Performance Food Group Company — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended December 26, 2015; comparisons are with the periods ended December 27, 2014. The company distributes food and related products through Performance Foodservice, PFG Customized and Vistar.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $3,893.9 million, up 2.7% | $7,822.8 million, up 4.4% |
| Gross profit | $486.8 million, up 6.5% | $967.9 million, up 6.7% |
| Operating profit | $53.8 million, up 14.2% | $97.8 million, up 22.6% |
| Net income | $17.5 million; diluted EPS $0.17 | $29.7 million; diluted EPS $0.32 |
| Adjusted EBITDA | $95.4 million, up 10.2% | $175.5 million, up 11.9% |
Gross margin was approximately 12.5% in the quarter and 12.4% for six months, versus 12.1% in each prior-year comparable period. Operating margin was approximately 1.4% and 1.3%, respectively, versus 1.2% and 1.1%. Net margin was approximately 0.4% in both current periods, compared with 0.3% in the prior-year periods. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow and liquidity: First-half operating cash flow was $10.7 million, versus cash used of $49.5 million a year earlier. Investing used $51.5 million, including $42.9 million of capital expenditures and $9.2 million for an acquisition. Cash ended at $9.0 million. At December 26, current assets were $1,935.7 million and current liabilities $1,213.6 million. ABL borrowings were $708.4 million, with $593.3 million excess availability; average ABL interest rate was 2.07%.
Debt: Total debt, including capital and finance leases, was $1,257.4 million, compared with $1,442.5 million at June 27, 2015. The IPO generated $226.8 million net proceeds, principally used to repay $223.0 million principal under the Term Facility. Long-term debt excluding current installments was $1,245.4 million.
Changes versus the prior comparable periods
- Sales growth reflected case-volume increases of 4.2% in the quarter and 4.7% for six months, partly offset by food-price deflation. Management estimated annualized deflation of 1.3% and 0.6%, respectively; the prior periods had estimated inflation of 3.9% and 3.6%.
- Gross profit grew faster than sales, which management attributed to higher volume and a more favorable mix of Street customers and Performance Brands. Operating expenses rose 5.6% in the quarter and 5.2% for six months, slower than gross profit growth.
- Performance Foodservice and Vistar drove much of the growth. Quarterly sales rose 3.0% and 7.5%, respectively; PFG Customized sales declined 1.2%. Corporate & All Other EBITDA worsened to negative $35.8 million for the quarter from negative $27.2 million.
- Per-share comparisons reflect the IPO and higher weighted-average shares: quarterly basic shares increased 14.1%. Quarterly diluted EPS rose to $0.17 from $0.15; six-month diluted EPS rose to $0.32 from $0.22.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said operating cash flows and available borrowing capacity should cover anticipated cash needs for at least the next 12 months. It cited sustained case growth, potential industry-share gains and its Winning Together productivity program.
- On February 1, 2016, after quarter-end, the ABL facility was amended: capacity increased from $1.4 billion to $1.6 billion, LIBOR pricing was lowered, and maturity extended from May 2017 to February 2021. The company planned to borrow $200 million under the ABL to repay Term Facility loans and expected approximately $6.6 million of amendment fees and expenses. It expected a $5.8 million third-quarter loss on extinguishment from the repayment.
- Quarterly interest expense included accelerated amortization of $5.5 million of deferred financing costs and original issue discount following the IPO-related debt repayment. The company also recorded $3.8 million of second-quarter stock compensation expense after IPO-related changes to the 2007 Option Plan; management estimated approximately $40 million of possible future compensation expense, with about $25 million expected to be recognized over four years and the balance dependent on performance conditions.
- Key disclosed risks include intense competition in a low-margin business, food-cost inflation or deflation, customer and supplier concentration or dependence, fuel-price volatility, labor availability and costs, execution of cost-saving initiatives, acquisitions, pension obligations, receivables collectability, and litigation or product-liability claims.
- Contingencies include an estimated $6.0 million remaining Central States multiemployer pension withdrawal liability, $22.1 million maximum undiscounted operating-lease residual guarantees, and $19.6 million maximum potential payments under purchasing-group trade-payable guarantees; the company considered payment under the latter guarantees remote. Management did not expect pending litigation to have a material adverse effect, while noting outcomes are uncertain.
Investor verification priorities
- Confirm the effect of the February 2016 ABL refinancing on borrowing costs, available liquidity, covenants and total debt after the $200 million term-loan repayment.
- Assess whether case growth and favorable customer/product mix can persist amid deflation, and monitor performance at PFG Customized and Corporate & All Other.
- Reconcile adjusted EBITDA adjustments and assess recurring cash generation against capital expenditure and working-capital needs.
- Track the realization and timing of stock-compensation expense, pension withdrawal payments, and guarantee or litigation exposures.
- Evaluate dilution and per-share trends in light of the IPO, option-plan changes and the increase in weighted-average shares.