A N N U A L R E P O R T
NET SALES =$17.6 BILLION
■ Performance Foodservice
■ Vistar
■ PFG Customized
■ Other
59%
19%
21%
1%
ADJUSTED EBITDA
CAGR = 9.5%
1
7
2
$
6
8
2
$
9
2
3
$
7
6
3
$
1
9
3
$
7
2
4
$
2013 2014 2015 2016 2017 2018
In fiscal 2018, Performance Food Group (PFG)
delivered on several strategic initiatives and
generated double-digit earnings growth and
strong cash flow.
Total case volume grew 3%, which included
a solid increase in independent cases. Vistar
had an exceptional year, particularly the back
half of fiscal 2018. The strategic investments
we made two years ago paid dividends in the
fourth quarter, and we expect them to help fuel
future growth. In Performance Foodservice,
we are making strategic investments in our
sales force, supply chain optimization and
technology.
FISCAL 2018 HIGHLIGHTS INCLUDE:
n Total case volume growth of 3%
n Solid net sales growth of more than 5%
n Gross profit increase of nearly 8%
n Net income grew 59.4% to $64.4 million
n Adjusted EBITDA growth of more than 9%
n Substantial return on invested capital
Total case volume included a 6.1% increase
in independent cases, growth in Performance
Brands cases and broad-based growth in
Vistar’s sales channels, partially offset by
declines in the casual dining segment within
PFG Customized. The increase in net sales was
primarily attributable to sales growth in Vistar,
particularly in the theater and retail channels;
case growth in Performance Foodservice,
particularly in the independent channel; and
recent acquisitions. Gross profit growth was the
result of case growth and an improved sales mix
of customer channels and products, specifically
to the independent restaurant channel.
Performance Foodservice net sales increased
6.2% driven by an increase in cases sold,
including independent case growth and solid
independent customer demand for Performance
Brands. For fiscal 2018, independent sales as a
percentage of total segment sales was up 100
basis points to 45.2%. EBITDA increased 3.3%
for the full year. Performance Foodservice’s
earnings were lower than expected due to
higher than anticipated operating expenses
from labor costs associated with hiring sales,
delivery and warehouse associates, and rising
fuel prices. We believe this is the right time to
strategically invest in Performance Foodservice
to support future growth and are continuing to
invest in customer-facing technology to further
enhance our customer experience.
GEORGE L. HOLM
Vistar had a robust year with net sales growth
of 11.2% driven by strong case sales
growth in the segment’s theater, vending
and retail channels, and as a result of recent
acquisitions. The box office continued to
outpace expectations and helped drive our
theater business. Vistar’s full-year EBITDA
increased 13.1% driven by gross profit dollar
growth of 18.4%. These increases were fueled
by an increase in the number of cases sold
and a favorable change in mix towards higher
margin channels.
Customized net sales decreased 4.2%. This
decrease was primarily a result of the Georgia
facility that was closed in the fourth quarter
of fiscal 2017 and the challenging casual
dining environment. PFG Customized EBITDA
increased 16.6% driven by good operating
expense control.
PFG’s return on invested capital significantly
improved during fiscal 2018 driven by strong
operating profit, a lower tax rate, and robust
cash flow which was used to reduce debt.
We generated $367 million in cash flow from
operating activities, an increase of $165.3
million versus the prior year period. We
invested $140.1 million in capital expenditures,
in line with capital spending versus prior year.
I want to thank all of our associates for their
hard work and dedication over the past year.
I’m proud to be part of such a great company
that has so much potential for growth. Our
more than 15,000 associates strive every day
to provide an unsurpassed customer-centric
experience.
Looking ahead, we believe we are well-
positioned across our businesses for another
fiscal year of solid earnings growth, with
associates who are determined to provide the
best customer experience. And we believe we
have the right strategies to deliver best-in-class
service and sustainable annual growth. And,
we are investing in people and technology, and
most importantly, our customers, so they can
compete and grow.
Best regards,
George L. Holm
President and CEO
August 23, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37578
Performance Food Group Company
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
12500 West Creek Parkway
Richmond, Virginia 23238
(Address of principal executive offices)
43-1983182
(IRS employer
identification no.)
(804) 484-7700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes � No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No �
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
Emerging Growth Company
☒
☐ (Do not check if a smaller reporting company)
☐
Accelerated Filer
Smaller Reporting Company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At December 29, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of common stock
held by non-affiliates was $2,846,661,169 (based on the closing sale price of common stock on such date on the New York Stock Exchange).
104,735,605 shares of common stock were outstanding as of August 6, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Schedule 14A relating to the Registrant’s
Annual Meeting of Stockholders, to be held on November 13, 2018, are incorporated by reference in response to Items 10, 11, 12, 13 and 14 of Part III of this Annual
Report on Form 10-K. The definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal
year ended June 30, 2018.
