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 Form 10-Q.
Our Company
Following the completion of the Reinhart acquisition, we market and distribute
over 200,000 food and related products to customers across the United States
from over 100 distribution facilities to over 200,000 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, beverages, cigarettes,
and other tobacco products. We also sell disposables, cleaning and kitchen
supplies, and related products used by our customers. 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.
The Company has two reportable segments: Foodservice and Vistar. 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, and business and industry
locations. 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, cigarettes, other tobacco products and other items nationally to
vending distributors, office coffee service distributors, big box retailers,
theaters, convenience stores, and other channels. 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.
Recent Trends and Initiatives
Our case volume has grown in each quarter over the comparable prior fiscal year
quarter, starting in the second quarter of fiscal 2010 and continuing through
the most recent quarter. Our net income decreased 4.4% from the second quarter
of fiscal 2019 to the second quarter of fiscal 2020 as a result of an increase
in interest expense due to the additional debt issued to help finance the
Reinhart acquisition. Net income increased 8.4% for the first six months of
fiscal 2020 compared to the first six months of fiscal 2019. Adjusted EBITDA
increased 22.2% from the second quarter of fiscal 2019 to the second quarter of
fiscal 2020 and increased 27.4% for the first six months of fiscal 2020 compared
to the first six months of fiscal 2019, driven primarily by case growth and
improved profit per case. Case volume grew 6.7% in the second quarter of fiscal
2020 and 8.7% in the first six months of fiscal 2020 compared to prior year
periods. Gross profit dollars rose 15.7% and 17.7% in the second quarter of
fiscal 2020 and the first six months of fiscal 2020, respectively, versus the
prior year periods, which was faster than case growth, primarily as a result of
shifting our channel mix toward higher gross margin customers and shifting our
product mix toward sales of Performance Brands. Our operating expenses in the
second quarter and first six months of fiscal 2020 compared to the second
quarter and first six months of fiscal 2019 rose 16.5% and 17.9%, respectively,
as a result of increases in variable operational and selling expenses associated
with the increase in case volume and as a result of recent acquisitions.
Key Factors Affecting Our Business
We believe that our performance is principally affected by the following key
factors:
• Changing demographic and macroeconomic trends. The share of consumerspending captured by the food-away-from-home industry increased steadily
for several decades and paused during the recession that began in 2008.
Following the recession, the share has again increased as a result 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 foodserviceestablishments. 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.
22
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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 thatenhance 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 both of our
reportable segments, expansion of geographies, utilizing our
infrastructure to gain further 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) and inbound freight. Cost of goods sold generally changes as we incur higher or lower costs from our suppliers and as our customer and product mix changes.
EBITDA and Adjusted EBITDA
Management measures operating performance based on our EBITDA, defined as net
income before interest expense, interest income, income taxes, and depreciation
and amortization. EBITDA is not defined under GAAP and is not a measure of
operating income, operating performance, or liquidity presented in accordance
with GAAP and is subject to important limitations. Our definition of EBITDA may
not be the same as similarly titled measures used by other companies.
We believe that the presentation of EBITDA enhances an investor's understanding
of our performance. We use this measure to evaluate the performance of our
segments and for business planning purposes. We present EBITDA in order to
provide supplemental information that we consider relevant for the readers of
our consolidated financial statements included elsewhere in this report, and
such information is not meant to replace or supersede GAAP measures.
In addition, our management uses 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 credit agreement and
indentures (other than certain pro forma adjustments permitted under our credit
agreement and indentures governing the Notes due 2024 and Notes due 2027
relating to the Adjusted EBITDA contribution of acquired entities or businesses
prior to the acquisition date). Under our credit agreement 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 credit agreement 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 and is subject to important
limitations. 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 credit agreement and
holders of our Notes due 2024 and Notes due 2027, in their evaluation of the
operating performance of companies in industries similar to ours. 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.
23
-------------------------------------------------------------------------------- EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:
• exclude certain tax payments that may represent a reduction in cash
available to us;
• do not reflect any cash capital expenditure requirements for the assets
being depreciated and amortized that may have to be replaced in the
future;
• do not reflect changes in, or cash requirements for, our working capital
needs; and
• do 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 adjustment items as permitted or required by our credit agreement 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 calculations of EBITDA and Adjusted EBITDA for the periods presented.
