Performance Food Group Company — Form 10-Q Summary
Business and period: PFG distributes food and food-related products across the United States. This unaudited filing covers the three months ended September 29, 2018, the first quarter of fiscal 2019, compared with the three months ended September 30, 2017. Fiscal 2019 reporting segments are Foodservice and Vistar; prior-period segment figures were recast for the change.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $4,539.7 million | $4,364.9 million | +4.0% |
| Gross profit | $593.6 million | $554.7 million | +7.0% |
| Gross margin | 13.1% | 12.7% | +0.4 percentage points |
| Operating profit | $50.6 million | $50.5 million | +0.2% |
| Net income | $28.2 million | $22.6 million | +24.8% |
| Diluted EPS | $0.27 | $0.22 | +$0.05 |
| Adjusted EBITDA | $95.5 million | $90.7 million | +5.3% |
Revenue growth reflected 3.7% case-volume growth, with strength in Vistar and Foodservice independent customers. Gross profit outpaced sales growth, helped by favorable channel and product mix, including increased Performance Brand sales. Operating expenses rose 7.7%, including higher variable costs, personnel costs, and a $6.0 million increase in fuel expense. As a result, operating profit was nearly unchanged. Net income growth primarily reflected lower income tax expense, partly offset by higher interest expense. The effective tax rate was 20.0%, versus 37.5% a year earlier, reflecting the lower federal statutory rate and excess tax benefits on stock awards.
Segments
- Foodservice: Sales increased 2.2% to $3,646.0 million; EBITDA declined 5.3% to $92.0 million. Independent case growth was approximately 4.8%, while declines in chain casual dining partly offset gains. Higher fuel, insurance, and operating costs weighed on EBITDA.
- Vistar: Sales increased 12.0% to $892.6 million; EBITDA increased 22.5% to $31.6 million. Growth came from vending, theater, and retail channels, acquisitions, and improved gross profit per case.
- Corporate & All Other: EBITDA improved to a loss of $37.3 million from a loss of $40.8 million, primarily on lower personnel expenses and advisory fees, partly offset by legal costs.
Cash flow, liquidity, and debt
- Operating cash flow was $32.3 million, versus $16.0 million. Investing used $56.3 million, including $31.5 million for acquisitions and $25.0 million in capital expenditures. Financing provided $25.3 million, including $36.5 million of net ABL borrowings.
- Cash and restricted cash totaled $19.1 million at quarter-end, including $8.6 million unrestricted cash and $10.5 million restricted cash. Working capital included $1,115.5 million of inventory and $1,068.8 million of accounts receivable.
- Long-term debt was $1,159.8 million; total debt including capital and finance leases was $1,233.6 million. ABL borrowings were $816.6 million, with a 3.67% average interest rate and $891.0 million of excess availability. The company also had $350.0 million of 5.500% notes due 2024.
- Management said operating cash flows and available borrowing capacity should cover anticipated needs for at least the next 12 months. The company reported compliance with its debt covenants. Seasonal borrowing needs are typically highest in the first and second fiscal quarters.
Outlook, risks, and notable items
- No quantitative earnings or revenue guidance was provided. Management reported continued year-over-year case growth, estimated industry-share gains, and cited case growth and improved profit per case as drivers of higher Adjusted EBITDA.
- Principal risks include intense competition and thin industry margins; cost inflation and fuel volatility; labor availability and costs; customer retention and changing demand; reliance on suppliers; acquisition execution; debt and interest-rate exposure; and technology, cybersecurity, legal, and regulatory risks.
- The EEOC employment-discrimination litigation remains outstanding. The EEOC sought sanctions in 2018 over alleged failure to preserve documents; the company opposed the motions. The company said it could not estimate a potential loss or range of loss if the case proceeds adversely.
- Other commitments included $30.4 million of capital-project and service purchase orders, $10.5 million of which related to capital projects, and $25.9 million of maximum potential residual-value lease-guarantee payments, mitigated by the value of leased assets. Management did not expect pending legal proceedings, based on current estimates, to materially affect financial position or results.
- The company paid $31.5 million for an acquisition during the quarter and $24.9 million for another acquisition after quarter-end. It adopted the new revenue standard without significant financial impact. It expects adoption of the new lease standard in fiscal 2020 to have a significant financial-statement impact; the impact was still under evaluation.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Foodservice can reverse its EBITDA decline as independent and Performance Brand mix gains offset fuel, labor, and other operating costs.
- Whether Vistar’s double-digit growth and acquisition contributions are sustainable, and how much growth is organic.
- Working-capital needs, seasonal ABL borrowing, interest-rate exposure, and the effect of rising debt and lease obligations on liquidity.
- The eventual outcome and potential financial impact of the EEOC litigation and sanctions motions, for which the company could not estimate a loss range.
- The details and financing of the post-quarter $24.9 million acquisition, and the eventual balance-sheet impact of lease-accounting adoption.