UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 26, 2020

OR

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

Commission File No. 001-37786

US FOODS HOLDING CORP.

(Exact name of registrant as specified in its charter)

Delaware	26-0347906
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

9399 W. Higgins Road, Suite 100

Rosemont, IL 60018

(847) 720-8000

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	USFD	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, 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 ☒

220,848,627 shares of the registrant's common stock were outstanding as of October 29, 2020.

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q (this “Quarterly Report”) which are not historical in nature are “forward-looking statements” within the meaning of the federal securities laws. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “plan,” “outlook,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecast,” “mission,” “strive,” “more,” “goal,” or similar expressions and are based upon various assumptions and our experience in the industry, as well as historical trends, current conditions, and expected future developments. However, you should understand that these statements are not guarantees of performance or results, and there are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from those expressed in the forward-looking statements, including, among others:

•    any declines in the consumption of food prepared away from home;

•    the extent and duration of the negative impact of the COVID-19 pandemic on us;

•    cost inflation/deflation and commodity volatility;

•    competition;

•    reliance on third-party suppliers and interruption of product supply or increases in product costs;

•    changes in our relationships with customers and group purchasing organizations;

•    our ability to increase or maintain the highest margin portions of our business;

•    effective integration of acquired businesses;

•    achievement of expected benefits from cost savings initiatives;

•    increases in fuel costs;

•    economic factors affecting consumer confidence and discretionary spending;

•    changes in consumer eating habits;

•    reputation in the industry;

•    labor relations and costs and continued access to qualified and diverse labor;

•    cost and pricing structures;

•    changes in tax laws and regulations and resolution of tax disputes;

•    environmental, health and safety and other government regulation, including actions taken by national, state and local governments to contain the COVID-19 pandemic, such as travel restrictions or bans, social distancing requirements, and required closures of non-essential businesses;

•    product recalls and product liability claims;

•    adverse judgments or settlements resulting from litigation;

•    disruption of existing technologies and implementation of new technologies;

•    cybersecurity incidents and other technology disruptions;

•    management of retirement benefits and pension obligations;

•    extreme weather conditions, natural disasters and other catastrophic events, including pandemics and the rapid spread of contagious illnesses;

•    risks associated with intellectual property, including potential infringement;

•    indebtedness and restrictions under agreements governing indebtedness; and

•    interest rate increases.

For a detailed discussion of these and other risks, uncertainties and factors, see Part I, Item 1A— “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (the “2019 Annual Report”) and Part II, Item 1A— “Risk Factors” of this Quarterly Report.

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

Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, and should be viewed only as historical data.

	TABLE OF CONTENTS
		Page No.
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019	1
	Consolidated Statements of Comprehensive Income for the 13 weeks and 39 weeks ended September 26, 2020 and September 28, 2019	2
	Consolidated Statements of Shareholders' Equity for the 13 weeks and 39 weeks ended September 26, 2020 and September 28, 2019	3
	Consolidated Statements of Cash Flows for the 39 weeks ended September 26, 2020 and September 28, 2019	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
Part II. Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
Signatures		43

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

US FOODS HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
	September 26, 2020		December 28, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,019	$	90
Accounts receivable, less allowances of $88 and $30	1,185		1,455
Vendor receivables, less allowances of $7 and $4	155		143
Inventories—net	1,314		1,432
Prepaid expenses	93		109
Assets held for sale	10		1
Other current assets	29		32
Total current assets	3,805		3,262
Property and equipment—net	2,055		2,075
Goodwill	5,644		4,728
Other intangibles—net	913		967
Other assets	379		256
Total assets	$	12,796	$	11,288
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft liability	$	159	$	222
Accounts payable	1,543		1,460
Accrued expenses and other current liabilities	521		538
Current portion of long-term debt	149		142
Total current liabilities	2,372		2,362
Long-term debt	5,638		4,594
Deferred tax liabilities	250		308
Other long-term liabilities	525		315
Total liabilities	8,785		7,579
Commitments and contingencies (Note 22)
Mezzanine equity:
Series A Convertible Preferred Stock, $0.01 par value—25 shares authorized; 0.5 and 0.0 issued and outstanding as of September 26, 2020 and December 28, 2019	496		—
Shareholders’ equity:
Common stock, $0.01 par value—600 shares authorized; 221 and 220 issued and outstanding as of September 26, 2020 and December 28, 2019, respectively	2		2
Additional paid-in capital	2,886		2,845
Retained earnings	684		916
Accumulated other comprehensive loss	(57)		(54)
Total shareholders’ equity	3,515		3,709
Total liabilities, mezzanine equity and shareholders' equity	$	12,796	$	11,288

See Notes to Consolidated Financial Statements (Unaudited).