Results of Operations, EBITDA, and Adjusted EBITDA
The following table sets forth a summary of our results of operations, EBITDA,
and Adjusted EBITDA for the periods indicated (in millions, except per share
data):
Three Months Ended
December 28, 2019 December 29, 2018 Change %
Net sales $ 6,068.6 $ 4,615.7 $ 1,452.9 31.5
Cost of goods sold 5,357.4 4,001.1 1,356.3 33.9
Gross profit 711.2 614.6 96.6 15.7
Operating expenses 630.7 541.6 89.1 16.5
Operating profit 80.5 73.0 7.5 10.3
Other expense, net
Interest expense 26.4 16.0 10.4 65.0
Other, net (0.2 ) 0.7 (0.9 ) NM
Other expense, net 26.2 16.7 9.5 56.9
Income before income taxes 54.3 56.3 (2.0 ) (3.6 )
Income tax expense 13.1 13.2 (0.1 ) (0.8 )
Net income $ 41.2 $ 43.1 $ (1.9 ) (4.4 )
EBITDA $ 124.5 $ 109.4 $ 15.1 13.8
Adjusted EBITDA $ 142.9 $ 116.9 $ 26.0 22.2
Weighted-average common shares
outstanding:
Basic 104.3 103.9 0.4 0.4
Diluted 106.4 104.9 1.5 1.4
Earnings per common share:
Basic $ 0.39 $ 0.41 $ (0.02 ) (4.9 )
Diluted $ 0.39 $ 0.41 $ (0.02 ) (4.9 )
24
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Six Months Ended
December 28,
2019 December 29, 2018 Change %
Net sales $ 12,311.6 $ 9,155.4 $ 3,156.2 34.5
Cost of goods sold 10,889.0 7,947.2 2,941.8 37.0
Gross profit 1,422.6 1,208.2 214.4 17.7
Operating expenses 1,278.6 1,084.6 194.0 17.9
Operating profit 144.0 123.6 20.4 16.5
Other expense, net
Interest expense 43.7 31.6 12.1 38.3
Other, net (0.2 ) 0.5 (0.7 ) NM
Other expense, net 43.5 32.1 11.4 35.5
Income before income taxes 100.5 91.5 9.0 9.8
Income tax expense 23.2 20.2 3.0 14.9
Net income $ 77.3 $ 71.3 $ 6.0 8.4
EBITDA $ 230.7 $ 195.7 $ 35.0 17.9
Adjusted EBITDA $ 270.6 $ 212.4 $ 58.2 27.4
Weighted-average common shares
outstanding:
Basic 104.2 103.7 0.5 0.5
Diluted 106.2 105.0 1.2 1.1
Earnings per common share:
Basic $ 0.74 $ 0.69 $ 0.05 7.2
Diluted $ 0.73 $ 0.68 $ 0.05 7.4
We believe that the most directly comparable GAAP measure to EBITDA and Adjusted
EBITDA is net income. The following table reconciles EBITDA and Adjusted EBITDA
to net income for the periods presented:
Three Months Ended Six Months Ended
December 29, December 29,
December 28, 2019 2018 December 28, 2019 2018
(In millions) (In millions)
Net income $ 41.2 $ 43.1 $ 77.3 $ 71.3
Interest expense 26.4 16.0 43.7 31.6
Income tax expense 13.1 13.2 23.2 20.2
Depreciation 35.1 27.5 69.0 54.4
Amortization of intangible assets 8.7 9.6 17.5 18.2
EBITDA 124.5 109.4 230.7 195.7
Non-cash items (1) 5.7 4.7 12.7 9.6
Acquisition, integration and
reorganization (2) 12.2 1.3 23.8 4.0
Other adjustment items (3) 0.5 1.5 3.4 3.1
Adjusted EBITDA $ 142.9 $ 116.9 $ 270.6 $ 212.4 (1) Includes adjustments for non-cash charges arising from stock-based
compensation and gain/loss on disposal of assets. Stock-based compensation
expense was
2020 and fiscal 2019, respectively, and
six months of fiscal 2020 and fiscal 2019, respectively. In addition, this
includes increases in the last-in-first-out ("LIFO") reserve of
and
respectively, and increases in the LIFO reserve of
million for the first six months of fiscal 2020 and fiscal 2019,
respectively.
(2) Includes professional fees and other costs related to acquisitions, costs of
integrating certain of our facilities, and facility closing costs.
