PERFORMANCE FOOD GROUP COMPANY
The following discussion and analysis of our financial condition and results of
operations should be read together with the unaudited consolidated financial
statements and notes thereto included elsewhere in this quarterly report on Form
10-Q and the audited consolidated financial statements and the notes thereto
included in the Form 10-K. In addition to historical consolidated financial
information, this discussion contains forward-looking statements that reflect
our plans, estimates, and beliefs and involve numerous risks and uncertainties,
including but not limited to those described in the "Item 1A. Risk Factors"
section of the Form 10-K. Actual results may differ materially from those
contained in any forward-looking statements. You should carefully read "Special
Note Regarding Forward-Looking Statements" in this quarterly report on Form
10-Q.
Our Company
We market and distribute food and food-related products to customers across
North America from our over 150 locations to over 300,000 customer locations in
the "food-away-from-home" industry. We offer our customers a broad assortment of
products including our proprietary-branded products, nationally branded
products, and products bearing our customers' brands. Our product assortment
ranges from "center-of-the-plate" items (such as beef, pork, poultry, and
seafood), frozen foods, and groceries to candy, snacks, and beverages. We also
sell disposables, cleaning and kitchen supplies, and related products used by
our customers, as well as cigarettes and other tobacco products. In addition to
the products we offer to our customers, we provide value-added services by
allowing our customers to benefit from our industry knowledge, scale, and
expertise in the areas of product selection and procurement, menu development,
and operational strategy.
Based on the Company's organization structure and how the Company's management
reviews operating results and makes decisions about resource allocation, the
Company has three reportable segments: Foodservice, Vistar, and Convenience. Our
Foodservice segment distributes a broad line of national brands, customer
brands, and our proprietary-branded food and food-related products, or
"Performance Brands." Foodservice sells to independent and multi-unit "Chain"
restaurants and other institutions such as schools, healthcare facilities,
business and industry locations, and retail establishments. Our Chain customers
are multi-unit restaurants with five or more locations and include some of the
most recognizable family and casual dining restaurant chains. Our Vistar segment
specializes in distributing candy, snacks, beverages, and other items nationally
to vending, office coffee service, theater, retail, hospitality, and other
channels. Our Convenience channel distributes candy, snacks, beverages,
cigarettes, other tobacco products, food and foodservice related products and
other items to convenience stores across North America . We believe that there
are substantial synergies across our segments. Cross-segment synergies include
procurement, operational best practices such as the use of new productivity
technologies, and supply chain and network optimization, as well as shared
corporate functions such as accounting, treasury, tax, legal, information
systems, and human resources.
On
Key Factors Affecting Our Business
Our business, our industry and the U.S. economy are influenced by a number of
general macroeconomic factors, including, but not limited to, changes in the
rate of inflation and fuel prices, interest rates, supply chain disruptions,
labor shortages, and the effects of health epidemics and pandemics. We continue
to actively monitor the impacts of the evolving macroeconomic and geopolitical
landscape on all aspects of our business. The Company and our industry may face
challenges related to product supply, increased product and logistics costs,
access to labor supply, lower disposable incomes due to inflationary pressures
and macroeconomic conditions, and the emergence of COVID-19 variants. The extent
to which these challenges will affect our future financial position, liquidity,
and results of operations remains uncertain.
We believe that our long-term performance is principally affected by the following key factors:
•
Changing demographic and macroeconomic trends. Excluding the peak years of the
COVID-19 pandemic, the share of consumer spending captured by the
food-away-from-home industry has increased steadily for several decades. The
share increases in periods of increasing employment, rising disposable income,
increases in the number of restaurants, and favorable demographic trends, such
as smaller household sizes, an increasing number of dual income households, and
an aging population base that spends more per capita at foodservice
establishments. The foodservice distribution industry is also sensitive to
national and regional economic conditions, such as changes in consumer spending,
changes in consumer confidence, and changes in the prices of certain goods.
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Food distribution market structure. The food distribution market consists of a wide spectrum of companies ranging from businesses selling a single category of product (e.g., produce) to large national and regional broadline distributors with many distribution centers and thousands of products across all categories. We believe our scale enables us to invest in our Performance Brands, to benefit from economies of scale in purchasing and procurement, and to drive supply chain efficiencies that enhance our customers' satisfaction and profitability. We believe that the relative growth of larger foodservice distributors will continue to outpace that of smaller, independent players in our industry.
•
Our ability to successfully execute our segment strategies and implement our
initiatives. Our performance will continue to depend on our ability to
successfully execute our segment strategies and to implement our current and
future initiatives. The key strategies include focusing on independent sales and
Performance Brands, pursuing new customers for each of our reportable segments,
expansion of geographies, utilizing our infrastructure to gain further selling,
operating and purchasing efficiencies, and making strategic acquisitions.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures. The key measures used by our management are
discussed below. The percentages on the results presented below are calculated
based on rounded numbers.
Net Sales
Net sales is equal to gross sales, plus excise taxes, minus sales returns; sales
incentives that we offer to our customers, such as rebates and discounts that
are offsets to gross sales; and certain other adjustments. Our net sales are
driven by changes in case volumes, product inflation that is reflected in the
pricing of our products, and mix of products sold.
