Performance Food Group Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017; comparisons are to the three months ended October 1, 2016. PFG distributes food and related products through Performance Foodservice, PFG Customized, and Vistar.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $4,364.9 million | $4,046.1 million | +7.9% |
| Gross profit | $554.7 million | $511.3 million | +8.5% |
| Operating profit | $50.5 million | $31.6 million | +59.8% |
| Net income | $22.6 million | $12.2 million | +85.2% |
| Diluted EPS | $0.22 | $0.12 | +$0.10 |
| EBITDA | $82.2 million | $61.9 million | +32.8% |
| Adjusted EBITDA | $90.7 million | $76.0 million | +19.3% |
Gross margin was approximately 12.7% of sales, versus 12.6% a year earlier; operating margin was approximately 1.2%, versus 0.8%. Adjusted EBITDA is a non-GAAP measure; the company reconciles it to net income and excludes specified items.
- Cash flow: Operating activities provided $16.0 million, compared with $75.2 million used in the prior-year quarter. Investing used $79.6 million, including $63.2 million for acquisitions and $16.5 million of capital expenditures. Financing provided $62.4 million, mainly from ABL borrowings. Cash and restricted cash ended at $19.8 million, including $12.9 million restricted.
- Liquidity and debt: September 30 current assets were $2,132.8 million and current liabilities $1,375.2 million. Total debt, including capital and finance leases, was $1,363.8 million, up from $1,297.6 million at July 1. ABL borrowings were $966.5 million, with $628.2 million excess availability; average ABL interest rate was 2.69%. The company reported compliance with its debt covenants.
- Taxes: Effective tax rate was 37.5%, nearly unchanged from 37.4%.
Material changes and drivers
- Management reported 3.5% case-volume growth and said sales grew faster than the industry growth rate it tracked. Revenue growth reflected volume and higher selling price per case.
- Management attributed stronger gross profit to case growth, a shift toward higher-margin independent customers and Performance Brands, and procurement gains. Operating expenses rose 5.1%, less than sales, mainly due to volume-related operating and selling costs, personnel, and fuel.
- Performance Foodservice sales grew 7.8% and segment EBITDA 8.5%; independent sales grew approximately 10.3%. PFG Customized sales increased 3.3%, with lower case volume partly offset by product mix. Vistar sales rose 7.5% and EBITDA 18.3%, led by hospitality, retail, theater, and vending channels.
- The company paid $63.4 million for a fiscal 2018 acquisition, principally allocated to working capital, goodwill, and intangible assets. Management said acquisitions did not materially affect reported results.
- The ABL facility was amended in August 2017, increasing commitments from $1.6 billion to $1.95 billion. In September, Wellspring sold 5 million shares, reducing its ownership to approximately 10.8%; PFG received no proceeds.
Outlook, risks, and contingencies
Management stated that operating cash flows and available borrowing capacity should be sufficient for anticipated cash needs for at least the next 12 months. No specific earnings or revenue guidance was provided in the filing. Management described ongoing priorities including independent-customer and Performance Brand growth, new customers, geographic expansion, operating efficiencies, and strategic acquisitions.
- Risks include intense competition, low industry margins, food and fuel cost volatility, labor availability and cost, supplier reliance, customer retention, weather disruptions, technology and cybersecurity incidents, indebtedness, and credit losses.
- The filing specifically noted that Hurricane Harvey and Hurricane Irma disrupted some operations and affected locations of customers and employees.
- Outstanding purchase commitments for capital projects and services were $15.9 million. Potential lease residual-value guarantees had an undiscounted maximum of $27.4 million; $0.2 million was recorded as a liability.
- The company accrued $2.3 million for a proposed settlement in the Wilder driver wage-and-hour matter, pending final court approval. It also disclosed an EEOC discrimination lawsuit for which it could not estimate potential loss; management said it intended to defend the case. Management did not believe pending proceedings would ultimately materially affect financial position or results, while noting outcomes remain uncertain.
- A $6.0 million subordinated promissory note principal was due in December 2017. A $350 million 5.5% senior notes issue matures in 2024.
Important facts for investors to verify
- Whether case growth, independent-customer gains, and higher-margin product mix persist, and whether growth converts into stronger operating margins.
- How acquisition spending, working-capital needs, and capital expenditures affect operating cash flow and ABL borrowings.
- Debt levels, borrowing availability, variable interest-rate exposure, and the December 2017 promissory-note repayment.
- Any developments in hurricane-related disruption, the EEOC litigation, and final approval of the $2.3 million settlement.
- The assumptions behind Adjusted EBITDA and its exclusions; it is non-GAAP and does not reflect all cash costs, including capital needs, working capital, and debt service.