(3) Consists primarily of amounts related to fuel collar derivatives, certain
financing transactions, lease amendments, legal settlements and franchise tax
expense, and other adjustments permitted by our credit agreement.
Consolidated Results of Operations
Three and six months ended
Net sales growth is a function of 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$1,452.9 million , or 31.5%, for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 and increased$3,156.2 million , or 34.5%, for the first six months of fiscal 2020 25 -------------------------------------------------------------------------------- compared to the first six months of fiscal 2019. The increase in net sales was primarily attributable to recent acquisitions, sales growth in Vistar, particularly in the corrections, vending, and office coffee service channels, and case growth in Foodservice, particularly in the independent channel. The acquisition ofEby-Brown in the fourth quarter of 2019 contributed$1,260.8 million and$2,634.8 million of net sales in the second quarter and first six months of fiscal 2020, respectively, including$267.3 million and$559.0 million related to excise taxes for the respective periods. Case volume increased 6.7% and 8.7% in the second quarter and first six months of fiscal 2020, respectively, compared to the prior year periods.
Gross Profit
Gross profit increased$96.6 million , or 15.7%, for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 and increased$214.4 million , or 17.7%, for the first six months of fiscal 2020 compared to the first six months of fiscal 2019. Within Foodservice, case growth to independent customers positively affected gross profit per case. Independent customers typically receive more services from us, cost more to serve, and pay a higher gross profit per case than other customers. Also, in the second quarter and first six months of fiscal 2020, Foodservice grew our Performance Brand sales, which have higher gross profit per case compared to the other brands we sell. See "-Segment Results-Foodservice" below for additional discussion. Gross profit as a percentage of net sales was 11.7% for the second quarter of fiscal 2020 compared to 13.3% for the second quarter of fiscal 2019, and 11.6% for the first six months of fiscal 2020 compared to 13.2% for the first six months of fiscal 2019; the decrease reflectingEby-Brown's lower margins primarily due to tobacco sales.
Operating Expenses
Operating expenses increased$89.1 million , or 16.5%, for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 and increased$194.0 million , or 17.9%, for the first six months of fiscal 2020 compared to the first six months of fiscal 2019. The increase in operating expenses for both the second quarter and first six months of fiscal 2020 was primarily driven by recent acquisitions and the increase in case volume and the resulting impact on variable operational and selling expenses. Operating expenses also increased by$6.5 million for the second quarter and$12.9 million for the first six months of fiscal 2020 as a result of professional fees related to acquisitions. Depreciation and amortization of intangible assets increased from$37.1 million in the second quarter of fiscal 2019 to$43.8 million in the second quarter of fiscal 2020. Depreciation and amortization of intangible assets increased from$72.6 million for the first six months of fiscal 2019 to$86.5 million in the first six months of fiscal 2020. Depreciation of fixed assets increased as a result of capital outlays to support our growth.
Net Income
Net income decreased$1.9 million , or 4.4%, for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. The decrease in net income was primarily attributable to a$10.4 million increase in interest expense, partially offset by a$7.5 million increase in operating profit. Net income increased$6.0 million , or 8.4%, for the first six months of fiscal 2020 compared to the first six months of fiscal 2019. The increase in net income was primarily attributable to a$20.4 million increase in operating profit, partially offset by a$12.1 million increase in interest expense and a$3.0 million increase in income tax expense. The increase in operating profit was a result of the increase in gross profit discussed above, partially offset by the increase in operating expenses. The increase in interest expense was primarily the result of an increase in borrowings during fiscal 2020 compared to fiscal 2019. The increase in income tax expense was primarily a result of the increase in income before taxes. Our effective tax rate for the three months endedDecember 28, 2019 was 24.2% compared to 23.4% for the three months endedDecember 29, 2018 and 23.1% for the first six months of fiscal 2020 compared to 22.1% for the first six months of fiscal 2019. The increase in the tax rate was due to an increase in non-deductible expenses and state income taxes, partially offset by a decrease in excess tax benefits related to stock-based compensation as a percentage of income before taxes. Segment Results We have two reportable segments as described above - Foodservice and Vistar. Management evaluates the performance of these segments based various operating and financial metrics, including their respective sales growth and EBITDA. 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. 26 --------------------------------------------------------------------------------
