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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-37578

 

Performance Food Group Company

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

43-1983182

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

 

 

12500 West Creek Parkway

Richmond, Virginia 23238

 

(804) 484-7700

(Address of principal executive offices)

 

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

PFGC

 

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large Accelerated Filer

 

  

Accelerated Filer

 

 

 

 

 

Non-accelerated Filer

 

 

  

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

 

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

154,314,660 shares of common stock were outstanding as of November 3, 2021.

 

 

 

 


 

TABLE OF CONTENTS

 

 

Page

 

 

Special Note Regarding Forward-Looking Statements

3

 

 

PART I - FINANCIAL INFORMATION

5

 

 

Item 1.

 

Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

 

Item 4.

 

Controls and Procedures

32

 

 

 

 

PART II - OTHER INFORMATION

33

 

 

Item 1.

 

Legal Proceedings

33

 

 

 

 

Item 1A.

 

Risk Factors

33

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

33

 

 

 

 

Item 4.

 

Mine Safety Disclosures

33

 

 

 

 

Item 5.

 

Other Information

33

 

 

 

 

Item 6.

 

Exhibits

34

 

 

 

 

SIGNATURE

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (this “Form 10-Q”) may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position, our business outlook, business trends and other information are forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved, and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021 (the “Form 10-K”), as such risk factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (the “SEC”), including under Part II, Item 1A, Risk Factors of this Form 10-Q, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

 

the material adverse impact the novel coronavirus (“COVID-19”) pandemic has had and is expected to continue to have on the global markets, the restaurant industry, and our business specifically, including the effects on vehicle miles driven, on the financial health of our business partners, on supply chains, and on financial and capital markets;

 

competition in our industry is intense, and we may not be able to compete successfully;

 

we operate in a low margin industry, which could increase the volatility of our results of operations;

 

we may not realize anticipated benefits from our operating cost reduction and productivity improvement efforts;

 

our profitability is directly affected by cost inflation and deflation and other factors;

 

we do not have long-term contracts with certain of our customers;

 

group purchasing organizations may become more active in our industry and increase their efforts to add our customers as members of these organizations;

 

changes in eating habits of consumers;

 

extreme weather conditions, including earthquake and natural disaster damage;

 

our reliance on third-party suppliers;

 

labor relations and cost risks and availability of qualified labor;

 

volatility of fuel and other transportation costs;

 

inability to adjust cost structure where one or more of our competitors successfully implement lower costs;

 

we may be unable to increase our sales in the highest margin portion of our business;

 

changes in pricing practices of our suppliers;

 

our growth strategy may not achieve the anticipated results;

 

risks relating to acquisitions, including the risk that we are not able to realize benefits of acquisitions or successfully integrate the businesses we acquire;

 

environmental, health, and safety costs;

 

the risk that we fail to comply with requirements imposed by applicable law or government regulations, including increased regulation of electronic cigarette and other alternative nicotine products;

 

a portion of our sales volume is dependent upon the distribution of cigarettes and other tobacco products, sales of which are generally declining;

 

 

if products we distribute are alleged to cause injury or illness or fail to comply with governmental regulations, we may need to recall our products and may experience product liability claims;

3


 

 

 

our reliance on technology and risks associated with disruption or delay in implementation of new technology;

 

costs and risks associated with a potential cybersecurity incident or other technology disruption;

 

product liability claims relating to the products we distribute and other litigation;

 

adverse judgements or settlements or unexpected outcomes in legal proceedings;

 

negative media exposure and other events that damage our reputation;  

 

decrease in earnings from amortization charges associated with acquisitions;

 

impact of uncollectibility of accounts receivable;  

 

difficult economic conditions affecting consumer confidence;

 

increase in excise taxes or reduction in credit terms by taxing jurisdictions;

 

the cost and adequacy of insurance coverage and increases in the number or severity of insurance and claims expenses;

 

risks relating to our outstanding indebtedness;

 

our ability to raise additional capital;

 

the following risks related to the acquisition of Core-Mark Holding Company, Inc. (“Core-Mark”):

 

the possibility that the expected synergies and value creation from the acquisition will not be realized or will not be realized within the expected time period;

 

the risk that unexpected costs will be incurred in connection with the integration of the acquisition or that the integration of Core-Mark will be more difficult or time consuming than expected;

 

the inability to retain key personnel;

 

disruption from the acquisition including potential adverse reactions or changes to business relationships with customers, employees, suppliers or regulators, making it more difficult to maintain business and operational relationships; and

 

the risk that the combined company may not be able to effectively manage its expanded operations.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. We cannot assure you (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” or “PFG” as used in this Form 10-Q refer to Performance Food Group Company and its consolidated subsidiaries.

