Performance Food Group Company — Form 10-Q Summary
Business context and reporting period
For the three months ended October 1, 2016 (fiscal first quarter 2017), Performance Food Group distributed food and related products across the United States through Performance Foodservice, PFG Customized, and Vistar. The unaudited results are compared with the three months ended September 26, 2015.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $4,046.1 million | $3,928.9 million | +3.0% |
| Gross profit | $511.3 million | $481.1 million | +6.3% |
| Operating profit | $31.6 million | $44.0 million | -28.2% |
| Net income | $12.2 million | $12.2 million | Unchanged |
| Diluted EPS | $0.12 | $0.14 | -14.3% |
| EBITDA | $61.9 million | $70.0 million | -11.6% |
| Adjusted EBITDA | $76.0 million | $80.1 million | -5.1% |
Gross margin was approximately 12.6% of sales, versus 12.2% a year earlier; operating margin was approximately 0.8%, versus 1.1%. Case volume rose 6.5%, while selling price per case fell 3.5%, reflecting supplier pack-size changes, mix shifts, and deflation. Operating expenses increased 9.7%, outpacing gross-profit growth. Management attributed the increase partly to personnel, legal, insurance, and growth-related investment costs. The effective tax rate declined to 37.4% from 41.3%.
Operating cash flow was negative $75.2 million, compared with negative $25.9 million. Investing cash flow was negative $49.5 million, including $34.8 million in capital expenditures and $14.8 million for acquisitions. Financing cash flow was positive $122.7 million, primarily from $124.7 million of net ABL borrowings. Cash ended the quarter at $8.9 million, down from $10.9 million at fiscal year-end. Management said operating cash flows and borrowing capacity should be sufficient for anticipated needs for at least the next 12 months.
At October 1, 2016, total debt, including finance leases, was $1,266.6 million, compared with $1,145.5 million at July 2, 2016. Long-term debt was $1,236.5 million. ABL borrowings were $889.7 million, with $604.2 million of excess availability; the average ABL interest rate was 1.96%. The company reported compliance with debt covenants. Total assets were $3,528.1 million and shareholders’ equity was $820.6 million.
Material changes and segment performance
- Performance Foodservice sales increased 2.9% and EBITDA increased 4.7%, supported by case growth among Street customers and stronger Performance Brand mix.
- PFG Customized sales declined 6.5% and EBITDA declined 46.6%. Management cited planned customer exits to free capacity for Red Lobster business, lower case volumes among some casual-dining customers, and customer relationship intangible amortization. Red Lobster distribution began for some restaurants, with full service expected by the end of Q2.
- Vistar sales increased 17.3%, including acquisition-driven growth, but EBITDA was nearly flat (+0.9%). Spending on dollar-store expansion, acquisitions, and a new automated retail facility weighed on profitability.
- Corporate & All Other EBITDA worsened to negative $38.4 million from negative $30.2 million, reflecting higher personnel, legal, stock-compensation, and insurance costs.
Outlook, risks, contingencies, and unusual items
The filing provides no numerical earnings or revenue guidance. Management reported continued case-volume growth and believed it gained industry share, while emphasizing execution of segment strategies, productivity initiatives, and Winning Together. It also noted that the business is seasonal, with borrowing typically highest in the first and second fiscal quarters.
- Key risks include intense competition and low industry margins; food-cost inflation or deflation; customer and product mix; supplier dependence; labor availability and costs; fuel and transportation costs; weather; customer credit losses; and execution of productivity efforts and acquisitions.
- Operating cash use rose year over year partly because of working-capital investment associated with new business in Customized and Vistar. The prior-year quarter included a $25 million break-up fee receipt related to a terminated acquisition agreement.
- The company accrued $2.3 million for a proposed settlement of the Wilder delivery-driver wage-and-hour lawsuit. The non-binding settlement was subject to a final agreement and court approval; no class had been certified.
- After quarter-end, the company paid $57.3 million for two acquisitions, described as immaterial individually to the consolidated financial statements.
- Other disclosed exposures include a $5.7 million estimated outstanding multiemployer pension withdrawal liability, up to $23.8 million of potential vehicle and equipment lease-guarantee payments (mitigated by asset value), and $31.5 million of outstanding capital-project and service purchase commitments. The filing states that legal proceedings were not expected to have a material adverse effect, while noting outcomes remain uncertain.
- Nine interest-rate swaps had $850 million of notional value. Management estimated a 100-basis-point LIBOR increase would add about $4.8 million to annual cash interest expense on variable-rate debt. Fuel collars covered about 17% of expected gallons over the next 12 months; a 10% increase in diesel prices could add about $6.6 million to fuel costs before customer surcharges.
Most important facts for investors to verify
- Whether sales growth and higher case volume can translate into improved operating profit, given the 9.7% increase in operating expenses and declines in Customized profitability.
- Working-capital trends, cash generation, capital spending, and the effect of subsequent acquisitions on borrowing needs and ABL availability.
- Debt levels, covenant headroom, variable-rate exposure, and the effect of interest-rate and fuel-price changes.
- Final terms and court approval of the $2.3 million Wilder settlement, along with developments in other legal, pension, and guarantee exposures.
- Execution and returns from Red Lobster onboarding, Vistar expansion, and productivity initiatives; the filing gives no quantified forward earnings guidance.