Gross Profit
Gross profit is equal to our net sales minus our cost of goods sold. Cost of goods sold primarily includes inventory costs (net of supplier consideration), inbound freight, and remittances of excise tax. Cost of goods sold generally changes as we incur higher or lower costs from our suppliers and as our customer and product mix changes. Adjusted EBITDA Management measures operating performance based on our Adjusted EBITDA, defined as net income before interest expense, interest income, income and franchise taxes, and depreciation and amortization, further adjusted to exclude certain items that we do not consider part of our core operating results. Such adjustments include certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items permitted in calculating covenant compliance under our ABL Facility and indentures (other than certain pro forma adjustments permitted under our ABL Facility and indentures governing the Notes due 2025, Notes due 2027, and Notes due 2029 relating to the Adjusted EBITDA contribution of acquired entities or businesses prior to the acquisition date). Under our ABL Facility and indentures, our ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and making restricted payments is tied to ratios based on Adjusted EBITDA (as defined in the ABL Facility and indentures). Our definition of Adjusted EBITDA may not be the same as similarly titled measures used by other companies. Adjusted EBITDA is not defined under GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with GAAP, and is subject to important limitations. We use this measure to evaluate the performance of our business on a consistent basis over time and for business planning purposes. In addition, targets based on Adjusted EBITDA are among the measures we use to evaluate our management's performance for purposes of determining their compensation under our incentive plans. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties, including our lenders under the ABL Facility and holders of our Notes due 2025, Notes due 2027, and Notes due 2029 in their evaluation of the operating performance of companies in industries similar to ours. Adjusted EBITDA has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:
•
excludes certain tax payments that may represent a reduction in cash available to us;
•
does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
24
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does not reflect changes in, or cash requirements for, our working capital needs; and
•
does not reflect the significant interest expense, or the cash requirements, necessary to service our debt.
In calculating Adjusted EBITDA, we add back certain non-cash, non-recurring, and other items as permitted or required by our ABL Facility and indentures. Adjusted EBITDA among other things:
•
does not include non-cash stock-based employee compensation expense and other non-cash charges; and
•
does not include acquisition, restructuring, and other costs incurred to realize future cost savings and enhance our operations.
We have included the calculation of Adjusted EBITDA for the periods presented.
Results of Operations and Adjusted EBITDA
The following table sets forth a summary of our results of operations and
Adjusted EBITDA for the periods indicated (in millions, except per share data):
Three Months Ended
December 31,
2022 January 1, 2022 Change %
Net sales $ 13,898.9 $ 12,838.8 $ 1,060.1 8.3
Cost of goods sold 12,399.3 11,560.0 839.3 7.3
Gross profit 1,499.6 1,278.8 220.8 17.3
Operating expenses 1,355.6 1,221.0 134.6 11.0
Operating profit 144.0 57.8 86.2 149.1
Other expense, net
Interest expense 55.7 45.2 10.5 23.2
Other, net (7.9 ) 1.2 (9.1 ) 758.3
Other expense, net 47.8 46.4 1.4 3.0
Income before income taxes 96.2 11.4 84.8 743.9
Income tax expense 25.1 3.0 22.1 736.7
Net income $ 71.1 $ 8.4 $ 62.7 746.4
Adjusted EBITDA $ 308.8 $ 241.1 $ 67.7 28.1
Weighted-average common shares
outstanding:
Basic 154.1 152.9 1.2 0.8
Diluted 156.1 154.3 1.8 1.2
Earnings per common share:
Basic $ 0.46 $ 0.05 $ 0.41 820.0
Diluted $ 0.46 $ 0.05 $ 0.41 820.0
25--------------------------------------------------------------------------------
Six Months Ended
December 31, 2022 January 1, 2022 Change %
Net sales $ 28,618.2 $ 23,225.1 $ 5,393.1 23.2
Cost of goods sold 25,543.5 20,804.0 4,739.5 22.8
Gross profit 3,074.7 2,421.1 653.6 27.0
Operating expenses 2,739.5 2,315.1 424.4 18.3
Operating profit 335.2 106.0 229.2 216.2
Other expense, net
Interest expense 106.1 89.2 16.9 18.9
Other, net 3.0 (0.1 ) 3.1 3,100.0
Other expense, net 109.1 89.1 20.0 22.4
Income before income taxes 226.1 16.9 209.2 1,237.9
Income tax expense 59.3 3.8 55.5 1,460.5
Net income $ 166.8 $ 13.1 $ 153.7 1,173.3
Adjusted EBITDA $ 663.5 $ 424.8 $ 238.7 56.2
Weighted-average common shares
outstanding:
Basic 153.9 146.3 7.6 5.2
Diluted 155.9 147.7 8.2 5.6
Earnings per common share:
Basic $ 1.08 $ 0.09 $ 0.99 1,100.0
Diluted $ 1.07 $ 0.09 $ 0.98 1,088.9
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We believe that the most directly comparable GAAP measure to Adjusted EBITDA is
net income. The following table reconciles Adjusted EBITDA to net income for the
periods presented:
Three Months Ended Six Months Ended
January 1, January 1,
December 31, 2022 2022 December 31, 2022 2022
(In millions) (In millions)
Net income $ 71.1 $ 8.4 $ 166.8 $ 13.1
Interest expense 55.7 45.2 106.1 89.2
Income tax expense 25.1 3.0 59.3 3.8
Depreciation 77.4 70.4 153.5 127.4
Amortization of intangible assets 47.8 46.1 90.9 87.8
Change in LIFO reserve (1) 25.0 45.5 51.8 34.2
Stock-based compensation expense 11.4 14.3 22.9 24.3
(Gain) Loss on fuel derivatives (7.3 ) 1.4 2.5 0.1
Acquisition, integration &
reorganization expenses (2) 2.8 4.5 5.8 37.3
Other adjustments (3) (0.2 ) 2.3 3.9 7.6
Adjusted EBITDA $ 308.8 $ 241.1 $ 663.5 $ 424.8
(1)
Includes an increase in the LIFO reserve of $2.0 million for Foodservice and an
increase of $23.0 million for Convenience for the second quarter of fiscal 2023
compared to an increase of $8.2 million for Foodservice and an increase of $37.3
million for Convenience for the second quarter of fiscal 2022. The LIFO reserve
decreased $2.0 million for Foodservice and increased $53.8 million for
Convenience for the first six months of fiscal 2023 compared to an increase of
$13.9 million for Foodservice and an increase of $20.3 million for Convenience
for the first six months of fiscal 2022.