PFG_10K_2018_FINAL_96pages.indd 1
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TABLE OF CONTENTS
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS .................................................................................
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS .................................................................................
PART I .............................................................................................................................................................................................
PART I .............................................................................................................................................................................................
Item 1. Business ...................................................................................................................................................................
Item 1. Business ...................................................................................................................................................................
Item 1A. Risk Factors .............................................................................................................................................................
Item 1A. Risk Factors .............................................................................................................................................................
Page
Page
1
1
3
3
9
3
3
9
Item 1B. Unresolved Staff Comments ....................................................................................................................................
Item 1B. Unresolved Staff Comments ....................................................................................................................................
21
21
Item 2.
Item 2.
Properties .................................................................................................................................................................
Properties .................................................................................................................................................................
22
22
Item 3. Legal Proceedings ...................................................................................................................................................
Item 3. Legal Proceedings ...................................................................................................................................................
23
23
Item 4. Mine Safety Disclosures ..........................................................................................................................................
Item 4. Mine Safety Disclosures ..........................................................................................................................................
23
23
PART II ...........................................................................................................................................................................................
PART II ...........................................................................................................................................................................................
24
24
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ............................................................................................................................................................................................
Securities ............................................................................................................................................................................................
24
24
Item 6.
Item 6.
Selected Financial Data ......................................................................................................................................................................
Selected Financial Data ......................................................................................................................................................................
26
26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................................................
27
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...........................................................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...........................................................................................................
44
44
Item 8.
Item 8.
Financial Statements and Supplementary Data ..................................................................................................................................
Financial Statements and Supplementary Data ..................................................................................................................................
46
46
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...........................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...........................................................
87
87
Item 9A. Controls and Procedures .....................................................................................................................................................................
Item 9A. Controls and Procedures .....................................................................................................................................................................
87
87
Item 9B. Other Information ...............................................................................................................................................................................
Item 9B. Other Information ...............................................................................................................................................................................
88
88
PART III ..........................................................................................................................................................................................
PART III ..........................................................................................................................................................................................
88
88
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................................
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................................
88
88
.................
.................
Item 11. Executive Compensation .......................................................................................................................................
88
Item 11. Executive Compensation .......................................................................................................................................
88
....
....
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............
88
88
..........
..........
Item 13. Certain Relationships and Related Transactions, and Director Independence .....................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .....................................................
...................
...................
88
88
Item 14. Principal Accountant Fees and Services ................................................................................................................
Item 14. Principal Accountant Fees and Services ................................................................................................................
88
88
.............
.............
PART IV ..........................................................................................................................................................................................
PART IV ..........................................................................................................................................................................................
88
88
Item 15. Exhibits and Financial Statement Schedules ...........................................................................................................
Item 15. Exhibits and Financial Statement Schedules ...........................................................................................................
88
88
Item 16. Form 10-K Summary ...............................................................................................................................................
Item 16. Form 10-K Summary ...............................................................................................................................................
88
88
SIGNATURES ................................................................................................................................................................................
SIGNATURES ................................................................................................................................................................................
92
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K (this “Form 10-K”) may contain “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those
sections. All statements, other than statements of historical facts included in this Form 10-K, including statements concerning our
plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and
our business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,”
“expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and
variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements
are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many
of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are
expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s
expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is
expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause
our actual results to differ materially from the forward-looking statements contained in this Form 10-K. Such risks, uncertainties and
other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth
under Part I, Item 1A. Risk Factors in this Form 10-K, as such risk factors may be updated from time to time in our periodic filings
with the Securities and Exchange Commission (the “SEC”), and are accessible on the SEC’s website at www.sec.gov, and also include
the following:
competition in our industry is intense, and we may not be able to compete successfully;
•
• we operate in a low margin industry, which could increase the volatility of our results of operations;
• we may not realize anticipated benefits from our operating cost reduction and productivity improvement efforts;
our profitability is directly affected by cost inflation and deflation and other factors;
•
• we do not have long-term contracts with certain of our customers;
•
•
•
•
•
•
group purchasing organizations may become more active in our industry and increase their efforts to add our customers as
members of these organizations;
changes in eating habits of consumers;
extreme weather conditions;
our reliance on third-party suppliers;
labor relations and cost risks and availability of qualified labor;
volatility of fuel and other transportation costs;
inability to adjust cost structure where one or more of our competitors successfully implement lower costs;
•
• we may be unable to increase our sales in the highest margin portion of our business;
•
•
•
•
•
•
•
•
•
•
•
changes in pricing practices of our suppliers;
our growth strategy may not achieve the anticipated results;
risks relating to any future acquisitions;
environmental, health, and safety costs;
the risk that we fail to comply with requirements imposed by applicable law or government regulations;
our reliance on technology and risks associated with disruption or delay in implementation of new technology;
costs and risks associated with a potential cybersecurity incident or other technology disruption;
product liability claims relating to the products we distribute and other litigation;
adverse judgements or settlements;
negative media exposure and other events that damage our reputation;
anticipated multiemployer pension related liabilities and contributions to our multiemployer pension plan;
1
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•
•
•
•
•
•
•
•
decrease in earnings from amortization charges associated with future acquisitions;
impact of uncollectibility of accounts receivable;
difficult economic conditions affecting consumer confidence;
departure of key members of senior management;
risks relating to federal, state, and local tax rules, including the impact of the Tax Cuts and Jobs Act and related
interpretations and determinations by tax authorities;
the cost and adequacy of insurance coverage;
risks relating to our outstanding indebtedness; and
our ability to maintain an effective system of disclosure controls and internal control over financial reporting.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and
other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that
we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the
way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or
the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is
complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All
forward-looking statements in this Form 10-K apply only as of the date of this Form 10-K report or as of the date they were made and,
except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a
result of new information, future developments or otherwise.
