Performance Food Group Company — FY2019 Form 10-K
Reporting period: Fiscal year ended June 29, 2019 (52 weeks). The filing is an annual report, not a standalone “2018 Q4” filing; it includes fourth-quarter FY2019 results. Unless noted otherwise, amounts are in U.S. dollars.
Business context
PFG distributes food and related products through its Foodservice and Vistar segments, serving more than 170,000 customer locations from 83 distribution centers. Foodservice serves restaurants and institutions; Vistar serves vending, office coffee, retail, theater, convenience and other channels. The company reorganized its reportable segments in FY2019 and recast prior-year segment data.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $19,743.5 million | $17,619.9 million | +12.1% |
| Gross profit / gross margin | $2,513.0 million / 12.7% | $2,292.8 million / 13.0% | Profit +9.6% |
| Operating profit / operating margin | $283.3 million / 1.4% | $253.5 million / 1.4% | +11.8% |
| Net income | $166.8 million | $198.7 million | -16.1% |
| Diluted EPS | $1.59 | $1.90 | -16.3% |
| Adjusted EBITDA | $475.5 million | $426.7 million | +11.4% |
| Cash from operations | $317.4 million | $367.0 million | Down $49.6 million |
| Capital expenditures | $139.1 million | $140.1 million | — |
Net income fell despite higher operating profit, principally because income tax expense rose by $56.6 million and interest expense rose by $5.0 million. FY2018 benefited from one-time tax effects of the Tax Cuts and Jobs Act, including deferred-tax revaluation and stock-based compensation tax benefits. The effective tax rate was 23.6% in FY2019 versus -2.6% in FY2018.
Operating cash flow declined largely due to working-capital investment. Investing activities used $349.4 million, including $211.6 million in net acquisition payments. Year-end cash was $14.7 million, plus $10.7 million of restricted cash. Total debt was $1,350.1 million, compared with $1,184.2 million a year earlier; credit-facility availability was $1,182.7 million after letters of credit and reserves. The amended revolving credit agreement raised capacity to $2.4 billion, extended maturity to May 2024 and reduced borrowing rates; the reported average borrowing rate was 4.01%.
Fourth-quarter results and material changes
- FY2019 Q4 net sales were $5,899.1 million versus $4,594.7 million in prior-year Q4; operating profit was $100.5 million versus $93.8 million, net income was $63.2 million versus $64.4 million, and diluted EPS was $0.60 versus $0.61. Q4 sales include the Eby-Brown acquisition.
- Case volume increased 6.0% for the year. Management attributed growth to Foodservice independent-customer activity, Vistar channel growth, acquisitions and favorable customer/product mix. Gross profit dollars grew faster than case volume, supported by independent customers and higher-margin Performance Brands.
- FY2019 sales included $949.7 million from Eby-Brown, acquired in Q4, including $194.7 million of tobacco excise taxes. Eby-Brown increased Vistar scale but diluted segment gross margin; it did not materially affect FY2019 net income.
- Vistar sales rose 38.9% and EBITDA rose 24.4%, largely reflecting acquisitions. Foodservice sales increased 5.8%, while EBITDA increased 4.0%. Company gross margin fell to 12.7%, primarily because of Eby-Brown’s lower margins.
Outlook, risks and unusual items
No specific numerical earnings or sales guidance is provided. Management said operating cash flows and available borrowing capacity should cover anticipated cash needs for at least 12 months. It cited continued case growth, independent-customer sales, Performance Brands, efficiency initiatives and acquisitions as strategic priorities. Management reported that case volume had grown in each comparable quarter since FY2010 and believed the company gained industry share in FY2019.
- On July 1, 2019, PFG agreed to acquire Reinhart Foodservice for $2.0 billion, or an estimated $1.7 billion net of an approximately $265 million tax benefit. Closing remained subject to regulatory approvals and other customary conditions. Planned financing included credit-facility borrowings, new unsecured notes and a proposed $300–$400 million common-stock offering. Integration, financing, approval and synergy risks are material.
- PFG operates in a low-margin, highly competitive business; customer retention, supplier pricing and rebates, food-cost movements, labor availability and expense, fuel prices, weather, food safety, regulation and cybersecurity may affect results. Cigarette consumption is declining, and tobacco taxes and regulation may pressure sales or liquidity.
- Variable-rate debt creates interest-rate exposure. A hypothetical 100-basis-point LIBOR increase was estimated to raise annual cash interest expense by approximately $6.0 million on the disclosed variable-rate exposure.
- An EEOC employment-discrimination lawsuit remained unresolved. The company could not estimate a potential loss or range of loss; the court denied the EEOC’s sanctions motions in June 2019 but reserved a related issue.
- FY2019 included acquisition and integration costs and other adjustments in Adjusted EBITDA. This non-GAAP measure was $475.5 million; reported net income was $166.8 million. The company reported no goodwill or indefinite-lived intangible impairment.
Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Reinhart transaction status, final purchase price and tax benefit, financing mix, share issuance and expected leverage after closing.
- Organic case growth and acquisition contribution, particularly Eby-Brown’s margins and the ongoing effects of tobacco exposure.
- Working-capital needs, operating cash conversion, capital spending and available borrowing capacity as the business expands.
- Recurring versus adjusted earnings: reconcile Adjusted EBITDA add-backs with GAAP operating profit, net income and cash flow.
- Developments in the EEOC case and any other legal, regulatory or contingent liabilities.