Performance Food Group Company — FY2022 Form 10-K
Business context and reporting period. This annual report covers the 52-week fiscal year ended July 2, 2022, not a standalone fourth quarter. Performance Food Group distributes food and related products to more than 300,000 customer locations through Foodservice, Vistar, and Convenience segments. The prior comparable fiscal year ended July 3, 2021 had 53 weeks. PFG completed its acquisition of Core-Mark on September 1, 2021, substantially expanding its convenience-store distribution business and adding Canadian operations.
Key financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $50.9 billion | $30.4 billion | +67.4% |
| Gross profit | $5.26 billion | $3.53 billion | +49.1% |
| Operating profit | $327.4 million | $200.7 million | +63.1% |
| Net income | $112.5 million | $40.7 million | +$71.8 million |
| Diluted EPS | $0.74 | $0.30 | +$0.44 |
| EBITDA (non-GAAP) | $812.8 million | $546.0 million | +48.9% |
| Adjusted EBITDA (non-GAAP) | $1.02 billion | $625.3 million | +63.1% |
| Cash from operating activities | $276.5 million | $64.6 million | +$211.9 million |
Margins and earnings quality. Gross margin was approximately 10.3%, versus 11.6% in FY2021; operating margin was approximately 0.6%, versus 0.7%; and net margin was approximately 0.2%, versus 0.1%. Sales and earnings benefited from the Core-Mark acquisition, recovering foodservice and theater-related demand, higher case volumes, and inflation-driven selling prices. FY2022 also included higher LIFO charges, acquisition-related costs, and operating cost pressures. Adjusted EBITDA is a company-defined non-GAAP measure and includes specified add-backs.
Cash flow and investment. Operating cash flow was $276.5 million. Investing activities used $1.86 billion, including $1.65 billion net cash paid for acquisitions and $215.5 million of capital expenditures. The company reported $18.7 million of cash and restricted cash at year-end, of which $7.1 million was restricted.
Debt and liquidity. Long-term debt was $3.91 billion, excluding finance lease obligations; total indebtedness including finance leases was reported as $4.36 billion. The $4.0 billion ABL revolving facility had $1.61 billion outstanding and $2.20 billion of excess availability, net of letters of credit and lender reserves. The ABL average interest rate at year-end was 2.89%. PFG issued $1.0 billion of 4.25% senior notes due 2029 and repaid $350 million of notes due 2024 during the year. The company said it was in compliance with debt covenants and expected operating cash flow and borrowing capacity to meet anticipated requirements.
Material changes versus the prior period
- Core-Mark contributed $14.5 billion of FY2022 sales from its acquisition date and materially enlarged the Convenience segment. Reported growth therefore substantially reflects acquisition scope, not solely organic expansion.
- Total case volume rose 28.8%; organic case volume rose 7.9%, or 10.3% excluding the prior year’s extra week. Overall product cost inflation was approximately 11.9%.
- Convenience sales rose 246.5% to $20.6 billion, chiefly due to Core-Mark. Foodservice sales increased 21.4%, and Vistar sales increased 45.0% as markets recovered from pandemic disruption.
- Operating costs were pressured by a $90.9 million increase in fuel expense and an $81.2 million increase in temporary contract labor and related travel costs. Management said temporary labor use normalized in the fourth quarter.
- Operating cash flow improved, but remained affected by working-capital investment, including $220.3 million of advance tobacco inventory purchases near year-end. The prior year included $117.4 million of net income tax refunds and a $117.3 million operating cash outflow for Eby-Brown contingent consideration.
- In the second quarter, PFG changed its reportable segments to Foodservice, Vistar, and Convenience and restated prior-period segment presentation.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said operating conditions improved as pandemic effects eased but identified continuing uncertainty from inflation, fuel and logistics costs, product availability, labor constraints, supply-chain disruption, reduced consumer purchasing power, and possible COVID-19 variants. It also noted that the Core-Mark integration may involve unexpected costs or take longer than anticipated.
Other significant risks include intense competition in a low-margin industry; reliance on suppliers and customers without long-term contracts; labor availability and expense; fuel-price volatility; substantial leverage and floating-rate exposure; declining cigarette consumption and tobacco regulation; food-safety, product-liability, cybersecurity, and environmental risks. A 100-basis-point increase in LIBOR on estimated variable-rate debt was projected to increase annual interest expense by approximately $12.2 million. PFG had interest-rate swaps covering $400 million notional and fuel collars covering approximately 24% of expected diesel use over the following 12 months as of year-end.
The company is a defendant in JUUL-related litigation involving its subsidiaries. JUUL has agreed to defend and indemnify the subsidiaries under specified agreements, but PFG said it could not estimate a potential loss or range of loss. Management stated that currently pending legal matters were not expected to have a material adverse effect based on available estimates and insurance. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified vendor rebates and promotional incentives as a critical audit matter because of transaction volume, contract complexity, and estimation judgments.
Most important facts for investors to verify
- Separate Core-Mark’s contribution and inflation-driven pricing from underlying organic volume and sustainable growth; review comparable segment trends accounting for the prior year’s extra week.
- Assess whether gross-profit and operating margins can hold up against inflation, LIFO adjustments, labor, fuel, and other distribution costs.
- Evaluate post-acquisition integration, synergies, and purchase-accounting effects, including Core-Mark’s reported $17.6 million net loss since acquisition, which management attributed to purchase accounting and LIFO adjustments.
- Monitor working-capital needs, cash conversion, capital spending, debt maturities, variable-rate exposure, and the availability and conditions of the ABL facility.
- Review tobacco-related sales concentration and the status and potential exposure of JUUL-related litigation, for which the filing gives no estimable loss range.