2
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Item 1. Business
PART I
Performance Food Group Company (“we,” “our,” “us,” “the Company,” or “PFG”), through its subsidiaries, markets and
distributes more than 150,000 food and food-related products from 73 distribution centers to over 150,000 customer locations across
the United States. Our more than 15,000 employees serve a diverse mix of customers, from independent and chain restaurants to
schools, business and industry locations, hospitals, vending distributors, office coffee service distributors, retailers, and theaters. We
source our products from over 5,000 suppliers and serve as an important partner to our suppliers by providing them access to our
broad customer base. 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. Our three reportable segments are Performance Foodservice, PFG Customized, and Vistar.
Performance Food Group Company was incorporated under the laws of the state of Delaware on September 23, 2002.
References to “Blackstone” refer to certain investment funds affiliated with The Blackstone Group L.P. and references to
“Wellspring” are to investment funds affiliated with Wellspring Capital Management LLC.
Customers and Marketing
We serve different types of customers through each of our three reportable segments. Our Performance Foodservice segment
serves two types of customers—independent customers and multi-unit, or “Chain” customers. Our PFG Customized segment
distributes to Chain customers, including family and casual dining, fast casual, and quick serve restaurants. Our Vistar segment
distributes to vending and office coffee service distributors, retailers, theaters, and hospitality providers, among others. We believe
that customers select a distributor based on breadth of product offerings, consistent product quality, timely and accurate delivery of
orders, value-added services, and price. In addition, we believe that some of our larger independent and Chain customers gain
operational efficiencies by dealing with a limited number of foodservice distributors. No single customer accounted for more than
10% of our total net sales for fiscal 2018, fiscal 2017 or fiscal 2016.
Independent Customers. Our Performance Foodservice segment serves our independent customers, which predominantly
include family dining, bar and grill, pizza and Italian, and fast casual restaurants. We seek to increase the mix of our total sales to
independent customers because they typically generate higher gross profit per case that more than offsets the generally higher supply
chain costs that we incur in serving these customers. Independent customers use more value-added services, particularly in the areas of
product selection and procurement, market trends, menu development, and operational strategy. In addition, independent customers
also use more of our proprietary-branded products (“Performance Brands”), which are our highest margin products. Our Performance
Foodservice segment supports sales to independent customers with a team of sales and marketing representatives, customer service
representatives, and product specialists. Our sales representatives serve customers in person, by telephone, and through the internet,
accepting and processing orders, reviewing inventory and account balances, disseminating new product information, and providing
business assistance and advice where appropriate. These representatives typically use laptop computers to assist customers by entering
orders, checking product availability, and pricing and developing menu-planning ideas on a real-time basis.
Chain Customers. Both our Performance Foodservice and PFG Customized segments serve Chain customers. Chain customers
are multi-unit restaurants with five or more locations and include fine dining, family and casual dining, fast casual, and quick serve
restaurants, as well as hotels, healthcare facilities, and other multi-unit institutional customers. Our Performance Foodservice segment
Chain customers, primarily regional businesses requiring short-haul routes, include various locations of Blaze Pizza, Chuy’s, Marco’s
Pizza, Mellow Mushroom, Pollo Tropical, Shake Shack, Subway, Zaxby’s and many others. Our PFG Customized segment customers,
primarily national businesses requiring long-haul routes, include many of the most recognizable family and casual dining restaurant
chains including Cracker Barrel, Red Lobster, TGI Friday’s, Outback Steakhouse, O’Charley’s, Chili’s, and Ruby Tuesday. PFG
Customized also serves fast casual chains such as Fuzzy’s Taco Shop and PDQ. Sales to Chain customers are typically lower gross
margin but have larger deliveries than those to independent customers. Dedicated account representatives are responsible for
managing the overall Chain customer relationship, including ensuring complete order fulfillment and customer satisfaction. Members
of senior management assist in identifying potential new Chain customers and managing long-term account relationships.