1

US FOODS HOLDING CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In millions, except per share data)
	13 Weeks Ended				39 Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net sales	$	5,848	$	6,531	$	16,747	$	19,005
Cost of goods sold	4,874		5,375		14,036		15,655
Gross profit	974		1,156		2,711		3,350
Operating expenses:
Distribution, selling and administrative costs	873		968		2,779		2,837
Restructuring and asset impairment charges	23		—		39		—
Total operating expenses	896		968		2,818		2,837
Operating income (loss)	78		188		(107)		513
Other (income) expense—net	(6)		1		(16)		(3)
Interest expense—net	63		43		178		127
Income (loss) before income taxes	21		144		(269)		389
Income tax provision (benefit)	13		39		(53)		97
Income (loss) from continuing operations	8		105		(216)		292
Income from discontinued operations—net of tax:	—		1		—		1
Net income (loss)	8		106		(216)		293
Other comprehensive income (loss)—net of tax:
Changes in retirement benefit obligations	—		3		1		5
Unrecognized gain (loss) on interest rate swaps	2		(1)		(4)		(15)
Comprehensive income (loss)	$	10	$	108	$	(219)	$	283
Net income (loss)	$	8	$	106	$	(216)	$	293
Series A Convertible Preferred Stock Dividends	10		—		15		—
Net (loss) income available to common shareholders	$	(2)	$	106	$	(231)	$	293
Net (loss) income per share—basic
Continuing operations	$	(0.01)	$	0.48	$	(1.05)	$	1.33
Discontinued operations	—		0.01		—		0.01
Net (loss) income per share	$	(0.01)	$	0.49	$	(1.05)	$	1.34
Net (loss) income per share—diluted:
Continuing operations	$	(0.01)	$	0.47	$	(1.05)	$	1.33
Discontinued operations	—		0.01		—		0.01
Net (loss) income per share	$	(0.01)	$	0.48	$	(1.05)	$	1.34
Weighted-average common shares outstanding
Basic	220		218		220		218
Diluted	220		220		220		219

See Notes to Consolidated Financial Statements (Unaudited).

2

US FOODS HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
	Shares	Amount
BALANCE—December 28, 2019	220	$	2	$	2,845	$	916	$	(54)	$	3,709
Share-based compensation expense	—	—		7		—		—		7
Proceeds from employee stock purchase plan	—	—		6		—		—		6
Exercise of stock options	—	—		1		—		—		1
Tax withholding payments for net share-settled equity awards	—	—		(2)		—		—		(2)
Unrecognized loss on interest rate swaps, net of income tax	—	—		—		—		(6)		(6)
Adoption of ASU 2016-13 (Note 2 and 7)	—	—		—		(1)		—		(1)
Net loss	—	—		—		(132)		—		(132)
BALANCE—March 28, 2020	220	2		2,857		783		(60)		3,582
Share-based compensation expense	—	—		12		—		—		12
Proceeds from employee stock purchase plan	1	—		5		—		—		5
Tax withholding payments for net share-settled equity awards	—	—		(3)		—		—		(3)
Series A Convertible Preferred Stock Dividends	—	—		—		(5)		—		(5)
Changes in retirement benefit obligations, net of income tax	—	—		—		—		1		1
Net loss	—	—		—		(92)		—		(92)
BALANCE—June 27, 2020	221	2		2,871		686		(59)		3,500
Share-based compensation expense	—	—		10		—		—		10
Proceeds from employee stock purchase plan	—	—		4		—		—		4
Exercise of stock options	—	—		1		—		—		1
Series A Convertible Preferred Stock Dividends	—	—		—		(10)		—		(10)
Unrecognized gain on interest rate swaps, net of income tax	—	—		—		—		2		2
Net income	—	—		—		8		—		8
BALANCE—September 26, 2020	221	$	2	$	2,886	$	684	$	(57)	$	3,515