 

4


 

Part I – FINANCIAL INFORMATION

Item 1.

Financial Statements

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

(In millions, except per share data)

 

As of

October 2, 2021

 

 

As of

July 3, 2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

35.1

 

 

$

11.1

 

Accounts receivable, less allowances of $48.8 and $42.6

 

 

2,164.9

 

 

 

1,580.0

 

Inventories, net

 

 

2,864.0

 

 

 

1,839.4

 

Income taxes receivable

 

 

73.1

 

 

 

49.6

 

Prepaid expenses and other current assets

 

 

211.7

 

 

 

100.3

 

Total current assets

 

 

5,348.8

 

 

 

3,580.4

 

Goodwill

 

 

2,220.5

 

 

 

1,354.7

 

Other intangible assets, net

 

 

1,280.1

 

 

 

796.4

 

Property, plant and equipment, net

 

 

1,978.5

 

 

 

1,589.6

 

Operating lease right-of-use assets

 

 

650.8

 

 

 

438.7

 

Restricted cash

 

 

7.1

 

 

 

11.1

 

Other assets

 

 

95.9

 

 

 

74.8

 

Total assets

 

$

11,581.7

 

 

$

7,845.7

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade accounts payable and outstanding checks in excess of deposits

 

 

2,374.1

 

 

 

1,776.5

 

Accrued expenses and other current liabilities

 

 

709.9

 

 

 

625.0

 

Finance lease obligations—current installments

 

 

71.5

 

 

 

48.7

 

Operating lease obligations—current installments

 

 

105.8

 

 

 

77.0

 

Total current liabilities

 

 

3,261.3

 

 

 

2,527.2

 

Long-term debt

 

 

3,669.7

 

 

 

2,240.5

 

Deferred income tax liability, net

 

 

376.1

 

 

 

140.4

 

Finance lease obligations, excluding current installments

 

 

355.0

 

 

 

255.0

 

Operating lease obligations, excluding current installments

 

 

560.5

 

 

 

378.0

 

Other long-term liabilities

 

 

235.6

 

 

 

198.5

 

Total liabilities

 

 

8,458.2

 

 

 

5,739.6

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common Stock: $0.01 par value per share, 1.0 billion shares authorized, 152.8 million shares issued and outstanding as of October 2, 2021;

132.5 million shares issued and outstanding as of July 3, 2021

 

 

1.5

 

 

 

1.3

 

Additional paid-in capital

 

 

2,764.6

 

 

 

1,752.8

 

Accumulated other comprehensive loss, net of tax benefit of $1.6 and $1.9

 

 

(4.6

)

 

 

(5.3

)

Retained earnings

 

 

362.0

 

 

 

357.3

 

Total shareholders’ equity

 

 

3,123.5

 

 

 

2,106.1

 

Total liabilities and shareholders’ equity

 

$

11,581.7

 

 

$

7,845.7

 

 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

 

5


 

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

(In millions, except per share data)

 

Three Months Ended October 2, 2021

 

 

Three Months Ended September 26, 2020

 

Net sales

 

$

10,386.3

 

 

$

7,046.8

 

Cost of goods sold

 

 

9,244.0

 

 

 

6,231.3

 

Gross profit

 

 

1,142.3

 

 

 

815.5

 

Operating expenses

 

 

1,094.1

 

 

 

779.7

 

Operating profit

 

 

48.2

 

 

 

35.8

 

Other expense, net:

 

 

 

 

 

 

 

 

Interest expense

 

 

44.0

 

 

 

38.8

 

Other, net

 

 

(1.3

)

 

 

(1.0

)

Other expense, net

 

 

42.7

 

 

 

37.8

 

Income (loss) before taxes

 

 

5.5

 

 

 

(2.0

)

Income tax expense (benefit)

 

 

0.8

 

 

 

(1.3

)

Net income (loss)

 

$

4.7

 

 

$

(0.7

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

139.7

 

 

 

