UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 26, 2020

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

For the transition period from                      to                     

Commission File Number 001-37578

Performance Food Group Company

(Exact name of registrant as specified in its charter)

Delaware	43-1983182
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)
12500 West Creek Parkway Richmond, Virginia 23238	(804) 484-7700
(Address of principal executive offices)	(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	PFGC	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

133,526,139 shares of common stock were outstanding as of October 28, 2020.

TABLE OF CONTENTS

		Page
Special Note Regarding Forward-Looking Statements		3
PART I - FINANCIAL INFORMATION		5
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II - OTHER INFORMATION		32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURE		34

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (this “Form 10-Q”) may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position, our business outlook, business trends and other information are forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved, and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2020 (the “Form 10-K”), as such risk factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (the “SEC”), including under Part II, Item 1A, Risk Factors of this Form 10-Q, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

• the impact of the novel coronavirus (“COVID-19”) pandemic on the global markets, the restaurant industry, and our business specifically has had and is expected to continue to have a material adverse effect on our results of operations;

• competition in our industry is intense, and we may not be able to compete successfully;

• we operate in a low margin industry, which could increase the volatility of our results of operations;

• we may not realize anticipated benefits from our operating cost reduction and productivity improvement efforts;

• our profitability is directly affected by cost inflation and deflation and other factors;

• we do not have long-term contracts with certain of our customers;

• group purchasing organizations may become more active in our industry and increase their efforts to add our customers as members of these organizations;

• changes in eating habits of consumers;

• extreme weather conditions;

• our reliance on third-party suppliers;

• labor relations and cost risks and availability of qualified labor;

• volatility of fuel and other transportation costs;

• inability to adjust cost structure where one or more of our competitors successfully implement lower costs;

• we may be unable to increase our sales in the highest margin portion of our business;

• changes in pricing practices of our suppliers;

• our growth strategy may not achieve the anticipated results;

• risks relating to acquisitions, including the risk that we are not able to realize benefits of acquisitions or successfully integrate the businesses we acquire;

• environmental, health, and safety costs;

• the risk that we fail to comply with requirements imposed by applicable law or government regulations;

• a portion of our sales volume is dependent upon the distribution of cigarettes and other tobacco products, sales of which are generally declining;

• if the products we distribute are alleged to cause injury or illness or fail to comply with governmental regulations, we may need to recall our products and may experience product liability claims;

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• the risk that we fail to comply with requirements imposed by applicable law or government regulations;

• our reliance on technology and risks associated with disruption or delay in implementation of new technology;

• costs and risks associated with a potential cybersecurity incident or other technology disruption;

• product liability claims relating to the products we distribute and other litigation;

• adverse judgements or settlements;

• negative media exposure and other events that damage our reputation;  

• decrease in earnings from amortization charges associated with acquisitions;

• impact of uncollectibility of accounts receivable;  

• difficult economic conditions affecting consumer confidence;

• risks relating to federal, state, and local tax rules;

• the cost and adequacy of insurance coverage;

• risks relating to our outstanding indebtedness;

• our ability to raise additional capital;

• our ability to maintain an effective system of disclosure controls and internal control over financial reporting;

• the possibility that the expected synergies and value creation from the acquisition of Reinhart Foodservice L.L.C. (“Reinhart”) will not be realized or will not be realized within the expected time period; and

• the risk that, as a result of the recent Reinhart acquisition, the combined company may not be able to effectively manage its expanded operations.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. We cannot assure you (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” or “PFG” as used in this Form 10-Q refer to Performance Food Group Company and its consolidated subsidiaries.