(2)
Includes professional fees and other costs related to completed and abandoned acquisitions, costs of integrating certain of our facilities, and facility closing costs.
(3)
Includes asset impairments, gains and losses on disposal of fixed assets, amounts related to favorable and unfavorable leases, foreign currency transaction gains and losses, franchise tax expense, and other adjustments permitted by our ABL Facility.
Consolidated Results of Operations
Three and six months ended
Net sales growth is a function of acquisitions, case growth, pricing (which is primarily based on product inflation/deflation), and a changing mix of customers, channels, and product categories sold.
Net sales increased$1.1 billion , or 8.3%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 due to an increase in selling price per case as a result of inflation and channel mix. Net sales increased$5.4 billion , or 23.2%, for the first six months of fiscal 2023 compared to the first six months of fiscal 2022 as a result of the acquisition of Core-Mark in the first quarter of fiscal 2022 and an increase in selling price per case due to inflation and channel mix. Overall product cost inflation has continued to decline through the first six months of fiscal 2023 and was approximately 10.3% for the second quarter of fiscal 2023 and 11.3% for the first six months of fiscal 2023. Total case volume increased 3.0% and 9.4%, including 6.6% and 6.7% of independent case growth, in the second quarter and first six months of fiscal 2023, respectively, compared to the same periods of fiscal 2022. Total organic case volume was flat in the second quarter and the first six months of fiscal 2023 compared to the prior year periods. Total organic case volume benefited from an increase of 4.3% and 4.4% in organic independent cases sold during the second quarter and first six months of fiscal 2023, respectively, growth in Performance Brands cases, and broad-based growth across Vistar's channels, offset by declines in our Foodservice Chain business.
Gross Profit
Gross profit increased$220.8 million , or 17.3%, for the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. The increase in gross profit for the second quarter of fiscal 2023 was primarily driven by a favorable shift in the mix of cases sold and growth in the independent channel. Gross profit increased$653.6 million , or 27.0%, for the first six months of fiscal 2023 compared to the first six months of fiscal 2022. The increase in gross profit for the first six months of fiscal 2023 was primarily driven by the acquisition of Core-Mark in the first quarter of fiscal 2022, procurement related gains, and growth in the independent channel, partially offset by an increase in the LIFO reserve. Operating Expenses Operating expenses increased$134.6 million , or 11.0%, for the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022. The increase in operating expenses was primarily driven by a$53.7 million increase in personnel expense primarily 27 -------------------------------------------------------------------------------- related to salaries and wages, commissions, annual bonus, and benefits and a$20.6 million increase in fuel expense primarily due to higher fuel prices for the second quarter of fiscal 2023 as compared to the prior year period. Operating expenses increased$424.4 million , or 18.3%, for the first six months of fiscal 2023 compared to the first six months of fiscal 2022. The increase in operating expenses for the first six months of fiscal 2023 was primarily driven by the acquisition of Core-Mark, as well as increases in personnel expense and fuel expense. Operating expenses include an incremental$192.8 million for Core-Mark in the first six months of fiscal 2023 compared to four months of operating expenses for Core-Mark in fiscal 2022. Operating expenses also increased as a result of a$95.5 million increase in personnel expenses primarily related to salaries and wages, commissions, annual bonus, and benefits and a$49.0 million increase in fuel expense primarily due to higher fuel prices for the first six months of fiscal 2023 compared to the prior year period. These increases were partially offset by a$15.8 million decrease in professional fees primarily related to prior year acquisitions for the first six months of fiscal 2023 compared to the prior year period. Depreciation and amortization of intangible assets increased from$116.5 million in the second quarter of fiscal 2022 to$125.2 million in the second quarter of fiscal 2023. Depreciation and amortization of intangible assets increased from$215.2 million in the first six months of fiscal 2022 to$244.4 million in the first six months of fiscal 2023. Depreciation of fixed assets and amortization of intangible assets increased as a result of the Core-Mark acquisition and a prior year acquisition within Foodservice.
Net Income
Net income increased$62.7 million for the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022 driven by the increase in operating profit and an increase in other income, partially offset by increases in income tax expense and interest expense. Net income increased$153.7 million for the first six months of fiscal 2023 compared to the first six months of fiscal 2022 due to the increase in operating profit, partially offset by increases in income tax expense and interest expense. The increases in interest expense were primarily the result of an increase in the average interest rate and an increase in average borrowings outstanding during the second quarter and first six months of fiscal 2023 compared to the prior year periods. The increase in other income for the second quarter of fiscal 2023 primarily relates to realized and unrealized gains for fuel hedging instruments. The Company reported income tax expense of$25.1 million and$59.3 million for the second quarter and first six months of fiscal 2023, respectively, compared to income tax expense of$3.0 million and$3.8 million for the second quarter and first six months of fiscal 2022, respectively. Our effective tax rates for the second quarter and first six months of fiscal 2023 were 26.1% and 26.2%, respectively, compared to 26.5% and 22.6% for the second quarter and first six months of fiscal 2022, respectively. The effective tax rate for periods endedDecember 31, 2022 differed from the prior year periods primarily due to the relative size of stock-based compensation and other discrete permanent items as a percentage of book income. Segment Results The Company has three reportable segments: Foodservice, Vistar, and Convenience. Management evaluates the performance of these segments based on various operating and financial metrics, including their respective sales growth and Adjusted EBITDA. In the first quarter of fiscal 2023, the Company changed its measure of segment profit to Adjusted EBITDA as this is the metric reported to management for purposes of reviewing operating results and making decisions about allocating resources. Adjusted EBITDA is defined as net income before interest expense, interest income, income taxes, depreciation, amortization and excludes certain items that the Company does not consider part of its segments' core operating results, including stock-based compensation expense, changes in the LIFO reserve, acquisition, integration and reorganization expenses, and gains and losses related to fuel derivatives. See Note 13. Segment Information within Part I, Item 1. Financial Statements. Corporate & All Other is comprised of unallocated corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of our internal logistics unit responsible for managing and allocating inbound logistics revenue and expense. The presentation and amounts for the three and six months endedJanuary 1, 2022 have been restated to reflect the change to the measure of segment profit to Adjusted EBITDA described above.