131.7

 

Diluted

 

 

141.2

 

 

 

131.7

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

(0.01

)

Diluted

 

$

0.03

 

 

$

(0.01

)

 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

 

6


 

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

($ in millions)

 

Three Months Ended

October 2, 2021

 

 

Three Months Ended

September 26, 2020

 

Net income (loss)

 

$

4.7

 

 

$

(0.7

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

Change in fair value, net of tax

 

 

(0.2

)

 

 

(0.3

)

Reclassification adjustment, net of tax

 

 

1.3

 

 

 

0.7

 

Foreign currency translation adjustment, net of tax

 

 

(0.4

)

 

 

 

Other comprehensive income

 

 

0.7

 

 

 

0.4

 

Total comprehensive income (loss)

 

$

5.4

 

 

$

(0.3

)

 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

 

7


 

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Retained

 

 

Shareholders’

 

(In millions)

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Equity

 

Balance as of June 27, 2020

 

 

131.3

 

 

$

1.3

 

 

$

1,703.0

 

 

$

(10.3

)

 

$

316.6

 

 

$

2,010.6

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

0.4

 

 

 

 

 

 

0.4

 

Issuance of common stock under stock-based compensation plans

 

 

0.4

 

 

 

 

 

 

(1.7

)

 

 

 

 

 

 

 

 

(1.7

)

Issuance of common stock under employee stock purchase plan

 

 

0.3

 

 

 

 

 

 

7.8

 

 

 

 

 

 

 

 

 

7.8

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4.3

 

 

 

 

 

 

 

 

 

4.3

 

Balance as of September 26, 2020

 

 

132.0

 

 

 

1.3

 

 

 

1,713.4

 

 

 

(9.9

)

 

 

315.9

 

 

 

2,020.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of July 3, 2021

 

 

132.5

 

 

 

1.3

 

 

 

1,752.8

 

 

 

(5.3

)

 

 

357.3

 

 

 

2,106.1

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.7

 

 

 

4.7

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

 

 

 

1.1

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(0.4

)

 

 

 

 

 

(0.4

)

Issuance of common stock under stock-based compensation plans

 

 

0.4

 

 

 

 

 

 

(4.9

)

 

 

 

 

 

 

 

 

(4.9

)

Conversion of Core-Mark shares of common stock

 

 

19.9

 

 

 

0.2

 

 

 

998.6

 

 

 

 

 

 

 

 

 

998.8

 

Conversion of Core-Mark stock-based compensation (1)

 

 

 

 

 

 

 

 

9.2

 

 

 

 

 

 

 

 

 

9.2

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

8.9

 

 

 

 

 

 

 

 

 

8.9

 

Balance as of October 2, 2021

 

 

152.8

 

 

 

1.5

 

 

 

2,764.6

 

 

 

(4.6

)

 

 

362.0

 

 

 

3,123.5

 

(1) Represents the portion of replacement stock-based compensation awards that relates to pre-combination vesting.

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

 

8


 

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

($ in millions)

 

Three Months Ended October 2, 2021

 

 

Three Months Ended September 26, 2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4.7

 

 

$

(0.7

)

Adjustments to reconcile net income (loss) to net cash provided

   by (used in) operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

57.0

 

 

 

52.8

 

Amortization of intangible assets

 

 

41.7

 

 

 

29.3

 

Amortization of deferred financing costs

 

 

2.2

 

 

 

3.6

 

Provision for losses on accounts receivables

 

 

0.2

 

 

 

(2.0

)

Change in LIFO reserve

 

 

11.3

 

 

 

(8.7

)

Stock compensation expense

 

 

10.0

 

 

 

4.7

 

Deferred income tax (benefit) expense

 

 

(0.3

)

 

 

5.5

 

Loss on extinguishment of debt

 

 

3.2

 

 

 

 

Other non-cash activities

 

 

(0.5

)

 

 

(3.1

)

Changes in operating assets and liabilities, net

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(77.3

)

 

 

(23.6

)

Inventories

 

 

26.1

 

 

 

34.2

 

Income taxes receivable

 

 

0.5

 

 

 

(7.5

)

Prepaid expenses and other assets

 

 

10.2

 

 

 

(15.1

)

Trade accounts payable and outstanding checks in excess of deposits

 

 

21.2

 

 

 

(155.3

)