3

US FOODS HOLDING CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In millions)
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
	Shares	Amount
BALANCE—December 29, 2018	217	$	2	$	2,780	$	531	$	(84)	$	3,229
Share-based compensation expense	—	—		6		—		—		6
Proceeds from employee stock purchase plan	—	—		5		—		—		5
Exercise of stock options	1	—		6		—		—		6
Tax withholding payments for net share-settled equity awards	—	—		(2)		—		—		(2)
Changes in retirement benefit obligations, net of income tax	—	—		—		—		1		1
Unrecognized loss on interest rate swaps, net of income tax	—	—		—		—		(6)		(6)
Net income	—	—		—		71		—		71
BALANCE—March 30, 2019	218	2		2,795		602		(89)		3,310
Share-based compensation expense	—	—		9		—		—		9
Proceeds from employee stock purchase plan	—	—		5		—		—		5
Exercise of stock options	1	—		5		—		—		5
Tax withholding payments for net share-settled equity awards	—	—		(3)		—		—		(3)
Changes in retirement benefit obligations, net of income tax	—	—		—		—		1		1
Unrecognized loss on interest rate swaps, net of income tax	—	—		—		—		(8)		(8)
Net income	—	—		—		116		—		116
BALANCE—June 29, 2019	219	2		2,811		718		(96)		3,435
Share-based compensation expense	—	—		7		—		—		7
Proceeds from employee stock purchase plan	—	—		5		—		—		5
Exercise of stock options	—	—		2		—		—		2
Changes in retirement benefit obligations, net of income tax	—	—		—		—		3		3
Unrecognized loss on interest rate swaps, net of income tax	—	—		—		—		(1)		(1)
Net income	—	—		—		106		—		106
BALANCE—September 28, 2019	219	$	2	$	2,825	$	824	$	(94)	$	3,557

See Notes to Consolidated Financial Statements (Unaudited).

4

US FOODS HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
	39 Weeks Ended
	September 26, 2020		September 28, 2019
Cash flows from operating activities:
Net (loss) income	$	(216)	$	293
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Income from discontinued operations, net of tax	—		(1)
Depreciation and amortization	316		260
Gain on disposal of property and equipment—net	(15)		(1)
Asset impairment charges	9		—
Amortization of deferred financing costs	12		3
Deferred tax (benefit) provision	(65)		7
Share-based compensation expense	29		22
Provision for doubtful accounts	80		14
Changes in operating assets and liabilities:
Decrease (increase) in receivables	182		(162)
Decrease (increase) in inventories—net	161		(22)
Decrease in prepaid expenses and other assets	30		14
Increase in accounts payable and cash overdraft liability	19		160
Decrease in accrued expenses and other liabilities	(9)		(29)
Net cash provided by operating activities of continuing operations	533		558
Net cash provided by operating activities of discontinued operations	—		1
Net cash provided by operating activities	533		559
Cash flows from investing activities:
Acquisition of businesses—net of cash	(973)		(1,829)
Proceeds from sales of assets	7		—
Proceeds from sales of property and equipment	33		9
Purchases of property and equipment	(154)		(157)
Net cash used in investing activities	(1,087)		(1,977)
Cash flows from financing activities:
Proceeds from debt borrowings	3,645		5,084
Principal payments on debt and financing leases	(2,640)		(3,654)
Net proceeds from issuance of Series A Convertible Preferred Stock	491		—
Debt financing costs and fees	(33)		(42)
Proceeds from employee stock purchase plan	15		15
Proceeds from exercise of stock options	2		13
Tax withholding payments for net share-settled equity awards	(5)		(5)
Net cash provided by financing activities	1,475		1,411
Net increase (decrease) in cash, cash equivalents and restricted cash	921		(7)
Cash, cash equivalents and restricted cash—beginning of period	98		105
Cash, cash equivalents and restricted cash—end of period	$	1,019	$	98
Supplemental disclosures of cash flow information:
Interest paid—net of amounts capitalized	$	122	$	112
Income taxes paid—net	3		116
Property and equipment purchases included in accounts payable	11		21
Leased assets obtained in exchange for financing lease liabilities	63		77
Leased assets obtained in exchange for operating lease liabilities	21		11
Cashless exercise of stock options	—		1
Paid-in-kind Series A Convertible Preferred Stock Dividends	5		—

See Notes to Consolidated Financial Statements (Unaudited).

5

US FOODS HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Amounts in tables in millions, except per share data, unless otherwise noted)

1.     OVERVIEW AND BASIS OF PRESENTATION

US Foods Holding Corp., a Delaware corporation, and its consolidated subsidiaries are referred to in these consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “US Foods.” US Foods Holding Corp. conducts all of its operations through its wholly owned subsidiary US Foods, Inc. (“USF”) and its subsidiaries. All of the Company’s indebtedness, as further described in Note 13, Debt, is a direct obligation of USF and its subsidiaries.