The following tables set forth net sales and Adjusted EBITDA by segment for the periods indicated (dollars in millions):
28
--------------------------------------------------------------------------------Net Sales Three Months Ended December 31, 2022 January 1, 2022 Change % Foodservice $ 6,896.6 $ 6,214.4$ 682.2 11.0 Vistar 1,118.9 907.3 211.6 23.3 Convenience 5,864.1 5,710.0 154.1 2.7 Corporate & All Other 154.0 121.4 32.6 26.9 Intersegment Eliminations (134.7 ) (114.3 ) (20.4 ) (17.8 ) Total net sales $ 13,898.9$ 12,838.8 $ 1,060.1 8.3 Six Months Ended December 31, 2022 January 1, 2022 Change % Foodservice $ 14,226.6$ 12,576.4 $ 1,650.2 13.1 Vistar 2,209.0 1,753.8 455.2 26.0 Convenience 12,151.0 8,881.2 3,269.8 36.8 Corporate & All Other 306.3 242.0 64.3 26.6 Intersegment Eliminations (274.7 ) (228.3 ) (46.4 ) (20.3 ) Total net sales $ 28,618.2$ 23,225.1 $ 5,393.1 23.2 Adjusted EBITDA Three Months Ended December 31, 2022 January 1, 2022 Change % Foodservice $ 214.2 $ 167.5$ 46.7 27.9 Vistar 92.2 $ 49.7 42.5 85.5 Convenience 69.3 $ 76.5 (7.2 ) (9.4 ) Corporate & All Other (66.9 ) $ (52.6 ) (14.3 ) (27.2 ) Total Adjusted EBITDA $ 308.8 $ 241.1$ 67.7 28.1 Six Months Ended December 31, 2022 January 1, 2022 Change % Foodservice $ 450.3 $ 337.6$ 112.7 33.4 Vistar $ 166.6 $ 79.9 86.7 108.5 Convenience $ 174.9 $ 107.9 67.0 62.1 Corporate & All Other $ (128.3 ) $ (100.6 ) (27.7 ) (27.5 ) Total Adjusted EBITDA $ 663.5 $ 424.8$ 238.7 56.2 Segment Results-Foodservice
Three and six months ended
Net sales for Foodservice increased$682.2 million , or 11.0%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 and increased$1.7 billion , or 13.1%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. These increases in net sales were driven by an increase in selling price per case as a result of inflation and a prior year acquisition. Overall product cost inflation has continued to decline throughout the first six months of fiscal 2023 and was approximately 9.6% for the second quarter of fiscal 2023 and 11.6% for the first six months of fiscal 2023. Securing new and expanding business with independent customers resulted in organic independent case growth of approximately 4.3% in the second quarter of fiscal 2023 and approximately 4.4% in the first six months of fiscal 2023, compared to the prior year periods. For the quarter, independent sales as a percentage of total Foodservice sales were 38.3%.
Adjusted EBITDA
Adjusted EBITDA for Foodservice increased$46.7 million , or 27.9%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 and increased$112.7 million , or 33.4%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. These increases were the result of an increase in gross profit, partially offset by an increase in operating expenses. Gross profit contributing to Foodservice's Adjusted EBITDA increased$124.6 million , or 15.5%, in the second quarter of fiscal 2023 and 29 -------------------------------------------------------------------------------- increased$272.8 million , or 16.8% in the first six months of fiscal 2023, compared to the prior year periods. These increases in gross profit were driven by a favorable shift in the mix of cases sold to independent customers, including more Performance Brands products sold to our independent customers. Additionally, gross profit benefited from the prior year acquisition. The increases in gross profit were partially offset by expected decreases in procurement gains as the rate of inflation declines. Operating expenses impacting Foodservice's Adjusted EBITDA increased$78.0 million , or 12.2%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023. Operating expenses increased as a result of the prior year acquisition, a$34.0 million increase in personnel expenses primarily related to commissions, annual bonus, and benefits and an increase in fuel expense of$13.3 million primarily as a result of an increase in fuel prices. Operating expenses impacting Foodservice's Adjusted EBITDA increased$160.2 million , or 12.5%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. Operating expenses increased as a result of the prior year acquisition, a$58.6 million increase in personnel expenses primarily related to commissions, annual bonus, and benefits, an increase in fuel expense of$31.6 million primarily as a result of an increase in fuel prices, an increase of$4.5 million in reserves for expected credit losses, and a$4.0 million increase in insurance expense compared to the prior year period. Depreciation and amortization of intangible assets recorded in this segment increased from$60.7 million in the second quarter of fiscal 2022 to$71.8 million in the second quarter of fiscal 2023 and increased from$125.0 million in the first six months of fiscal 2022 to$137.8 million in the first six months of fiscal 2023. Depreciation of fixed assets and amortization of intangible assets increased during these periods as a result of the prior year acquisition, which included accelerated amortization of certain customer relationships, partially offset by fully amortized intangible assets.
