Performance Food pany(PFGC) - 2020 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements Special Note Regarding Forward-Looking Statements This section outlines potential risks and uncertainties that could cause actual results to differ from forward-looking statements. It highlights numerous factors, including intense competition, industry-low margins, cost inflation, and risks associated with acquisitions, particularly the pending Reinhart Transaction. The company cautions that this list is not exhaustive and undertakes no obligation to update these statements - The report identifies several key business and operational risks, such as intense competition, low margins, cost inflation, reliance on suppliers, and labor costs[11] - Significant risks related to the proposed acquisition of Reinhart Foodservice, L.L.C. are disclosed, including potential delays in regulatory approval, failure to realize expected synergies, integration difficulties, and potential disruption to business relationships[13] PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the quarterly period ended September 28, 2019. It includes the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Shareholders' Equity, and Statements of Cash Flows, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial items Consolidated Balance Sheet Highlights (Unaudited) | (In millions) | As of Sep 28, 2019 | As of Jun 29, 2019 | | :--- | :--- | :--- | | Total current assets | $3,769.7 | $2,670.6 | | Total assets | $6,163.0 | $4,653.5 | | Total current liabilities | $1,823.0 | $1,699.3 | | Long-term debt | $2,212.1 | $1,202.9 | | Total liabilities | $4,829.9 | $3,355.3 | | Total shareholders' equity | $1,333.1 | $1,298.2 | Consolidated Statement of Operations Highlights (Unaudited) | (In millions, except per share data) | Three Months Ended Sep 28, 2019 | Three Months Ended Sep 29, 2018 | | :--- | :--- | :--- | | Net sales | $6,243.0 | $4,539.7 | | Gross profit | $711.4 | $593.6 | | Operating profit | $63.5 | $50.6 | | Net income | $36.1 | $28.2 | | Diluted EPS | $0.34 | $0.27 | Consolidated Statement of Cash Flows Highlights (Unaudited) | (In millions) | Three Months Ended Sep 28, 2019 | Three Months Ended Sep 29, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $84.2 | $32.3 | | Net cash used in investing activities | ($22.5) | ($56.3) | | Net cash provided by financing activities | $1,000.3 | $25.3 | | Net increase in cash and restricted cash | $1,062.0 | $1.3 | Note 3: Accounting Pronouncements The company adopted the new lease accounting standard (ASU 2016-02, Topic 842) on June 30, 2019. This resulted in the recognition of $423.8 million in operating lease liabilities and $423.0 million in operating lease right-of-use assets on the balance sheet. The adoption did not materially impact the statements of operations or cash flows. The company is currently evaluating the impact of other recently issued standards, including those on credit losses and cloud computing arrangements - Effective June 30, 2019, the company adopted the new lease standard (ASC 842) using the modified retrospective approach[35] - The adoption resulted in the recognition of operating lease liabilities of $423.8 million and operating lease right-of-use assets of $423.0 million[36] Note 5: Business Combinations On July 1, 2019, the company entered into an agreement to acquire Reinhart Foodservice, L.L.C. for $2.0 billion. The transaction is expected to be financed through a combination of debt and equity. In preparation, the company issued $1.06 billion of senior notes in September 2019. Additionally, contingent consideration for the prior acquisition of Eby-Brown stood at $86.4 million as of September 28, 2019 - The company entered into an agreement to acquire Reinhart Foodservice, L.L.C. for $2.0 billion, with the closing subject to regulatory approvals[43] - To finance the Reinhart transaction, the company issued $1,060.0 million of Notes due 2027 on September 27, 2019[44] - Contingent consideration outstanding for the Eby-Brown acquisition was $86.4 million as of September 28, 2019[42] Note 6: Debt Total long-term debt increased to $2.21 billion from $1.20 billion at the end of the prior