Business Description—The Company, through USF, operates in one business segment in which it markets and distributes fresh, frozen and dry food and non-food products to foodservice customers throughout the U.S. These customers include independently owned single and multi-unit restaurants, regional concepts, national restaurant chains, hospitals, nursing homes, hotels and motels, country clubs, government and military organizations, colleges and universities, and retail locations.

Basis of Presentation—The Company operates on a 52 or 53-week fiscal year, with all periods ending on a Saturday. When a 53-week fiscal year occurs, the Company reports the additional week in the fiscal fourth quarter. Fiscal year 2020 is a 53-week fiscal year. Fiscal year 2019 was a 52-week fiscal year.

The consolidated financial statements included in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements and notes prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures included in this Quarterly Report are adequate to make the information presented not misleading. These interim consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the 2019 Annual Report.

The consolidated interim financial statements reflect all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results that might be achieved for the full fiscal year.

2.    RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04-Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance is currently effective prospectively for all entities through December 31, 2022 when the reference rate replacement activity is expected to have completed. The Company adopted the provisions of this standard on a prospective basis at the beginning of the second quarter of fiscal year 2020 with no impact to the Company’s financial position or results of operations.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted the relevant provisions of this standard on a prospective basis at the beginning of the third quarter of fiscal year 2020. The Company's adoption of the relevant provisions of the new standard did not materially affect the Company's financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which provides new guidance on the accounting for implementation, set-up, and other upfront costs incurred in a hosted cloud computing arrangement. Under the new guidance, entities will apply the same criteria for capitalizing implementation costs as they would for an internal-use software license arrangement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this standard on a prospective basis at the beginning of fiscal year 2020. The Company's adoption of the provisions of the new standard did not materially affect its financial position or results of operations.

6

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a forward-looking, expected loss model to estimate credit losses. It also requires entities to consider additional disclosures related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. ASU 2016-13 was further amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 236, Financial Instrument-Credit Losses. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the provisions of this standard on a modified retrospective basis at the beginning of fiscal year 2020, which resulted in the recording of a cumulative-effect adjustment to retained earnings of $1 million. The adoption of the provision of the new standard did not materially affect the Company's financial position or results of operations. See Note 7, Allowance For Doubtful Accounts, for further discussion over the Company's allowance for doubtful accounts.     

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, convertible debt will be accounted for as a single liability measured at its amortized cost. Additionally, the new guidance requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. This guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impacts of the provision of the new standard on our financial position, results of operation and cash flows.

3.    REVENUE RECOGNITION

The Company recognizes revenue when the performance obligation is satisfied, which occurs when a customer obtains control of the promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for these goods or services. The Company generates substantially all of its revenue from the distribution and sale of food and food-related products and recognizes revenue when title and risk of loss passes and the customer accepts the goods, which occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated as a reduction of revenue at the time the revenue is recognized. Sales taxes invoiced to customers and remitted to governmental authorities are excluded from net sales. Shipping and handling costs are treated as fulfillment costs and included in distribution, selling and administrative costs.

The Company did not have any material outstanding performance obligations, contract liabilities or capitalized contract acquisition costs as of September 26, 2020 and December 28, 2019. Customer receivables, which are included in accounts receivable, less allowances in the Company’s Consolidated Balance Sheets, were $1.2 billion and $1.5 billion as of September 26, 2020 and December 28, 2019, respectively.

The Company has certain customer contracts under which incentives are paid upfront to its customers. These payments have become industry practice and are not related to financing any customer’s business, nor are these costs associated with any distinct good or service to be received from any customer. These incentive payments are capitalized in prepaid expenses and other assets and amortized as a reduction of revenue over the life of the contract or as goods or services are transferred to the customer. The Company’s contract assets for these upfront payments were $26 million and $35 million included in prepaid expenses in the Company’s Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019, respectively, and $29 million and $39 million included in other assets in the Company’s Consolidated Balance Sheets as of September 26, 2020 and December 28, 2019, respectively.

