Performance Food Group Company — Q2 Fiscal 2023 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2022; comparisons are to the three and six months ended January 1, 2022. Financial statements are unaudited. PFG distributes food and related products through Foodservice, Vistar, and Convenience; the prior-year comparison reflects the Core-Mark acquisition completed September 1, 2021.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $13.899B | $12.839B | $28.618B | $23.225B |
| Gross profit | $1.500B | $1.279B | $3.075B | $2.421B |
| Operating profit | $144.0M | $57.8M | $335.2M | $106.0M |
| Net income | $71.1M | $8.4M | $166.8M | $13.1M |
| Diluted EPS | $0.46 | $0.05 | $1.07 | $0.09 |
| Adjusted EBITDA | $308.8M | $241.1M | $663.5M | $424.8M |
| Operating cash flow | Not separately provided | Not separately provided | $424.5M | $153.8M |
Margins: Q2 gross margin was approximately 10.8% versus 10.0%; operating margin was 1.0% versus 0.5%. For the six-month periods, gross margin was approximately 10.7% versus 10.4%, and operating margin was 1.2% versus 0.5%. Net margin was approximately 0.5% versus 0.1% for Q2 and 0.6% versus 0.1% for the six months.
Cash flow and liquidity: Six-month operating cash flow was $424.5M. Investing activities used $160.3M, including $98.1M of capital spending and $65.8M for an acquisition; financing activities used $269.6M, principally reflecting $232.1M in net ABL repayments. Cash and restricted cash totaled $13.3M at December 31, 2022, including $7.2M restricted. Current assets were $5.808B and current liabilities $3.396B.
Debt: Long-term debt was $3.680B, down from $3.909B at July 2, 2022; this excludes lease liabilities. ABL borrowings were $1.376B, with $2.445B of excess availability after reserves. The ABL average rate was 5.78%, up from 2.89%. The company reported compliance with its debt covenants.
Changes and operating drivers
- Q2 sales increased 8.3%; six-month sales increased 23.2%. Management attributed growth mainly to inflation-related selling prices, channel mix, and, for the six-month comparison, Core-Mark. Product cost inflation was approximately 10.3% in Q2 and 11.3% for the six months, and was declining.
- Total case volume rose 3.0% in Q2 and 9.4% for the six months, while organic case volume was flat in both periods. Independent case growth and Performance Brands gains were offset in part by declines in Foodservice Chain.
- Q2 Adjusted EBITDA increased 28.1%. Foodservice and Vistar EBITDA rose, while Convenience declined 9.4% to $69.3M; higher personnel and fuel costs contributed to the Convenience decline. Corporate & All Other EBITDA loss widened to $66.9M.
- Interest expense rose to $55.7M in Q2 and $106.1M for the six months, primarily due to higher average rates and borrowings. The Q2 other-income benefit primarily reflected gains on fuel hedging instruments.
- Management changed its segment-profit measure to Adjusted EBITDA in fiscal 2023 and restated prior comparable segment data. Adjusted EBITDA is a non-GAAP measure with limitations and should not be viewed as a substitute for GAAP results or cash flow.
Outlook, risks, and contingencies
The filing provides no specific quantitative earnings or sales guidance. Management expects operating cash flows and available ABL borrowing capacity to meet anticipated cash needs for at least 12 months and normal operating and capital spending needs. It identifies inflation, fuel and transportation costs, labor availability and expense, supply disruption, interest rates, consumer spending, low industry margins, competition, customer retention, and acquisition integration as risks.
Capital commitments included $133.4M of purchase obligations and $74.2M for warehouse capital projects. The company authorized a new $300M share repurchase program through November 16, 2026; no shares were purchased under the public program in Q2, and the full authorization remained available at quarter end.
JUUL-related litigation developments included dismissal with prejudice of the Oklahoma case following a JUUL settlement and a separate announced MDL settlement that reportedly includes PFG subsidiaries as released parties; the settlement terms had not been disclosed to the company. A separate Illinois case remained active, with a trial tentatively scheduled for Q1 2024, and its inclusion in the MDL settlement was uncertain. PFG stated that it could not estimate potential losses for matters outside the settlement. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much reported sales growth reflects price inflation and acquisition effects versus sustainable organic volume and mix.
- Whether margin and EBITDA improvements persist as inflation and procurement gains moderate, while labor, fuel, and interest costs remain elevated.
- Debt-service capacity and liquidity under changing borrowing rates, seasonal working-capital needs, and the ABL borrowing-base terms.
- The final scope and terms of JUUL-related settlements, including treatment of the Illinois litigation and any residual exposure.
- Capital spending, warehouse lease commitments, and any future use of the $300M repurchase authorization.