fiscal year. This increase was primarily due to the issuance of $1.06 billion in 5.500% Senior Notes due 2027 to finance the pending Reinhart acquisition. The company also has an ABL Facility with $810.0 million in borrowings and $1.25 billion in excess availability as of September 28, 2019 Debt Composition (in millions) | Debt Instrument | As of Sep 28, 2019 | As of Jun 29, 2019 | | :--- | :--- | :--- | | ABL Facility | $810.0 | $859.0 | | 5.500% Notes due 2024 | $350.0 | $350.0 | | 5.500% Notes due 2027 | $1,060.0 | - | | Total Long-term debt | $2,212.1 | $1,202.9 | - On September 27, 2019, the company issued $1,060.0 million of 5.500% Senior Notes due 2027 to finance part of the Reinhart Transaction[50] Note 13: Segment Information The company operates through two reportable segments: Foodservice and Vistar. For the three months ended September 28, 2019, Foodservice generated $3.93 billion in total sales and $104.0 million in EBITDA. Vistar generated $2.31 billion in total sales and $51.5 million in EBITDA. The significant increase in Vistar's sales is primarily due to the acquisition of Eby-Brown Segment Net External Sales (Three Months Ended Sep 28, 2019) | (In millions) | Foodservice | Vistar | Corporate & All Other | Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net external sales | $3,927.0 | $2,310.5 | $5.5 | $6,243.0 | Segment EBITDA (Three Months Ended) | (In millions) | Sep 28, 2019 | Sep 29, 2018 | | :--- | :--- | :--- | | Foodservice EBITDA | $104.0 | $92.0 | | Vistar EBITDA | $51.5 | $31.6 | | Corporate & All Other EBITDA | ($49.3) | ($37.3) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the financial results for the first quarter of fiscal 2020, highlighting a 37.5% increase in net sales to $6.2 billion and a 28.0% increase in net income to $36.1 million compared to the prior year. The growth was driven by the Eby-Brown acquisition and organic case growth. The discussion details the performance of the Foodservice and Vistar segments, liquidity position, capital resources, and financing activities, including the debt issuance for the pending Reinhart acquisition - Net sales increased 37.5% YoY, primarily due to recent acquisitions, with the Eby-Brown acquisition contributing $1,374.0 million to net sales in the quarter[110] - Net income increased 28.0% YoY to $36.1 million, driven by a $12.9 million increase in operating profit[114] - Adjusted EBITDA increased 33.7% YoY to $127.7 million, driven by case growth and improved profit per case[93][106] Consolidated Results of Operations For Q1 FY2020, net sales rose 37.5% to $6.24 billion, driven by the Eby-Brown acquisition ($1.37 billion contribution) and organic case growth of 10.7%. Gross profit increased 19.8% to $711.4 million due to higher case volume and an improved product/channel mix. Operating expenses grew 19.3%, in line with increased volume and acquisitions. Net income rose 28.0% to $36.1 million Reconciliation of Net Income to Adjusted EBITDA | (In millions) | Three months ended Sep 28, 2019 | Three months ended Sep 29, 2018 | | :--- | :--- | :--- | | Net income | $36.1 | $28.2 | | Interest expense | 17.3 | 15.6 | | Income tax expense | 10.1 | 7.0 | | Depreciation & Amortization | 42.7 | 35.5 | | EBITDA | $106.2 | $86.3 | | Adjustments | 21.5 | 9.2 | | Adjusted EBITDA | $127.7 | $95.5 | - The acquisition of Eby-Brown in Q4 2019 contributed $1,374.0 million to net sales for Q1 FY2020[110] - Gross profit as a percentage of net sales decreased from 13.1% to 11.4%, reflecting the impact of Eby-Brown's lower margin business[111] Segment Results In Q1 FY2020, the Foodservice segment's net sales grew 7.8% to $3.9 billion, driven by a 5.6% increase in cases sold to independent customers. Foodservice EBITDA increased 13.0% to $104.0 million. The Vistar segment's net sales surged 158.9% to $2.3 billion, primarily due to the Eby-Brown acquisition, which contributed $1.37 billion. Vistar's EBITDA grew 63.0% to $51.5 million - Foodservice net sales increased 7.8% YoY, driven by a 5.6% growth in cases sold to independent customers[121] - Foodservice EBITDA increased 13.0% YoY to $104.0 million, benefiting from a favorable shift in sales mix towards