Performance Food Group Company — Q2 FY2018 Form 10-Q
Business context and reporting period. Performance Food Group distributes food and food-related products to restaurants and institutional customers through Performance Foodservice, PFG Customized and Vistar. This unaudited filing covers the quarter ended December 30, 2017, and the first six months of fiscal 2018; comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $4,311.1 million | $4,051.8 million | $8,676.0 million | $8,097.9 million |
| Gross profit | $567.6 million | $517.2 million | $1,122.3 million | $1,028.5 million |
| Operating profit | $49.1 million | $51.3 million | $99.6 million | $82.9 million |
| Net income | $78.0 million | $22.9 million | $100.6 million | $35.1 million |
| Diluted EPS | $0.75 | $0.22 | $0.96 | $0.34 |
| Adjusted EBITDA | $105.0 million | $93.6 million | $195.7 million | $169.6 million |
- Quarterly sales increased 6.4%; gross profit rose 9.7%. Gross margin was approximately 13.2%, up from 12.8%. Operating expenses rose 11.3%, faster than sales, and operating profit declined 4.3%; operating margin was approximately 1.1%, versus 1.3%.
- For the six months, sales grew 7.1%, gross profit 9.1%, operating profit 20.1%, and Adjusted EBITDA 15.4%. Net income increased 186.6%, substantially reflecting tax benefits described below.
- Quarterly case volume grew 4.2%; six-month case volume grew 3.9%. Management attributed gross-profit growth to case growth, a more favorable mix of independent customers and Performance Brands, and procurement gains.
- Quarterly segment sales: Performance Foodservice $2,535.3 million, up 7.5%; PFG Customized $888.2 million, down 4.9%; Vistar $838.9 million, up 13.7%. Performance Foodservice and Vistar EBITDA increased, while PFG Customized EBITDA declined 11.9% for the quarter. Corporate & All Other EBITDA loss widened to $41.4 million from $33.0 million.
- Six-month operating cash flow was $32.6 million, compared with cash used of $25.5 million a year earlier. Investing cash outflow was $101.4 million, including $63.2 million for acquisitions and $38.5 million of capital expenditures. Financing provided $70.8 million, mainly from ABL borrowings.
- At December 30, 2017, cash was $10.1 million and restricted cash was $12.9 million. Current assets were $2,140.0 million and current liabilities $1,280.1 million. Total debt, including capital and finance leases, was $1,413.1 million, versus $1,297.6 million at fiscal year-end.
Material changes and unusual items
- The Tax Cuts and Jobs Act drove a $37.4 million deferred-tax benefit from revaluing deferred tax balances. Vesting of performance-based stock awards generated a further $15.4 million excess tax benefit. Together these items materially boosted reported net income; the quarterly effective tax rate was negative 128.3% and the six-month rate negative 43.1%.
- Management estimated a fiscal 2018 effective tax rate of approximately 33%. Excluding the reported tax benefits and specified adjustments, the filing shows effective rates of 33.9% for the quarter and 32.1% for the six months.
- Accelerated vesting of awards led to $6.3 million of accelerated compensation expense and contributed to higher operating expenses. Performance criteria were met after Wellspring sold its remaining shares; Wellspring no longer beneficially owned Company shares. The Company received no proceeds from those stock sales.
- The ABL Facility was amended in August 2017, increasing its commitment from $1.6 billion to $1.95 billion. At quarter-end, ABL borrowings were $1,016.3 million, excess availability was $577.8 million, and its average interest rate was 2.98%. The $350 million 5.5% Senior Notes mature in 2024. The Company reported compliance with debt covenants.
- Fiscal 2018 acquisitions required $64.9 million in cash during the first six months; a further acquisition payment of $6.6 million followed quarter-end. A $6.0 million subordinated promissory note was paid off in December 2017.
Outlook, risks and contingencies
- No specific sales, earnings or EBITDA guidance was provided. Management said case volume had grown in each quarter versus the prior-year quarter since Q2 FY2010, believed the Company gained industry share in Q2 FY2018, and cited growth, mix and productivity initiatives as strategic priorities.
- Management believes operating cash flows and borrowing capacity will cover anticipated cash needs for at least the next 12 months. Liquidity is seasonal, with borrowing typically highest in the first and second fiscal quarters.
- Key disclosed risks include intense competition and low industry margins; inflation/deflation, fuel and labor costs; reliance on suppliers and customers without long-term contracts; execution of productivity initiatives and acquisitions; food safety, litigation, cybersecurity and technology disruption; and substantial indebtedness and multiemployer pension exposure.
- The Company disclosed $28.4 million of undiscounted maximum potential payments under operating-lease residual-value guarantees, mitigated by the value of the leased assets; $0.2 million was recorded as a liability. Capital-project and service purchase commitments totaled $10.1 million at quarter-end, with another $8.8 million contract entered into afterward.
- The EEOC lawsuit alleges a pattern of gender discrimination in hiring and promotion; the Company said it could not estimate a potential loss or range. The Wilder/Roma Food settlement of $1.9 million was paid January 10, 2018. Management stated pending legal matters are not expected to materially affect results, while noting outcomes remain uncertain.
- The Company expects the new lease-accounting standard to have a significant financial-statement impact. It expected revenue-recognition timing to be substantially unchanged under the forthcoming standard, but anticipated significant additional disclosures.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operating performance versus the $37.4 million deferred-tax remeasurement and $15.4 million stock-award tax benefit.
- Whether sales and case growth translate into sustained operating-profit and margin improvement, given Q2 expense growth exceeded sales growth.
- Whether PFG Customized’s sales and quarterly EBITDA weakness persist, and whether Vistar can convert strong sales growth into stronger profitability.
- Debt, ABL availability, interest costs and covenant compliance as borrowings increase; also monitor working-capital needs and seasonal liquidity.
- Acquisition performance, integration costs, productivity spending and the resolution or potential cost of the EEOC litigation and other contingencies.