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Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except per share data)	As of September 26, 2020			As of June 27, 2020
ASSETS
Current assets:
Cash	$	417.2		$	420.7
Accounts receivable, less allowances of $80.1 and $86.7		1,284.2			1,258.6
Inventories, net		1,523.9			1,549.4
Income taxes receivable		164.0			156.5
Prepaid expenses and other current assets		79.6			68.7
Total current assets		3,468.9			3,453.9
Goodwill		1,349.5			1,353.0
Other intangible assets, net		887.5			918.6
Property, plant and equipment, net		1,512.3			1,479.0
Operating lease right-of-use assets		445.3			441.2
Restricted cash		11.1			11.1
Other assets		65.3			62.9
Total assets	$	7,739.9		$	7,719.7
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Outstanding checks in excess of deposits	$	106.1		$	110.4
Trade accounts payable		1,456.9			1,608.0
Accrued expenses and other current liabilities		496.9			678.0
Long-term debt - current installments		108.3			107.6
Finance lease obligations—current installments		36.1			30.3
Operating lease obligations—current installments		83.6			84.4
Total current liabilities		2,287.9			2,618.7
Long-term debt		2,551.4			2,249.3
Deferred income tax liability, net		121.2			115.6
Finance lease obligations, excluding current installments		200.8			185.7
Operating lease obligations, excluding current installments		369.7			362.4
Other long-term liabilities		188.2			177.4
Total liabilities		5,719.2			5,709.1
Commitments and contingencies (Note 10)
Shareholders’ equity:
Common Stock: $0.01 par value per share, 1.0 billion shares authorized, 132.0 million shares issued and outstanding as of September 26, 2020; 1.0 billion shares authorized, 131.3 million shares issued and outstanding as of June 27, 2020		1.3			1.3
Additional paid-in capital		1,713.4			1,703.0
Accumulated other comprehensive loss, net of tax benefit of $3.5 and $3.6		(9.9	)		(10.3	)
Retained earnings		315.9			316.6
Total shareholders’ equity		2,020.7			2,010.6
Total liabilities and shareholders’ equity	$	7,739.9		$	7,719.7

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per share data)	Three Months Ended September 26, 2020			Three Months Ended September 28, 2019
Net sales	$	7,046.8		$	6,243.0
Cost of goods sold		6,231.3			5,531.6
Gross profit		815.5			711.4
Operating expenses		779.7			647.9
Operating profit		35.8			63.5
Other expense, net:
Interest expense		38.8			17.3
Other, net		(1.0	)		-
Other expense, net		37.8			17.3
(Loss) income before taxes		(2.0	)		46.2
Income tax (benefit) expense		(1.3	)		10.1
Net (loss) income	$	(0.7	)	$	36.1
Weighted-average common shares outstanding:
Basic		131.7			104.0
Diluted		131.7			105.6
(Loss) earnings per common share:
Basic	$	(0.01	)	$	0.35
Diluted	$	(0.01	)	$	0.34

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

($ in millions)	Three months ended September 26, 2020			Three months ended September 28, 2019
Net (loss) income	$	(0.7	)	$	36.1
Other comprehensive income (loss), net of tax:
Interest rate swaps:
Change in fair value, net of tax		(0.3	)		(0.5	)
Reclassification adjustment, net of tax		0.7			(0.6	)
Other comprehensive income (loss)		0.4			(1.1	)
Total comprehensive (loss) income	$	(0.3	)	$	35.0

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

					Additional			Accumulated Other						Total
	Common Stock				Paid-in			Comprehensive			Retained			Shareholders’
(In millions)	Shares		Amount		Capital			Loss			Earnings			Equity
Balance as of June 29, 2019		103.8	$	1.0	$	866.7		$	(0.2	)	$	430.7		$	1,298.2
Net income		—		—		—			—			36.1			36.1
Interest rate swaps		—		—		—			(1.1	)		—			(1.1	)
Issuance of common stock under stock-based compensation plans		0.4		—		(4.5	)		—			—			(4.5	)
Stock-based compensation expense		—		—		4.4			—			—			4.4
Balance as of September 28, 2019		104.2		1.0		866.6			(1.3	)		466.8			1,333.1
Balance as of June 27, 2020		131.3		1.3		1,703.0			(10.3	)		316.6			2,010.6
Net loss		—		—		—			—			(0.7	)		(0.7	)
Interest rate swaps		—		—		—			0.4			—			0.4
Issuance of common stock under stock-based compensation plans		0.4		—		(1.7	)		—			—			(1.7	)
Issuance of common stock under employee stock purchase plan		0.3		—		7.8			—			—			7.8
Stock-based compensation expense		—		—		4.3			—			—			4.3
Balance as of September 26, 2020		132.0	$	1.3	$	1,713.4		$	(9.9	)	$	315.9		$	2,020.7

