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 and "Part II, Item 1A. Risk Factors" of this Form 10-Q.
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
We market and distribute over 200,000 food and food-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.
Key Factors Affecting Our BusinessWe believe that our short-term performance is principally affected by the COVID-19 pandemic:
InMarch 2020 , during the Company's third quarter endedMarch 28, 2020 , theWorld Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 across the country, federal, state, and local governments have implemented various means of slowing the spread of the virus. These measures include quarantines, stay-at-home or shelter-in-place orders, school closures, travel restrictions, closure of non-essential businesses, and other means. These measures have already had a significant adverse impact on the economy, but the full scope of the impact of COVID-19 is unknown. As an essential element of the country's food supply chain, the Company has continued to operate all of it distribution centers. Despite the Company's continued operations, mandatory and voluntary containment measures in response to COVID-19 have had a significant impact on the food-away-from-home industry, as many restaurants have closed, are restricting the number of patrons they will serve at one time, or are only providing carry-out or delivery options. These restrictions have also impacted businesses throughout the economy, including theaters, retail operations, schools and other businesses we provide products and services to. Additionally, any economic recession in the future will likely have an adverse impact on the industry, as the frequency of purchases and amount spent by consumers for food away from home can impact our customers and therefore our sales. During our third quarter endedMarch 28, 2020 , we began to see the impact of COVID-19 in our operations, including significant decreases in sales. Despite these difficulties, we have taken steps to ensure a strong financial position including forging new partnerships with grocery locations, supporting restaurant customers with the transition to higher volumes in take-out and delivery, and other means. Actions we have taken with the goal of maintaining financial liquidity and flexibility have included halting non-essential capital expenditure activities, managing costs, suspending our share repurchase program, furloughing or eliminating approximately 3,000 positions across our organization and loaning approximately 1,000 associates to grocery retail partners to help maintain food supply, as well as deferring 25% of our senior management's base compensation and 25% of the cash fees to our directors for the period commencingApril 6, 2020 throughDecember 31, 2020 . We have drawn$400 million from the Company's$3.0 billion revolving line of credit under the ABL Facility and entered into the First Amendment to the ABL Facility to provide for the$110 million Additional Junior Term Loan. Additionally, we issued and sold 15,525,000 shares of the Company's common stock and issued and sold the Notes due 2025. 24 -------------------------------------------------------------------------------- We continue to assess the economic situation and evaluate measures to lessen the adverse impact of COVID-19 on our operations. However, there is no certainty that such measures, or measures that we have already taken, will be successful in mitigating the risks posed by COVID-19. We expect that COVID-19 will have a material adverse impact on our reported results for our fourth fiscal quarter of 2020 and potentially beyond. However, the extent to which COVID-19 will affect our operations and results are highly variable and cannot be reasonably estimated at this time. For further discussion of this matter, refer "Item 1A. Risk Factors" in Part II of this report.
We believe that our long-term performance is principally affected by the following key factors:
• Changing demographic and macroeconomic trends. The share of consumer
spending 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.
• 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
25
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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 2024, Notes due 2027 and Notes due 2025
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 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 ABL Facility and
holders of our Notes due 2024, Notes due 2027 and Notes due 2025, 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.
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 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 calculations of EBITDA and Adjusted EBITDA for the periods presented.
