Performance Food Group Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months of fiscal 2016, ended March 26, 2016; comparisons are to periods ended March 28, 2015. Although the request metadata says “2015 Q3,” the filing covers 2016 Q3. Figures are in millions of dollars unless noted.
Business context and financial performance
PFG markets and distributes food and related products across the United States through Performance Foodservice, PFG Customized, and Vistar. The company reported continued case-volume growth, with results benefiting from channel and product mix as well as productivity initiatives.
| Metric | Fiscal Q3 2016 | Fiscal Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,909.1 | $3,795.5 | $11,731.9 | $11,285.6 |
| Gross profit | $480.8 | $451.6 | $1,448.7 | $1,358.3 |
| Operating profit | $37.6 | $27.1 | $135.4 | $106.9 |
| Net income | $9.4 | $2.9 | $39.1 | $22.3 |
| Diluted EPS | $0.09 | $0.03 | $0.40 | $0.25 |
| Adjusted EBITDA | $76.4 | $69.3 | $251.9 | $226.1 |
Q3 sales rose 3.0% and nine-month sales rose 4.0%; case volume grew 4.1% and 4.5%, respectively, while selling price per case declined 1.1% and 0.5%, primarily from deflation and mix. Gross profit increased 6.5% in Q3 and 6.7% year to date. Approximate gross margin improved to 12.3% from 11.9% in Q3 and to 12.3% from 12.0% for nine months; operating margin was approximately 1.0% versus 0.7% in Q3 and 1.2% versus 0.9% year to date. Q3 net income growth also reflects a lower effective tax rate (39.4% versus 45.7%).
- Segment trends: Q3 sales/EBITDA were Performance Foodservice $2,298.7/$63.0, PFG Customized $957.9/$9.7, and Vistar $651.2/$26.7. Performance Foodservice EBITDA increased 19.3%; Vistar sales increased 9.0%; PFG Customized sales fell 3.2%, reflecting weaker case volume among some casual-dining customers.
- Cash flow: Nine-month operating cash flow was $117.6, versus $28.4 a year earlier. Investing cash use was $107.5, including $68.0 of capital expenditures and $40.2 for acquisitions. Operating cash flow less capital expenditures was $49.6. Financing cash use was $8.6; cash ended at $10.7.
- Balance sheet and liquidity: At March 26, 2016, cash was $10.7, current assets $1,945.1, and current liabilities $1,270.0 (working capital $675.1; current ratio about 1.53). Total debt including capital and finance leases was $1,214.1, down from $1,442.5 at June 27, 2015. ABL availability was $615.1, with $866.9 drawn and a 2.06% average interest rate. Management stated that operating cash flow and available borrowing capacity should meet anticipated needs for at least 12 months.
Material changes and unusual items
- The October 2015 IPO generated $226.4 of net proceeds to the company; $223.0 was used to repay Term Facility debt. It issued 12.8 million shares, contributing to higher weighted-average shares and dilution.
- In February 2016, the ABL facility was amended: capacity increased from $1.4 billion to $1.6 billion, maturity extended to February 2021, LIBOR-based pricing was reduced, and certain covenant terms changed. The company borrowed $200.0 under the ABL and repaid the same amount of Term Facility debt.
- Debt repayments and refinancing resulted in a $5.8 loss on extinguishment in Q3 and $5.5 of accelerated amortization of financing costs and original issue discount during the nine months. These items affected interest expense.
- Stock-based compensation expense increased to $13.6 for the nine months, versus $0.9 a year earlier, following changes to legacy option awards and new awards. Management estimated approximately $40 of potential future compensation expense for amended awards, with recognition dependent in part on performance conditions.
- Two acquisitions cost $40.2 in the first nine months and increased goodwill by $12.2; the filing says they did not materially affect consolidated financial statements.
Outlook, risks, and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management cited sustained case growth, improved profit per case, and Winning Together productivity efforts, and said it believed the company had gained industry share. It also cautioned that results are exposed to competition and low industry margins, food-cost inflation or deflation, fuel costs, labor availability, customer concentration or contract limitations, supplier dependence, weather, acquisitions, and execution of cost initiatives.
- The company reported $5.9 of estimated remaining Central States multiemployer pension withdrawal liability.
- Maximum potential residual-value lease guarantees were $22.3; the company had recorded $0.2. Purchasing-alliance trade-payable guarantees had a $24.6 maximum potential amount; management considered payment remote and recorded no liability.
- Various legal proceedings and sales/use tax audits remain possible exposures. Management did not expect pending litigation to have a material adverse effect, but noted outcomes are uncertain.
- Interest-rate exposure remains because debt is variable-rate; five swaps had $750.0 notional, and fuel collars covered forecast diesel purchases. The filing notes that a breach of derivative-related credit provisions could require settlement of $8.6.
Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether case growth and gross-profit-per-case improvement persist, particularly in Performance Foodservice and Vistar, and whether PFG Customized recovers.
- How much of reported earnings and Adjusted EBITDA growth reflects recurring operations versus refinancing costs, stock compensation, and other permitted adjustments.
- Post-refinancing borrowing costs, ABL availability, covenant headroom, and sensitivity to interest rates and working-capital needs.
- The timing and ultimate amount of stock-based compensation expense and the performance conditions tied to amended awards.
- Developments in pension withdrawal liability, lease and purchasing-alliance guarantees, legal proceedings, and sales-tax audits.