 2024 were used to pay in full the remaining outstanding aggregate principal amount of the loans under the Company's term loan facility and to terminate the facility; to temporarily repay a portion of the outstanding borrowings under the ABL Facility; and to pay the fees, expenses, and other transaction costs incurred in connection with the Notes due 2024. The Notes due 2024 were issued at 100.0% of their par value. The Notes due 2024 mature onJune 1, 2024 and bear interest at a rate of 5.500% per year, payable semi-annually in arrears. Upon the occurrence of a change of control triggering event or upon the sale of certain assets in whichPerformance Food Group, Inc. does not apply the proceeds as required, the holders of the Notes due 2024 will have the right to requirePerformance Food Group, Inc. to make an offer to repurchase each holder's Notes due 2024 at a price equal to 101% (in the case of a change of control triggering event) or 100% (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest. PerformanceFood Group, Inc. currently may redeem all or part of the Notes due 2024 at a redemption price equal to 101.325% of the principal amount redeemed, plus accrued and unpaid interest. The redemption price decreases to 100.000% of the principal amount redeemed onJune 1, 2021 . The indenture governing the Notes due 2024 contains covenants limiting, among other things, PFGC's and its restricted subsidiaries' ability to incur or guarantee additional debt or issue disqualified stock or preferred stock; pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; create certain restrictions on the ability of PFGC's restricted subsidiaries to make dividends or other payments to PFGC; designate restricted subsidiaries as unrestricted subsidiaries; and transfer or sell certain assets. These covenants are subject to a number of important exceptions and qualifications. The Notes due 2024 also contain customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes due 2024 to become or be declared due and payable. Senior Notes due 2027: OnSeptember 27, 2019 ,PFG Escrow Corporation (which merged with and intoPerformance Food Group, Inc. ) issued and sold$1,060.0 million aggregate principal amount of the Noted due 2027. The Notes due 2027 are jointly and severally guaranteed on a senior unsecured basis by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The Notes due 2027 are not guaranteed by the Company. The proceeds from the Notes due 2027, along with an offering of shares of the Company's common stock and borrowings under the ABL Facility, were used to fund the cash consideration for the Reinhart acquisition and to pay related fees and expenses.
The Notes due 2027 were issued at 100.0% of their par value. The Notes due 2027
mature on
37
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Upon the occurrence of a change of control triggering event or upon the sale of
certain assets in which Performance Food Group, Inc. does not apply the proceeds
as required, the holders of the Notes due 2027 will have the right to require
Performance Food Group, Inc. to repurchase each holder's Notes due 2027 at a
price equal to 101% (in the case of a change of control triggering event) or
100% (in the case of an asset sale) of their principal amount, plus accrued and
unpaid interest. Performance Food Group, Inc. may redeem all or a part of the
Notes due 2027 at any time prior to October 15, 2022 at a redemption price equal
to 100% of the principal amount of the Notes due 2027 being redeemed plus a
make-whole premium and accrued and unpaid interest, if any, to, but not
including, the redemption date. In addition, beginning on October 15, 2022 ,
Performance Food Group, Inc. may redeem all or a part of the Notes due 2027 at a
redemption price equal to 102.750% of the principal amount redeemed, plus
accrued and unpaid interest. The redemption price decreases to 101.375% and 100%
of the principal amount redeemed on October 15, 2023 and October 15, 2024 ,
respectively. In addition, at any time prior to October 15, 2022 , Performance
Food Group Inc. may redeem up to 40% of the Notes due 2027 from the proceeds of
certain equity offerings at a redemption price equal to 105.500% of the
principal amount thereof, plus accrued and unpaid interest.
The indenture governing the Notes due 2027 contains covenants limiting, among
other things, PFGC's and its restricted subsidiaries' ability to incur or
guarantee additional debt or issue disqualified stock or preferred stock; pay
dividends and make other distributions on, or redeem or repurchase, capital
stock; make certain investments; incur certain liens; enter into transactions
with affiliates; consolidate, merge, sell or otherwise dispose of all or
substantially all of its assets; create certain restrictions on the ability of
PFGC's restricted subsidiaries to make dividends or other payments to PFGC;
designate restricted subsidiaries as unrestricted subsidiaries; and transfer or
sell certain assets. These covenants are subject to a number of important
exceptions and qualifications. The Notes due 2027 also contain customary events
of default, the occurrence of which could result in the principal of and accrued
interest on the Notes due 2027 to become or be declared due and payable.