Vistar Customers. Our Vistar segment distributes candy, snacks, beverages, health & beauty, and other products to a number of
distinct channels. Vending operators comprise Vistar’s largest channel. We distribute a broad selection of vending machine products
to the operators’ depots, from which they distribute products and stock machines. We are a leading distributor of these products to
theater chains, and Vistar’s customers include AMC, Cinemark, Galaxy Theaters, Regal Cinemas, and others. We typically deliver our
orders directly to individual theater locations. We are a leading distributor to the office coffee service channel. Vistar also distributes
to retailers, particularly for candy, snack, and beverage purchases in impulse buying locations. Our customers include retailers such as
Dollar Tree, Home Depot, Staples, and others. Vistar distributes to other channels with a heavy concentration of candy, snacks, and
3
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beverage products, including hospitality providers, concessionaires, college book stores, hotel and airport gift shops, corrections
facilities, and others. The distribution model also includes a “pick and pack” capability, which utilizes third-party carriers and Vistar’s
SKU variety to sell to customers whose order sizes are too small to be served effectively by our delivery network. Vistar also operates
Merchant’s Marts locations, which are cash-and-carry operators where customers generally pick up orders rather than having them
delivered.
Products and Services
We distribute more than 150,000 food and food-related products. These products include a full line of frozen foods, such as
meats, fully prepared appetizers and entrees, fruits, vegetables, and desserts; a full line of canned and dry foods; fresh meats; dairy
products; beverage products; imported specialties; fresh produce; and candy, snack, and other products. We also supply a wide variety
of non-food items including paper products such as pizza boxes, disposable napkins, plates and cups; tableware such as china and
silverware; cookware such as pots, pans, and utensils; restaurant and kitchen equipment and supplies; and cleaning supplies. We also
provide our customers with value-added services, as described below, in the normal course of providing full-service distribution
services.
Performance Brands. We offer our customers an extensive line of proprietary-branded products. We provide umbrella brands
for our broadline distribution operation. Ridgecrest provides discerning chefs with the one of the highest levels of quality and
consistency. West Creek provides a level of quality, consistency, and value that we believe meets or exceeds national brand offerings.
Silver Source provides core products that are value priced while satisfying customers’ specifications. We also have a number of
specialty brands, such as Braveheart 100% Black Angus beef, Empire’s Treasure seafood, Brilliance premium shortenings and oils,
Heritage Ovens baked goods, Village Garden salad dressings, Guest House premium teas and cocoas, Peak Fresh Produce, Allegiance
Premium Pork, Ascend Beverages, and others. We also have an extensive line of products for use in the pizzeria and Italian restaurant
business under the names Piancone, Roma, Assoluti, and others. We believe that these products are a major source of competitive
advantage. We intend to continue to enhance our product offerings based on supplier advice, customer preferences, and data analysis
using our data warehouse. Our Performance Brands enable us to offer customers an alternative to comparable national brands across a
wide range of products and price points, which we believe also promotes customer loyalty. Our Performance Brands products are
manufactured for us according to specifications that have been developed by our quality assurance team. In addition, our quality
assurance team certifies the manufacturing and processing plants where these products are packaged, enforces our quality control
standards, and identifies supply sources that satisfy our requirements.
National Brands. We offer our customers a broad selection of national brand products. We believe that these brands are
attractive to Chain, independent, and other customers seeking recognized national brands in their operations. We believe that
distributing national brands has strengthened our relationships with many national suppliers who provide us with important sales and
marketing support. These sales complement sales of our Performance Brand products.
Customer Brands. Some of our Chain customers, particularly those with national distribution, develop exclusive SKU
specifications directly with suppliers and brand these SKUs. We purchase these SKUs directly from suppliers and receive them into
our distribution centers, where they are mixed with other SKUs and delivered to the Chain customers’ locations.
Value-Added Services. We believe that prompt and accurate delivery of orders, close contact with customers, and the ability to
provide a full array of products and services to assist customers in their foodservice operations are of primary importance in
foodservice distribution. Our operating companies offer multiple deliveries per week to certain customer locations and have the
capability of delivering special orders on short notice. Through our sales and marketing representatives and support staff, we monitor
the needs of our customers and acquaint them with new products and services. Our operating companies also provide ancillary
services relating to foodservice distribution, such as providing customers with electronic order-taking, payment, and other internet
based services, various reports and other data, menu planning advice, food safety training, and assistance in inventory control, as well
as access to various third-party services designed to add value to our customers’ businesses.
Refer to Note 19. Segment Information of Notes to Consolidated Financial Statements included in Part II, Item 8 – “Financial
Statements and Supplementary Data” (“Item 8”) for the sales mix for the Company’s principal product and service categories for each
of the last three fiscal years.