26
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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
March 28, 2020 March 30, 2019 Change %
Net sales $ 7,000.7 $ 4,689.0 $ 2,311.7 49.3
Cost of goods sold 6,193.2 4,084.3 2,108.9 51.6
Gross profit 807.5 604.7 202.8 33.5
Operating expenses 824.9 545.5 279.4 51.2
Operating (loss) profit (17.4 ) 59.2 (76.6 ) (129.4 ) Other expense, net Interest expense 35.2 16.5 18.7 113.3 Other, net 7.9 (1.0 ) 8.9 NM Other expense, net 43.1 15.5 27.6 178.1 (Loss) income before income taxes (60.5 ) 43.7 (104.2 ) (238.4 ) Income tax (benefit) expense (20.3 ) 11.4 (31.7 ) (278.1 ) Net (loss) income $ (40.2 ) $ 32.3$ (72.5 ) (224.5 ) EBITDA $ 74.0 $ 99.9$ (25.9 ) (25.9 ) Adjusted EBITDA $ 131.1 $ 106.1$ 25.0 23.6 Weighted-average common shares outstanding: Basic 115.9 103.8 12.1 11.7 Diluted 115.9 105.1 10.8 10.3 (Loss) earnings per common share: Basic $ (0.35 ) $ 0.31$ (0.66 ) (212.9 ) Diluted $ (0.35 ) $ 0.31$ (0.66 ) (212.9 ) Nine Months Ended March 28, 2020 March 30, 2019 Change % Net sales$ 19,312.3 $ 13,844.4 $ 5,467.9 39.5 Cost of goods sold 17,082.2 12,031.5 5,050.7 42.0 Gross profit 2,230.1 1,812.9 417.2 23.0 Operating expenses 2,103.5 1,630.1 473.4 29.0 Operating profit 126.6 182.8 (56.2 ) (30.7 ) Other expense, net Interest expense 78.9 48.1 30.8 64.0 Other, net 7.7 (0.5 ) 8.2 NM Other expense, net 86.6 47.6 39.0 81.9 Income before income taxes 40.0 135.2 (95.2 ) (70.4 ) Income tax expense 2.9 31.6 (28.7 ) (90.8 ) Net income $ 37.1 $ 103.6$ (66.5 ) (64.2 ) EBITDA $ 304.7 $ 295.6$ 9.1 3.1 Adjusted EBITDA $ 401.7 $ 318.5$ 83.2 26.1 Weighted-average common shares outstanding: Basic 108.1 103.8 4.3 4.1 Diluted 109.5 105.1 4.4 4.2 Earnings per common share: Basic $ 0.34 $ 1.00$ (0.66 ) (66.0 ) Diluted $ 0.34 $ 0.99$ (0.65 ) (65.7 ) 27
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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 Nine Months Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019
(In millions) (In millions)
Net (loss) income $ (40.2 ) $ 32.3 $ 37.1 $ 103.6
Interest expense 35.2 16.5 78.9 48.1
Income tax (benefit) expense (20.3 ) 11.4 2.9 31.6
Depreciation 49.3 29.3 118.3 83.7
Amortization of intangible assets 50.0 10.4 67.5 28.6
EBITDA 74.0 99.9 304.7 295.6
Non-cash items (1) 6.1 3.3 18.8 12.9
Acquisition, integration and
reorganization (2) 36.9 1.3 60.7 5.3
Productivity initiatives and
other adjustment items (3) 14.1 1.6 17.5 4.7
Adjusted EBITDA $ 131.1 $ 106.1 $ 401.7 $ 318.5
(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
nine months of fiscal 2020 and fiscal 2019, respectively. In addition, this
includes decreases in the last-in-first-out ("LIFO") reserve of
for both the third quarter of fiscal 2020 and fiscal 2019 and increases in
the LIFO reserve of
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) Includes
initiatives the Company is no longer pursuing as a result of the Reinhart
acquisition, as well as amounts related to fuel collar derivatives, certain
financing transactions, lease amendments, legal settlements and franchise tax
expense, and other adjustments permitted by our ABL Facility.
Consolidated Results of Operations
Three and nine months ended
Net Sales 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$2,311.7 million , or 49.3%, for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 and increased$5,467.9 million , or 39.5%, for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. These increases in net sales were primarily attributable to recent acquisitions. The acquisition ofEby-Brown in the fourth quarter of 2019 contributed$1,212.1 million and$3,846.9 million of net sales in the third quarter and first nine months of fiscal 2020, respectively, including$256.9 million and$815.9 million related to excise taxes for the respective periods. The acquisition of Reinhart in the third quarter of 2020 contributed$1,355.1 million of net sales in the third quarter and first nine months of fiscal 2020. Case volume increased 26.4% and 14.6% in the third quarter and first nine months of fiscal 2020, respectively, compared to the prior year periods. Excluding the impact of the Reinhart andEby-Brown acquisitions, case volume declined 7.2% and 0.9% in the third quarter and first nine months of fiscal 2020, respectively, as compared to the prior year periods due primarily to the effects of COVID-19.
