Performance Food Group Company (PFGC) — FY2021 Form 10-K
Period clarification: The filing is for the 53-week fiscal year ended July 3, 2021, not 2020 Q4. Fiscal 2020 was the 52-week year ended June 27, 2020. The filing was signed August 23, 2021.
Business context
PFG distributes food and related products through its Foodservice and Vistar segments, serving more than 250,000 customer locations from 107 distribution centers. Foodservice supplies restaurants and institutions; Vistar distributes snacks, beverages, tobacco and other products to vending, convenience, theater and other channels. Fiscal 2021 results reflect the Reinhart acquisition, continuing COVID-19 disruption and an extra fiscal week.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $30,398.9 million | $25,086.3 million |
| Gross profit / gross margin | $3,525.2 million / 11.6% | $2,869.2 million / 11.4% |
| Operating income (loss) | $200.7 million | $(99.0) million |
| Net income (loss) | $40.7 million | $(114.1) million |
| Diluted EPS | $0.30 | $(1.01) |
| Adjusted EBITDA | $625.3 million | $405.5 million |
| Cash provided by operating activities | $64.6 million | $623.6 million |
| Capital expenditures | $188.8 million | $158.0 million |
Operating cash flow less capital expenditures was approximately negative $124.2 million in FY2021, versus positive $465.6 million in FY2020. Operating cash flow fell primarily with higher working-capital investment and the $117.3 million operating cash-flow portion of Eby-Brown earnout payments; $117.4 million in net tax refunds partly offset the decline.
At July 3, 2021, total assets were $7,845.7 million and total liabilities were $5,739.6 million. Cash and restricted cash totaled $22.2 million, including $11.1 million of restricted cash. Current assets were $3,580.4 million and current liabilities $2,527.2 million. Reported debt was $2,240.5 million excluding finance leases; debt including finance lease obligations was $2,544.2 million. ABL borrowings were $586.3 million, with $2,252.0 million of excess availability after letters of credit and reserves. The company reported compliance with debt covenants.
Changes versus prior year
- Sales rose 21.2%, largely reflecting Reinhart, which contributed $6,049.3 million in FY2021 versus $2,525.0 million in FY2020, plus the 53rd week, estimated to contribute $664.6 million in sales.
- Case volume increased 15.4%; excluding the extra week, it increased 13.0%. Excluding Reinhart’s effect for the first half, organic case volume grew 2.7% year over year.
- Gross profit increased 22.9%. Net income recovered from a loss to a profit, supported by higher operating profit and lower credit-loss provisions; interest expense rose to $152.4 million from $116.9 million.
- Vistar sales increased 1.9%, but COVID-related weakness in theaters, office coffee, hospitality and travel weighed on its channels. Its gross margin declined to 7.8% from 8.7%, partly due to increased convenience-store mix.
- Cash and restricted cash declined $409.6 million, primarily reflecting acquisition-related payments, working-capital investment, debt repayment and other financing activity.
Outlook, risks and unusual items
- Management said COVID-19 continued to adversely affect results and that ongoing effects on demand, labor, supply chains and liquidity remained uncertain. It did not provide quantified earnings or revenue guidance.
- Management expected operating cash flows and borrowing capacity to cover anticipated cash needs for at least the next 12 months, including normal operations and capital expenditures.
- On May 17, 2021, PFG agreed to acquire Core-Mark for $23.875 cash and 0.44 PFG shares per Core-Mark share, valuing the transaction at approximately $2.5 billion including Core-Mark net debt. At filing, closing was expected in fiscal Q1 2022; the HSR waiting period had expired, but the FTC investigation remained open and could continue after closing.
- After year-end, PFG issued $1.0 billion of 4.250% notes due 2029, used part of the proceeds to pay down the ABL and redeemed the $350 million notes due 2024. The company expected to fund Core-Mark’s cash consideration with ABL borrowings and was seeking to increase ABL commitments by $1.0 billion, to as much as $4.0 billion. If the acquisition is not completed, the 2029 notes must be redeemed at issue price plus accrued interest.
- Key exposures include the low-margin, competitive distribution business; food and fuel inflation; labor availability and costs; customer credit and receivables; variable-rate debt; regulatory and product-liability matters; and execution, financing, antitrust and integration risks related to Core-Mark.
- FY2021 included $36.9 million of inventory write-offs, primarily related to COVID-19, versus $54.5 million in FY2020. FY2020 included $108.6 million of Eby-Brown contingent-consideration accretion expense. The company reported no goodwill or indefinite-lived intangible impairment in either year.
- Legal proceedings included JUUL-related claims involving Eby-Brown; management could not estimate a potential loss or range of loss. JUUL agreed to defend and indemnify Eby-Brown under a distribution agreement. Management stated that other pending proceedings were adequately provided for or insured and were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Core-Mark closed as expected, the FTC’s subsequent actions, and the final purchase price, financing and integration costs.
- Post-acquisition debt, leverage, interest expense, ABL availability and covenant headroom, including the outcome of the proposed ABL amendment.
- Whether cash generation and working capital improved as customer demand recovered, and how results compare after adjusting for Reinhart and the extra fiscal week.
- Whether Vistar’s affected channels recovered and whether its lower-margin convenience-store mix continued to pressure profitability.
- Developments in the JUUL litigation and other contingencies, and the collectability of customer receivables amid changing economic conditions.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. Vendor rebates and promotional incentives were identified as a critical audit matter because of transaction volume, contract complexity and estimation judgment.