Performance Food Group Company — Q2 FY2022 Form 10-Q
Reporting period: Second quarter ended January 1, 2022; six-month period ended the same date. Comparatives are the three and six months ended December 26, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
PFG distributes food and food-related products, plus convenience-store merchandise, across the U.S. and Canada. On September 1, 2021, it completed its acquisition of Core-Mark, substantially expanding its Convenience business. The results include Core-Mark from the acquisition date, so year-over-year comparisons are not like-for-like. The company also changed its reportable segments to Foodservice, Vistar, and Convenience, and restated comparative segment data.
Key financial metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $12,838.8 | $6,845.2 | $23,225.1 | $13,892.0 |
| Gross profit | $1,278.8 | $811.1 | $2,421.1 | $1,626.6 |
| Operating profit | $57.8 | $60.9 | $106.0 | $96.7 |
| Net income | $8.4 | $17.6 | $13.1 | $16.9 |
| Diluted EPS | $0.05 | $0.13 | $0.09 | $0.13 |
| EBITDA (non-GAAP) | $173.1 | $147.2 | $321.3 | $266.1 |
| Adjusted EBITDA (non-GAAP) | $241.1 | $158.0 | $424.8 | $293.2 |
Q2 gross margin was approximately 10.0% versus 11.8% a year earlier; operating margin was 0.45% versus 0.89%, and net margin was 0.07% versus 0.26%. For the six months, gross margin was approximately 10.4% versus 11.7%, operating margin 0.46% versus 0.70%, and net margin 0.06% versus 0.12%.
- Cash flow: Six-month operating cash flow was $153.8, versus cash used of $24.4 in the prior-year period. Investing used $1,718.7, mainly for acquisitions ($1,651.1) and capital spending ($68.5). Financing provided $1,559.4, including debt issuance and borrowings.
- Liquidity: Cash was $9.6 at January 1, 2022, plus $7.1 of restricted cash. ABL excess availability was $2,250.8, net of reserves. Management believes operating cash flow and available borrowing capacity will cover anticipated needs for at least 12 months.
- Debt: Reported long-term debt was $3,846.8, up from $2,240.5 at July 3, 2021. ABL borrowings were $1,549.0. The company issued $1.0 billion of 4.25% notes due 2029 and redeemed $350.0 million of 5.5% notes due 2024; the redemption generated a $3.2 debt-extinguishment loss. The $4.0 billion ABL facility matures September 2026, with $2,250.8 of excess availability.
- Working capital and leases: Inventories rose to $3,190.9 from $1,839.4, largely reflecting the acquisition and operating needs. Total lease liabilities were $1,110.0.
Material changes versus the prior comparable period
- Q2 sales grew 87.6%; six-month sales grew 67.2%. Core-Mark contributed $4,227.0 of Q2 sales and $5,799.3 since acquisition. Total case volume rose 40.0% in Q2 and 33.3% for six months; excluding Core-Mark, case volume increased 15.5% and 16.7%, respectively. Management cited food-cost inflation of approximately 12.5% in Q2 and 11.8% for six months.
- Despite higher gross profit, Q2 operating profit declined 5.1% and net income fell 52.3%; six-month net income fell 22.5%. Higher operating costs and interest expense offset sales and gross-profit growth. Operating expenses included higher temporary labor, fuel, insurance, and acquisition-related costs.
- Core-Mark contributed $4.9 of Q2 net income and $5.9 since acquisition. Convenience EBITDA increased to $37.4 in Q2 from $16.4; Foodservice EBITDA was nearly flat at $158.0 versus $155.3, while Vistar rose to $49.2 from $22.0. Corporate & All Other EBITDA worsened to negative $71.5 from negative $46.5.
- Adjusted EBITDA growth includes add-backs for non-cash items, acquisition/integration costs and other adjustments; it is a non-GAAP measure and should not be treated as equivalent to net income or cash flow.
Outlook, management commentary, risks and contingencies
- No quantified earnings or sales guidance is provided. Management reported significantly improved operating conditions in the first half as consumers returned to restaurants, travel and entertainment, but said recovery challenges remain.
- Management identified COVID-19 effects, product supply, inflation and logistics costs, labor availability, fuel prices, and the ability to hire and retain workers as continuing risks. It also cited competition, low industry margins, supplier dependence, customer concentration and acquisition integration risks.
- The Core-Mark acquisition was valued at approximately $2.4 billion, net of cash received; the company reported two first-half acquisitions totaling $2.7 billion in cash and stock transactions. Integration, realization of synergies, and the increased debt burden are important execution and financial risks.
- The ABL facility and note indentures contain financial and other restrictive covenants. PFG reported compliance with applicable covenants at January 1, 2022.
- JUUL-related product and marketing litigation names subsidiaries Eby-Brown and Core-Mark in certain cases. JUUL has agreed to defend and indemnify them under agreements, but PFG said it cannot estimate a potential loss or range of loss. The filing states management does not expect pending legal matters, based on current estimates, to materially affect the company, while noting outcomes remain uncertain.
- Other disclosed commitments include $121.1 of purchase obligations and $83.3 of capital-project commitments. Certain future operating leases totaling $388.5 in minimum payments had not yet commenced.
Important facts for investors to verify
- How much reported sales and EBITDA growth reflects Core-Mark and inflation versus organic volume, and whether acquired operations deliver expected synergies.
- Whether margins and earnings recover as labor, fuel, insurance, supply and other operating costs evolve; review non-GAAP adjustments alongside GAAP results.
- Debt repayment capacity, interest costs, ABL borrowing-base availability and covenant headroom following the acquisition and refinancing.
- Working-capital needs, particularly inventory growth and seasonal borrowing patterns, and the adequacy of liquidity through the next 12 months.
- Developments in JUUL-related litigation, the scope and effectiveness of indemnification, and any change in the company’s ability to estimate potential exposure.