The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):
Net Sales Three Months Ended December 28, 2019 December 29, 2018 Change % Foodservice $ 3,847.4 $ 3,671.9$ 175.5 4.8 Vistar 2,219.2 941.9 1,277.3 135.6 Corporate & All Other 78.6 69.3 9.3 13.4 Intersegment Eliminations (76.6 ) (67.4 ) (9.2 ) (13.6 ) Total net sales $ 6,068.6 $ 4,615.7$ 1,452.9 31.5 Six Months Ended December 28, 2019 December 29, 2018 Change % Foodservice$ 7,778.3 $ 7,317.9$ 460.4 6.3 Vistar 4,530.3 1,834.5 2,695.8 147.0 Corporate & All Other 158.6 139.1 19.5 14.0 Intersegment Eliminations (155.6 ) (136.1 ) (19.5 ) (14.3 ) Total net sales$ 12,311.6 $ 9,155.4$ 3,156.2 34.5 EBITDA Three Months Ended December 28, 2019 December 29, 2018 Change % Foodservice $ 113.6 $ 104.3$ 9.3 8.9 Vistar 56.6 45.4 11.2 24.7 Corporate & All Other (45.7 ) (40.3 ) (5.4 ) (13.4 ) Total EBITDA $ 124.5 $ 109.4$ 15.1 13.8 Six Months Ended December 28, 2019 December 29, 2018 Change % Foodservice $ 217.6 $ 196.3$ 21.3 10.9 Vistar 108.1 77.0 31.1 40.4 Corporate & All Other (95.0 ) (77.6 ) (17.4 ) (22.4 ) Total EBITDA $ 230.7 $ 195.7$ 35.0 17.9 Segment Results-Foodservice
Three and six months ended
Net sales for Foodservice increased$175.5 million , or 4.8%, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased$460.4 million , or 6.3%, from the first six months of fiscal 2019 to the first six months of fiscal 2020. These increases in net sales were attributable to growth in cases sold, as well as an increase in selling price per case as a result of inflation. Securing new and expanded business with independent customers resulted in independent case growth of approximately 4.9% in the second quarter and 5.2% in the first six months of fiscal 2020 compared to the prior year periods. For the quarter, independent sales as a percentage of total segment sales were 33.7%. EBITDA EBITDA for Foodservice increased$9.3 million , or 8.9%, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased$21.3 million , or 10.9%, from the first six months of fiscal 2019 to the first six months of fiscal 2020. These increases were the result of an increase in gross profit, partially offset by an increase in operating expenses excluding depreciation and amortization. Gross profit increased 5.6% in the second quarter of fiscal 2020 and 6.4% in the first six months of fiscal 2020, compared to the prior year periods, as a result of an increase in the gross profit per case, as well as an increase in cases sold. The increase in gross profit per case was driven by a favorable shift in the mix of cases sold, including more Performance Brands products sold to our independent customers, as well as by an increase in procurement gains. Independent business has higher gross margins than Chain customers within this segment. 27 -------------------------------------------------------------------------------- Operating expenses excluding depreciation and amortization for Foodservice increased by$16.7 million , or 4.6%, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased by$38.4 million , or 5.2%, from the first six months of fiscal 2019 to the first six months of fiscal 2020. Operating expenses increased as a result of an increase in case volume and the resulting impact on variable operational and selling expenses, as well as an increase in personnel expenses. Depreciation and amortization of intangible assets recorded in this segment increased from$21.7 million in the second quarter of fiscal 2019 to$25.8 million in the second quarter of fiscal 2020 and increased from$42.6 million in the first six months of fiscal 2019 to$50.4 million in the first six months of fiscal 2020. This increase was the result of capital outlays for transportation equipment and information technology.
Segment Results-Vistar
Three and six months ended
Net sales for Vistar increased$1,277.3 million , or 135.6%, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased$2,695.8 million , or 147.0%, from the first six months of fiscal 2019 to the first six months of fiscal 2020. This increase was driven by recent acquisitions, as well as by sales growth in the segment's corrections, vending, and office coffee service channels. The acquisition ofEby-Brown in the fourth quarter of 2019 contributed$1,260.8 million and$2,634.8 million of net sales in the second quarter and first six months of fiscal 2020, respectively, including$267.3 million and$559.0 million related to excise taxes for the respective periods.