The following table presents the disaggregation of revenue for each of the Company’s principal product categories:

	13 Weeks Ended				39 Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Meats and seafood	$	2,069	$	2,352	$	5,989	$	6,849
Dry grocery products	992		1,100		2,866		3,254
Refrigerated and frozen grocery products	891		1,054		2,626		3,076
Dairy	636		689		1,738		1,955
Equipment, disposables and supplies	638		628		1,768		1,822
Beverage products	309		352		876		1,029
Produce	313		356		884		1,020
Net sales	$	5,848	$	6,531	$	16,747	$	19,005

7

4.    BUSINESS ACQUISITIONS

Smart Foodservice Acquisition—On April 24, 2020, USF completed the acquisition of Smart Stores Holding Corp., a Delaware corporation (“Smart Foodservice”), from funds managed by affiliates of Apollo Global Management, Inc. Total consideration paid at the closing of the acquisition (net of cash acquired) was $973 million, and is subject to certain customary post-closing adjustments. Smart Foodservice operates 70 small-format cash and carry stores across California, Idaho, Nevada, Montana, Oregon, Washington and Utah that serve small and mid-sized restaurants and other food business customers. The acquisition of Smart Foodservice expands the Company’s cash and carry business in the West and Northwest parts of the U.S.

USF financed the acquisition with a new $700 million incremental senior secured term loan facility under its existing term loan credit agreement, as further described in Note 13, Debt, and with cash on hand. The assets, liabilities and results of operations of Smart Foodservice have been included in the Company’s consolidated financial statements since the date the acquisition was completed.

The following table summarizes the preliminary purchase price allocation recognized for the Smart Foodservice acquisition based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The preliminary purchase price allocation is subject to further adjustment as additional information becomes available and final valuations are completed. There can be no assurances that these final valuations and additional analyses and studies will not result in significant changes to the preliminary estimates of fair value set forth below. Adjustments to the preliminary purchase price allocation recorded in the 13 weeks ended September 26, 2020 were immaterial to the Company's consolidated financial statements.

	Preliminary Purchase Price Allocation
Accounts receivable	$	5
Inventories	43
Other current assets	20
Property and equipment	85
Goodwill(1)	913
Other intangibles(2)	14
Other assets	129
Accounts payable	(39)
Accrued expenses and other current liabilities	(30)
Deferred income taxes	(7)
Other long-term liabilities, including financing leases	(160)
Cash paid for acquisition	$	973

(1)    Goodwill recognized is primarily attributable to intangible assets that do not qualify for separate recognition, as well as expected synergies from the combined company. The acquired goodwill is not deductible for U.S. federal income tax purposes.

(2)    Other intangibles consist of a trade name of $14 million with an estimated useful life of approximately 1 year.

Net sales and net income for Smart Foodservice, which have been included in the Company’s Consolidated Statements of Comprehensive Income since the date the acquisition was completed, were $276 million and $8 million, respectively, for the 13 weeks ended September 26, 2020, and $484 million and $19 million, respectively, for the 39 weeks ended September 26, 2020.

Smart Foodservice acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were less than $1 million for the 13 weeks ended September 26, 2020 and $20 million for the 39 weeks ended September 26, 2020, respectively.

Food Group Acquisition—On September 13, 2019, USF completed the $1.8 billion acquisition of five foodservice companies (the “Food Group”) from Services Group of America, Inc.: Food Services of America, Inc., Systems Services of America, Inc., Amerifresh, Inc., Ameristar Meats, Inc. and GAMPAC Express, Inc.

USF financed the acquisition with a new $1.5 billion incremental senior secured term loan facility under its existing term loan credit agreement, as further described in Note 13, Debt, and with borrowings under its revolving credit facilities. The assets, liabilities and results of operations of the Food Group have been included in the Company’s consolidated financial statements since the date the acquisition was completed. As a condition to receiving regulatory clearance for the acquisition from the Federal Trade Commission, USF divested three Food Group distribution facilities (the "Divested Assets") during the fourth quarter of 2019.

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The following table summarizes the final purchase price allocation for the acquisition of Food Group as of September 13, 2019. Adjustments to the preliminary purchase price allocation were immaterial to the Company's consolidated financial statements.

	Purchase Price Allocation
Accounts receivable	$	145
Inventories	165
Assets of discontinued operations	130
Other current assets	7
Property and equipment	210
Goodwill(1)	764
Other intangibles(2)	695
Other assets	47
Accounts payable	(200)
Accrued expenses and other current liabilities	(69)
Liabilities of discontinued operations	(19)
Other long-term liabilities, including financing leases	(43)
Cash paid for acquisition	$	1,832

(1)    Goodwill recognized is primarily attributable to intangible assets that do not qualify for separate recognition, as well as expected synergies from the combined company. The acquired goodwill is deductible for U.S. federal income tax purposes.