Accrued expenses and other liabilities

 

 

(78.4

)

 

 

(46.1

)

Net cash provided by (used in) operating activities

 

 

31.8

 

 

 

(132.0

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(24.4

)

 

 

(40.8

)

Net cash paid for acquisitions

 

 

(1,382.6

)

 

 

 

Proceeds from sale of property, plant and equipment

 

 

0.4

 

 

 

6.1

 

Net cash used in investing activities

 

 

(1,406.6

)

 

 

(34.7

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net borrowings under ABL Facility

 

 

786.9

 

 

 

301.0

 

Borrowing of Notes due 2029

 

 

1,000.0

 

 

 

 

Repayment of Notes due 2024

 

 

(350.0

)

 

 

 

Cash paid for debt issuance, extinguishment and modifications

 

 

(21.5

)

 

 

 

Payments under finance lease obligations

 

 

(15.0

)

 

 

(8.0

)

Payments on financed property, plant and equipment

 

 

(0.1

)

 

 

(0.3

)

Cash paid for acquisitions

 

 

(0.6

)

 

 

(135.6

)

Proceeds from employee stock purchase plan

 

 

 

 

 

7.8

 

Proceeds from exercise of stock options

 

 

1.5

 

 

 

2.5

 

Cash paid for shares withheld to cover taxes

 

 

(6.4

)

 

 

(4.2

)

Net cash provided by financing activities

 

 

1,394.8

 

 

 

163.2

 

Net increase (decrease) in cash and restricted cash

 

 

20.0

 

 

 

(3.5

)

Cash and restricted cash, beginning of period

 

 

22.2

 

 

 

431.8

 

Cash and restricted cash, end of period

 

$

42.2

 

 

$

428.3

 

 

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

 

(In millions)

 

As of October 2, 2021

 

 

As of July 3, 2021

 

Cash

 

$

35.1

 

 

$

11.1

 

Restricted cash(1)

 

 

7.1

 

 

 

11.1

 

Total cash and restricted cash

 

$

42.2

 

 

$

22.2

 

9


 

 

 

(1)

Restricted cash represents the amounts required by insurers to collateralize a part of the deductibles for the Company’s workers’ compensation and liability claims.

 

Supplemental disclosures of non-cash transactions are as follows:

 

(In millions)

 

Three Months Ended October 2, 2021

 

 

Three Months Ended September 26, 2020

 

Debt assumed through finance lease obligations

 

$

35.7

 

 

$

28.9

 

Purchases of property, plant and equipment, financed

 

 

 

 

 

0.2

 

Non-cash issuance of PFG stock in exchange for Core-Mark stock

 

 

1,008.0

 

 

 

 

 

Supplemental disclosures of cash flow information are as follows:

 

(In millions)

 

Three Months Ended October 2, 2021

 

 

Three Months Ended September 26, 2020

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest

 

$

11.8

 

 

$

10.8

 

Income tax payments, net

 

 

0.6

 

 

 

0.7

 

 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

 

 

10


 

PERFORMANCE FOOD GROUP COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Summary of Business Activities

Business Overview

Performance Food Group Company, through its subsidiaries, markets and distributes primarily national and company-branded food and food-related products to customer locations across the United States and Canada. The Company serves both of the major customer types in the restaurant industry: (i) independent customers, and (ii) multi-unit, or “Chain” customers, which include some of the most recognizable family and casual dining restaurant chains, as well as schools, business and industry locations, healthcare facilities, and retail establishments. The Company also specializes in distributing candy, snacks, beverages, cigarettes, other tobacco products, health and beauty care products and other items within the United States and Canada to vending distributors, big box retailers, theaters, convenience stores, drug stores, grocery stores, liquor stores, travel providers, and hospitality providers.

On September 1, 2021 Performance Food Group Company completed the acquisition of Core-Mark. As a result, the Company expanded its convenience business within the Vistar segment, which now includes operations in Canada. Refer to Note 5. Business Combinations for additional details regarding the acquisition of Core-Mark.

 

 

2.