4
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Suppliers
We purchase from over 5,000 suppliers, none of which accounted for more than 5% of our aggregate purchases in fiscal 2018,
fiscal 2017 or fiscal 2016. Many of our suppliers provide products to all three reportable segments, while others sell to only one
segment. Our supplier base consists principally of large corporations that sell their national brands, our Performance Brands, and
sometimes both. We also buy from smaller suppliers, particularly on a regional basis, and particularly those that specialize in produce
and other perishable commodities. Many of our suppliers provide sales material and sales call support for the products that we
purchase.
Pricing
Our pricing to customers is either set by contract with the customer or is priced at the time of order. If the price is by contract,
then it is either based on a percentage markup over cost or a fixed markup per unit, and the unit may be expressed either in cases or
pounds of product. If the pricing is set at time of order, the pricing is agreed to between our sales associate and the customer and is
typically based on a product cost that fluctuates weekly or more frequently.
If contracts are based on a fixed markup per unit or pound, then our customers bear the risk of cost fluctuations during the
contract life. In the case of a fixed markup percentage, we typically bear the risk of cost deflation or the benefit of cost inflation. If
pricing is set at the time of order, we have the current cost of goods in our inventory and typically pass cost increases or decreases to
our customers. We generally do not lock in or otherwise hedge commodity costs or other costs of goods sold except within certain
customer contracts where the customer bears the risk of cost fluctuation. We believe that our pricing mechanisms provide us with
significant insulation from fluctuations in the cost of goods that we sell. Our inventory turns, on average, approximately every three-
and-a-half weeks, which further protects us from cost fluctuations.
We seek to minimize the effect of higher diesel fuel costs both by reducing fuel usage and by taking action to offset higher fuel
prices. We reduce usage by designing more efficient truck routes and by increasing miles per gallon through on-board computers that
monitor and adjust idling time and maximum speeds and through other technologies. In our Performance Foodservice and Vistar
segments, we seek to manage fuel prices through diesel fuel surcharges to our customers and through the use of costless collars. As of
June 30, 2018, we had collars in place for approximately 13% of the gallons we expect to use over the 12 months following June 30,
2018. These fuel collars do not qualify for hedge accounting treatment for reasons discussed in Note 9. Derivatives and Hedging
Activities of Notes to Consolidated Financial Statements. Therefore, these collars are recorded at fair value as either an asset or
liability on the balance sheet. Any changes in fair value are recorded in the period of the change as unrealized gains or losses on fuel
hedging instruments. In our PFG Customized segment, we have limited exposure to fuel costs since our sales contracts largely transfer
fuel price volatility to our customers.
Competition
The foodservice distribution industry is highly competitive. Certain of our competitors have greater financial and other
resources than we do. Furthermore, there are two larger broadline distributors, Sysco and US Foods, with national footprints. In
addition, there are numerous regional, local, and specialty distributors. These smaller distributors often align themselves with other
smaller distributors through purchasing cooperatives and marketing groups to enhance their geographic reach, private label offerings,
overall purchasing power, cost efficiencies and to assemble delivery networks for national or multi-regional distribution. We often do
not have exclusive service agreements with our customers and our customers may switch to other distributors if those distributors can
offer lower prices, differentiated products, or customer service that is perceived to be superior. We believe that most purchasing
decisions in the foodservice business are based on the quality and price of the product and a distributor’s ability to fill orders
completely and accurately and to provide timely deliveries.
We believe we have a competitive advantage over regional and local broadline distributors through economies of scale in
purchasing and procurement, which allow us to offer a broad variety of products (including our proprietary Performance Brands) at
competitive prices to our customers. Our customers benefit from our ability to provide them with extensive geographic coverage as
they continue to grow. We believe we also benefit from supply chain efficiency, including a growing inbound logistics backhaul
network that uses our collective distribution network to deliver inbound products across business segments; best practices in
warehousing, transportation, and risk management; the ability to benefit from the scale of our purchases of items not for resale, such
as trucks, construction materials, insurance, banking relationships, healthcare, and material handling equipment; and the ability to
optimize our networks so that customers are served from the most efficient distribution centers, which minimizes the cost of delivery.
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We believe these efficiencies and economies of scale will provide opportunities for improvements in our operating margins when
combined with incremental fixed-cost advantage.
Seasonality
Historically, the food-away-from-home and foodservice distribution industries are seasonal, with lower profit in the first and
third quarters of each calendar year. Consequently, we typically experience lower operating profit during our first and third fiscal
quarters, depending on the timing of acquisitions, if any.
