Performance Food Group Company — FY2017 Form 10-K
Reporting period: Fiscal year ended July 1, 2017 (52 weeks). The request refers to 2016 Q4, but the supplied filing is the FY2017 annual report; it includes quarterly results, including fiscal Q4. Fiscal 2016 had 53 weeks, which affects year-over-year comparisons.
Business context and reporting period
PFG distributes food and related products to more than 150,000 customer locations through Performance Foodservice, PFG Customized, and Vistar. Its customers include independent and chain restaurants, institutions, vending and office coffee operators, retailers, and theaters. The company reported more than 14,000 employees and 76 distribution centers.
Financial results and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $16,761.8 million | $16,104.8 million |
| Gross profit | $2,124.8 million | $2,010.0 million |
| Operating profit | $211.0 million | $202.2 million |
| Net income | $96.3 million | $68.3 million |
| Diluted EPS | $0.93 | $0.70 |
| Adjusted EBITDA | $390.7 million | $366.6 million |
| Operating cash flow | $201.7 million | $235.8 million |
| Cash and cash equivalents at year-end | $8.1 million | $10.9 million |
| Total debt, including capital and finance leases | $1,297.6 million | $1,145.5 million |
Fiscal 2017 gross margin was approximately 12.7%, operating margin 1.3%, and net margin 0.6%. Cash used in investing was $332.0 million, including $140.2 million of capital expenditures and $192.9 million of acquisition payments. Financing provided $127.5 million, mainly from net ABL borrowings. At year-end, ABL excess availability was $594.6 million after letters of credit and lender reserves. Management said operating cash flow and borrowing capacity should cover anticipated needs for at least 12 months.
Fiscal Q4: Sales were $4,428.9 million, gross profit $574.9 million, operating profit $81.4 million, and net income $40.4 million. In fiscal Q4 2016, these were $4,372.9 million, $561.3 million, $66.8 million, and $29.2 million, respectively. Q4 2017 gross, operating, and net margins were approximately 13.0%, 1.8%, and 0.9%. The filing does not provide quarterly cash-flow data.
Material changes versus the prior comparable period
- Full-year sales rose 4.1%, gross profit 5.7%, operating profit 4.4%, net income 41.0%, and Adjusted EBITDA 6.6%. Case volume increased 4.1%; excluding fiscal 2016’s extra week, management reported growth of 6.2%.
- The 53rd week in fiscal 2016 contributed an estimated $312.4 million of sales and $2.1 million of net income, so reported annual growth understates underlying volume growth.
- Management attributed improvement to case growth and a more favorable customer and product mix, including growth in Street customers and higher-margin Performance Brands. Gross profit grew faster than case volume.
- Operating expenses increased 5.9%, reflecting higher volume, strategic investments, compensation and benefits, and an $8.4 million increase in insurance expense. A $3.0 million amount for professional and legal fees, including settlements, was also cited.
- Interest expense declined by $29.0 million, partly because fiscal 2016 included a $9.4 million debt-extinguishment loss and $5.5 million of accelerated financing-cost amortization. Operating cash flow decreased from fiscal 2016; excluding its $25.0 million break-up fee receipt, fiscal 2016 operating cash flow was $210.8 million.
- Segment results were mixed: Performance Foodservice EBITDA increased 5.9% to $325.2 million; Vistar EBITDA increased 6.9% to $120.8 million; PFG Customized EBITDA fell 25.8% to $25.3 million. Vistar sales grew 11.2%, while PFG Customized sales grew 1.0%.
Outlook, commentary, risks, and unusual items
- No quantified forward guidance is provided. Management cited sustained case growth, estimated market-share gains, and continued focus on Street sales, Performance Brands, new customers, geographic expansion, operational efficiencies, and acquisitions.
- In August 2017, after fiscal year-end, the ABL Facility was amended to increase commitments from $1.6 billion to $1.95 billion. The company reported compliance with debt covenants at year-end. Substantial leverage, floating-rate exposure, restrictive covenants, and debt-service requirements remain risks.
- Interest-rate swaps covered $550 million notional at year-end. Management estimated that a 100-basis-point increase in LIBOR would increase annual cash interest expense by about $6 million on variable-rate debt. Fuel-price, food-cost inflation or deflation, and low industry margins may also affect results.
- PFG paid $193.6 million for seven fiscal 2017 acquisitions and paid a further $64.0 million for an acquisition after year-end. Integration and realizing acquisition benefits are risks.
- A proposed $2.3 million settlement of a New Jersey wage-and-hour class action was accrued, subject to final court approval. The company also faced an EEOC discrimination lawsuit; it said potential loss could not be estimated.
- Other material risks described include intense competition, customer switching and pricing pressure, supplier and labor availability, food-safety regulation and product liability, adverse weather, cybersecurity and technology disruption, customer credit losses, and multiemployer pension obligations.
- The company reported no goodwill or indefinite-lived intangible impairment for fiscal 2017. Deloitte issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- How much of reported growth reflects comparable-week case growth versus acquisitions, pricing, and mix, and whether Street and Performance Brand momentum continues.
- Whether PFG Customized can recover EBITDA after customer exits, facility-closure costs, and the Red Lobster transition.
- Acquisition contribution and integration progress, including the post-year-end acquisition, alongside elevated acquisition and capital spending.
- Cash conversion and working-capital needs, given lower operating cash flow and low year-end cash despite substantial ABL availability.
- Debt trajectory, borrowing costs, covenant headroom, and the implications of the August 2017 ABL expansion and variable-rate exposure.
- Resolution of the EEOC matter and final approval of the $2.3 million wage-and-hour settlement.