Performance Food Group Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended April 1, 2017, compared with periods ended March 26, 2016. The request metadata says “2016 Q3,” but the filing itself covers fiscal 2017 Q3.
Business context
PFG markets and distributes food and related products across the United States through Performance Foodservice, PFG Customized and Vistar. It serves restaurant, institutional, vending, retail and other food-away-from-home customers.
Financial performance
| Metric | Three months ended Apr. 1, 2017 | Year-over-year | Nine months ended Apr. 1, 2017 | Year-over-year |
|---|---|---|---|---|
| Net sales | $4,235.0 million | +$325.9 million; +8.3% | $12,332.9 million | +$601.0 million; +5.1% |
| Gross profit | $521.4 million | +8.4% | $1,549.9 million | +7.0% |
| Operating profit | $46.7 million | +$9.1 million | $129.6 million | -$5.8 million; -4.3% |
| Net income | $20.8 million | +$11.4 million; +121.3% | $55.9 million | +$16.8 million; +43.0% |
| Diluted EPS | $0.20 | +$0.11 | $0.54 | +$0.14 |
| Adjusted EBITDA | $89.6 million | +17.3% | $259.2 million | +2.9% |
Gross margin was approximately 12.3% for the quarter and 12.6% for the nine-month period. Operating margin was approximately 1.1% and 1.1%, respectively; net margin was approximately 0.5% and 0.5%. Adjusted EBITDA is a non-GAAP measure and includes adjustments described in the filing.
- Cash flow: Nine-month operating cash flow was $102.0 million, versus $118.4 million a year earlier. Investing used $250.8 million, including $106.6 million of capital expenditures and $144.9 million paid for acquisitions. Financing provided $145.5 million, principally from ABL borrowings. Cash declined to $7.6 million from $10.9 million at fiscal year-end.
- Liquidity: Current assets were $2,080.5 million and current liabilities $1,375.1 million at April 1, 2017. ABL excess availability was $577.9 million, down from $725.5 million at July 2, 2016. Management said operating cash flows and borrowing capacity should meet anticipated needs for at least 12 months.
- Debt: Total debt including capital and finance leases was $1,314.3 million, versus $1,145.5 million at July 2, 2016. This included $916.0 million outstanding under the ABL, $350.0 million of 5.5% notes due 2024 and a $6.0 million subordinated note due December 2017. The ABL average rate was 2.37%. The company reported compliance with debt covenants.
Changes and management commentary
- Quarterly case volume grew 7.7%; nine-month case volume grew 6.6%. Management attributed growth to customer and case gains, including Street customers, Performance Brands and Vistar channels, and said it believed the company gained industry share.
- Quarterly sales growth was strongest at Vistar (+15.2%), followed by PFG Customized (+8.2%) and Performance Foodservice (+4.8%). Nine-month sales rose 14.7% at Vistar, 3.1% at Performance Foodservice and 1.3% at PFG Customized.
- Gross-profit growth reflected case growth and a more favorable mix of Street customers and Performance Brands. Operating expenses rose 7.1% in the quarter and 8.1% year to date, driven by volume, personnel and insurance costs, strategic investments and acquisition-related activity.
- Quarterly net income benefited from higher operating profit and lower interest expense. For the nine months, operating profit declined despite higher sales and gross profit, as operating expenses grew faster; lower interest and other expense more than offset that decline.
- PFG Customized’s nine-month EBITDA fell 20.2%, partly because the company exited some customer business to make room for Red Lobster distribution. Vistar’s growth was partly offset by costs from acquisitions, geographic expansion and its automated retail facility.
Outlook, risks and unusual items
- The filing provides no specific earnings, sales or EPS guidance. Management’s liquidity outlook is that available operating cash flow and borrowing capacity will be sufficient for at least the next 12 months.
- Key disclosed risks include intense competition and thin industry margins; supplier, labor, fuel and commodity cost exposure; customer retention; execution of productivity initiatives and acquisitions; economic conditions; receivable collectability; and litigation, pension and technology risks.
- Interest-rate sensitivity: management estimated that a 100-basis-point increase in LIBOR would add about $5.3 million to annual cash interest expense on variable-rate debt. Nine swaps covered $850 million notional; the filing estimated about $530 million of variable-rate debt exposure under its stated assumptions.
- The company reported $21.4 million of outstanding capital-project and service purchase commitments, including $15.7 million for warehouse projects. Estimated multiemployer pension withdrawal liability was $5.5 million. Vehicle and equipment lease guarantees had an undiscounted maximum potential payment of $26.4 million, mitigated by leased-asset value.
- The Wilder wage-and-hour case had a proposed $2.3 million settlement accrued, pending court approval. A separate Laumea class-action settlement of $1.4 million was funded in February 2017. The EEOC discrimination lawsuit remained unresolved; the company said it could not estimate potential losses.
- Six acquisitions cost $145.5 million during the first nine months of fiscal 2017. Subsequent to quarter-end, the company paid $50.0 million for another acquisition; purchase-price allocation was still being determined.
- Blackstone and other selling stockholders sold 33.5 million shares in secondary offerings; the company received no proceeds. Blackstone’s ownership fell from 45.4% to approximately 13.5%.
Important facts for investors to verify
- Whether case growth, favorable customer/product mix and segment gains persist, particularly given modest year-to-date Adjusted EBITDA growth.
- Working-capital demands, acquisition spending and capital expenditures, and the effect on ABL borrowings, availability and leverage.
- Progress and profitability of Red Lobster distribution, Vistar expansion and recent acquisitions, including the post-quarter $50.0 million acquisition.
- Resolution and final cost of the EEOC and Wilder matters, and the status of pension and lease-guarantee obligations.
- Interest-rate exposure and covenant headroom; the filing’s Adjusted EBITDA and related measures are non-GAAP and should be assessed alongside GAAP results and cash flow.