Senior Notes due 2025: On April 24, 2020 , Performance Food Group, Inc. issued
and sold $275.0 million aggregate principal amount of the Notes due 2025,
pursuant to an indenture dated as of April 24, 2020 . The Notes due 2025 are
jointly and severally guaranteed on a senior unsecured basis by PFGC and all
domestic direct and indirect wholly-owned subsidiaries of PFGC (other than
captive insurance subsidiaries and other excluded subsidiaries). The Notes due
2025 are not guaranteed by the Company.
The proceeds from the Notes due 2025 were used for working capital and general
corporate purposes and to pay the fees, expenses, and other transaction costs
incurred in connection with the Notes due 2025.
The Notes due 2025 were issued at 100.0% of their par value. The Notes due 2025
mature on May 1, 2025 and bear interest at a rate of 6.875% per year, payable
semi-annually in arrears.
Upon the occurrence of a change of control triggering event or upon the sale of
certain assets in which Performance Food Group, Inc. does not apply the proceeds
as required, the holders of the Notes due 2025 will have the right to require
Performance Food Group, Inc. to repurchase each holder's Notes due 2025 at a
price equal to 101% (in the case of a change of control triggering event) or
100% (in the case of an asset sale) of their principal amount, plus accrued and
unpaid interest. Performance Food Group, Inc. may redeem all or a part of the
Notes due 2025 at any time prior to May 1, 2022 at a redemption price equal to
100% of the principal amount of the Notes due 2025 being redeemed plus a
make-whole premium and accrued and unpaid interest, if any, to, but not
including, the redemption date. In addition, beginning on May 1, 2022 ,
Performance Food Group, Inc. may redeem all or a part of the Notes due 2025 at a
redemption price equal to 103.438% of the principal amount redeemed, plus
accrued and unpaid interest. The redemption price decreases to 101.719% and 100%
of the principal amount redeemed on May 1, 2023 and May 1, 2024 ,
respectively. In addition, at any time prior to May 1, 2022 , Performance Food
Group, Inc. may redeem up to 40% of the Notes due 2025 from the proceeds of
certain equity offerings at a redemption price equal to 106.875% of the
principal amount thereof, plus accrued and unpaid interest.
The indenture governing the Notes due 2025 contains covenants limiting, among
other things, PFGC's and its restricted subsidiaries' ability to incur or
guarantee additional debt or issue disqualified stock or preferred stock; pay
dividends and make other distributions on, or redeem or repurchase, capital
stock; make certain investments; incur certain liens; enter into transactions
with affiliates; consolidate, merge, sell or otherwise dispose of all or
substantially all of its assets; create certain restrictions on the ability of
PFGC's restricted subsidiaries to make dividends or other payments to PFGC;
designate restricted subsidiaries as unrestricted subsidiaries; and transfer or
sell certain assets. These covenants are subject to a number of important
exceptions and qualifications. The Notes due 2025 also contain customary events
of default, the occurrence of which could result in the principal of and accrued
interest on the Notes due 2025 to become or be declared due and payable.
Letters of Credit Facility: On August 9, 2018 , Performance Food Group, Inc. and
PFGC entered into a Continuing Agreement for Letters of Credit (the "Letters of
Credit Facility"). The Letters of Credit Facility is an uncommitted facility
that provides for the issuance of letters of credit in an aggregate amount not
to exceed $40.0 million . Each letter of credit shall have a term not to exceed
one year; however, a letter of credit may renew automatically in accordance with
its terms. A fee equal to 2.5% per annum on the
38
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average daily amount available to be drawn on each day under each outstanding
letter of credit is payable quarterly. As of
The ABL Facility and the indentures governing the Notes due 2024, the Notes due 2027, and the Notes due 2025 contain customary restrictive covenants under which all of the net assets of PFGC and its subsidiaries were restricted from distribution toPerformance Food Group Company , except for approximately$787.4 million of restricted payment capacity available under such debt agreements, as ofJune 27, 2020 . Such minimum estimated restricted payment capacity is calculated based on the most restrictive of our debt agreements and may fluctuate from period to period, which fluctuations may be material. Our restricted payment capacity under other debt instruments to which the Company is subject may be materially higher than the foregoing estimate.
