Performance Food Group Company — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2016, three months ended September 26, 2015; comparisons are with the three months ended September 27, 2014. Amounts are in U.S. dollars. The filing’s unaudited results were issued November 4, 2015.
Business context
PFG markets and distributes food and food-related products through Performance Foodservice, PFG Customized, and Vistar. It reported serving more than 150,000 customer locations from 68 distribution facilities. The quarter preceded the October 2015 IPO.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $3,928.9 million | $3,697.6 million | +6.3% |
| Gross profit | $481.1 million | $449.4 million | +7.1% |
| Operating profit | $44.0 million | $32.7 million | +34.6% |
| Net income | $12.2 million | $6.6 million | +84.8% |
| Diluted EPS | $0.14 | $0.08 | — |
| EBITDA | $70.0 million | $62.7 million | +11.6% |
| Adjusted EBITDA | $80.1 million | $70.2 million | +14.1% |
Gross margin was approximately 12.2% versus 12.2% in the prior-year quarter; operating margin was approximately 1.1% versus 0.9%, and net margin approximately 0.3% versus 0.2%. Case volume increased 5.1%. Management attributed the stronger gross profit growth to customer and product mix, including Street customers and Performance Brands, as well as productivity improvements. Adjusted EBITDA is a non-GAAP measure; the company cautions it excludes, among other things, working-capital needs, capital spending, and debt-service cash requirements.
Cash flow: Operating activities used $25.9 million, compared with $82.7 million used a year earlier. Investing activities used $26.4 million, including $17.7 million of capital expenditures and $8.9 million for an acquisition. Financing activities provided $54.6 million, primarily from $57.5 million of net ABL borrowings. Cash increased $2.3 million to $11.5 million. Operating cash flow less capital expenditures was approximately negative $43.6 million.
Balance sheet and liquidity: At September 26, 2015, current assets were $1,918.4 million and current liabilities $1,223.0 million; cash was $11.5 million. Total debt including capital and finance leases was $1,497.2 million, of which $12.4 million was current. The ABL had $723.2 million drawn, $97.9 million of letters of credit, and $578.9 million of excess availability, subject to customary conditions. The company reported compliance with its credit covenants. Management believed operating cash flows and borrowing capacity would cover anticipated needs for at least 12 months.
Material changes and management commentary
- Sales grew across all three reportable segments: Performance Foodservice +5.2%, PFG Customized +6.7%, and Vistar +9.8%. Segment EBITDA was $70.5 million, $7.3 million, and $22.4 million, respectively; corporate and other EBITDA was negative $30.2 million.
- Performance Foodservice EBITDA increased 27.0%, supported by case growth, a favorable Street-customer and Performance Brands mix, and purchasing efficiencies. Vistar EBITDA declined 6.7% as operating expenses grew faster than gross profit. PFG Customized EBITDA declined 3.9%.
- PFG Customized’s sales increase was largely a presentation change: an amended customer arrangement led the company to report certain product sales gross rather than net. This accounted for approximately 96% of that segment’s sales increase and was not expected to affect sales for the rest of the fiscal year.
- Management reported estimated food inflation of 0.1% versus 3.2% a year earlier and said it was seeing deflation, particularly in dairy, beef, and seafood, entering Q2. It reported continued case growth and believed it gained industry share. No quantified earnings or revenue guidance was provided.
- The October 6 IPO generated approximately $223.7 million in net proceeds to the company; $223.0 million repaid Term Facility principal. The company sold 12.8 million new shares at $19 per share, while selling stockholders sold approximately 3.9 million shares. The company’s stock began NYSE trading October 1. The reported quarter-end debt balance predates the repayment.
Risks, contingencies, and unusual items
- The company operates in a low-margin business and identified risks including food-cost inflation or deflation, fuel costs, customer retention and lack of long-term contracts, competition, labor availability, supplier reliance, weather, acquisitions, technology disruptions, receivable collectability, litigation, and multiemployer pension obligations.
- Fuel collars generated $1.2 million of unrealized losses and $1.0 million of settlement expense in the quarter, compared with $0.2 million of unrealized losses and no settlements a year earlier. Interest-rate swaps covered $750 million notional; management estimated $6.4 million would be reclassified into interest expense over the next 12 months.
- Amendments to the 2007 option plan and the IPO-related end of repurchase rights may result in an estimated $3.8 million compensation charge in Q2. Management’s preliminary estimate for potential future compensation expense on modified performance awards was approximately $40 million over four years, subject to achievement becoming probable. The filing also reported $0.8 million of Q1 expense under the 2015 incentive plan.
- The estimated multiemployer pension withdrawal liability was $6.1 million. Maximum undiscounted potential lease residual guarantees were $21.2 million, with $0.2 million recorded. Management did not expect pending litigation to have a material adverse effect, while noting outcomes are uncertain.
- The company paid $5.0 million in advisory fees and reimbursements to Blackstone and Wellspring affiliates during the quarter. The advisory agreement was amended after quarter-end to terminate no later than the second anniversary of the IPO closing.
Most important facts for investors to verify
- Whether reported case growth, favorable mix, and Winning Together productivity persist, especially as food deflation affects sales and margins.
- How much of sales growth and profitability is organic, including the gross-versus-net reporting effect in PFG Customized.
- Post-IPO debt, interest expense, covenant headroom, and liquidity after the $223.0 million Term Facility repayment.
- The timing and realized cost of modified option awards, including the preliminary $40 million compensation estimate and Q2 charge estimate.
- Working-capital cash needs, given operating cash use despite higher net income, and the company’s sensitivity to seasonal borrowing.
- Future segment profitability, fuel-hedge results, pension obligations, and the outcome of legal and other contingencies.