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)	Three months ended September 26, 2020			Three months ended September 28, 2019
Cash flows from operating activities:
Net (loss) income	$	(0.7	)	$	36.1
Adjustments to reconcile net (loss) income to net cash (used in) provided    by operating activities
Depreciation		52.8			33.9
Amortization of intangible assets		29.3			8.8
Amortization of deferred financing costs		3.6			4.5
Provision for losses on accounts receivables		(2.0	)		4.1
Stock compensation expense		4.7			4.4
Deferred income tax expense		5.5			(5.6	)
Other non-cash activities		(3.1	)		(0.1	)
Changes in operating assets and liabilities, net
Accounts receivable		(23.6	)		(3.7	)
Inventories		25.5			(54.3	)
Income taxes receivable		(7.5	)		12.0
Prepaid expenses and other assets		(15.1	)		0.9
Trade accounts payable		(151.0	)		57.4
Outstanding checks in excess of deposits		(4.3	)		(19.0	)
Accrued expenses and other liabilities		(46.1	)		4.8
Net cash (used in) provided by operating activities		(132.0	)		84.2
Cash flows from investing activities:
Purchases of property, plant and equipment		(40.8	)		(22.8	)
Proceeds from sale of property, plant and equipment		6.1			0.3
Net cash used in investing activities		(34.7	)		(22.5	)
Cash flows from financing activities:
Net borrowings (payments) under ABL Facility		301.0			(49.0	)
Borrowing of Notes due 2027		—			1,060.0
Cash paid for debt issuance, extinguishment and modifications		—			(0.7	)
Payments under finance lease obligations		(8.0	)		(4.6	)
Payments on financed property, plant and equipment		(0.3	)		(0.4	)
Cash paid for acquisitions		(135.6	)		(0.5	)
Proceeds from employee stock purchase plan		7.8			—
Proceeds from exercise of stock options		2.5			1.4
Cash paid for shares withheld to cover taxes		(4.2	)		(5.9	)
Net cash provided by financing activities		163.2			1,000.3
Net (decrease) increase in cash and restricted cash		(3.5	)		1,062.0
Cash and restricted cash, beginning of period		431.8			25.4
Cash and restricted cash, end of period	$	428.3		$	1,087.4

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

(In millions)	As of September 26, 2020		As of June 27, 2020
Cash	$	417.2	$	420.7
Restricted cash(1)		11.1		11.1
Total cash and restricted cash	$	428.3	$	431.8

(1) Restricted cash represents the amounts required by insurers to collateralize a part of the deductibles for the Company’s workers’ compensation and liability claims.

Supplemental disclosures of non-cash transactions are as follows:

(In millions)	Three months ended September 26, 2020		Three months ended September 28, 2019
Debt assumed through finance lease obligations	$	28.9	$	26.8
Purchases of property, plant and equipment, financed		0.2		0.9

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Supplemental disclosures of cash flow information are as follows:

(In millions)	Three months ended September 26, 2020		Three months ended September 28, 2019
Cash paid during the year for:
Interest	$	10.8	$	11.9
Income taxes paid, net of refunds		0.7		2.5

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Business Activities

Business Overview

Performance Food Group Company, through its subsidiaries, markets and distributes primarily national and company-branded food and food-related products to customer locations across the United States. The Company serves both of the major customer types in the restaurant industry: (i) independent customers, and (ii) multi-unit, or “Chain” customers, which include some of the most recognizable family and casual dining restaurant chains, as well as schools, business and industry locations, healthcare facilities, and retail establishments. The Company also specializes in distributing candy, snacks, beverages, cigarettes, other tobacco products and other items nationally to vending distributors, big box retailers, theaters, convenience stores, travel providers, and hospitality providers.              