Summary of Significant Accounting Policies and Estimates

 

Basis of Presentation

The consolidated financial statements have been prepared by the Company, without audit, with the exception of the July 3, 2021 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the Form 10-K. The financial statements include consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income, shareholders’ equity, and cash flows for all periods presented have been made.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates used by management are related to the accounting for the allowance for doubtful accounts, reserve for inventories, impairment testing of goodwill and other intangible assets, acquisition accounting, reserves for claims and recoveries under insurance programs, vendor rebates and other promotional incentives, bonus accruals, depreciation, amortization, determination of useful lives of tangible and intangible assets, leases and income taxes. Actual results could differ from these estimates.

The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Form 10-K. Certain footnote disclosures included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

Foreign Currency Translation

As a result of the Core-Mark acquisition on September 1, 2021, PFG now has operations in Canada. The operating assets and liabilities of the Company’s Canadian operations, whose functional currency is the Canadian dollar, are translated to U.S. dollars at exchange rates in effect at period-end. Translation gains and losses are recorded in Accumulated Other Comprehensive Income (“AOCI”) as a component of stockholders’ equity. Revenue and expenses from Canadian operations are translated using the monthly average exchange rates in effect during the period in which the transactions occur. The Company also recognizes gains or losses on foreign currency exchange transactions between its Canadian and U.S. operations, net of applicable income taxes, in the consolidated statements of operations. The Company currently does not hedge Canadian foreign currency cash flows.

 

 

11


 

3.

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions for intra-period tax allocations, the recognition of deferred tax liabilities after a foreign subsidiary transitions to or from equity method accounting, and the methodology of calculating income taxes in an interim period with year-to-date losses. Additionally, the guidance provides additional clarification on other areas, including step-up of the tax basis of goodwill recorded as part of an acquisition and the treatment of franchise taxes that are partially based on income. This pronouncement is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. Companies are required to apply the standard on a prospective basis, except for certain sections of the guidance which shall be applied on a retrospective or modified retrospective basis. The Company adopted this new ASU in the first quarter of fiscal 2022 and concluded that this ASU does not have a material impact on the Company's consolidated financial statements.

 

4.

Revenue Recognition

 

The Company markets and distributes primarily national and company-branded food and food-related products to customer locations in the United States and Canada. The Foodservice segment supplies a “broad line” of products to its customers, including the Company’s performance brands and custom-cut meats and seafood, as well as products that are specific to each customer’s menu requirements. Vistar distributes candy, snacks, beverages, cigarettes, other tobacco products and other products to various customer channels. The Company disaggregates revenue by product offerings and determined that disaggregating revenue at the segment level achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 14. Segment Information for external revenue by reportable segment.

The Company has customer contracts in which incentives are paid upfront to certain customers. These payments have become industry practice and are not related to financing the customer’s business, nor are they associated with any distinct good or service to be received from the customer. These incentive payments are capitalized and amortized over the life of the contract or the expected life of the customer relationship on a straight-line basis. The Company’s contract asset for these incentives totaled $20.8 million and $19.9 million as of October 2, 2021 and July 3, 2021, respectively.

 

5.

Business Combinations

During the first quarter of fiscal 2022, the Company made one acquisition in a cash and stock transaction valued at $2.4 billion. There were no acquisitions in the first quarter of fiscal 2021.

On September 1, 2021, the Company acquired Core-Mark in a transaction valued at $2.4 billion, net of cash received. Under the terms of the transaction, Core-Mark shareholders received $23.875 per share in cash and 0.44 shares of the Company’s stock for each Core-Mark share outstanding as of August 31, 2021. The following table summarizes the purchase price for the acquisition:

(In millions, except shares, cash per share, exchange ratio, and closing price)

 

 

 

 

Core-Mark shares outstanding at August 31, 2021

 

 

45,201,975

 

Cash consideration (per Core-Mark share)

 

$

23.875

 

      Cash portion of purchase price

 

$

1,079.2

 

Core-Mark shares outstanding at August 31, 2021

 

 

45,201,975

 

Exchange ratio (per Core-Mark share)

 

 

0.44

 

Total PFGC common shares issued

 

 

19,888,869

 

Closing price of PFGC common stock on August 31, 2021

 

$

50.22

 

   Equity issued

 

$

998.8

 

Equity compensation (1)

 

$

9.2

 

   Total equity portion of purchase price

 

$

1,008.0

 

Debt assumed, net of cash

 

$

303.4

 

       Total purchase price

 

$

2,390.6

 

 

 

(1)

Represents the portion of replacement share-based payment awards that relates to pre-combination vesting.