(2)    Other intangibles consist of customer relationships of $656 million with estimated useful lives of 15 years and indefinite-lived brand names and trademarks of $39 million.

Food Group acquisition and integration related costs included in distribution, selling and administrative costs in the Company’s Consolidated Statements of Comprehensive Income were $4 million and $17 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and $23 million and $35 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively.

Pro Forma Financial Information—The following table presents the Company’s unaudited pro forma consolidated net sales, net income and earnings per share (“EPS”) for the 13 weeks and 39 weeks ended September 26, 2020 and September 28, 2019. The unaudited pro forma financial information presents the combined results of operations as if the acquisitions and related financings of Smart Foodservice and the Food Group had occurred as of December 30, 2018 and December 31, 2017, respectively, which dates represent the first day of the Company’s fiscal year prior to their respective acquisition dates.

	13 Weeks Ended				39 Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Pro forma net sales	$	5,848	$	7,498	$	17,120	$	21,934
Pro forma net (loss) income available to common shareholders	$	(2)	$	130	$	(202)	$	323
Pro forma net (loss) income per share:
Basic	$	(0.01)	$	0.59	$	(0.92)	$	1.48
Diluted	$	(0.01)	$	0.59	$	(0.92)	$	1.47

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The unaudited pro forma financial information presented above excludes the results of operations related to the Food Group Divested Assets, as the results of operations related to the Divested Assets were reflected as discontinued operations. Unaudited pro forma net sales, net income and net income per share related to the Divested Assets for the 13 weeks and 39 weeks ended September 28, 2019 were as follows:

	13 Weeks Ended		39 Weeks Ended
	September 28, 2019		September 28, 2019
Pro forma net sales	$	114	$	372
Pro forma net income	$	3	$	6
Pro forma net income per share:
Basic	$	0.02	$	0.03
Diluted	$	0.01	$	0.03

The unaudited pro forma financial information above includes adjustments for: (1) incremental depreciation expense related to fair value increases of certain acquired property and equipment, (2) amortization expense related to the fair value of intangible assets acquired, (3) interest expense related to the incremental senior secured term loan facilities and revolving credit facilities used to finance the acquisitions, (4) the elimination of acquisition-related costs that were included in the Company’s historical results, and (5) adjustments to the income tax provision based on pro forma results of operations. No effect has been given to potential synergies, operating efficiencies or costs arising from the integration of Smart Foodservice and the Food Group with our previously existing operations or the standalone cost estimates and estimated costs that were incurred by their former respective parent companies. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the operating results that would have been achieved had the pro forma events taken place on the dates indicated. Further, the pro forma financial information does not purport to project the Company’s future consolidated results of operations following the acquisitions.

5.    RESTRICTED CASH

Restricted cash primarily consists of cash on deposit with financial institutions as collateral for certain letters of credit. Cash, cash equivalents and restricted cash as presented in the Company's Consolidated Statements of Cash Flows as of September 26, 2020 and December 28, 2019 consisted of the following:

	September 26, 2020		December 28, 2019
Cash and cash equivalents	$	1,019	$	90
Restricted cash—included in other assets	—		8
Total cash, cash equivalents and restricted cash	$	1,019	$	98

6.    INVENTORIES

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

The Company records inventories at the lower of cost or market primarily using the last-in, first-out (“LIFO”) method, except for Smart Foodservice, which uses the retail method of inventory accounting. For our LIFO based inventories, the base year values of beginning and ending inventories are determined using the inventory price index computation method. This "links" current costs to original costs in the base year when the Company adopted LIFO. LIFO reserves in the Company’s Consolidated Balance Sheets were $161 million and $152 million as of September 26, 2020 and December 28, 2019, respectively. As a result of changes in LIFO reserves, cost of goods sold increased $3 million and $1 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and increased $9 million and $13 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively. Additionally, during the 39 weeks ended September 26, 2020, due to the impact that the COVID-19 pandemic (as further described in Note 7) had on our business, the Company incurred charges of $40 million related to inventory adjustments and product donations recorded in cost of goods sold.

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7.    ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts based on a combination of factors. The Company maintains an allowance for doubtful accounts, which is based upon historical experience, future expected losses, as well as specific customer collection issues that have been identified. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy, accounts referred to outside parties for collection, and accounts past due primarily over specified periods.