2. Summary of Significant Accounting Policies and Estimates

Basis of Presentation

The consolidated financial statements have been prepared by the Company, without audit, with the exception of the June 27, 2020 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the Form 10-K. The financial statements include consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income, shareholders’ equity, and cash flows for all periods presented have been made.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates used by management are related to the accounting for the allowance for doubtful accounts, reserve for inventories, impairment testing of goodwill and other intangible assets, acquisition accounting, reserves for claims and recoveries under insurance programs, vendor rebates and other promotional incentives, bonus accruals, depreciation, amortization, determination of useful lives of tangible and intangible assets, leases, and income taxes. Actual results could differ from these estimates.

The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K. Certain footnote disclosures included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of COVID-19. The unprecedented impact of COVID-19 has grown throughout the world, including in the United States, and governmental authorities and businesses 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 operations and the operations of its customers and suppliers. 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 adversely affected and is expected to continue to adversely affect demand in the foodservice industry, including demand for our products and services.

We expect that COVID-19 could have a material adverse impact on our future results of operations and liquidity. However, the extent to which COVID-19 will affect our financial position, liquidity, and results of operations is uncertain.

Accounts Receivable

Accounts receivable are comprised of trade receivables from customers in the ordinary course of business, are recorded at the invoiced amount, and primarily do not bear interest. Accounts receivable also includes other receivables primarily related to various rebate and promotional incentives with the Company’s suppliers. Receivables are recorded net of the allowance for credit losses on the

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accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable based on a combination of factors. The Company regularly analyzes its significant customer accounts, and when it becomes aware of a specific customer’s inability to meet its financial obligations to the Company, such as bankruptcy filings or deterioration in the customer’s operating results or financial position, the Company records a specific reserve for bad debt to reduce the related receivable to the amount it reasonably believes is collectible. The Company also records 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, the Company’s estimates of the recoverability of receivables could be further adjusted. Refer to Note 3. Recently Issued Accounting Pronouncements for further discussion of the Company’s adoption of ASU 2016-13.

3. Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and has issued subsequent amendments to this guidance. The pronouncement changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new standard at the beginning of fiscal 2021. Companies are required to apply the standard using a modified retrospective approach, with a cumulative-effect adjustment recorded to beginning retained earnings on the effective date. The Company determined this update did not have a material impact on the Company’s consolidated financial statements upon adoption. Refer to Note 2. Summary of Significant Accounting Policies and Estimates for further discussion of the Company’s reserve for credit losses related to its accounts receivable.                 

In August 2018, the FASB issued ASU 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. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this ASU on a prospective basis at the beginning fiscal 2021. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions for intra-period tax allocations, recognition of deferred tax liabilities after a foreign subsidiary transitions to or from equity method accounting, and methodology of calculating income taxes in an interim period with year-to-date losses. Additionally, the guidance provides additional clarification on other areas, including step-up of the tax basis of goodwill recorded as part of an acquisition and the treatment of franchise taxes that are partially based on income. This pronouncement is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company plans to adopt this new ASU in fiscal 2022. Companies are required to apply the standard on a prospective basis, except for certain sections of the guidance which shall be applied on a retrospective or modified retrospective basis. The Company is in the process of assessing the impact of this ASU on its future consolidated financial statements but does not expect this update to have a material impact on the Company's consolidated financial statements.

4. Revenue Recognition

The Company markets and distributes primarily national and company-branded food and food-related products to customer locations across the United States. The Foodservice segment supplies a “broad line” of products to its customers, including the Company’s performance brands and custom-cut meats and seafood, as well as products that are specific to each customer’s menu requirements. Vistar distributes candy, snacks, beverages, cigarettes, other tobacco products and other products to various customer channels. The Company disaggregates revenue by product offerings and determined that disaggregating revenue at the segment level achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 13. Segment Information for external revenue by reportable segment.

