Performance Food Group Company — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2019, ended March 30, 2019. The filing’s period differs from the “2018 Q3” request metadata. Dollar figures are in millions unless noted.
Business context and results
PFG distributes food and related products to restaurants and institutional customers across the United States. Its reportable segments are Foodservice and Vistar. Comparisons below are with the quarter ended March 31, 2018, and the corresponding nine-month period.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $4,689.0; up 7.8% | $13,844.4; up 6.3% |
| Gross profit | $604.7; up 8.2% | $1,812.9; up 7.8% |
| Operating profit | $59.2; down 1.5% | $182.8; up 14.5% |
| Net income | $32.3; down 4.2% | $103.6; down 22.9% |
| Diluted EPS | $0.31 vs. $0.32 | $0.99 vs. $1.29 |
| Adjusted EBITDA | $106.1; up 11.0% | $318.5; up 9.3% |
| Operating cash flow | $260.5 for nine months, versus $229.6 |
Gross margin was 12.9% for the quarter versus 12.8%, and 13.1% for nine months versus 12.9%. Operating margin was approximately 1.3% for the quarter versus 1.4%, and 1.3% for nine months versus 1.2%. Net margin was approximately 0.7% for the quarter versus 0.8%, and 0.7% for nine months versus 1.0%.
Cash flow, debt and liquidity
- Nine-month investing cash outflow was $149.8, including $93.1 of capital spending and $57.7 net cash paid for acquisitions. Financing cash outflow was $110.1, mainly reflecting $81.7 of net ABL repayments. Cash and restricted cash ended at $18.4.
- At March 30, 2019, total debt including capital and finance leases was $1,184.9, compared with $1,184.2 at June 30, 2018. ABL borrowings were $698.4; the $350.0 senior notes bear 5.5% interest and mature in 2024. ABL average interest rate was 4.06%, up from 3.52% at June 2018.
- ABL excess availability was $1,031.5, compared with $854.2 at June 2018. Management said operating cash flow and available borrowing capacity should cover anticipated needs for at least 12 months. The company reported compliance with debt covenants.
Material changes and management commentary
- Management reported case-volume growth of 5.3% in the quarter and 4.8% for nine months, and said sales growth outpaced the industry forecast, indicating market-share gains. Higher gross profit reflected favorable customer/channel mix, more Performance Brands sales, and procurement gains.
- Quarterly operating expenses rose 9.4%, faster than sales, due mainly to case-related variable costs and higher personnel and insurance expenses. Nine-month expenses also included higher fuel costs; increased depreciation and amortization reflected investment and acquisitions.
- Foodservice sales rose 7.5% for the quarter and 5.2% for nine months; segment EBITDA increased 6.4% and 1.0%, respectively. Vistar sales rose 8.8% and 11.0%; EBITDA increased 13.8% and 23.5%, supported by channel growth and acquisitions.
- Nine-month net income fell largely because the prior-year period included a $38.5 tax benefit from revaluation of deferred tax liabilities and a $15.4 excess stock-award tax benefit. Fiscal 2019’s nine-month effective tax rate was 23.4%, versus a prior-year benefit-driven rate of negative 16.7%.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or sales guidance. Management described ongoing strategies of growing independent-customer and Performance Brands sales, expanding geographies, pursuing efficiencies, and making strategic acquisitions.
- Subsequent to quarter-end, PFG paid $150.6 for a Vistar acquisition with contingent consideration; purchase accounting was not yet complete.
- The company repurchased $9.3 of shares over nine months under its $250 share-repurchase authorization; $240.7 remained available at quarter-end. Further repurchases are discretionary and subject to market conditions and debt covenants.
- Material risks include intense competition and low industry margins; food, fuel and labor cost volatility; customer and supplier concentration or dependence; acquisition integration; debt and interest-rate exposure; and operational, regulatory, product-liability and cybersecurity risks.
- A long-running EEOC employment-discrimination lawsuit remains unresolved. The company said it cannot estimate a potential loss or range of loss, including in connection with the EEOC’s sanctions motions. Management stated that pending legal matters are not expected to materially affect results, but outcomes cannot be assured.
- Management expects adoption of lease accounting in fiscal 2020 to significantly affect the balance sheet, but not materially affect the income statement or cash flows. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether case growth, favorable mix and Vistar momentum persist, and whether expense growth remains controlled.
- How reported earnings compare after accounting for prior-year tax benefits and the company’s non-GAAP Adjusted EBITDA adjustments.
- Cash conversion, working-capital needs, capital spending and acquisition funding, including the post-quarter Vistar acquisition and its contingent consideration.
- Debt costs, ABL availability and covenant capacity, especially as interest rates and planned share repurchases affect liquidity.
- Developments in the EEOC litigation, lease-standard implementation, and other disclosed contingencies.