Performance Food Group Company — Q2 Fiscal 2019 Form 10-Q
Reporting period: Quarter and six months ended December 29, 2018; comparisons are with periods ended December 30, 2017. The company distributes food and related products through Foodservice and Vistar segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $4,615.7 million | $4,311.1 million | $9,155.4 million | $8,676.0 million |
| Gross profit | $614.6 million | $567.6 million | $1,208.2 million | $1,122.3 million |
| Gross margin | 13.3% | 13.2% | 13.2% | 12.9% |
| Operating profit | $73.0 million | $49.1 million | $123.6 million | $99.6 million |
| Net income | $43.1 million | $78.0 million | $71.3 million | $100.6 million |
| Diluted EPS | $0.41 | $0.75 | $0.68 | $0.96 |
| Operating cash flow | Not provided quarterly in this filing | Not provided quarterly in this filing | $70.0 million | $32.6 million |
Q2 sales increased 7.1%, gross profit 8.3%, and operating profit 48.7%; six-month sales increased 5.5%, gross profit 7.7%, and operating profit 24.1%. Net income declined 44.7% in Q2 and 29.1% for the six months, principally because the prior-year periods included substantial tax benefits. Adjusted EBITDA, a non-GAAP measure, rose 11.3% to $116.9 million in Q2 and 8.5% to $212.4 million for the six months.
Case volume grew 5.5% in Q2 and 4.6% for the six months. Management attributed stronger gross profit growth to favorable channel and product mix, including more independent-customer and Performance Brand sales, and improved Vistar gross profit per case. Operating expenses increased 4.5% in Q2 and 6.1% for the six months, reflecting higher volume, fuel costs, and prior investments in sales, warehouse, and delivery personnel.
Cash, debt, and liquidity
- Six-month operating cash flow was $70.0 million; investing cash outflow was $116.4 million, including $60.1 million of capital expenditures and $57.0 million for acquisitions. Financing provided $46.7 million, mainly from net ABL borrowings of $65.4 million.
- Cash was $7.5 million and restricted cash $10.6 million at December 29, 2018. Restricted cash supports insurance collateral.
- Total debt including capital and finance leases was $1,298.1 million, up from $1,184.2 million at June 30, 2018. Long-term debt was $1,188.4 million, including $845.0 million drawn on the ABL and $350.0 million of 5.500% notes due 2024.
- ABL excess availability was $859.0 million; the ABL average interest rate was 3.96%, versus 3.52% at June 30, 2018. Management said cash flows and borrowing capacity should cover anticipated needs for at least the next 12 months. The company reported compliance with debt covenants.
Segments and material developments
- Foodservice: Q2 sales increased 5.8% to $3,671.9 million and EBITDA increased 2.2% to $104.3 million. Six-month sales rose 4.0%, while EBITDA declined 1.5% to $196.3 million.
- Vistar: Q2 sales increased 12.3% to $941.9 million and EBITDA rose 33.5% to $45.4 million. Six-month sales increased 12.2% and EBITDA rose 28.8% to $77.0 million. Growth included theater, retail, and vending channels and acquisitions.
- In Q1 FY2019, the company reorganized its reportable segments into Foodservice and Vistar; prior-year segment figures were recast. It adopted the new revenue standard and early-adopted updated hedge accounting guidance, with no material financial-statement impact reported.
- The board authorized a $250 million share repurchase program in November 2018. The company repurchased and retired about 0.2 million shares for $5.2 million during Q2; $244.8 million remained available at quarter-end.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management cited sustained case growth and estimated that the company gained industry share in Q2, based on sales growth exceeding the industry growth forecast it referenced. It also identified growth initiatives including independent-customer sales, Performance Brands, geographic expansion, operating efficiencies, and acquisitions.
Risks include intense competition and low industry margins, food and fuel cost volatility, labor and transportation costs, reliance on suppliers and customers without long-term contracts, acquisition execution, economic conditions, cybersecurity and technology disruption, indebtedness, and regulatory, tax, product-liability, and insurance exposures. The company said it expects adoption of the new lease standard in fiscal 2020 to significantly affect its balance sheet, but not materially affect earnings or cash flows.
Contingencies include an EEOC lawsuit alleging gender discrimination in hiring and promotion. The company reported that it could not estimate a potential loss or range of loss, including because the case may proceed to further individual claims; it is defending the matter. Management stated that pending legal matters were not expected to materially affect financial position or results, while noting outcomes cannot be predicted with certainty. Outstanding purchase obligations for capital projects and services were $31.8 million; maximum potential lease residual guarantees were approximately $25.5 million.
Important facts for investors to verify
- How much of sales and EBITDA growth reflects organic case growth, pricing and mix versus acquisitions, particularly in Vistar.
- The sustainability of margin improvement and the effect of fuel, labor, insurance, and other operating-cost inflation.
- The tax comparison: prior-year net income benefited from a $37.4 million deferred-tax revaluation benefit and a $15.4 million stock-award tax benefit; these make year-over-year GAAP earnings comparisons unusually distorted.
- Debt growth, variable-rate exposure, ABL availability and covenants, and capacity to fund capital spending, acquisitions, and the authorized repurchase program.
- Developments in the EEOC litigation and the eventual balance-sheet effect of lease accounting adoption.