Performance Food Group Company — Q1 FY2023 Form 10-Q
Business context and period: Unaudited results cover the three months ended October 1, 2022, compared with the three months ended October 2, 2021. PFG distributes food and related products through Foodservice, Vistar, and Convenience. The prior-year comparison includes Core-Mark for only one month following its September 1, 2021 acquisition; the current quarter includes a full quarter.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Net sales | $14,719.3 million | $10,386.3 million |
| Gross profit | $1,575.1 million | $1,142.3 million |
| Operating profit | $191.2 million | $48.2 million |
| Net income | $95.7 million | $4.7 million |
| Diluted EPS | $0.62 | $0.03 |
| Adjusted EBITDA | $354.7 million | $183.7 million |
| Operating cash flow | $315.9 million | $31.8 million |
- Sales grew 41.7%; gross profit rose 37.9%, operating profit increased $143.0 million, and net income increased $91.0 million.
- Calculated gross margin was approximately 10.7% versus 11.0%; operating margin was approximately 1.3% versus 0.5%. Adjusted EBITDA margin was approximately 2.4% versus 1.8%.
- Management attributed sales growth mainly to Core-Mark and inflation. Product cost inflation was approximately 12.3%; total case volume increased 16.3%, but organic case volume was flat. Independent case growth was 6.9% overall and 4.6% organically.
- Adjusted EBITDA by segment: Foodservice $236.1 million (up 38.8%), Vistar $74.4 million (up 146.4%), Convenience $105.6 million (up 236.3%); Corporate & All Other was negative $61.4 million.
Cash, debt and liquidity
- Cash was $10.6 million at quarter-end; cash plus restricted cash was $17.7 million. Operating cash flow was $315.9 million, while capital expenditures were $40.1 million.
- Long-term debt was $3,664.0 million, down from $3,908.8 million at July 2, 2022. ABL borrowings declined to $1,362.2 million from $1,608.4 million; reported excess availability was $2,449.7 million. The ABL average interest rate increased to 4.76% from 2.89%.
- Current assets were $5,867.7 million and current liabilities $3,573.4 million (calculated current ratio approximately 1.64). Total finance and operating lease liabilities were $1,088.1 million.
- Cash used in investing was $39.7 million, versus $1,406.6 million in the prior-year quarter, which included $1,382.6 million of cash paid for Core-Mark. Financing used $277.2 million, mainly reflecting net ABL repayments of $246.2 million.
Changes, outlook and risks
- Core-Mark contributed $4.7 billion of current-quarter sales versus $1.6 billion in the comparison quarter. Accordingly, reported growth is materially affected by the acquisition’s partial-period inclusion in the prior year.
- Gross profit benefited from the acquired business, procurement gains, and independent-channel mix, but was partly offset by an increase in the LIFO reserve. Higher wages, fuel, insurance, depreciation and amortization, interest, and fuel-hedging mark-to-market losses added costs.
- Management said operating cash flow and available borrowing capacity should meet anticipated cash requirements for at least the next 12 months and support normal operations and capital spending. No specific earnings or revenue guidance was provided.
- Management cited uncertainty from inflation, fuel and interest rates, labor availability, supply-chain disruption, consumer spending, and COVID-19 developments. The company operates in a low-margin industry and has substantial debt.
- JUUL-related litigation includes federal multidistrict, Oklahoma, and Illinois matters. JUUL has agreed to defend and indemnify the company’s subsidiaries under specified agreements, but PFG could not estimate potential losses. Management said pending proceedings were not expected to materially adversely affect results, while noting outcomes remain uncertain.
- At October 1, 2022, the company reported compliance with debt covenants. It had $148.5 million of purchase obligations and $84.2 million of commitments for warehouse capital projects. Disclosure controls were deemed effective; no material change in internal control was reported.
Investor verification priorities
- Separate underlying case-volume and margin trends from inflation, pricing, and the Core-Mark acquisition’s differing comparison periods.
- Track organic case volumes, particularly Foodservice Chain trends, and whether independent-channel growth and procurement benefits persist.
- Monitor interest expense and borrowing costs as ABL rates rise, alongside debt reduction, availability, and covenant headroom.
- Assess cash conversion and working-capital changes, including the effect of inventory, payables, and accrued liabilities on operating cash flow.
- Follow the JUUL litigation and indemnification arrangements, and assess whether any developments change the company’s currently unquantified exposure.