Performance Food Group Company — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended December 28, 2019; comparisons are with periods ended December 29, 2018. The company distributes food and related products through Foodservice and Vistar. The Reinhart acquisition closed on December 30, 2019, after quarter-end; Eby-Brown, acquired in fiscal Q4 2019, materially affected current-period comparisons.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $6,068.6 million | $4,615.7 million | $12,311.6 million | $9,155.4 million |
| Gross profit | $711.2 million | $614.6 million | $1,422.6 million | $1,208.2 million |
| Operating profit | $80.5 million | $73.0 million | $144.0 million | $123.6 million |
| Net income | $41.2 million | $43.1 million | $77.3 million | $71.3 million |
| Diluted EPS | $0.39 | $0.41 | $0.73 | $0.68 |
| Adjusted EBITDA (non-GAAP) | $142.9 million | $116.9 million | $270.6 million | $212.4 million |
- Q2 sales rose 31.5%, gross profit 15.7%, operating profit 10.3%, and Adjusted EBITDA 22.2%. Net income fell 4.4%, principally because interest expense increased $10.4 million; diluted EPS declined 4.9%.
- First-half sales rose 34.5%, gross profit 17.7%, operating profit 16.5%, net income 8.4%, and Adjusted EBITDA 27.4%. Case volume increased 6.7% in Q2 and 8.7% for the six months.
- Gross margin was 11.7% in Q2 versus 13.3% a year earlier, and 11.6% for the first half versus 13.2%. Management attributed the decline mainly to Eby-Brown’s lower-margin tobacco sales. Gross profit growth also reflected improved customer and product mix, including more independent-customer and Performance Brand sales.
- Interest expense was $26.4 million in Q2 versus $16.0 million; first-half expense was $43.7 million versus $31.6 million. The increase primarily reflected additional borrowings related to acquisition financing.
Cash flow, debt and liquidity
- First-half operating cash flow was $157.8 million, compared with $70.0 million; investing cash outflow was $48.5 million, compared with $116.4 million; financing cash inflow was $967.2 million, compared with $46.7 million.
- Capital spending was $49.0 million for the first half versus $60.1 million. The company reported $37.4 million of outstanding capital-project and service purchase obligations at December 28, including $20.6 million for warehouse projects and equipment.
- At December 28, reported debt was $2,188.4 million: $786.4 million under the ABL Facility, $350.0 million of 5.5% notes due 2024, and $1,060.0 million of 5.5% notes due 2027, net of discounts and financing costs. ABL excess availability was $1,295.2 million and its average interest rate was 3.22%.
- Cash and restricted cash totaled $1,101.9 million, but $1,089.2 million was restricted, mainly proceeds from the 2027 notes held in escrow for the Reinhart transaction. Unrestricted cash was $12.7 million. Management stated cash flows and borrowing capacity should cover anticipated needs for at least 12 months.
- On December 30, the company amended its ABL facility, increasing capacity from $2.4 billion to $3.0 billion and extending maturity to December 30, 2024; it also borrowed $466.5 million for the acquisition. The filing does not provide a complete post-acquisition debt balance.
Material developments and management commentary
- Reinhart was acquired for approximately $2.0 billion, or about $1.7 billion net of an estimated $265 million tax benefit. Financing included $1,033.7 million of net 2027-note proceeds, $491.0 million of net equity-offering proceeds, and $466.5 million of ABL borrowings. Purchase accounting valuations were incomplete at filing time.
- Eby-Brown contributed $1,260.8 million of Q2 sales and $2,634.8 million of first-half sales, including excise taxes of $267.3 million and $559.0 million, respectively. It drove much of Vistar’s reported sales growth and reduced consolidated gross margin percentage.
- Management cited case growth, improved profit per case, customer mix and Performance Brand sales as operating drivers. It also noted higher variable operating and selling costs from volume and acquisitions, and acquisition-related professional fees.
- The company reported no material change in its previously disclosed risk factors or market risks. Key risks include intense competition and low industry margins, supplier and product-cost volatility, fuel and labor costs, customer retention, acquisitions and integration, receivable collectability, technology and cybersecurity, litigation, and indebtedness.
- The EEOC gender-discrimination case remains pending; the company cannot estimate potential loss or range of loss. Management said other pending legal matters are not expected to have a material adverse effect, while noting outcomes are uncertain. Lease residual-value guarantees had a maximum potential payment of approximately $23.2 million, mitigated by the value of leased assets.
- No quantified financial guidance was provided. Disclosure controls were reported effective, and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reinhart’s final purchase-price allocation, realized synergies, integration costs and operating contribution.
- Post-acquisition debt, interest burden, leverage and available liquidity after escrow funds were deployed and acquisition financing completed.
- Whether case growth and improved profit per case continue to offset operating-cost increases and the lower gross-margin mix associated with Eby-Brown.
- The composition and sustainability of Adjusted EBITDA growth, including acquisition, integration and other permitted adjustments; this is a non-GAAP measure.
- Developments in the EEOC litigation and any change in the company’s assessment of contingent liabilities.