Performance Food Group Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended April 2, 2022; comparisons are with periods ended March 27, 2021. The filing is dated May 11, 2022. Amounts are in millions unless stated otherwise.
Business context
Performance Food Group distributes food and food-related products, plus convenience-store goods, across the United States and Canada. Its reportable segments are Foodservice, Vistar, and Convenience. Core-Mark was acquired on September 1, 2021, expanding the Convenience business and adding Canadian operations.
Financial results and liquidity
| Metric | Three months ended April 2, 2022 | Change vs. prior year | Nine months ended April 2, 2022 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $13,079.0 | +81.6% | $36,304.1 | +72.1% |
| Gross profit | $1,345.6 | +61.6% | $3,766.7 | +53.2% |
| Operating profit | $68.6 | +$45.2 | $174.6 | +$54.5 |
| Net income (loss) | $23.4 | Prior year: $(7.6) | $36.5 | Prior year: $9.3 |
| Diluted EPS | $0.15 | Prior year: $(0.06) | $0.24 | Prior year: $0.07 |
| Adjusted EBITDA | $237.9 | +96.3% | $662.7 | +59.9% |
Margins: Gross margin was approximately 10.3% for the quarter and 10.4% year to date, versus approximately 11.6% in each prior-year comparable period. Operating margin was approximately 0.5% for the quarter (prior year 0.3%) and 0.5% year to date (prior year 0.6%).
- Sales drivers: Core-Mark contributed $4,149.6 of quarterly sales and $9,948.9 since acquisition. Total case volume rose 35.3% in the quarter and 34.0% year to date; organic case volume rose 8.3% and 13.9%, respectively. Product cost inflation was approximately 13.6% for the quarter and 11.2% year to date.
- Profitability: Revenue and profit increased with Core-Mark, recovering food-away-from-home demand, higher case volumes, and inflation-related pricing. Gross margin declined year over year. Higher labor, fuel, insurance, depreciation, and acquisition-related costs partially offset higher gross profit.
- Cash flow: Operating activities provided $390.6 for the first nine months, compared with $173.1 a year earlier. Investing activities used $1,788.2, including $1,651.1 for acquisitions and $140.8 for capital expenditures. Financing activities provided $1,396.2.
- Debt and liquidity: Long-term debt was $3,721.1 at April 2, 2022, versus $2,240.5 at July 3, 2021. Cash was $13.7, with another $7.1 restricted. ABL borrowings were $1,422.0; reported excess availability was $2,374.3, and the average ABL interest rate was 2.09%. The ABL facility has a $4.0 billion commitment and matures September 17, 2026.
- Balance sheet: Total assets were $11,979.6 and total liabilities $8,775.1. Current assets were $5,568.4 and current liabilities $3,503.9.
Material changes and management commentary
- Core-Mark’s $2.394 billion acquisition was funded through a mix of cash, PFG shares, and assumed debt. PFG also completed another acquisition during the first nine months; total acquisition consideration was $2.7 billion.
- Management attributed the operating recovery to easing pandemic-related restrictions and consumers returning to restaurants, travel, and entertainment venues. It also cited ongoing supply-chain disruption and labor shortages.
- Temporary contract labor costs increased $16.0 in the quarter and $102.3 year to date; higher fuel prices increased expense by $22.0 and $56.1, respectively.
- Management said operating cash flow and available borrowing capacity should be sufficient for anticipated cash needs for at least the next 12 months, including normal operations and capital expenditures. The filing provides no specific earnings or sales guidance.
- The company reported compliance with debt covenants. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Risks, contingencies, and unusual items
- Management highlighted continuing uncertainty from COVID-19, supply-chain and labor constraints, product and logistics inflation, fuel costs, and consumer economic conditions. Other stated risks include intense competition, low industry margins, supplier reliance, customer concentration and credit exposure, indebtedness, and acquisition integration and synergy execution.
- Core-Mark’s reported net loss was $5.1 for the quarter and $9.5 since acquisition; management attributed it to purchase-accounting and LIFO inventory-reserve adjustments. The acquisition also added $8.8 of inventory step-up amortization to gross profit costs since acquisition.
- Interest expense was $45.9 for the quarter and $135.1 year to date. Year-to-date results included a $3.2 loss on extinguishment of debt related to redemption of the 5.500% notes due 2024. The company issued $1.0 billion of 4.250% notes due 2029.
- JUUL-related multidistrict and other litigation names subsidiaries Eby-Brown and Core-Mark as defendants in some claims. JUUL has agreed to defend and indemnify them under agreements described in the filing. The company could not estimate a potential loss or range of loss; it stated that currently pending matters were not expected to materially affect financial position or results, while noting outcomes cannot be predicted with certainty.
- Outstanding purchase obligations were $168.8, including $108.5 of capital-project commitments. Additional uncommenced operating leases carried $428.3 in future minimum payments. The company also disclosed $16.2 of maximum potential lease residual-value guarantee payments, mitigated by the assets’ value at lease end.
Important facts for investors to verify
- Separate organic growth, inflation-driven pricing, and Core-Mark’s acquired contribution when assessing sales growth and margins.
- Track gross-margin trends, LIFO reserve effects, acquisition-related amortization, and whether reported profit converts into sustained operating cash flow.
- Review integration progress and realized synergies from Core-Mark, including the effect of its purchase accounting and reported segment performance.
- Monitor leverage, ABL borrowing-base availability, interest costs, and covenant headroom as financing and working-capital needs change.
- Follow labor, fuel, supplier, customer-credit, and JUUL litigation developments; the filing does not quantify a potential loss for the JUUL matters.