Performance Food Group Company — Fiscal 2021 Second Quarter 10-Q
Reporting period: Quarter ended December 26, 2020, compared with the quarter ended December 28, 2019. The filing also reports the six months ended on those dates. All dollar amounts are in millions, except per-share data.
Business context and results
PFG distributes food and food-related products through its Foodservice and Vistar segments. Results reflect the Reinhart acquisition, completed in fiscal 2020, and continuing COVID-19 effects on restaurants, theaters, schools, travel, and other customer channels.
| Metric | Quarter | Prior-year quarter | Six months | Prior-year six months |
|---|---|---|---|---|
| Net sales | $6,845.2 | $6,068.6 | $13,892.0 | $12,311.6 |
| Gross profit | $811.1 | $711.2 | $1,626.6 | $1,422.6 |
| Operating profit | $60.9 | $80.5 | $96.7 | $144.0 |
| Net income | $17.6 | $41.2 | $16.9 | $77.3 |
| Diluted EPS | $0.13 | $0.39 | $0.13 | $0.73 |
| Adjusted EBITDA | $158.0 | $142.9 | $293.2 | $270.6 |
Financial position, cash flow and liquidity
- Quarter sales increased 12.8%, primarily because Reinhart contributed $1,348.0; gross profit rose 14.0%. Gross margin was 11.8%, versus 11.7%. Operating profit fell 24.3% and net income fell 57.3%; approximate net margin declined to 0.3% from 0.7%.
- For the six months, sales grew 12.8%, while operating profit declined 32.8% and net income declined 78.1%. Gross margin was 11.7%, versus 11.6%.
- Six-month operating cash flow was a use of $24.4, compared with a source of $157.8 a year earlier. Investing used $88.8, including $83.0 of capital expenditures and $12.2 for an acquisition. Financing provided $109.2, including $256.2 net ABL borrowings.
- Cash and restricted cash totaled $427.8 at quarter-end. ABL excess availability was $1,456.1, down from $1,712.2 at June 27, 2020. Management said cash flows and available borrowing capacity should cover anticipated needs for at least 12 months.
- Total debt, including current installments, was $2,616.8, compared with $2,356.9 at June 27, 2020; $109.0 was current. ABL borrowings rose to $966.2 from $710.0. The company reported compliance with its debt covenants.
Material changes and management commentary
- Reported growth was acquisition-led: excluding Reinhart, case volume declined 16.9% in the quarter and 17.2% in the six-month period, mainly due to COVID-19. Consolidated case volume increased because of Reinhart.
- Foodservice sales increased 27.0% for the quarter and segment EBITDA rose 36.7%, with Reinhart contribution offset in part by weaker organic volumes. Excluding Reinhart, independent cases declined 5.0% in the quarter.
- Vistar sales fell 11.9% and EBITDA fell 31.6% for the quarter. Theater, vending, office coffee, hospitality, and travel channels remained weak. Vistar gross margin declined to 8.6% from 9.6%, partly reflecting channel mix.
- Higher operating expenses, depreciation and amortization, and interest expense weighed on earnings. Quarterly interest expense rose to $38.1 from $26.4; management attributed the increase primarily to higher average borrowings.
- Management described COVID-19 as an ongoing material uncertainty and did not provide specific financial guidance in the filing. The fiscal 2021 year is a 53-week year, versus 52 weeks for fiscal 2020.
Risks, contingencies and unusual items
- COVID-19 could continue to materially adversely affect demand, liquidity, customers, suppliers, labor, logistics, and the broader economy. The duration and financial effects remain uncertain.
- The company paid $185.6 for Eby-Brown acquisition earnouts in the first quarter, including $117.3 classified as operating cash flow and $68.3 as financing cash flow. It also paid $67.3 relating to Reinhart final net working capital.
- Inventory write-offs were $7.0 in the quarter and $19.0 for six months, with increases attributed primarily to the COVID-affected environment. Vistar also disclosed risk of unreserved theater-customer inventory, while noting customer contracts include reimbursement provisions for inventory losses.
- The EEOC employment litigation was resolved through a court-approved consent decree; the company had accrued an amount it considered immaterial for the settlement payment. Eby-Brown is a defendant in JUUL-related litigation; JUUL has agreed to defend and indemnify it, but PFG cannot estimate a potential loss or range of loss.
- Lease residual-value guarantees had a maximum undiscounted potential payment of approximately $21.9, mitigated by the future fair value of leased assets. The company reported no off-balance-sheet arrangements expected to materially affect its financial condition or results.
Important facts for investors to verify
- How much of future reported sales and earnings reflects Reinhart versus organic recovery, especially in Foodservice and Vistar.
- Whether COVID-related customer demand, case volumes, inventory write-offs, and Vistar channel margins improve or deteriorate.
- Operating cash flow and working-capital trends, given the six-month cash use and increased ABL borrowing.
- Debt levels, ABL availability, covenant headroom, and interest costs as borrowing needs change.
- Developments in JUUL litigation and the scope and continuing effectiveness of the indemnity; any subsequent estimates or accruals.