EBITDA
EBITDA for Vistar increased$11.2 million , or 24.7%, from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased$31.1 million , or 40.4%, from the first six months of fiscal 2019 to the first six months of fiscal 2020. Gross profit dollar growth of$70.1 million , or 49.0%, for the second quarter fiscal 2020 and$153.4 million , or 57.4%, for the first six months of fiscal 2020 compared to the respective prior year periods, was driven by recent acquisitions. On occasion, the Company may now earn a higher gross profit on cigarette inventory and excise tax stamp quantities when manufacturers increase their prices or when jurisdictions increase their excise tax rates. During the first six months of fiscal 2020 the Company recognized$5.6 million of gross profit related to increases in excise tax rates. Additionally, there was an increase in procurement gains, as well as a favorable shift in channel mix that impacted this segment. Gross profit as a percentage of net sales declined from 15.2% for the second quarter of fiscal 2019 to 9.6% for the second quarter of fiscal 2020 and from 14.6% for the first six months of fiscal 2019 to 9.3% the first six months of fiscal 2020 as a result ofEby-Brown's lower margins. Operating expense dollar growth, excluding depreciation and amortization, increased$58.9 million , or 60.2%, for the second quarter of fiscal 2020 and$122.3 million , or 64.2%, for the first six months of fiscal 2020 compared to the prior year periods. Operating expenses increased primarily as a result of the acquisition ofEby-Brown . Depreciation and amortization of intangible assets recorded in this segment increased from$9.3 million in the second quarter of fiscal 2019 to$11.5 million in the second quarter of fiscal 2020 and increased from$18.2 million in the first six months of fiscal 2019 to$23.1 million in the first six months of fiscal 2020. Depreciation of fixed assets and amortization of intangible assets increased as a result of recent acquisitions.
Segment Results-Corporate & All Other
Three and six months ended
Net sales for Corporate & All Other increased$9.3 million from the second quarter of fiscal 2019 to the second quarter of fiscal 2020 and increased$19.5 million from the first six months of fiscal 2019 to the first six months of fiscal 2020. The increase was primarily attributable to an increase in logistics services provided to our other segments.
EBITDA
EBITDA for Corporate & All Other was a negative$45.7 million for the second quarter of fiscal 2020 compared to a negative$40.3 million for the second quarter of fiscal 2019 and was a negative$95.0 million for the first six months of fiscal 2020 compared to a negative$77.6 million for the first six months of fiscal 2019. These declines in EBITDA were primarily driven by an increase in professional and legal fees of$5.8 million and$12.1 million in the second quarter of fiscal 2020 and the first six months of fiscal 2020, respectively, compared to prior year periods. 28 -------------------------------------------------------------------------------- Depreciation and amortization of intangible assets recorded in this segment increased from$6.1 million in the second quarter of fiscal 2019 to$6.5 million in the second quarter of fiscal 2020 and increased from$11.8 million in the first six months of fiscal 2019 to$13.0 million in the first six months of fiscal 2020 as a result of recent capital outlays for information technology. 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 capital 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 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.
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. AtDecember 28, 2019 , our cash balance totaled$1,101.9 million , including restricted cash of$1,089.2 million , as compared to a cash balance totaling$25.4 million , including restricted cash of$10.7 million , atJune 29, 2019 . This increase in cash during the first six months of fiscal 2020 was attributable to net cash provided by operating activities of$157.8 million and net cash provided by financing activities of$967.2 million , partially offset by net cash used in investing activities of$48.5 million . OnSeptember 27, 2019 , the Escrow Issuer (which merged with and intoPerformance Food Group, Inc. upon the completion of the Reinhart acquisition) issued and sold$1,060.0 million aggregate principal amount of its Notes due 2027. As ofDecember 28, 2019 , the gross proceeds from the issuance of the Notes due 2027 were held in escrow and are classified as restricted cash on the Company's consolidated balance sheet. OnDecember 30, 2019 ,PFGC andPerformance Food Group , Inc. entered into the Amended Credit Agreement and borrowed$466.5 million to help finance the Reinhart acquisition. See "Financing Activities" below for a full description of the amended terms related to the Amended Credit Agreement. OnDecember 30, 2019 , the Company physically settled the equity forward at the forward sale price of$42.70 per share, net of the underwriting discount. The Company used the$491.0 million net proceeds from the offering of shares of the Company's common stock to finance part of the cash consideration payable in connection with the acquisition of Reinhart. Following the completion of the Reinhart acquisition onDecember 30, 2019 , the funds related to the Notes due 2027 were released from escrow and were used, together with the net proceeds from the offering of shares of the Company's common stock and borrowings under the Amended Credit Agreement, to fund the cash consideration for the Reinhart acquisition and to pay related fees and expenses.