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The Company has customer contracts in which incentives are paid upfront to certain customers. These payments have become industry practice and are not related to financing the customer’s business, nor are they associated with any distinct good or service to be received from the customer. These incentive payments are capitalized and amortized over the life of the contract or the expected life of the customer relationship on a straight-line basis. The Company’s contract asset for these incentives totaled $14.7 million and $15.3 million as of September 26, 2020 and June 27, 2020, respectively.

5. Business Combinations

There were no acquisitions during the first quarter of fiscal 2021 or fiscal 2020.

The acquisition of Eby-Brown Company LLC (“Eby-Brown”) in fiscal 2019 included contingent consideration, including earnout payments in the event certain operating results are achieved during a defined post-closing period. As of June 27, 2020, the Company had accrued $191.2 million related to this contingent consideration. In the first quarter of fiscal 2021, the Company paid the first earnout payment of $185.6 million, which included $68.3 million as a financing activity cash outflow and $117.3 million as an operating activity cash outflow in the consolidated statement of cash flows for the three months ended September 26, 2020. As of September 26, 2020, the Company has accrued $6.1 million related to additional earnout payments. Earnout liabilities are measured using unobservable inputs that are considered a Level 3 measurement.

In fiscal 2020, the Company acquired Reinhart from Reyes Holdings, L.L.C. The Reinhart acquisition is reported in the Foodservice segment. Assets acquired and liabilities assumed were recognized at their respective fair values as of the acquisition date. In the first quarter of fiscal 2021, the Company paid a total of $67.3 million related to the final net working capital acquired, which is reflected as a financing activity cash outflow in the consolidated statement of cash flows for the three months ended September 26, 2020.

Subsequent to September 26, 2020, the Company paid $12.2 million for an acquisition. The acquisition will be reported within the Company’s Vistar segment. The Company is in the process of determining the fair values of the assets acquired and liabilities assumed.

6. Debt

The Company is a holding company and conducts its operations through its subsidiaries, which have incurred or guaranteed indebtedness as described below.

Debt consisted of the following:

(In millions)	As of September 26, 2020			As of June 27, 2020
ABL Facility	$	1,011.0		$	710.0
5.500% Notes due 2024		350.0			350.0
6.875% Notes due 2025		275.0			275.0
5.500% Notes due 2027		1,060.0			1,060.0
Less: Original issue discount and deferred financing costs		(36.3	)		(38.1	)
Long-term debt		2,659.7			2,356.9
Less: current installments		(108.3	)		(107.6	)
Total debt, excluding current installments	$	2,551.4		$	2,249.3

ABL Facility

PFGC, Inc. (“PFGC”), a wholly-owned subsidiary of the Company, is a party to the Fourth Amended and Restated Credit Agreement dated December 31, 2019 (as amended by the First Amendment to Fourth Amended and Restated Credit Agreement dated as of April 29, 2020 and the Second Amendment to Fourth Amended and Restated Credit Agreement dated as of May 15, 2020, the “ABL Facility”). The ABL Facility has an aggregate principal amount of $3.11 billion and matures December 30, 2024, of which $110 million is a 364-day maturity loan that is junior to the other obligations owed under the ABL Facility (“Additional Junior Term Loan”). The Second Amendment to the ABL Facility entered into on May 15, 2020 temporarily expands the definition of accounts receivable and is effective only until delivery of the first Borrowing Base Certificate after November 30, 2020. Performance Food 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.

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Borrowings under the ABL Facility bear interest, at Performance 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.

The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:

(Dollars in millions)	As of September 26, 2020			As of June 27, 2020
Aggregate borrowings	$	1,011.0		$	710.0
Letters of credit under ABL Facility		166.0			139.6
Excess availability, net of lenders’ reserves of $63.5 and $64.9		1,536.6			1,712.2
Average interest rate		2.32	%		2.85	%

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 average daily amount available to be drawn on each day under each outstanding letter of credit is payable quarterly. As of September 26, 2020, the Company has $28.3 million letters of credit outstanding under the Letters of Credit Facility.

