Business context and reporting period
Performance Food Group Company (PFG) distributes food and related products across the United States through Performance Foodservice, PFG Customized and Vistar. This is the annual Form 10-K for the 52-week fiscal year ended June 30, 2018, with fiscal 2017 (ended July 1, 2017) as the comparable period. The filing also reports fourth-quarter results; the “2017 Q4” metadata does not match the filing’s reporting period.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $17,619.9 million | $16,761.8 million |
| Gross profit | $2,292.8 million; 13.0% of sales | $2,124.8 million; 12.7% of sales |
| Operating profit | $253.5 million; approximately 1.4% of sales | $211.0 million; approximately 1.3% of sales |
| Net income | $198.7 million | $96.3 million |
| Diluted EPS | $1.90 | $0.93 |
| Adjusted EBITDA | $426.7 million | $390.7 million |
| Cash provided by operating activities | $367.0 million | $201.7 million |
Net sales grew 5.1%, while case volume increased 3.0%. Gross profit rose 7.9%; management attributed improvement to increased volume and a favorable channel and product mix, including independent-customer and Performance Brand sales. Operating expenses rose 6.6%, including higher fuel costs and added selling, warehouse and delivery personnel. Net income more than doubled, substantially reflecting lower income tax expense: FY2018 recorded a $5.1 million tax benefit versus $61.4 million expense in FY2017, including effects of the Tax Cuts and Jobs Act and stock-based compensation tax benefits.
Fourth-quarter FY2018 sales were $4,594.7 million, operating profit $93.8 million and net income $64.4 million, compared with $4,428.9 million, $81.4 million and $40.4 million, respectively, in fourth-quarter FY2017.
At June 30, 2018, cash was $7.5 million and restricted cash was $10.3 million. Total debt, including capital and finance leases, was $1,184.2 million, down from $1,297.6 million a year earlier. The ABL Facility had $780.1 million drawn and $854.2 million of excess availability; its average interest rate was 3.52%, versus 2.59% in FY2017. The company reported compliance with debt covenants and stated that operating cash flow and borrowing capacity should meet anticipated requirements for at least 12 months. Capital expenditures were $140.1 million; cash paid for acquisitions was $71.1 million.
Material changes and segment performance
- Performance Foodservice sales increased 6.2% to $10,431.2 million; segment EBITDA increased 3.3% to $330.6 million. Independent-customer sales grew approximately 8.4%.
- Vistar sales increased 11.2% to $3,341.0 million; EBITDA increased 13.1% to $133.1 million, supported by theater and retail growth and acquisitions.
- PFG Customized sales declined 4.2% to $3,658.5 million, mainly following closure of its Georgia facility. EBITDA rose 16.6% to $29.5 million.
- Fiscal 2017 and FY2018 each comprised 52 weeks; fiscal 2016 comprised 53 weeks, affecting comparisons with that earlier year.
Outlook, risks and unusual items
No numerical earnings or revenue guidance is provided in the supplied filing text. Management highlighted continuing case growth, independent-customer sales, Performance Brands, geographic expansion, efficiency initiatives and strategic acquisitions as priorities. It reported case growth in each quarter since the second quarter of FY2010 and believed FY2018 share gains reflected sales growth above the industry forecast.
Key risks include intense competition and low margins; customer and supplier concentration is limited, but many customer and supplier relationships lack long-term contracts. Other risks include food and fuel cost volatility, labor availability and expense, supply disruptions, weather, food safety and product liability, customer credit losses, execution of acquisitions and productivity initiatives, cybersecurity and technology disruption, and substantial leverage with exposure to variable interest rates. The company uses fuel surcharges and collars and had interest-rate swaps with $650 million notional value at year-end.
The EEOC gender-discrimination lawsuit remains a significant contingency. In May 2018, the EEOC sought sanctions over alleged preservation failures, including a possible default judgment or limits on summary judgment. PFG is contesting the motions and stated it cannot estimate a potential loss or range of loss. The filing reports no goodwill or indefinite-lived intangible impairment for FY2018 or FY2017. The company has no current plans to pay cash dividends.
Important facts for investors to verify
- How much FY2018 net-income growth is sustainable after excluding tax-law and stock-award benefits.
- Whether gross-margin and mix improvements persist as fuel, labor and other operating expenses rise.
- ABL borrowing-base availability, interest-rate exposure, covenant headroom and debt repayment needs.
- Developments in the EEOC case and the potential effect of the sanctions motions.
- Acquisition contribution and integration performance, particularly in Vistar and other recent additions.