Gross Profit
Gross profit increased$202.8 million , or 33.5%, for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 and increased$417.2 million , or 23.0%, for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. The acquisition of Reinhart contributed$167.6 million of gross profit for the third quarter and first nine months of fiscal 2020 while the acquisition ofEby-Brown contributed$55.9 million and$183.1 million of gross profit for the third quarter and first nine months of fiscal 2020, respectively. Gross profit for the third quarter and first nine months of fiscal 2020 were negatively impacted by the decline in organic case volume and increases in inventory reserves of$4.9 million and$4.1 million , respectively, from the prior year periods, as a result of COVID-19. Gross profit as a percentage of net sales was 11.5% for the third quarter of fiscal 2020 compared to 12.9% for the third quarter of fiscal 2019, and 11.5% for the first nine months of fiscal 2020 compared to 13.1% for the first nine months of fiscal 2019; the decrease reflectingEby-Brown's lower margins primarily due to tobacco sales. 28 --------------------------------------------------------------------------------
Operating Expenses
Operating expenses increased$279.4 million , or 51.2%, for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 and increased$473.4 million , or 29.0%, for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. The increase in operating expenses for both the third quarter and first nine months of fiscal 2020 was primarily driven by recent acquisitions. The acquisition of Reinhart resulted in an increase in operating expenses excluding depreciation and amortization of$158.9 million for the third quarter and first nine months of fiscal 2020 while the acquisition ofEby-Brown resulted in an increase in operating expenses excluding depreciation and amortization of$53.6 million and$160.3 million for the third quarter and first nine months of fiscal 2020, respectively. Operating expenses also increased by$22.2 million for the third quarter and$35.0 million for the first nine months of fiscal 2020 as a result of professional fees related to acquisitions and$18.3 million for the third quarter and$19.5 million for the first nine months of fiscal 2020 due to an increase in reserves related to expected credit losses as a result of the current economic environment resulting from COVID-19. These increases were partially offset by a decrease in bonus expense of$46.2 million and$34.2 million for the third quarter and first nine months of fiscal 2020, respectively, compared to the prior year periods. Depreciation and amortization of intangible assets increased from$39.7 million in the third quarter of fiscal 2019 to$99.3 million in the third quarter of fiscal 2020. Depreciation and amortization of intangible assets increased from$112.3 million for the first nine months of fiscal 2019 to$185.8 million in the first nine months of fiscal 2020. These increases are primarily attributable to recent acquisitions. Total depreciation and amortization related to the acquisition of Reinhart was$52.4 million for the third quarter and first nine months of fiscal 2020, of which approximately$16.4 million of accelerated amortization related to customer relationships and trade names was recorded as a result of the impact of COVID-19 on the expected future net sales to Reinhart customers. Net Income Net income decreased$72.5 million , or 224.5%, for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. The decrease in net income was primarily attributable to a$76.6 million decrease in operating profit along with a$18.7 million increase in interest expense, partially offset by a$31.7 million decrease in income tax expense. Net income decreased$66.5 million , or 64.2%, for the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. The decrease in net income was primarily attributable to a$56.2 million decrease in operating profit along with a$30.8 million increase in interest expense, partially offset by a$28.7 million decrease in income tax expense.
The decrease in operating profit was a result of the increase in operating expenses discussed above, partially offset by the increase in gross profit. The increase in interest expense was primarily the result of an increase in borrowings during fiscal 2020 compared to fiscal 2019.
The decrease in income tax expense was primarily a result of the decrease in income before taxes. Our effective tax rate for the three months endedMarch 28, 2020 was 33.6% compared to 26.1% for the three months endedMarch 30, 2019 and 7.3% for the first nine months of fiscal 2020 compared to 23.4% for the first nine months of fiscal 2019. The effective tax rates for the three months and nine months endedMarch 28, 2020 differed from the prior year periods due to the increase of non-deductible expenses and discrete items as a percentage of income before taxes, which was significantly lower than the income before taxes for the same periods of fiscal 2019. Segment Results We have two reportable segments as described above - Foodservice and Vistar. Management evaluates the performance of these segments based various operating and financial metrics, including their respective sales growth and EBITDA. Corporate & All Other is comprised of unallocated corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of our internal logistics unit responsible for managing and allocating inbound logistics revenue and expense.