Recent Events

In March 2020, the World Health Organization characterized a novel strain of coronavirus (“COVID-19”) as a pandemic amidst a rising number of confirmed cases and thousands of deaths worldwide. As of December 28, 2019, the COVID-19 pandemic had not had a significant impact on our business. However, since mid-March 2020, our business has been significantly impacted. Beginning in mid-March 2020, many countries, including the United States, took steps to restrict travel, temporarily close or enforce capacity restrictions in businesses, schools and other public gathering spaces. Restrictions on public gatherings and attendance at retail or other establishments, including restaurants, and recreational, sporting and other similar venues, continue to evolve and are expected to continue to remain in effect in some capacity for the near-term. It remains unclear when and to what extent the COVID-19 pandemic will fully abate. Since mid-March 2020, the operations of our restaurant, hospitality and education customers (and our operations that are dependent upon these customers) have been significantly disrupted by the spread of COVID-19 and the corresponding sudden and significant decline in consumer demand for food prepared away from home. Due to the impact that the COVID-19 pandemic had on our customers, particularly our restaurant and hospitality customers, we significantly increased our allowance for doubtful accounts by $170 million during the 13 weeks ended March 28, 2020, of which, $75 million and $30 million was reversed during the 13 weeks ended June 27, 2020 and September 26, 2020, respectively, based on better than anticipated collection of our pre-COVID-19 accounts receivable.

A summary of the activity in the allowance for doubtful accounts for the 39 weeks ended September 26, 2020 was as follows:

Balance as of December 28, 2019	$	30
Charged to costs and expenses	80
Adoption of ASU 2016-13	1
Customer accounts written off—net of recoveries	(23)
Balance as of September 26, 2020	$	88

This table excludes the vendor receivable related allowance for doubtful accounts of $7 million and $4 million as of September 26, 2020 and December 28, 2019, respectively.

8.    FORMER ACCOUNTS RECEIVABLE FINANCING PROGRAM

Pursuant to a since-terminated accounts receivable financing facility (the “ABS Facility”), USF sold, on a revolving basis, eligible receivables to a wholly owned, special purpose, bankruptcy remote subsidiary (the “Receivables Company”). While the ABS Facility was in effect, the Company consolidated the Receivables Company and, consequently, the transfer of the eligible receivables was a transaction internal to the Company, and the eligible receivables held by the Receivables Company were previously not derecognized from the Company’s Consolidated Balance Sheet. Included in the Company’s accounts receivable balance as of December 28, 2019 was approximately $1.0 billion of eligible receivables held by the Receivables Company as collateral in support of amounts borrowed under the ABS Facility. On May 1, 2020, USF repaid all outstanding borrowings under the ABS Facility in full and terminated the ABS Facility, as further discussed in Note 13, Debt, and as a result, the Company's eligible receivables are no longer transferred to or held by the Receivables Company.

9.    ASSETS HELD FOR SALE

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

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The change in assets held for sale for the 39 weeks ended September 26, 2020 was as follows:

Balance as of December 28, 2019	$	1
Transfers in	24
Assets sold	(15)
Balance as of September 26, 2020	$	10

Land previously held for future use and two excess warehouse facilities were transferred to assets held for sale during the 39 weeks ended September 26, 2020. The Company sold the land on June 30, 2020 and received cash proceeds from the sale of $32 million, resulting in a gain on sale of $17 million, which was included in distribution, selling and administrative costs in the Company's Consolidated Statement of Comprehensive Income.

10.    PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Property and equipment under financing leases and leasehold improvements are amortized on a straight-line basis over the remaining terms of the related leases or the estimated useful lives of the assets, if reasonably assured the Company will purchase the assets at the end of the lease terms. As of September 26, 2020 and December 28, 2019, property and equipment-net included accumulated depreciation of $2,505 million and $2,298 million, respectively. Depreciation expense was $88 million and $75 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively and $257 million and $228 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively.

11.    GOODWILL AND OTHER INTANGIBLES

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

Customer relationships, amortizable trade names and noncompete agreements are intangible assets with definite lives and are carried at the acquired fair value, less accumulated amortization. Customer relationships, amortizable trade names and noncompete agreements are amortized over the estimated useful lives (which range from approximately 1 to 15 years). Amortization expense was $21 million and $12 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively and $59 million and $32 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively.