12


 

The $1.1 billion cash portion of the acquisition was financed using borrowings from the ABL Facility (as defined in Note 6. Debt). The Core-Mark acquisition strengthens the Company’s business diversification and expands its presence in the convenience store channel. The Core-Mark acquisition is reported in the Vistar segment.

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The following table summarizes the preliminary purchase price allocation for each major class of assets acquired and liabilities assumed for the fiscal 2022 acquisition:

(In millions)

 

Fiscal 2022

 

Net working capital

 

$

982.5

 

Goodwill

 

 

865.9

 

Intangible assets with definite lives:

 

 

 

 

Customer relationships

 

 

370.0

 

Trade names

 

 

140.0

 

Technology

 

 

7.0

 

Property, plant and equipment

 

 

387.4

 

Operating lease right-of-use assets

 

 

218.8

 

Other assets

 

 

20.9

 

Deferred tax liabilities

 

 

(235.7

)

Finance lease obligations

 

 

(102.1

)

Operating lease obligations

 

 

(217.6

)

Other liabilities

 

 

(46.5

)

Total purchase price

 

$

2,390.6

 

Intangible assets consist primarily of customer relationships, trade names, and technology with useful lives of 11 years, 5 years, and 5 years, respectively, and a total weighted-average useful life of 9.3 years. The excess of the estimated fair value of assets acquired and the liabilities assumed over consideration paid was recorded as $865.9 million of goodwill on the acquisition date. The goodwill reflects the value to the Company associated with the expansion of geographic reach and scale of our distribution footprint and enhancements to the Company’s customer base. The Company is in the process of determining the amount of goodwill that is deductible for income tax purposes.

The net sales and net income related to Core-Mark recorded in the Company’s Consolidated Statements of Operations since the acquisition date of September 1, 2021 are $1.6 billion and $1.0 million, respectively.

The following table summarizes the unaudited pro-forma consolidated financial information of the Company as if the acquisition had occurred on June 28, 2020.

 

 

Three Months Ended

 

(in millions)

 

October 2, 2021

 

 

September 26, 2020

 

Net sales

 

$

13,464.6

 

 

$

11,549.4

 

Net income (loss)

 

 

37.2

 

 

 

(50.6

)

These pro-forma results include nonrecurring pro-forma adjustments related to acquisition costs incurred, including the amortization of the step up in fair value of inventory acquired. The pro-forma net income for the three months ended September 26, 2020 includes $55.8 million, after-tax, of acquisition costs assuming the acquisition had occurred on June 28, 2020. The recurring pro-forma adjustments include estimates of interest expense for the Notes due 2029 and estimates of depreciation and amortization associated with fair value adjustments for property, plant and equipment and intangible assets acquired.

These unaudited pro-forma results do not necessarily represent financial results that would have been achieved had the acquisition actually occurred on June 28, 2020 or future consolidated results of operations of the Company.

The acquisition of Eby-Brown Company LLC (“Eby-Brown”) in fiscal 2019 included contingent consideration, including earnout payments in the event certain operating results are achieved during a defined post-closing period. In the first quarter of fiscal 2021, the Company paid the first earnout payment of $185.6 million, which included $68.3 million as a financing activity cash outflow and $117.3 million as an operating activity cash outflow in the consolidated statement of cash flows for the three months ended September 26, 2020. As of October 2, 2021 the Company has accrued $7.0 million related to additional earnout payments. Earnout liabilities are measured using unobservable inputs that are considered a Level 3 measurement.

 

13


 

6.

Debt

The Company is a holding company and conducts its operations through its subsidiaries, which have incurred or guaranteed indebtedness as described below.

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

(In millions)

 

As of October 2, 2021

 

 

As of July 3, 2021

 

ABL Facility

 

$

1,373.2

 

 

$

586.3

 

5.500% Notes due 2024

 

 

-

 

 

 

350.0

 

6.875% Notes due 2025

 

 

275.0

 

 

 

275.0

 

5.500% Notes due 2027

 

 

1,060.0

 

 

 

1,060.0

 

4.250% Notes due 2029

 

 

1,000.0

 

 

 

-

 

Less: Original issue discount and deferred financing costs

 

 

(38.5

)

 

 

(30.8

)

Long-term debt

 

 

3,669.7

 

 

 

2,240.5

 

Less: current installments