The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):
29
--------------------------------------------------------------------------------Net Sales Three Months Ended March 28, 2020 March 30, 2019 Change % Foodservice$ 4,949.9 $ 3,795.2 $ 1,154.7 30.4 Vistar 2,049.2 892.1 1,157.1 129.7 Corporate & All Other 107.1 71.6 35.5 49.6 Intersegment Eliminations (105.5 ) (69.9 ) (35.6 ) (50.9 ) Total net sales$ 7,000.7 $ 4,689.0 $ 2,311.7 49.3 Nine Months Ended March 28, 2020 March 30, 2019 Change % Foodservice$ 12,728.2 $ 11,113.1 $ 1,615.1 14.5 Vistar 6,579.5 2,726.6 3,852.9 141.3 Corporate & All Other 265.7 210.7 55.0 26.1 Intersegment Eliminations (261.1 ) (206.0 ) (55.1 ) (26.7 ) Total net sales$ 19,312.3 $ 13,844.4 $ 5,467.9 39.5 EBITDA Three Months Ended March 28, 2020 March 30, 2019 Change % Foodservice $ 91.7 $ 99.4$ (7.7 ) (7.7 ) Vistar 40.7 37.0 3.7 10.0 Corporate & All Other (58.4 ) (36.5 ) (21.9 ) (60.0 ) Total EBITDA $ 74.0 $ 99.9$ (25.9 ) (25.9 ) Nine Months Ended March 28, 2020 March 30, 2019 Change % Foodservice $ 309.3 $ 295.7$ 13.6 4.6 Vistar 148.8 114.0 34.8 30.5 Corporate & All Other (153.4 ) (114.1 ) (39.3 ) (34.4 ) Total EBITDA $ 304.7 $ 295.6$ 9.1 3.1
Segment Results-Foodservice
Three and nine months ended
Net Sales Net sales for Foodservice increased$1,154.7 million , or 30.4%, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020 and increased$1,615.1 million , or 14.5%, from the first nine months of fiscal 2019 to the first nine months of fiscal 2020. These increases in net sales were driven by the Reinhart acquisition, as well as an increase in selling price per case as a result of inflation for the first nine months of fiscal 2020. The acquisition of Reinhart in the third quarter of 2020 contributed$1,355.1 million of net sales in the third quarter and first nine months of fiscal 2020. The Reinhart acquisition also expanded business with independent customers, resulting in independent case growth of approximately 31.7% in the third quarter and 13.9% in the first nine months of fiscal 2020 compared to the prior year periods. Excluding the impact of Reinhart, independent cases declined 2.7% in the third quarter and increased 2.6% in the first nine months of fiscal 2020 compared to the prior year periods. The decline in independent cases in the third quarter of fiscal 2020 was driven by the impacts of COVID-19. For the quarter, independent sales as a percentage of total segment sales, including Reinhart, were 32.4%.
EBITDA
EBITDA for Foodservice decreased$7.7 million , or 7.7%, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020. This decrease was the result of an increase in operating expenses excluding depreciation and amortization, partially offset by an increase in gross profit. Gross profit increased 31.3% in the third quarter of fiscal 2020, compared to the prior year period, driven by the Reinhart acquisition which contributed an increase in gross profit of$167.6 million for the third quarter of fiscal 2020. This increase was partially offset by an increase in inventory reserves of$2.3 million due to COVID-19. 30 -------------------------------------------------------------------------------- EBITDA for this segment increased$13.6 million , or 4.6%, from the first nine months of fiscal 2019 to the first nine months of fiscal 2020. This increase was the result of an increase in gross profit, partially offset by an increase in operating expenses excluding depreciation and amortization. Gross profit increased 14.8% in the first nine months of fiscal 2020, compared to the prior year period, driven by the Reinhart acquisition which contributed an increase in gross profit of$167.6 million for the first nine months of fiscal 2020 as a result of an increase in cases sold. This increase was partially offset by an increase in the inventory reserve of$1.9 million due to COVID-19. Operating expenses excluding depreciation and amortization for Foodservice increased by$155.6 million , or 41.8%, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020 and increased by$194.0 million , or 17.5%, from the first nine months of fiscal 2019 to the first nine months of fiscal 2020. Operating expenses increased primarily as a result of the acquisition of Reinhart which contributed$158.9 million of operating expenses for the third quarter and first nine months of fiscal 2020. Additionally, the increase in operating expenses were driven by an increase in reserves related to expected credit losses of$11.7 million and$12.8 million for the third quarter and first nine months of fiscal 2020 as a result of the current economic environment due to the COVID-19 outbreak. These increases were partially offset by decreases in bonus expense of$24.9 million and$20.3 million for the third quarter and first nine months of fiscal 2020, respectively, compared to the prior year periods. Depreciation and amortization of intangible assets recorded in this segment increased from$24.2 million in the third quarter of fiscal 2019 to$79.9 million in the third quarter of fiscal 2020 and increased from$66.8 million in the first nine months of fiscal 2019 to$130.3 million in the first nine months of fiscal 2020. Depreciation of fixed assets and amortization of intangible assets increased as a result of the acquisition of Reinhart. Total depreciation and amortization related to the acquisition of Reinhart was$52.4 million for the third quarter and first nine months of fiscal 2020, of which approximately$16.4 million of accelerated amortization related to customer relationships and trade names was recorded as a result of the impact of COVID-19 on the expected future net sales to Reinhart customers.