Operating Activities
Six months ended
During the first six months of fiscal 2020 and fiscal 2019, our operating activities provided cash flow of$157.8 million and$70.0 million , respectively. The increase in cash flows provided by operating activities in the first six months of fiscal 2020 compared to the first six months of fiscal 2019 was largely driven by higher operating income and improvements in working capital.
Investing Activities
Cash used in investing activities totaled$48.5 million in the first six months of fiscal 2020 compared to$116.4 million in the first six months of fiscal 2019. These investments consisted primarily of payments for business acquisitions of$57.0 million for the first six months of fiscal 2019 with no corresponding amount for the first six months of fiscal 2020, and capital purchases of property, plant, and equipment of$49.0 million and$60.1 million for the first six months of fiscal 2020 and the first six months of fiscal 2019, respectively. For the first six months of fiscal 2020, purchases of property, plant, and equipment primarily consisted of outlays for information technology, warehouse equipment, warehouse expansions and improvements, and transportation equipment. The following table presents the capital purchases of property, plant, and equipment by segment: 29 --------------------------------------------------------------------------------
Six Months Ended
(Dollars in millions) December 28, 2019 December 29, 2018
Foodservice $ 16.3 $ 42.7
Vistar 21.5 6.7
Corporate & All Other 11.2 10.7
Total capital purchases of property, plant and equipment $ 49.0 $ 60.1
As of
Financing Activities
During the first six months of fiscal 2020, our financing activities provided cash flow of$967.2 million , which consisted primarily of$1,060.0 million in cash received from the issuance and sale of the Notes due 2027, partially offset by$72.6 million in net payments under our ABL Facility. During the first six months of fiscal 2019, our financing activities provided cash flow of$46.7 million , which consisted primarily of$65.4 million in net borrowings under our ABL Facility.
The following describes our financing arrangements as of
ABL Facility: As ofDecember 28, 2019 , PFGC, a wholly-owned subsidiary of the Company, is a party to the ABL Facility, which has an aggregate principal amount of$2.4 billion and matures onMay 17, 2024 . PerformanceFood Group, Inc. , a wholly-owned subsidiary of PFGC, 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 of 0.25%.
The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:
(Dollars in millions) As of December 28,
2019 As of June 29, 2019
Aggregate borrowings $ 786.4 $ 859.0
Letters of credit under credit agreements 95.0 89.9
Excess availability, net of lenders' reserves 1,295.2 1,182.7
of $40.3 and $38.6
Average interest rate 3.22 % 4.01 %
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) $180.0 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 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.
Amended Credit Agreement: On December 30, 2019 , PFGC and Performance Food Group,
Inc. entered into the Amended Credit Agreement with Wells Fargo Bank, National
Association , as Administrative Agent and Collateral Agent, and the other lenders
party thereto, which amends and restates the ABL Facility. The Amended Credit
Agreement, among other things, (i) increases the aggregate principal amount
available to $3.0 billion and (ii) extends the stated maturity date to December
30, 2024 . Like the ABL Facility, the
30
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Amended Credit Agreement provides for up to $800 million of uncommitted
incremental facilities. Additionally, certain covenants were amended to require
the maintenance of a minimum consolidated fixed charge coverage ratio if excess
availability falls below the greater of (i) $200.0 million and (ii) 10% of the
lesser of the borrowing base and the revolving credit facility amount for five
consecutive business days.
Senior Notes due 2024: On May 17, 2016 , Performance Food Group, Inc. issued and
sold $350.0 million aggregate principal amount of its Notes due 2024, pursuant
to an indenture dated as of May 17, 2016 . The Notes due 2024 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 2024 are not
guaranteed by Performance Food Group Company .
The proceeds from the Notes due 2024 were used to pay in full the remaining
outstanding aggregate principal amount of the loans under the Company's term
loan facility and to terminate the facility; to temporarily repay a portion of
the outstanding borrowings under the ABL Facility; and to pay the fees,
expenses, and other transaction costs incurred in connection with the Notes due
2024.