Segment Results-Vistar
Three and six months ended
Net sales for Vistar increased$211.6 million , or 23.3%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 and increased$455.2 million , or 26.0%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. These increases in net sales were driven primarily by an increase in selling price per case as a result of inflation and channel mix, as well as case volume growth in the vending, office coffee service, office supply, and hospitality channels in the second quarter and first six months of fiscal 2023 compared to the prior year periods.
Adjusted EBITDA
Adjusted EBITDA for Vistar increased$42.5 million , or 85.5%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 and increased$86.7 million , or 108.5%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. These increases were the result of an increase in gross profit, partially offset by an increase in operating expenses. Gross profit increased$53.3 million , or 34.8%, for the second quarter of fiscal 2023 and increased$109.5 million , or 38.2%, for the first six months of fiscal 2023 compared to the prior year periods driven by a favorable shift in the mix of cases sold, procurement related gains, and growth in cases sold. Operating expenses impacting Vistar's Adjusted EBITDA increased$10.9 million , or 10.5%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023 and increased$22.8 million , or 11.0%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. Operating expenses increased primarily as a result of increased case volume described above and the resulting impact on variable operational and selling expenses. Operating expenses also increased as a result of increases in personnel and fuel expenses. Personnel expenses primarily related to salaries, wages, and annual bonus increased$6.0 million and$11.1 million for the second quarter and first six months of fiscal 2023, respectively, compared to the prior year periods. Fuel expense increased$1.5 million and$3.3 million for the second quarter and first six months of fiscal 2023, respectively, compared to the prior year periods. Depreciation and amortization of intangible assets recorded in this segment decreased from$13.1 million in the second quarter of fiscal 2022 to$10.6 million in the second quarter of fiscal 2023 and decreased from$26.2 million in the first six months of fiscal 2022 to$21.3 million in the first six months of fiscal 2023 due to fully amortized intangible assets. 30 --------------------------------------------------------------------------------
Segment Results-Convenience
Three and six months ended
Net sales for Convenience increased$154.1 million , or 2.7%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023. Net sales related to cigarettes for the second quarter of fiscal 2023 was$3.6 billion , which includes$962.4 million of excise taxes, compared to net sales of cigarettes of$3.8 billion , which includes$1.1 billion of excise taxes, for the second quarter of fiscal 2022. The increase in net sales for the second quarter of fiscal 2023 for Convenience was driven primarily by case growth in food and foodservice related products and an increase in selling price per case as a result of inflation. Net sales for Convenience increased$3.3 billion , or 36.8%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. Net sales related to cigarettes for the first six months of fiscal 2023 was$7.5 billion , which includes$2.0 billion of excise taxes, compared to net sales of cigarettes of$5.8 billion , which includes$1.6 billion of excise taxes, for the first six months of fiscal 2022. The increase in net sales for the first six months of fiscal 2023 for Convenience was driven primarily by the acquisition of Core-Mark onSeptember 1, 2021 . Adjusted EBITDA Adjusted EBITDA for Convenience decreased$7.2 million , or 9.4%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023. This decrease was a result of an increase in operating expenses, partially offset by an increase in gross profit. Gross profit contributing to Convenience's Adjusted EBITDA increased$19.7 million , or 5.5%, for the second quarter of fiscal 2023 compared to the prior year period driven by a favorable shift in mix of products sold, partially offset by a decrease in procurement gains as a result of the timing of price increases and a decline in the rate of inflation. Operating expenses impacting Convenience's Adjusted EBITDA increased$27.3 million , or 9.7%, from the second quarter of fiscal 2022 to the second quarter of fiscal 2023. Operating expenses increased primarily as a result of increased personnel and fuel expenses. Personnel expenses primarily related to salaries and commissions increased$15.5 million . Fuel expense increased$6.1 million for the second quarter of fiscal 2023 compared to the prior year period. Adjusted EBITDA for Convenience increased$67.0 million , or 62.1%, from the first six months of fiscal 2022 to the first six months of fiscal 2023. This increase was a result of an increase in gross profit, partially offset by an increase in operating expenses driven by the acquisition of Core-Mark. Gross profit contributing to Convenience's Adjusted EBITDA increased$274.0 million , or 51.1%, for the first six months of fiscal 2023 compared to the prior year period as a result of the Core-Mark acquisition and procurement gains. Operating expenses impacting Convenience's Adjusted EBITDA increased$207.6 million , or 48.5%, from the first six months of fiscal 2022 to the first six months of fiscal 2023 as a result of the acquisition of Core-Mark onSeptember 1, 2021 and increases in personnel expenses and fuel expense. Depreciation and amortization of intangible assets recorded in this segment was$36.5 million in the second quarter of fiscal 2023 and$36.6 million in the second quarter of fiscal 2022. Depreciation and amortization of intangible assets increased from$51.7 million in the first six months of fiscal 2022 to$73.3 million in the first six months of fiscal 2023 primarily as a result of the Core-Mark acquisition.