Information Systems
We operate three principal systems that are customized versions of commercial products. These systems span operational
functions including procurement, receiving, warehouse and inventory management, and order processing. All three principal systems
feed financial systems that differ by segment. These financial systems in turn feed into a single consolidation system for financial and
managerial reporting. In addition, we continue to invest into what we believe are “best in breed” systems to optimize our business
performance. These systems include our sales force laptops and order entry systems, inbound logistics, and our “pay for performance”
systems in warehouse stock replenishment and order selection, delivery loading, routing, driver performance, and sales force
productivity.
Trademarks and Trade Names
We have numerous trademarks and trade names that are of significant importance, including West Creek, Silver Source,
Braveheart 100% Black Angus, Empire’s Treasure, Brilliance, Heritage Ovens, Village Garden, Guest House, Piancone, Luigi’s,
Ultimo, Corazo, Assoluti, Peak Fresh Produce, Roma, First Mark, Nature’s Best Dairy and Liberty. Although in the aggregate these
trademark and trade names are material to our results of operations, we believe the loss of a trademark or trade name individually
would not have a material adverse effect on our results of operations. The Company does not have any material patents or licenses.
Employees
As of June 30, 2018, we had more than 15,000 full-time employees. As of June 30, 2018, unions represented approximately
1,000 of our employees. We have entered into 12 collective bargaining and similar agreements with respect to our unionized
employees. We believe that we have good relations with both union and non-union employees and we strive to be well regarded in the
communities in which we operate. We have not had any material work stoppages or lockouts in the last five years. Our agreements
with our union employees expire at various times through 2027. See Part I, Item 1A.—Risk Factors—Risks Relating to Our Business
and Industry—We face risks relating to labor relations and the availability of qualified labor.”
We have made investments to increase the size of our sales force and currently employ over 3,000 sales associates who are
dedicated to serving our customers. Our typical sales representative calls on customers in their place of business on a periodic basis,
usually weekly, to ascertain customer product needs, to help manage the customer’s inventory, and to discuss new products and other
business. These sales representatives are supported by customer services representatives who work in the local market and assist
customers in a variety of ways; business development managers, who help sales representatives prospect for new business; and
category managers and specialists who assist sales representatives and customers with product specific knowledge. All of our
segments have a multi-unit, or Chain, sales force who call on regional and national customers.
Insurance
We maintain high-deductible insurance programs covering portions of general and vehicle liability and workers’ compensation.
The amounts in excess of the deductibles are insured by third-party insurance carriers, subject to certain limitations and exclusions.
We also maintain self-funded group medical insurance. In addition, we maintain property, business and casualty insurance that we
believe accords with customary foodservice industry practice. We cannot predict whether this insurance will be adequate to cover all
potential hazards incidental to our business.
Our operations are subject to regulation by state and local health departments, the U.S. Department of Agriculture (the
“USDA”), and the U.S. Food and Drug Administration (the “FDA”), which generally impose standards for product quality and
Regulation
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sanitation and are responsible for the administration of bioterrorism legislation affecting the foodservice industry. These government
authorities regulate, among other things, the processing, packaging, storage, distribution, advertising, and labeling of our products. In
2010, the FDA Food Safety Modernization Act (the “FSMA”) was enacted. The FSMA requires that the FDA impose comprehensive,
prevention-based controls across the food supply chain, further regulates food products imported into the United States, and provides
the FDA with mandatory recall authority. The FSMA requires the FDA to undertake numerous rulemakings and to issue numerous
guidance documents, as well as reports, plans, standards, notices, and other tasks. As a result, implementation of the legislation is
ongoing and likely to take several years. Our seafood operations are also specifically regulated by federal and state laws, including
those administered by the National Marine Fisheries Service, established for the preservation of certain species of marine life,
including fish and shellfish. Our processing and distribution facilities must be registered with the FDA biennially and are subject to
periodic government agency inspections. State and/or federal authorities generally inspect our facilities at least annually. The Federal
Perishable Agricultural Commodities Act, which specifies standards for the sale, shipment, inspection, and rejection of agricultural
products, governs our relationships with our fresh food suppliers with respect to the grading and commercial acceptance of product
shipments. We are also subject to regulation by state authorities for the accuracy of our weighing and measuring devices. Our
suppliers are also subject to similar regulatory requirements and oversight.
The failure to comply with applicable regulatory requirements could result in, among other things, administrative, civil, or
criminal penalties or fines, mandatory or voluntary product recalls, warning or untitled letters, cease and desist orders against
operations that are not in compliance, closure of facilities or operations, the loss, revocation, or modification of any existing licenses,
permits, registrations, or approvals, or the failure to obtain additional licenses, permits, registrations, or approvals in new jurisdictions
where we intend to do business, any of which could have a material adverse effect on our business, financial condition, or results of
operations. These laws and regulations may change in the future and we may incur material costs in our efforts to comply with current
or future laws and regulations or in any required product recalls.