Segment Results-Vistar
Three and nine months ended
Net Sales Net sales for Vistar increased$1,157.1 million , or 129.7%, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020, This increase was driven by recent acquisitions, as well as by sales growth in the segment's corrections, hospitality, and retail channels. Net sales for this segment increased$3,852.9 million , or 141.3%, from the first nine months of fiscal 2019 to the first nine months of fiscal 2020. This increase was driven by recent acquisitions, as well as by sales growth in the segment's corrections, hospitality, retail, vending, and office coffee services channels. Due to the restrictions implemented by governments to slow the spread of COVID-19, there have been significant declines in the theater and concessions channels for both the third quarter and first nine months of fiscal 2020, which are likely to remain as long as social distancing guidelines and stay home orders remain in place. The acquisition ofEby-Brown in the fourth quarter of 2019 contributed$1,212.1 million and$3,846.9 million of net sales in the third quarter and first nine months of fiscal 2020, respectively, including$256.9 million and$815.9 million related to excise taxes for the respective periods.
EBITDA
EBITDA for Vistar increased$3.7 million , or 10.0%, from the third quarter of fiscal 2019 to the third quarter of fiscal 2020 and increased$34.8 million , or 30.5%, from the first nine months of fiscal 2019 to the first nine months of fiscal 2020. Gross profit dollar growth of$55.2 million , or 43.0%, for the third quarter fiscal 2020 and$208.6 million , or 52.7%, for the first nine months of fiscal 2020 compared to the respective prior year periods, was driven by recent acquisitions. The acquisition ofEby-Brown contributed an increase in gross profit of$55.9 million and$183.1 million for the third quarter and first nine months of fiscal 2020, respectively. These increases were partially offset by an increase to the inventory reserve of$2.6 million and$2.3 million for the third quarter and first nine months of fiscal 2020, respectively, resulting from the current economic environment due to COVID-19. On occasion, the Company may 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 nine 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 that impacted this segment. Gross profit as a percentage of net sales declined from 14.4% for the third quarter of fiscal 2019 to 9.0% for the third quarter of fiscal 2020 and from 14.5% for the first nine months of fiscal 2019 to 9.2% the first nine months of fiscal 2020 as a result ofEby-Brown's lower margins. Operating expense dollar growth, excluding depreciation and amortization, increased$51.1 million , or 56.0%, for the third quarter of fiscal 2020 and$173.4 million , or 61.6%, for the first nine months of fiscal 2020 compared to the prior year periods. Operating expenses increased primarily as a result of the acquisition ofEby-Brown , which contributed an increase in operating expenses of$53.6 million and$160.3 million for the third quarter and first nine months of fiscal 2020, respectively. Additionally, Vistar operating expenses increased due to the increase in theEby-Brown earnout expense of$2.3 million and$8.5 million and increases in reserves primarily related to expected credit losses due to the impact of COVID-19 of$4.5 million for both the third quarter and first nine months of fiscal 2020 compared to the prior year periods. These increases were partially offset by decreases in bonus expense of$12.1 million and$10.7 million for the third quarter and first nine months of fiscal 2020, respectively, compared to the prior year periods. 31 -------------------------------------------------------------------------------- Depreciation and amortization of intangible assets recorded in this segment increased from$9.5 million in the third quarter of fiscal 2019 to$13.1 million in the third quarter of fiscal 2020 and increased from$27.7 million in the first nine months of fiscal 2019 to$36.2 million in the first nine 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 nine months ended
Net sales for Corporate & All Other increased$35.5 million from the third quarter of fiscal 2019 to the third quarter of fiscal 2020 and increased$55.0 million from the first nine months of fiscal 2019 to the first nine 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$58.4 million for the third quarter of fiscal 2020 compared to a negative$36.5 million for the third quarter of fiscal 2019 and was a negative$153.4 million for the first nine months of fiscal 2020 compared to a negative$114.1 million for the first nine months of fiscal 2019. These declines in EBITDA were primarily driven by an increase in professional and legal fees of$20.4 million and$32.4 million in the third quarter of fiscal 2020 and the first nine months of fiscal 2020, respectively, compared to prior year periods related to acquisitions. This increase was partially offset by decreases in bonus expense of$10.7 million and$7.3 million for the third quarter and first nine months of fiscal 2020, respectively, compared to the prior year periods. Depreciation and amortization of intangible assets recorded in this segment increased from$6.0 million in the third quarter of fiscal 2019 to$6.3 million in the third quarter of fiscal 2020 and increased from$17.8 