Segment Results-Corporate & All Other
Three and six months ended
Net sales for Corporate & All Other increased
Adjusted EBITDA
Adjusted EBITDA for Corporate & All Other was a negative$66.9 million for the second quarter of fiscal 2023 compared to a negative$52.6 million for the second quarter of fiscal 2022 and was a negative$128.3 million for the first six months of fiscal 2023 compared to a negative$100.6 million for the first six months of fiscal 2022. These declines in Adjusted EBITDA were primarily driven by a$3.7 million and$8.2 million increase in professional fees related to consulting, audit and information technology services and maintenance and a$7.5 million and$9.6 million increase in personnel expenses, primarily related to salaries and annual bonus for the second quarter and first six months of fiscal 2023, respectively, compared to the prior year periods. 31 -------------------------------------------------------------------------------- Depreciation and amortization of intangible assets recorded in this segment was$6.3 million in the second quarter of fiscal 2023 and$6.1 million in the second quarter of fiscal 2022. For the first six months of fiscal 2023 depreciation and amortization of intangible assets was$12.0 million compared to$12.3 million for the first six months of fiscal 2022. Liquidity and Capital Resources We have historically financed our operations and growth primarily with cash flows from operations, borrowings under our credit facility, operating and finance leases, and normal trade credit terms. We have typically funded our acquisitions with additional borrowings under our credit facility. Our working capital and borrowing levels are subject to seasonal fluctuations, typically with the lowest borrowing levels in the third and fourth fiscal quarters and the highest borrowing levels occurring in the first and second fiscal quarters. We borrow under our credit facility or pay it down regularly based on our cash flows from operating and investing activities. Our practice is to minimize interest expense while maintaining reasonable liquidity. As market conditions warrant, we may from time to time seek to repurchase our securities or loans in privately negotiated or open market transactions, by tender offer or otherwise. Any such repurchases may be funded by incurring new debt, including additional borrowings under our credit facility. In addition, depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider other financing transactions, the proceeds of which could be used to refinance our indebtedness, make investments or acquisitions or for other purposes. Any new debt may be secured debt. Our cash requirements over the next 12 months and beyond relate to our long-term debt and associated interest payments, operating and finance leases, and purchase obligations. For information regarding the Company's expected cash requirements related to long-term debt and operating and finance leases, see Note 6. Debt and Note 7. Leases, respectively, of the consolidated financial statements in this Form 10-Q. As ofDecember 31, 2022 , the Company had total purchase obligations of$133.4 million , which includes agreements for purchases related to capital projects and services in the normal course of business, for which all significant terms have been confirmed, as well as a minimum amount due for various Company meetings and conferences. Purchase obligations also include amounts committed to various capital projects in process or scheduled to be completed in the coming fiscal years. As ofDecember 31, 2022 , the Company had commitments of$74.2 million for capital projects related to warehouse expansion and improvements and warehouse equipment. The Company anticipates using cash flows from operations or borrowings under the ABL Facility to fulfill these commitments. Amounts due under these agreements were not included in the Company's consolidated balance sheet as ofDecember 31, 2022 . We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We believe that our cash flows from operations and available borrowing capacity will be sufficient both to meet our anticipated cash requirements over at least the next 12 months and to maintain sufficient liquidity for normal operating purposes and to fund capital expenditures.
As of
Six months ended
Operating Activities During the first six months of fiscal 2023 and fiscal 2022, our operating activities provided cash flow of$424.5 million and$153.8 million , respectively. The increase in cash flow provided by operating activities in the first six months of fiscal 2023 compared to the first six months of fiscal 2022 was largely driven by higher operating income and improvements in working capital.
Investing Activities
Cash used in investing activities totaled$160.3 million in the first six months of fiscal 2023 compared to$1,718.7 million in the first six months of fiscal 2022. These investments consisted of cash paid for acquisitions of$65.8 million in the first six months of fiscal 2023 compared to$1,651.1 million in the first six months of fiscal 2022, along with capital purchases of property, plant, and equipment of$98.1 million and$68.5 million for the first six months of fiscal 2023 and the first six months of fiscal 2022, respectively. For the first six months of fiscal 2023, purchases of property, plant, and equipment primarily consisted of outlays for warehouse expansion and improvements, warehouse equipment, information technology, and transportation equipment. The following table presents the capital purchases of property, plant, and equipment by segment. 32 --------------------------------------------------------------------------------
Six Months Ended
(Dollars in millions) December 31, 2022 January 1, 2022
Foodservice $ 76.6 $ 46.7
Vistar 4.5 5.3
Convenience 13.5 10.0
Corporate & All Other 3.5 6.5
Total capital purchases of property, plant and
equipment $ 98.1 $ 68.5
Financing Activities
During the first six months of fiscal 2023, our financing activities used cash
flow of
During the first six months of fiscal 2022, our financing activities provided cash flow of$1,559.4 million , which consisted primarily of$1.0 billion in cash received from the issuance and sale of the Notes due 2029 and$962.7 million in net borrowings under our ABL Facility, partially offset by$350.0 million in cash used for the repayment of the$350.0 million aggregate principal amount of the 5.500% Senior Notes due 2024 ("Notes due 2024").