As of
Contractual Cash Obligations
The following table sets forth our significant contractual cash obligations as
of
Payments Due by Period
Less than More than
(Dollars in millions) Total 1 Year 1-3 Years 3-5 Years 5 Years
Long-term debt $ 2,395.0 $ 110.0 $ - $ 1,225.0 $ 1,060.0
Finance lease obligations(1) 259.3 40.9 79.0 72.0 67.4
Interest payments related to
long-term debt(2) 691.4 119.7 226.8 199.2 145.7
Long-term operating leases 550.5 104.6 162.3 93.6 190.0
Purchase obligations(3) 67.8 60.1 3.0 1.7 3.0
Other(4) 5.5 0.9 0.7 0.7 2.7
Total contractual cash
obligations $ 3,969.5 $ 436.2 $ 471.8 $ 1,592.2 $ 1,468.8 (1) The amounts reflected in the table include the interest component of the
lease payments.
(2) Includes payments on our floating rate debt based on rates as of
2020, assuming the amount remains unchanged until maturity. The impact of our
outstanding floating-to-fixed interest rate swap on the floating rate debt
interest payments is included as well based on the floating rates in effect
as of
(3) For purposes of this table, purchase obligations include agreements for
purchases related to capital projects and services in the normal course of
business, for which all significant terms have been confirmed. The amounts
included above are based on estimates. Purchase obligations also include
amounts committed to various capital projects in process or scheduled to be
completed in the coming year, as well as a minimum amount due for various
Company meetings and conferences.
(4) Other includes financed purchases of property, plant and equipment,
unrecognized tax benefits under accounting standards related to uncertain tax
positions and interest and payments related to the multiemployer pension
plan. As of
unrecognized tax benefits for all tax jurisdictions and approximately
not able to reasonably estimate the timing of payments of the amount by which
the liability will increase or decrease over time. Accordingly, we only
reflected the balances we could reasonably estimate in the "Payments Due by
Period" section of the table.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
39
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Total Assets by SegmentTotal assets by segment discussed below exclude intercompany receivables between segments.
Total assets for Foodservice increased$2,376.8 million from$3,152.3 million as ofJune 29, 2019 to$5,529.1 million as ofJune 27, 2020 . During this time period, this segment increased its property, plant, and equipment, inventory, accounts receivable, goodwill, and intangible assets primarily due to the acquisition ofReinhart. Foodservice's assets also increased as a result of the Company'sJune 30, 2019 adoption of ASC 842 and the recognition of operating lease right-of-use assets of$182.4 million . Total assets for Vistar increased$114.4 million from$1,271.0 million as ofJune 29, 2019 to$1,385.4 million as ofJune 27, 2020 . Vistar's assets increased as a result of the Company'sJune 30, 2019 adoption of ASC 842 and the recognition of operating lease right-of-use assets of$249.3 million as well as an increase in its property, plant and equipment. These increases were partially offset by decreases in accounts receivable, inventory, and intangible assets. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those that are most important to portraying our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies and estimates include those that pertain to the allowance for doubtful accounts receivable, inventory valuation, insurance programs, income taxes, vendor rebates and promotional incentives, and goodwill and other intangible assets. Accounts Receivable Accounts receivable are primarily comprised of trade receivables from customers in the ordinary course of business, are recorded at the invoiced amount, and primarily do not bear interest. Receivables are recorded net of the allowance for doubtful accounts on the accompanying consolidated balance sheets. We evaluate the collectability of our accounts receivable based on a combination of factors. We regularly analyze our significant customer accounts, and when we become aware of a specific customer's inability to meet its financial obligations to us, such as a bankruptcy filing or a deterioration in the customer's operating results or financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debt for other customers based on a variety of factors, including the length of time the receivables are past due, macroeconomic considerations, and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted.
Inventory Valuation
Our inventories consist primarily of food and non-food products. We primarily
value inventories at the lower of cost or market using the first-in, first-out
method ("FIFO"). FIFO was used for approximately 88% of total inventories at
June 27, 2020 . The remainder of the inventory was valued using LIFO method using
the link chain technique of the dollar value method. We adjust our inventory
balances for slow-moving, excess, and obsolete inventories. These adjustments
are based upon inventory category, inventory age, specifically identified items,
and overall economic conditions.
Insurance Programs
We maintain high-deductible insurance programs covering portions of general and vehicle liability and workers' compensation. The amounts in excess of the deductibles are insured by third-party insurance carriers, subject to certain limitations and exclusions. We also maintain self-funded group medical insurance. We accrue our estimated liability for these deductibles, including an estimate for incurred but not reported claims, based on known claims and past claims history. The estimated short-term portion of these accruals is included in Accrued expenses on our consolidated balance sheets, while the estimated long-term portion of the accruals is included in Other long-term liabilities. The provisions for insurance claims include estimates of the frequency and timing of claims occurrence, as well as the ultimate amounts to be paid. These insurance programs are managed by a third party, and the deductibles for general and vehicle liability and workers compensation are primarily collateralized by letters of credit and restricted cash.