Our operations are subject to a variety of federal, state, and local laws and other requirements, including, but not limited to,
employment practice standards for workers set by the U.S. Department of Labor, and relating to the protection of the environment and
the safety and health of personnel and the public. These include requirements regarding the use, storage, and disposal of solid and
hazardous materials and petroleum products, including food processing wastes, the discharge of pollutants into the air and water, and
worker safety and health practices and procedures. In order to comply with environmental, health, and safety requirements, we may be
required to spend money to monitor, maintain, upgrade, or replace our equipment; plan for certain contingencies; acquire or maintain
environmental permits; file periodic reports with regulatory authorities; or investigate and clean up contamination. We operate and
maintain vehicle fleets, and some of our distribution centers have regulated underground and aboveground storage tanks for diesel fuel
and other petroleum products. Some jurisdictions in which we operate have laws that affect the composition and operation of our truck
fleet, such as limits on diesel emissions and engine idling. A number of our facilities have ammonia- or freon-based refrigeration
systems, which could cause injury or environmental damage if accidentally released, and many of our distribution centers have
propane or battery powered forklifts. Proposed or recently enacted legal requirements, such as those requiring the phase-out of certain
ozone-depleting substances and proposals for the regulation of greenhouse gas emissions, may require us to upgrade or replace
equipment, or may increase our transportation or other operating costs. To date, our cost of compliance with environmental, health,
and safety requirements has not been material. The discovery of contamination for which we are responsible, any accidental release of
regulated materials, the enactment of new laws and regulations, or changes in how existing requirements are enforced could require us
to incur additional costs or subject us to unexpected liabilities, which could have a material adverse effect on our business, financial
condition, or results of operations.
The Surface Transportation Board and the Federal Highway Administration regulate our trucking operations. In addition,
interstate motor carrier operations are subject to safety requirements prescribed in the U.S. Department of Transportation and other
relevant federal and state agencies. Such matters as weight and dimension of equipment are also subject to federal and state
regulations. We believe that we are in substantial compliance with applicable regulatory requirements relating to our motor carrier
operations. Failure to comply with the applicable motor carrier regulations could result in substantial fines or revocation of our
operating permits.
Our Segments
Performance Foodservice. Performance Foodservice is a leading U.S. foodservice distributor with substantial scale along the
Eastern Seaboard and in the Southeast. Performance Foodservice operates a network of 37 distribution centers, which supply a “broad
line” of products. Each of these distribution centers is run by a business team who understands the local markets and the needs of its
particular customers and who is empowered to make decisions on how best to serve them. This segment serves over 85,000 customer
locations with over 125,000 food and food-related products.
We offer our customers a broad product assortment that ranges from “center-of-the-plate” items (such as beef, pork, poultry, and
seafood), frozen foods, refrigerated products, and dry groceries to disposables, cleaning and kitchen supplies, and related products
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used by our customers. In addition to the products we offer, we provide value-added services by enabling our customers to benefit
from our industry knowledge, scale, and expertise in the areas of product selection and procurement, menu development, and
operational strategy.
We classify our customers under two major categories: independent and multi-unit “Chain.” Chain customers are multi-unit
restaurants with five or more locations, which include fine dining, family and casual dining, fast casual, and quick serve restaurants, as
well as hotels, healthcare facilities, and other multi-unit institutional customers. Independent customers utilize more of our value-
added services, particularly in the areas of product selection and procurement, market trends, menu development, and operational
strategy. Independent customer purchases typically generate greater gross profit per case compared to sales to Chain customers.
Our products consist of Performance Brands, as well as nationally-branded products and products bearing our customers’
brands. Our Performance Brands typically generate higher gross profit per case than other brands.
PFG Customized. PFG Customized is a leading national distributor to the family and casual dining channel. We serve over
4,500 customer locations across the United States from eight distribution centers that provide tailored supply chain solutions to our
customers. Our network of distribution centers was developed around our customers and is strategically positioned to provide an
efficient supply chain across both inbound and outbound logistics. PFG Customized’s product offerings are determined by each of our
customers’ specific menu requirements. We also provide customers with value-added services, such as expertise in fresh product
distribution, logistics management, procurement management, and information system interfaces, which enable our customers to run
their businesses efficiently.
We serve many of the most recognizable family and casual dining restaurant chains, including Cracker Barrel, Red Lobster, TGI
Friday’s, Outback Steakhouse, O’Charley’s, Chili’s, and Ruby Tuesday. PFG Customized’s five largest family and casual dining
customers have been with us for an average of more than 15 years. Cracker Barrel was PFG Customized’s first customer and grew
from a substantial regional account served by Performance Foodservice to an account whose needs are best served by customized
distribution. PFG Customized also serves fast casual chains such as Fuzzy’s Taco Shop and PDQ.