million in the first nine months of fiscal 2019 to$19.3 million in the first nine 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 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. COVID-19 The unprecedented impact of COVID-19 has grown throughout the world, including inthe United States , and governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of the virus, including travel bans and restrictions, quarantines, shelter in place orders, shutdowns and social distancing requirements. These measures have adversely affected and may further adversely affect the Company's workforce and operations and the operations of its customers and suppliers. We and our distribution centers have experienced instances of reduced operations, including reduced operating hours, and in markets where governments have imposed restrictions on travel outside of the home, or where customers are practicing social distancing, many of our customers, including restaurants, schools, hotels, movie theaters, and business and industry locations, have reduced or discontinued operations, which has and is expected to continue to adversely affect demand in the foodservice industry, including demand for our products and services. We have focused and are continuing to focus on financial measures to enhance our liquidity profile, as we believe the reduced or discontinued operations of many of our customers will continue to adversely affect demand for our products and services for an inherently uncertain period of time. Actions we have taken with the goal of maintaining financial liquidity and flexibility have included halting non-essential capital expenditure activities, managing costs, suspending our share repurchase program, furloughing or eliminating approximately 3,000 positions across our organization and loaning over 1,100 associates to grocery retail partners to help maintain food supply, as well as deferring 25% of our senior management's base compensation and 25% of the cash fees to our directors 32 -------------------------------------------------------------------------------- for the period commencingApril 6, 2020 throughDecember 31, 2020 . Given the uncertainties associated with the severity and duration of the outbreak, we have also drawn$400 million on the revolving line of credit under our ABL Facility, entered the First Amendment to provide the$110 million Additional Junior Term Loan, issued and sold shares of common stock, and issued and sold the Notes due 2025. We may explore more opportunities to raise additional funds and further strengthen our liquidity. Such financings may be in the form of secured or unsecured loans or issuances of debt securities, and there can be no assurance as to the timing, amount or mix of financing alternatives, or whether we will obtain financing on terms favorable to us, or at all. We believe that our cash flows from operations, available borrowing capacity, and the actions noted above 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. AtMarch 28, 2020 , our cash balance totaled$383.2 million , including restricted cash of$11.1 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 nine months of fiscal 2020 was attributable to net cash provided by operating activities of$17.6 million and net cash provided by financing activities of$2,429.5 million , partially offset by net cash used in investing activities of$2,089.3 million .
Nine months ended
Operating Activities During the first nine months of fiscal 2020 and the first nine months of fiscal 2019, our operating activities provided cash flow of$17.6 million and$260.5 million , respectively. As ofMarch 28, 2020 , the Company had a total cash balance of$585.8 million , consisting of borrowings under the ABL Facility and cash generated from operations. The$585.8 million cash balance resulted in$213.7 million of outstanding checks in excess of deposits being offset to cash. Excluding the impact of this offset, cash flows provided by operating activities would have been$231.3 million for the first nine months of fiscal 2020. The remaining decrease in cash flows provided by operating activities in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 was largely driven by lower operating income.
Investing Activities
Cash used in investing activities totaled$2,089.3 million in the first nine months of fiscal 2020 compared to$149.8 million in the first nine months of fiscal 2019. These investments consisted primarily of payments for business acquisitions of$1,989.0 million for the first nine months 2020 and$57.7 million for the first nine months of fiscal 2019, and capital purchases of property, plant, and equipment of$101.1 million and$93.1 million for the first nine months of fiscal 2020 and the first nine months of fiscal 2019, respectively. For the first nine 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: Nine Months Ended (Dollars in millions) March 28, 2020 March 30, 2019 Foodservice $ 37.8 $ 67.2 Vistar 44.7 9.5 Corporate & All Other 18.6 16.4
Total capital purchases of property, plant and equipment $ 101.1
$ 93.1
As of March 28, 2020 , the Company had commitments of $19.5 million for essential
capital projects related to warehouse expansion and improvements and warehouse
equipment. The Company anticipates using cash flows from operations or
borrowings from the ABL Facility to fulfill these commitments.