Income Taxes
We followFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740-10, Income Taxes-Overall, which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and 40 -------------------------------------------------------------------------------- liabilities and their reported amounts. Future tax benefits, including net operating loss carryforwards, are recognized to the extent that realization of such benefits is more likely than not. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statutes of limitations. Such adjustments are reflected in the tax provision as appropriate. Income tax calculations are based on the tax laws enacted as of the date of the financial statements.
Vendor Rebates and Other Promotional Incentives
We participate in various rebate and promotional incentives with our suppliers, either unilaterally or in combination with purchasing cooperatives and other procurement partners, that consist primarily of volume and growth rebates, annual and multi-year incentives, and promotional programs. Consideration received under these incentives is generally recorded as a reduction of cost of goods sold. However, in certain limited circumstances the consideration is recorded as a reduction of costs incurred by us. Consideration received may be in the form of cash and/or invoice deductions. Changes in the estimated amount of incentives to be received are treated as changes in estimates and are recognized in the period of change. Consideration received for volume and growth rebates, annual incentives, and multi-year incentives are recorded as a reduction of cost of goods sold. We systematically and rationally allocate the consideration for these incentives to each of the underlying transactions that results in progress by the Company toward earning the incentives. If the incentives are not probable and reasonably estimable, we record the incentives as the underlying objectives or milestones are achieved. We record annual and multi-year incentives when earned, generally over the agreement period. We use current and historical purchasing data, forecasted purchasing volumes, and other factors in estimating whether the underlying objectives or milestones will be achieved. Consideration received to promote and sell the supplier's products is typically a reimbursement of marketing costs incurred by the Company and is recorded as a reduction of our operating expenses. If the amount of consideration received from the suppliers exceeds our marketing costs, any excess is recorded as a reduction of cost of goods sold.
Acquisitions,
We account for acquired businesses using the acquisition method of accounting. Our financial statements reflect the operations of an acquired business starting from the completion of the acquisition.Goodwill and other intangible assets represent the excess of cost of an acquired entity over the amounts specifically assigned to those tangible net assets acquired in a business combination. Other identifiable intangible assets typically include customer relationships, trade names, technology, non-compete agreements, and favorable lease assets.Goodwill and intangibles with indefinite lives are not amortized. Intangibles with definite lives are amortized on a straight-line basis over their useful lives, which generally range from two to eleven years. Annually, or when certain triggering events occur, the Company assesses the useful lives of its intangibles with definite lives. Certain assumptions, estimates, and judgments are used in determining the fair value of net assets acquired, including goodwill and other intangible assets, as well as determining the allocation of goodwill to the reporting units. Accordingly, we may obtain the assistance of third-party valuation specialists for significant tangible and intangible assets. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), economic barriers to entry, a brand's relative market position, and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. We are required to test goodwill and other intangible assets with indefinite lives for impairment annually or more often if circumstances indicate. Indicators of goodwill impairment include, but are not limited to, significant declines in the markets and industries that buy our products, changes in the estimated future cash flows of its reporting units, changes in capital markets, and changes in its market capitalization. We apply the guidance in FASB Accounting Standards Update ("ASU") 2011-08 "Intangibles-Goodwill and Other-Testing Goodwill for Impairment," which provides entities with an option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill is necessary. In performing step zero for our goodwill impairment test, we are required to make assumptions and judgments, including but not limited to the following: the evaluation of macroeconomic conditions as related to our business, industry and market trends, and the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. If impairment indicators are present after performing step zero, we would perform a quantitative impairment analysis to estimate the fair value of goodwill. During fiscal 2020 and fiscal 2019, we performed the step zero analysis for our goodwill impairment test. As a result of our step zero analysis, no further quantitative impairment test was deemed necessary for fiscal 2020 and fiscal 2019. There were no impairments of goodwill or intangible assets with indefinite lives for fiscal 2020 and fiscal 2019. 41 --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
Refer to Note 3 Recently Issued Accounting Pronouncements within the Notes to Consolidated Financial Statements included in Item 8 for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on the Company's consolidated financial statements.
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