Performance Food Group Company — Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2017, ended December 31, 2016; comparisons are to periods ended December 26, 2015. The company distributes food and related products through Performance Foodservice, PFG Customized, and Vistar.
Financial performance
Amounts in millions, except per-share data. Margins are calculated from reported figures.
| Metric | Quarter 2017 | Quarter 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $4,051.8 | $3,893.9 | $8,097.9 | $7,822.8 |
| Gross profit / margin | $517.2 / 12.8% | $486.8 / 12.5% | $1,028.5 / 12.7% | $967.9 / 12.4% |
| Operating profit / margin | $51.3 / 1.3% | $53.8 / 1.4% | $82.9 / 1.0% | $97.8 / 1.3% |
| Net income | $22.9 | $17.5 | $35.1 | $29.7 |
| Diluted EPS | $0.22 | $0.17 | $0.34 | $0.32 |
| Adjusted EBITDA | $93.6 | $95.4 | $169.6 | $175.5 |
Quarterly sales rose 4.1%, while six-month sales increased 3.5%. Case volume grew 5.6% and 6.1%, respectively; selling price per case fell 1.4% and 2.5%, reflecting supplier pack-size changes, customer mix shifts, and slight deflation. Net income increased 30.9% for the quarter and 18.2% for six months, despite lower operating profit. Lower interest expense—partly reflecting prior-year accelerated financing-cost amortization—helped offset higher operating expenses and taxes. Adjusted EBITDA, a non-GAAP measure, declined 1.9% and 3.4%, respectively.
- Cash flow: First-half operating cash flow was negative $25.5 million, versus positive $10.7 million a year earlier. Investing used $161.8 million, including $79.9 million of capital expenditures and $82.1 million of acquisition payments. Financing provided $188.1 million, primarily from net ABL borrowings of $192.8 million. Cash ended at $11.7 million.
- Debt and liquidity: Total debt, including capital and finance leases, was $1,352.8 million at December 31, versus $1,145.5 million at July 2, 2016. ABL borrowings were $957.8 million; excess availability was $536.2 million, down from $725.5 million. The ABL average interest rate was 2.14%. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $2,019.7 million and current liabilities $1,250.7 million. Inventory was $985.1 million. Shareholders’ equity was $853.6 million.
- Segments: For the quarter, Vistar sales grew 11.6%, while Performance Foodservice and PFG Customized rose 1.8% and 2.0%. Six-month Vistar sales rose 14.4%; Performance Foodservice rose 2.3%; PFG Customized fell 2.2%. Six-month EBITDA declined in Customized ($10.6 million versus $16.5 million) and Vistar ($56.3 million versus $57.0 million), while Performance Foodservice EBITDA increased to $150.7 million from $143.9 million.
Changes, outlook, and risks
- Management attributed gross-profit growth to case growth and a shift toward higher-margin Street customers and Performance Brands. Operating expenses grew faster than sales, driven by compensation, legal and professional fees, insurance, and investments in Customized and Vistar operations.
- Four acquisitions were completed in the first six months for $82.8 million in cash; two further acquisitions costing $62.5 million were completed after quarter-end. Management described the acquisitions as immaterial individually to consolidated financial statements.
- Management stated that operating cash flows and borrowing capacity should meet anticipated cash needs for at least the next 12 months. The filing provides no quantified earnings or revenue guidance.
- Key exposures include the low-margin, competitive food-distribution industry; customer and supplier dependence; labor, fuel, and food-cost volatility; economic and weather conditions; and execution of productivity initiatives and acquisitions. A 100-basis-point LIBOR increase was estimated to add about $5.0 million to annual cash interest expense on variable-rate debt; a 10% diesel-price increase could add about $4.6 million to fuel costs before customer surcharges.
- Contingencies include a $5.6 million estimated remaining withdrawal liability for a multiemployer pension plan and up to $25.3 million of undiscounted operating-lease residual-value guarantees, mitigated by asset value. The company accrued $2.3 million for the Wilder case; a separate Laumea settlement was $1.4 million, expected to be funded after the appeal period. The EEOC litigation remained ongoing, with potential loss not estimable. Management did not expect pending matters, individually or in aggregate, to materially adversely affect results, but noted outcomes are uncertain.
- In November 2016 and January 2017, selling stockholders sold 20 million shares; the company received no proceeds. Blackstone’s ownership fell to approximately 26.2%. Early adoption of share-based payment accounting guidance affected tax and cash-flow presentation; the company said the pending revenue standard was not expected to have a material impact, while the new lease standard was expected to significantly affect the balance sheet.
Important facts for investors to verify
- Whether case-volume growth and favorable customer/product mix can continue to offset price deflation and rising operating costs, particularly in PFG Customized and Vistar.
- Working-capital trends and the causes of negative operating cash flow, alongside elevated capital spending, acquisitions, and increased ABL borrowings.
- ABL borrowing-base availability, interest-rate exposure, covenant headroom, and the company’s ability to refinance or repay debt as required.
- Future acquisition performance and integration costs, and the progress and expense of investments in new business, facilities, and productivity initiatives.
- Developments, settlement approval or payment, and potential exposure in the disclosed litigation, pension withdrawal liability, and lease guarantees.