The following describes our financing arrangements as of
Credit Agreement: PFGC, a wholly-owned subsidiary of the Company, andPerformance Food Group, Inc. , a wholly-owned subsidiary of PFGC, are parties to the ABL Facility. The ABL Facility has an aggregate principal amount of$4.0 billion under the revolving loan facility, is scheduled to mature onSeptember 17, 2026 , and includes an alternative reference rate, which provides mechanisms for the use of the Secured Overnight Financing Rate as a replacement rate upon a LIBOR cessation event. PerformanceFood Group, Inc. is the lead borrower under the ABL Facility, which is jointly and severally guaranteed by, and secured by the majority of the assets of, PFGC and all material domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). Availability for loans and letters of credit under the ABL Facility is governed by a borrowing base, determined by the application of specified advance rates against eligible assets, including trade accounts receivable, inventory, owned real properties, and owned transportation equipment. The borrowing base is reduced quarterly by a cumulative fraction of the real properties and transportation equipment values. Advances on accounts receivable and inventory are subject to change based on periodic commercial finance examinations and appraisals, and the real property and transportation equipment values included in the borrowing base are subject to change based on periodic appraisals. Audits and appraisals are conducted at the direction of the administrative agent for the benefit and on behalf of all lenders. Borrowings under the ABL Facility bear interest, atPerformance Food Group, Inc.'s option, at (a) the Base Rate (defined as the greater of (i) the Federal Funds Rate in effect on such date plus 0.5%, (ii) the Prime Rate on such day, or (iii) one month LIBOR plus 1.0%) plus a spread, or (b) LIBOR plus a spread. The ABL Facility also provides for an unused commitment fee rate of 0.25% per annum.
The following table summarizes outstanding borrowings, availability, and the average interest rate under the Company's ABL Facility:
(Dollars in millions) As of December 31, As of July 2, 2022
2022
Aggregate borrowings $ 1,376.3 $ 1,608.4
Letters of credit 179.2 190.5
Excess availability, net of lenders' 2,444.5 2,201.1
reserves of$90.0 and$104.4 Average interest rate, excluding impact of 5.78 % 2.89 % interest rate swaps The ABL Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below the greater of (i)$320.0 million and (ii) 10% of the lesser of the borrowing base and the revolving credit facility amount for five consecutive business days. The ABL Facility also contains customary restrictive covenants that include, but are not limited to, restrictions on PFGC's and certain of its subsidiary's ability to incur additional indebtedness, pay dividends, create liens, make investments or specified payments, and dispose of assets. The ABL Facility provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness. If an event of default occurs and is continuing, amounts due under such agreement may be accelerated and the rights and remedies of the lenders under the ABL Facility may be exercised, including rights with respect to the collateral securing the obligations under such agreement. Senior Notes due 2025: OnApril 24, 2020 ,Performance Food Group, Inc. issued and sold$275.0 million aggregate principal amount of its 6.875% Senior Notes due 2025 (the "Notes due 2025"), pursuant to an indenture dated as ofApril 24, 2020 . The Notes 33 -------------------------------------------------------------------------------- due 2025 are jointly and severally guaranteed on a senior unsecured basis by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The Notes due 2025 are not guaranteed byPerformance Food Group Company . The proceeds from the Notes due 2025 were used for working capital and general corporate purposes and to pay the fees, expenses, and other transaction costs incurred in connection with the Notes due 2025. The Notes due 2025 were issued at 100.0% of their par value. The Notes due 2025 mature onMay 1, 2025 and bear interest at a rate of 6.875% per year, payable semi-annually in arrears. Upon the occurrence of a change of control triggering event or upon the sale of certain assets in whichPerformance Food Group, Inc. does not apply the proceeds as required, the holders of the Notes due 2025 will have the right to requirePerformance Food Group, Inc. to repurchase each holder's Notes due 2025 at a price equal to 101% (in the case of a change of control triggering event) or 100% (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest. PerformanceFood Group, Inc. may redeem all or a part of the Notes due 2025 beginningMay 1, 2022 at a redemption price equal to 103.438% of the principal amount redeemed, plus accrued and unpaid interest. The redemption price decreases to 101.719% and 100% of the principal amount redeemed onMay 1, 2023 , andMay 1, 2024 , respectively. The indenture governing the Notes due 2025 contains covenants limiting, among other things, PFGC's and its restricted subsidiaries' ability to incur or guarantee additional debt or issue disqualified stock or preferred stock; pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; create certain restrictions on the ability of PFGC's restricted subsidiaries to make dividends or other payments to PFGC; designate restricted subsidiaries as unrestricted subsidiaries; and transfer or sell certain assets. These covenants are subject to a number of important exceptions and qualifications. The Notes due 2025 also contain customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes due 2025 to become or be declared due and payable. Senior Notes due 2027: OnSeptember 27, 2019 ,PFG Escrow Corporation (which merged with and intoPerformance Food Group, Inc. ) issued and sold$1,060.0 million aggregate principal amount of its 5.500% Senior Notes due 2027 ("the "Notes due 2027"). The Notes due 2027 are jointly and severally guaranteed on a senior unsecured basis by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The Notes due 2027 are not guaranteed byPerformance Food Group Company . The proceeds from the Notes due 2027 along with an offering of shares of the Company's common stock and borrowings under a prior credit agreement, were used to fund the cash consideration for the acquisition ofReinhart Foodservice, L.L.C and to pay related fees and expenses.
The Notes due 2027 were issued at 100.0% of their par value. The Notes due 2027
mature on
Upon the occurrence of a change of control triggering event or upon the sale of certain assets in whichPerformance Food Group, Inc. does not apply the proceeds as required, the holders of the Notes due 2027 will have the right to requirePerformance Food Group, Inc. to repurchase each holder's Notes due 2027 at a price equal to 101% (in the case of a change of control triggering event) or 100% (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest. Beginning onOctober 15, 2022 ,Performance Food Group, Inc. may redeem all or a part of the Notes due 2027 at a redemption price equal to 102.750% of the principal amount redeemed, plus accrued and unpaid interest. The redemption price decreases to 101.375% and 100% of the principal amount redeemed onOctober 15, 2023 , andOctober 15, 2024 , respectively. The indenture governing the Notes due 2027 contains covenants limiting, among other things, PFGC and its restricted subsidiaries' ability to incur or guarantee additional debt or issue disqualified stock or preferred stock; pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; create certain restrictions on the ability of PFGC's restricted subsidiaries to make dividends or other payments to PFGC; designate restricted subsidiaries as unrestricted subsidiaries; and transfer or sell certain assets. These covenants are subject to a number of important exceptions and qualifications. The Notes due 2027 also contain customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes due 2027 to become or be declared due and payable. Senior Notes due 2029: OnJuly 26, 2021 ,Performance Food Group, Inc. issued and sold$1.0 billion aggregate principal amount of its 4.250% Senior Notes due 2029 (the "Notes due 2029"). The Notes due 2029 are jointly and severally guaranteed on a 34 -------------------------------------------------------------------------------- senior unsecured basis by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The Notes due 2029 are not guaranteed byPerformance Food Group Company .
