Performance Food Group Company — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the 53-week fiscal year ended July 2, 2016, not a standalone 2015 Q4 filing. Fiscal 2015 ended June 27, 2015 and had 52 weeks. The filing includes quarterly results, including fiscal 2016 Q4.
Business context
PFG distributes food and related products through 71 distribution centers to more than 150,000 customer locations. Its three segments are Performance Foodservice, PFG Customized, and Vistar. The company emphasizes higher-margin independent “Street” customers and proprietary Performance Brands, alongside national-chain and vending, retail, theater, and hospitality distribution.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $16,104.8 million | $15,270.0 million | +5.5% |
| Gross profit | $2,010.0 million | $1,848.3 million | +8.7% |
| Operating profit | $202.2 million | $160.1 million | +26.3% |
| Net income | $68.3 million | $56.5 million | +20.9% |
| Diluted EPS | $0.70 | $0.64 | +9.4% |
| EBITDA | $317.0 million | $303.6 million | +4.4% |
| Adjusted EBITDA | $366.6 million | $328.6 million | +11.6% |
| Operating cash flow | $234.9 million | $127.4 million | +$107.5 million |
- Gross margin was approximately 12.5% versus 12.1%; operating margin approximately 1.3% versus 1.0%; net margin approximately 0.4% in both years.
- Fiscal 2016 case volume grew 7.0%, or 4.8% excluding the extra week. Sales per case fell 1.5%, primarily from deflation and mix. The extra week contributed an estimated $312.4 million of sales, $40.1 million of gross profit, and $2.1 million of net income.
- Cash from operations was $234.9 million; investing used $157.6 million, including $119.7 million of capital spending and $39.0 million for acquisitions. Financing used $75.6 million. Cash at year-end was $10.9 million.
- Total debt, including capital and finance leases, was $1,145.5 million, down from $1,422.6 million. The filing separately reports $1,145.5 million of indebtedness in its risk discussion. ABL borrowings were $765.0 million, with $725.5 million of excess availability; the ABL average interest rate was 1.87%.
- The company reported $3,455.4 million in total assets and $802.8 million in shareholders’ equity. Management believed operating cash flow and available borrowing capacity were sufficient for anticipated needs over at least 12 months.
Material changes and segment performance
- Performance Foodservice sales rose 5.8% to $9,616.3 million and EBITDA increased 20.8% to $307.0 million. Street sales grew about 8.3%, reaching 44.1% of segment sales; gains in Street customers and Performance Brands supported gross profit per case.
- PFG Customized sales increased 0.8% to $3,782.1 million, but excluding the extra week were estimated to decline 1.1%. EBITDA decreased 6.6% to $34.1 million. Management attributed pressure to planned customer exits and lower case volume; Red Lobster service was scheduled to begin in fiscal 2017.
- Vistar sales increased 11.4% to $2,701.5 million and EBITDA rose 7.1% to $113.0 million, supported by growth across retail, theater, vending, and hospitality channels and acquisitions.
- Growth in consolidated gross profit exceeded growth in operating expenses. Expenses nevertheless rose 7.1%, including increases in stock compensation of $16.0 million and bonus expense of $13.8 million.
Outlook, financing, risks, and unusual items
- No quantified company-wide earnings or sales guidance is provided. Management cited continued case growth, market-share gains, Street and Performance Brand expansion, productivity initiatives, acquisitions, and operating efficiencies as priorities. It expected to begin serving Red Lobster in fiscal 2017.
- The company completed its IPO in October 2015, receiving $226.4 million in net proceeds and using proceeds primarily to repay $223.0 million of term debt. In May 2016 it issued $350.0 million of 5.5% senior notes due 2024, repaid the remaining term facility, and amended the ABL facility: capacity increased to $1.6 billion and maturity extended to February 2021. PFG reported compliance with debt covenants at year-end.
- Fiscal 2016 earnings included debt-restructuring charges, including a $9.4 million loss on extinguishment and $5.5 million of accelerated amortization of financing costs and original issue discount. Fiscal 2015 included a $25.0 million termination-fee benefit related to the abandoned Sysco–US Foods transaction, affecting year-over-year comparisons.
- Principal risks include intense competition and thin margins; food-cost inflation or deflation; customer retention and pricing pressure; supplier, labor, fuel, and weather disruptions; food safety, regulatory, cyber and technology risks; acquisitions; and substantial, partly variable-rate indebtedness. A 100-basis-point LIBOR increase was estimated to raise annual cash interest expense by about $4.6 million.
- Contingencies include an accrued $1.4 million proposed California wage-and-hour class settlement subject to final approval, a resolved $3.75 million driver settlement, an EEOC lawsuit with potential loss not estimable, and other employment cases. A New Jersey case had an estimated potential range of $0–$3.0 million. The company also reported $5.8 million of estimated withdrawal liability for an underfunded multiemployer pension plan and up to $21.0 million of undiscounted lease residual-value guarantees.
- The company paid no common dividends and stated it had no current plans to do so. It identified adoption of the new lease accounting standard as expected to have a material impact on future financial statements.
Key investor verification points
- Separate underlying growth from the 53rd-week benefit and validate reported case growth, price deflation, and mix effects.
- Assess the sustainability of margin and EBITDA gains, especially the Street/Performance Brand contribution and PFG Customized volume trends.
- Review debt refinancing terms, variable-rate exposure, covenant headroom, ABL availability, and the company’s ability to fund capital needs and debt service.
- Track settlement approvals and outcomes for employment litigation, pension withdrawal liability, and lease guarantees.
- Reconcile Adjusted EBITDA to GAAP earnings and cash flow, including the substantial add-backs and unusual debt, stock-compensation, and restructuring costs.