7. Leases

The Company determines if an arrangement is a lease at inception and recognizes a financing or operating lease liability and right-of-use asset in the Company’s consolidated balance sheet. Right-of-use assets and lease liabilities for both operating and finance leases are recognized based on present value of lease payments over the lease term at commencement date. Since the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. This rate was determined by using the yield curve based on the Company’s credit rating adjusted for the Company’s specific debt profile and secured debt risk. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease expenses for these short-term leases are recognized on a straight-line basis over the lease term. The Company has several lease agreements that contain lease and non-lease components, such as maintenance, taxes, and insurance, which are accounted for separately. The difference between the operating lease right-of-use assets and operating lease liabilities primarily relates to adjustments for deferred rent, favorable leases, and prepaid rent.

Subsidiaries of the Company have entered into numerous operating and finance leases for various warehouses, office facilities, equipment, tractors, and trailers. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Certain full-service fleet lease agreements include variable lease payments associated with usage, which are recorded and paid as incurred. When calculating lease liabilities, lease terms will include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.  

Certain of the leases for tractors, trailers, and other vehicles and equipment provide for residual value guarantees to the lessors. Circumstances that would require the subsidiary to perform under the guarantees include either (1) default on the leases with the leased assets being sold for less than the specified residual values in the lease agreements, or (2) decisions not to purchase the assets at the end of the lease terms combined with the sale of the assets, with sales proceeds less than the residual value of the leased assets specified in the lease agreements. Residual value guarantees under these operating lease agreements typically range between 6% and 16% of the value of the leased assets at inception of the lease. These leases have original terms ranging from 5 to 7 years and expiration dates ranging from 2020 to 2027. As of September 26, 2020, the undiscounted maximum amount of potential future payments for lease residual value guarantees totaled approximately $22.9 million, which would be mitigated by the fair value of the leased assets at lease expiration.

The following table presents the location of lease costs in the Company’s consolidated statement of operations for the periods reported (in millions):

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Lease Cost	Statement of Operations Location	Three months ended September 26, 2020		Three months ended September 28, 2019
Finance lease cost:
Amortization of finance lease assets	Operating expenses	$	7.2	$	4.7
Interest on lease liabilities	Interest expense		3.0		2.2
Total finance lease cost		$	10.2	$	6.9
Operating lease cost	Operating expenses		27.8		28.1
Short-term lease cost	Operating expenses		5.1		5.9
Total lease cost		$	43.1	$	40.9

Supplemental cash flow information related to leases for the periods reported are as follows (in millions):

(In millions)	Three months ended September 26, 2020		Three months ended September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	24.6	$	26.8
Operating cash flows from finance leases		3.0		2.2
Financing cash flows from finance leases		8.0		4.6
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		26.8		8.7
Finance leases		28.9		26.8

Future minimum lease payments under non-cancelable leases as of September 26, 2020 are as follows (in millions):

Fiscal Year	Operating Leases		Finance Leases
Remainder of 2021	$	78.8	$	34.0
2022		91.6		44.6
2023		75.1		43.4
2024		56.5		42.6
2025		42.4		38.4
Thereafter		214.7		78.3
Total future minimum lease payments	$	559.1	$	281.3
Less: Interest		105.8		44.4
Present value of future minimum lease payments	$	453.3	$	236.9

As of September 26, 2020, the Company has additional operating leases that have not yet commenced which total $36.3 million in future minimum lease payments. These leases relate to warehouse leases and are expected to commence in the third quarter of fiscal 2021 and first quarter of fiscal 2022 with lease terms of 15 years.

8. Fair Value of Financial Instruments

The carrying values of cash, accounts receivable, outstanding checks in excess of deposits, trade accounts payable, and accrued expenses approximate their fair values because of the relatively short maturities of those instruments. The derivative assets and liabilities are recorded at fair value on the balance sheet. The fair value of long-term debt, which has a carrying value of $2,659.7 million and $2,356.9 million, is $2,738.6 million and $2,402.0 million at September 26, 2020 and June 27, 2020, respectively, and is determined by review