Financing Activities
During the first nine months of fiscal 2020, our financing activities provided cash flow of$2,429.5 million , which consisted primarily of$1,060.0 million in cash received from the issuance and sale of the Notes due 2027,$950.4 million in net borrowings under our ABL Facility, and$490.6 million in net proceeds from the issuance of common stock. These sources of cash were partially offset by$37.5 million paid for debt issuance cost associated with the Notes due 2027 and borrowings under the ABL Facility and$16.9 million in payments of finance lease obligations. During the first nine months of fiscal 2019, our financing activities used cash flow of$110.1 million , which consisted primarily of$81.7 million in net payments under our ABL Facility. 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.
On
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On December 30, 2019 , the Company physically settled an equity forward at the
forward sale price of $42.70 per share, net of the underwriting discount. The
Company used the $490.6 million of 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 on December 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 ABL Facility, to fund the cash
consideration for the Reinhart acquisition and to pay related fees and expenses.
Subsequent to the fiscal quarter end, in April 2020 , the Company issued and sold
15,525,000 shares of the Company's common stock for net proceeds of $337.7
million . On April 21, 2020 , Performance Food Group, Inc. issued and sold $275.0
million aggregate principal amount of the Notes due 2025. Additionally, on April
29, 2020 , PFGC entered the First Amendment to provide the $110 million
Additional Junior Term Loan. Refer to Note 6. Debt within the Notes to
Consolidated Financial Statements included in Part I, Item 1 for further
description of the First Amendment and Notes due 2025. The net proceeds of the
common stock issuance, the Notes due 2025 and the Junior Term Loan are intended
to be used for working capital and general corporate purposes.
The following describes our financing arrangements as of
ABL Facility: PFGC, a wholly-owned subsidiary of the Company, is a party to the ABL Facility, which has an aggregate principal amount of$3.0 billion and matures onDecember 30, 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 March 28, 2020 As of June 29, 2019 Aggregate borrowings $ 1,809.4 $ 859.0 Letters of credit under ABL Facility 139.1 89.9 Excess availability, net of lenders' reserves 848.8 1,182.7 of$70.1 and$38.6 Average interest rate 2.72 % 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)$200.0 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. Senior Notes due 2024: OnMay 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 ofMay 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 byPerformance 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. 34
-------------------------------------------------------------------------------- The Notes due 2024 were issued at 100.0% of their par value. The Notes due 2024 mature onJune 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 whichPerformance Food Group, Inc. does not apply the proceeds as required, the holders of the Notes due 2024 will have the right to requirePerformance 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. PerformanceFood 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 onJune 1, 2020 andJune 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: OnSeptember 27, 2019 , Escrow Issuer (which merged with and intoPerformance Food Group, Inc. ) issued and sold$1,060.0 million aggregate principal amount of Notes due 2027. OnDecember 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 byPerformance 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 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 ofMarch 28, 2020 , the Company has$28.3 million letters of credit outstanding under the Letters of Credit Facility.
As of
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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 of June 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 SegmentTotal assets by segment discussed below exclude intercompany receivables between segments.
Total assets for Foodservice increased$2,567.7 million from$3,166.5 million as ofMarch 30, 2019 to$5,734.2 million as ofMarch 28, 2020 . Total assets for Foodservice increased$2,581.9 million from$3,152.3 million as ofJune 29, 2019 to$5,734.2 million as ofMarch 28, 2020 . For both periods, this segment increased its property, plant and equipment, inventory, accounts receivable, goodwill, and intangible assets primarily due to the acquisition ofReinhart. Foodservice's assets also increased for both periods as a result of the Company'sJune 30, 2019 adoption of ASC 842 and the recognition of operating lease right-of-use assets of$178.5 million . Total assets for Vistar increased$692.7 million from$831.3 million as ofMarch 30, 2019 to$1,524.0 million as ofMarch 28, 2020 . During this time period, this segment increased its accounts receivable, inventory, property, plant and equipment, and goodwill, primarily due to the acquisition ofEby-Brown . Total assets for Vistar increased$253.0 million from$1,271.0 million as ofJune 29, 2019 to$1,524.0 million as ofMarch 28, 2020 . 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$252.3 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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