Performance Food Group Company — Form 10-Q Summary
Reporting period: Fiscal 2020 first quarter, three months ended September 28, 2019; compared with the three months ended September 29, 2018. The filing is dated November 6, 2019. PFG distributes food and related products through its Foodservice and Vistar segments.
Financial performance
| Metric | Quarter ended Sept. 28, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $6,243.0 million | $4,539.7 million | +37.5% |
| Gross profit | $711.4 million | $593.6 million | +19.8% |
| Gross margin | 11.4% | 13.1% | Down 1.7 percentage points |
| Operating profit | $63.5 million | $50.6 million | +25.5% |
| Net income | $36.1 million | $28.2 million | +28.0% |
| Diluted EPS | $0.34 | $0.27 | +$0.07 |
| Operating cash flow | $84.2 million | $32.3 million | +$51.9 million |
| Capital expenditures | $22.8 million | $25.0 million | Down $2.2 million |
Cash and liquidity: Cash was $16.0 million at quarter-end. Restricted cash was $1,071.4 million, primarily proceeds from the new notes held in escrow for the proposed Reinhart acquisition, plus funds for related interest payments; it should not be treated as generally available operating cash. PFG reported $1,248.3 million of excess availability under its ABL facility, net of lenders’ reserves.
Debt: Long-term debt increased to $2,212.1 million from $1,202.9 million at June 29, 2019. This includes $1,060.0 million of 5.5% senior notes due 2027 issued to help finance Reinhart. ABL borrowings were $810.0 million, with a reported average interest rate of 3.42%. The company said it was in compliance with debt covenants.
Changes and operating drivers
- Reported sales growth was substantially acquisition-driven: Eby-Brown contributed $1,374.0 million of sales, including $291.7 million in tobacco excise taxes. Case volume rose 10.7% year over year.
- Foodservice sales increased 7.8% to $3,930.9 million; segment EBITDA rose 13.0% to $104.0 million. Management cited independent-customer and Performance Brand growth, favorable mix, and procurement gains.
- Vistar sales increased 158.9% to $2,311.1 million, largely reflecting Eby-Brown, while segment EBITDA increased 63.0% to $51.5 million. Vistar gross margin fell from 13.9% to 9.0%, primarily due to Eby-Brown’s lower margins.
- Consolidated gross margin declined from 13.1% to 11.4%, also reflecting the lower-margin acquisition mix. Management said gross profit per case improved through channel and product mix, including more Performance Brands.
- Adjusted EBITDA, a non-GAAP measure, increased 33.7% to $127.7 million. Its reconciliation included $11.6 million of acquisition, integration and reorganization adjustments; the measure excludes certain costs and is not a substitute for GAAP results or cash flow.
Outlook, risks and unusual items
- Reinhart transaction: Announced July 1, 2019 at a stated value of $2.0 billion, or approximately $1.7 billion net of an estimated $265 million tax benefit. Closing remained subject to customary conditions, including regulatory approvals. The company expected to use ABL borrowings, note proceeds and a proposed $300–$400 million common-stock offering to fund the purchase. The notes’ escrowed proceeds were restricted pending the transaction.
- Management stated that operating cash flows and available borrowing capacity should meet anticipated cash requirements for at least the next 12 months and support normal operations. No quantified earnings or revenue guidance is provided in the supplied filing text.
- Management identified industry competition and low margins, input-cost inflation or deflation, supplier and labor risks, fuel costs, customer retention, and acquisition execution and integration among relevant business risks. Reinhart-specific risks include regulatory delays or failure to close, financing and integration costs, disruption to business relationships, and unrealized synergies.
- The filing reports an ongoing EEOC gender-discrimination lawsuit. The court denied the EEOC’s sanctions motions in June 2019 but reserved a question concerning potential prejudice to expert testimony; the company said it could not estimate a potential loss or range of loss. Management did not believe the resolution of pending legal matters would materially affect financial position or results, while noting outcomes cannot be predicted with certainty.
- The company adopted lease accounting standard ASC 842 on June 30, 2019, recognizing operating lease liabilities of $423.8 million and corresponding right-of-use assets of $423.0 million at adoption. The filing says the standard did not materially affect the statements of operations or cash flows.
Important facts for investors to verify
- Whether Reinhart received required regulatory approvals, closed as planned, and was financed on the anticipated terms—including the proposed equity offering.
- How Eby-Brown affects ongoing sales growth, segment profitability and gross margins after separating acquisition contribution from organic performance.
- Whether operating cash generation and ABL availability remain adequate, given higher debt and the substantial restricted-cash balance.
- Adjusted EBITDA’s reconciliation and permitted addbacks, alongside GAAP earnings, cash flow and debt-service requirements.
- Developments in the EEOC case, including summary-judgment proceedings and whether the potential exposure becomes estimable.