The Notes due 2024 were issued at 100.0% of their par value. The Notes due 2024
mature on June 1, 2024 and bear interest at a rate of 5.500% 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 which Performance Food Group, Inc. does not apply the proceeds
as required, the holders of the Notes due 2024 will have the right to require
Performance Food Group, Inc. to make an offer to repurchase each holder's Notes
due 2024 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. Performance Food Group, Inc. currently may redeem
all or part of the Notes due 2024 at a redemption price equal to 102.750% of the
principal amount redeemed, plus accrued and unpaid interest. The redemption
price decreases to 101.325% and 100.000% of the principal amount redeemed on
June 1, 2020 and June 1, 2021 , respectively.
The indenture governing the Notes due 2024 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 2024 also contain customary events
of default, the occurrence of which could result in the principal of and accrued
interest on the Notes due 2024 to become or be declared due and payable.
Senior Notes due 2027: On September 27, 2019 , Escrow Issuer (to be merged with
and into Performance Food Group, Inc. ) issued and sold $1,060.0 million
aggregate principal amount of Notes due 2027. On December 30, 2019 , the proceeds
from the Notes due 2027 were used to finance part of the Reinhart acquisition
and other transaction costs incurred with the Notes due 2027.
Following the completion of the Reinhart acquisition, Performance Food Group,
Inc. assumed the obligation of the Escrow Issuer and 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 by Performance Food Group Company .
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. PerformanceFood Group, Inc. may redeem all or a part of the Notes due 2027 at any time prior toOctober 15, 2022 at a redemption price equal to 100% of the principal amount of the Notes due 2027 being redeemed plus a make-whole premium and accrued and unpaid interest, if any, to, but not including, the redemption date. In addition, 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. In addition, at any time prior toOctober 15, 2022 ,Performance Food Group Inc. may redeem up to 40% of the Notes due 2027 from the proceeds of certain equity offerings at a redemption price equal to 105.500% of the principal amount thereof, plus accrued and unpaid interest. 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 31 -------------------------------------------------------------------------------- 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. Letters of Credit Facility: OnAugust 9, 2018 ,Performance Food Group, Inc. and PFGC entered into the Letters of Credit Facility. The Letters of Credit Facility is an uncommitted facility that provides for the issuance of letters of credit in an aggregate amount not to exceed$40.0 million . Each letter of credit shall have a term not to exceed one year; however, a letter of credit may renew automatically in accordance with its terms. A fee equal to 2.5% per annum on the average daily amount available to be drawn on each day under each outstanding letter of credit is payable quarterly. As ofDecember 28, 2019 , the Company has$28.3 million letters of credit outstanding under the Letters of Credit Facility. As ofDecember 28, 2019 , we were in compliance with all of the covenants under the ABL Facility and the indentures governing the Notes due 2024 and Notes due 2027. Contractual Obligations Refer to the "Contractual Cash Obligations" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for details on our contractual obligations and commitments to make specified contractual future cash payments as ofJune 29, 2019 . Off-Balance Sheet Arrangements 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. Total Assets by Segment
Total assets by segment discussed below exclude intercompany receivables between segments.
Total assets for Foodservice increased$242.4 million from$3,056.7 million as ofDecember 29, 2018 to$3,299.1 million as ofDecember 28, 2019 . During this time period, this segment increased its property, plant and equipment, inventory and accounts receivable, which was partially offset by a decrease in intangible assets. Total assets for Foodservice increased$146.8 million from$3,152.3 million as ofJune 29, 2019 to$3,299.1 million as ofDecember 28, 2019 . For both periods, Foodservice's assets also increased as a result of the Company'sJune 30, 2019 adoption of ASC 842 and the recognition of operating lease right-of-use assets of$153.4 million . Total assets for Vistar increased$620.4 million from$881.6 million as ofDecember 29, 2018 to$1,502.0 million as ofDecember 28, 2019 . During this time period, this segment increased its accounts receivable, inventory, property, plant and equipment, and goodwill, primarily due to acquisitions. Total assets for Vistar increased$231.0 million from$1,271.0 million as ofJune 29, 2019 to$1,502.0 million as ofDecember 28, 2019 . For both periods, Vistar's assets also increased as a result of the Company'sJune 30, 2019 adoption of ASC 842 and the recognition of operating lease right-of-use assets of$227.3 million . 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, 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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