higher-margin Performance Brands products sold to independent customers[122][123] - Vistar net sales increased 158.9% YoY, almost entirely due to the Eby-Brown acquisition. Vistar's EBITDA grew 63.0% to $51.5 million[126][127] Liquidity and Capital Resources The company's cash and restricted cash balance increased to $1.09 billion from $25.4 million, mainly due to receiving $1.06 billion in proceeds from the issuance of Notes due 2027. These funds are held in escrow to finance the Reinhart acquisition. Cash from operations was $84.2 million. The company maintains an ABL facility with $1.25 billion in excess availability - Cash and restricted cash increased to $1,087.4 million, primarily due to the $1,060.0 million proceeds from the Notes due 2027 issuance, which are held in escrow for the Reinhart Transaction[135][136] - Net cash provided by operating activities was $84.2 million for the quarter, an increase from $32.3 million in the prior year, driven by higher operating income and working capital improvements[139] ABL Facility Availability (in millions) | | As of Sep 28, 2019 | As of Jun 29, 2019 | | :--- | :--- | :--- | | Aggregate borrowings | $810.0 | $859.0 | | Letters of credit | $94.7 | $89.9 | | Excess availability | $1,248.3 | $1,182.7 | Quantitative and Qualitative Disclosures about Market Risk This section states that there have been no material changes to the company's market risks, which consist of interest rate risk and fuel price risk, since the end of the last fiscal year on June 29, 2019 - There have been no material changes to the company's market risks (interest rate and fuel price risk) since June 29, 2019[169] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 28, 2019. During the quarter, the company implemented a new lease accounting system and related controls for the adoption of the new lease standard. No other material changes to internal control over financial reporting were identified - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[171] - A new lease accounting system and related controls were implemented during the quarter to facilitate the adoption of the new lease accounting standard[172] PART II - OTHER INFORMATION Legal Proceedings The company states that it is subject to various legal actions in the ordinary course of business but reports no material changes to these proceedings from those disclosed in its Annual Report on Form 10-K - There have been no material changes to legal proceedings from those discussed in the Form 10-K for the fiscal year ended June 29, 2019[176] Risk Factors The company reports that there have been no material changes to its principal risk factors from those previously disclosed in its Annual Report on Form 10-K - There have been no material changes to the company's principal risk factors from those disclosed in the Form 10-K[177] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of fiscal 2020, the company repurchased 139,205 shares of its common stock at an average price of $44.54 per share. These repurchases were made via share withholding to cover employee payroll tax obligations related to stock-based compensation. As of September 28, 2019, approximately $240.7 million remained available under the company's $250 million share repurchase program Share Repurchases in Q1 FY2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jun 30 - Jul 27, 2019 | — | - | | Jul 28 - Aug 24, 2019 | 79,266 | $43.61 | | Aug 25 - Sep 28, 2019 | 59,939 | $45.76 | | Total | 139,205 | $44.54 | - The Board of Directors authorized a share repurchase program for up to $250 million in November 2018. As of September 28, 2019, approximately $240.7 million remained available for repurchases[180] Defaults Upon Senior Securities None reported Mine Safety Disclosures Not applicable Other Information None reported Exhibits This section lists the exhibits filed with the Form 10-Q, which include the indenture for the 5.500% Senior Notes due 2027, forms of restricted stock agreements, and CEO/CFO certifications as required by the Sarbanes-Oxley Act - Key exhibits filed include the Indenture for the new 5.500% Senior Notes due 2027 and Sarbanes-Oxley Act certifications by the CEO and CFO[181]