The proceeds from the Notes due 2029 were used to pay down the outstanding balance of the ABL Facility, to redeem the Senior Notes due 2024, and to pay the fees, expenses, and other transaction costs incurred in connection with the Notes due 2029.
The Notes due 2029 were issued at 100.0% of their par value. The Notes due 2029 mature onAugust 1, 2029 and bear interest at a rate of 4.250% per year, payable semi-annually in arrears. Upon the occurrence of a change of control triggering event or upon the sale of certain assets in whichPerformance Food Group, Inc. does not apply the proceeds as required, the holders of the Notes due 2029 will have the right to requirePerformance Food Group, Inc. to repurchase each holder's Notes due 2029 at a price equal to 101% (in the case of a change of control triggering event) or 100% (in the case of an asset sale) of their principal amount, plus accrued and unpaid interest. PerformanceFood Group, Inc. may redeem all or a part of the Notes due 2029 at any time prior toAugust 1, 2024 , at a redemption price equal to 100% of the principal amount of the Notes due 2029 being redeemed plus a make-whole premium and accrued and unpaid interest, if any, to, but not including, the redemption date. In addition, beginning onAugust 1, 2024 ,Performance Food Group, Inc. may redeem all or a part of the Notes due 2029 at a redemption price equal to 102.125% of the principal amount redeemed, plus accrued and unpaid interest. The redemption price decreases to 101.163% and 100% of the principal amount redeemed onAugust 1, 2025 , andAugust 1, 2026 , respectively. In addition, at any time prior toAugust 1, 2024 ,Performance Food Group, Inc. may redeem up to 40% of the Notes due 2029 from the proceeds of certain equity offerings at a redemption price equal to 104.250% of the principal amount thereof, plus accrued and unpaid interest. The indenture governing the Notes due 2029 contains covenants limiting, among other things, PFGC's and its restricted subsidiaries' ability to incur or guarantee additional debt or issue disqualified stock or preferred stock; pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; create certain restrictions on the ability of PFGC's restricted subsidiaries to make dividends or other payments to PFGC; designate restricted subsidiaries as unrestricted subsidiaries; and transfer or sell certain assets. These covenants are subject to a number of important exceptions and qualifications. The Notes due 2029 also contain customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes due 2029 to become or be declared due and payable.
As of
Total Assets by SegmentTotal assets by segment discussed below exclude intercompany receivables between segments.
Total assets for Foodservice increased$105.3 million from$6,188.7 million as ofJanuary 1, 2022 to$6,294.0 million as ofDecember 31, 2022 . During this time period, this segment increased its inventory, property, plant and equipment and accounts receivable, partially offset by a decrease in intangible assets. Total assets for Foodservice decreased$161.3 million from$6,455.3 million as ofJuly 2, 2022 to$6,294.0 million as ofDecember 31, 2022 . During this time period, this segment decreased its accounts receivable, intangible assets, and inventory, partially offset by an increase in property, plant and equipment. Total assets for Vistar increased$109.3 million from$1,106.7 million as ofJanuary 1, 2022 to$1,216.0 million as ofDecember 31, 2022 . During this time period, this segment increased its accounts receivable, inventory, and operating lease right-of-use assets, partially offset by a decrease in intangible assets. Total assets for Vistar increased$82.3 million from$1,133.7 million as ofJuly 2, 2022 to$1,216.0 million as ofDecember 31, 2022 . During this time period, this segment increased its inventory, operating lease right-of-use assets, and accounts receivable, partially offset by a decrease in intangible assets. Total assets for Convenience decreased$188.6 million from$4,324.5 million as ofJanuary 1, 2022 to$4,135.9 million as ofDecember 31, 2022 . During this time period, the segment decreased its inventory, intangible assets, prepaid expenses and other current assets, and property, plant and equipment, partially offset by an increase in accounts receivable. Total assets for Convenience decreased$275.7 million from$4,411.6 million as ofJuly 2, 2022 to$4,135.9 million as ofDecember 31, 2022 . During this time period, the segment decreased its inventory, accounts receivable, intangible assets, and property, plant and equipment. Total assets for Corporate & All Other increased$207.2 million from$336.5 million as ofJanuary 1, 2022 to$543.7 million as ofDecember 31, 2022 . During this period, Corporate & All Other primarily increased its assets due to a recent immaterial acquisition. Total assets for Corporate & All Other increased$166.3 million from$377.4 million as ofJuly 2, 2022 to$543.7 million as ofDecember 31, 2022 . During this period, Corporate & All Other primarily increased its assets due to a recent immaterial acquisition. 35 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates Critical accounting policies and estimates are those that are most important to portraying our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies and estimates include those that pertain to the allowance for doubtful accounts receivable, inventory valuation, insurance programs, income taxes, vendor rebates and promotional incentives, leases, and goodwill and other intangible assets, which are described in the Form 10-K. There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates described in the Form 10-K.
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