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Goodwill and other intangibles—net consisted of the following:  

	September 26, 2020		December 28, 2019
Goodwill	$	5,644	$	4,728
Other intangibles—net
Customer relationships—amortizable:
Gross carrying amount	$	736	$	789
Accumulated amortization	(114)		(115)
Net carrying value	622		674
Trade names—amortizable:
Gross carrying amount	15		—
Accumulated amortization	(6)		—
Net carrying value	9		—
Noncompete agreements—amortizable:
Gross carrying amount	3		3
Accumulated amortization	(2)		(2)
Net carrying value	1		1
Brand names and trademarks—not amortizing	281		292
Total other intangibles—net	$	913	$	967

The Company assesses for impairment intangible assets with definite lives only if events occur that indicate that the carrying amount of an asset may not be recoverable. The Company assesses goodwill and other intangible assets with indefinite lives for impairment annually, or more frequently if events occur that indicate an asset may be impaired. For goodwill and indefinite-lived intangible assets, the Company’s policy is to assess for impairment as of the beginning of each fiscal third quarter. The Company completed its most recent annual impairment assessment for goodwill and indefinite-lived intangible assets as of June 28, 2020, the first day of the third quarter of fiscal year 2020. Due to the adverse impacts of the COVID-19 pandemic on forecasted earnings and the discount rate utilized in our valuation models, the Company recognized an impairment charge of $9.4 million related to two trade names acquired as part of the Food Group acquisition, which was included in restructuring and asset impairment charges in the Company's Consolidated Statement of Comprehensive Income. The Company determined the fair value of indefinite-lived intangible assets using the relief-from-royalty method, which requires assumptions such as long-term growth rates of future revenues, the royalty rate for such revenue, and a discount rate. These assumptions require significant judgment by management, and are therefore considered Level 3 inputs in the fair value hierarchy. No other impairments were noted as part of the annual impairment assessment.

The increase in goodwill and the amortizable trade name as of September 26, 2020 is attributable to the Smart Foodservice acquisition, as described in Note 4, Business Acquisitions. The net decrease in the gross carrying amount of customer relationships as of September 26, 2020 is attributable to the write-off of fully amortized intangible assets related to certain 2016 business acquisitions.

12.    FAIR VALUE MEASUREMENTS

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

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

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

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

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

The Company’s assets and liabilities measured at fair value on a recurring basis as of September 26, 2020 and December 28, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows:

	September 26, 2020
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	857	$	—	$	—	$	857
Liabilities
Interest rate swaps	$	—	$	7	$	—	$	7
	December 28, 2019
	Level 1		Level 2		Level 3		Total
Liabilities
Interest rate swaps	$	—	$	1	$	—	$	1

There were no significant assets or liabilities in the Company's Consolidated Balance Sheets measured at fair value on a nonrecurring basis for the periods presented above.

Recurring Fair Value Measurements

Money Market Funds

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

Derivative Financial Instruments

The Company uses interest rate swaps, designated as cash flow hedges, to manage its exposure to interest rate movements in connection with its variable-rate Initial Term Loan Facility (as defined in Note 13, Debt).

USF has entered into four-year interest rate swap agreements expiring July 31, 2021, which collectively have a notional value of $550 million, which was reduced from $733 million on July 31, 2020. The Company pays an aggregate effective rate of 3.45% on the notional amount of the Initial Term Loan Facility covered by the interest rate swap agreements, comprised of a rate of 1.70% plus a spread of 1.75% (see Note 13, Debt).

The Company records its interest rate swaps in its Consolidated Balance Sheets at fair value, based on projections of cash flows and future interest rates. The determination of fair value includes the consideration of any credit valuation adjustments necessary, giving consideration to the creditworthiness of the respective counterparties and the Company. The following table presents the balance sheet location and fair value of the interest rate swaps as of September 26, 2020 and December 28, 2019:

		Fair Value
	Balance Sheet Location	September 26, 2020		December 28, 2019
Derivatives designated as hedging instruments
Interest rate swaps	Accrued expenses and other current liabilities	$	7	$	—
Interest rate swaps	Other long-term liabilities	—		1
	Total liabilities	$	7	$	1

Gains and losses on the interest rate swaps are initially recorded in accumulated other comprehensive loss and reclassified to interest expense during the period in which the hedged transaction affects income. The following table presents the effect of the Company’s interest rate swaps in its Consolidated Statements of Comprehensive Income for the 13 weeks and 39 weeks ended September 26, 2020 and September 28, 2019:

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Derivatives in Cash Flow Hedging Relationships Amount of Loss Recognized in Accumulated Other Comprehensive Loss, net of tax