Vistar. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors,
retailers, theaters, and hospitality providers. The segment provides national distribution of approximately 20,000 different SKUs of
candy, snacks, beverages, and other items to over 60,000 customer locations from our network of 25 Vistar OpCos and seven
Merchant’s Marts locations. Merchant’s Marts are cash-and-carry operators where customers generally pick up orders rather than
having them delivered. Vistar’s scale in these channels enhances our ability to procure a broad variety of products for our customers.
Vistar OpCos deliver to vending and office coffee service distributors and directly to most theaters and some other locations. The
distribution model also includes a “pick and pack” capability, which utilizes third-party carriers and Vistar’s SKU variety to sell to
customers whose order sizes are too small to be served effectively by our delivery network. We believe these capabilities, in
conjunction with the breadth of our inventory, are differentiating and allow us to serve many distinct customer types. Vistar has
successfully built upon our national platform to broaden the channels we serve to include hospitality venues, concessionaires, airport
gift shops, college book stores, corrections facilities, and impulse locations in big box retailers such as Home Depot, Dollar Tree,
Staples, and others.
Refer to Note 19. Segment Information of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form
10-K for financial information about our segments.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our filings with the SEC
are available to the public on the SEC’s website at www.sec.gov. Those filings are also available to the public on, or accessible
through, our website for free via the “Investors” section at www.pfgc.com. The information we file with the SEC or contained on or
accessible through our corporate website or any other website that we may maintain is not incorporated by reference herein and is not
part of this Form 10-K.
Website and Social Media Disclosure
We use our website (www.pfgc.com) and our corporate Facebook account as channels of distribution of company information.
The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in
addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically
receive e-mail alerts and other information about PFG when you enroll your e-mail address by visiting the “Email Alerts” section of
our website at investors.pfgc.com. The contents of our website and social media channels are not, however, a part of this Form 10-K.
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Item 1A. Risk Factors
Risks Relating to Our Business and Industry
Competition in our industry is intense, and we may not be able to compete successfully.
The foodservice distribution industry is highly competitive. Certain of our competitors have greater financial and other
resources than we do. Furthermore, there are two larger broadline distributors, Sysco and US Foods, with national footprints. In
addition, there are numerous regional, local, and specialty distributors. These smaller distributors often align themselves with other
smaller distributors through purchasing cooperatives and marketing groups to enhance their geographic reach, private label offerings,
overall purchasing power, cost efficiencies and to assemble delivery networks for national or multi-regional distribution. We often do
not have exclusive service agreements with our customers and our customers may switch to other distributors if those distributors can
offer lower prices, differentiated products, or customer service that is perceived to be superior. We believe that most purchasing
decisions in the foodservice business are based on the quality and price of the product and a distributor’s ability to fill orders
completely and accurately and provide timely deliveries. We cannot assure you that our current or potential competitors will not
provide products or services that are comparable or superior to those provided by us or adapt more quickly than we do to evolving
trends or changing market requirements. Accordingly, we cannot assure you that we will be able to compete effectively against current
and future competitors, and increased competition may result in price reductions, reduced gross margins, and loss of market share, any
of which could materially adversely affect our business, financial condition, or results of operations.
We operate in a low margin industry, which could increase the volatility of our results of operations.
Similar to other resale-based industries, the foodservice distribution industry is characterized by relatively low profit margins.
These low profit margins tend to increase the volatility of our reported net income since any decline in our net sales or increase in our
costs that is small relative to our total net sales or costs may have a large impact on our net income.
We may not realize anticipated benefits from our cost reduction and productivity improvement efforts.
We have implemented a number of cost reduction and productivity improvement initiatives that we believe are necessary to
position our business for future success and growth. Our future success and earnings growth depend upon our ability to achieve a
lower cost structure and to operate efficiently in the highly competitive foodservice distribution industry, particularly in an
environment of increased competitive activity and reduced profitability. A variety of factors could cause us not to realize some of the
expected cost savings and productivity enhancements, including, among other things, difficulties in implementation, delays in the
anticipated timing of activities related to our cost savings initiatives, lack of sustainability in cost savings over time, and unexpected
costs associated with operating our business. If we are unable to realize the anticipated benefits from our cost cutting and productivity
improvement efforts we could become cost disadvantaged in the marketplace, which could adversely affect our competitiveness and
our profitability. Furthermore, even if we realize the anticipated benefits of our cost reduction and productivity improvement efforts,
we may experience an adverse impact on our employees, customers, suppliers, and purchasing partners that could adversely affect our
business, financial condition, or results of operations.
Cost inflation or deflation could affect the value of our inventory and our financial results.
We make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a
result, volatile food costs may have a direct impact upon our profitability. Our profit levels may be negatively affected during periods
of product cost deflation, even though our gross profit percentage may remain relatively constant or even increase. Prolonged periods
of product cost inflation also may have a negative impact on our profit margins and earnings to the extent such product cost increases
are not passed on to customers because of their resistance to higher prices. Furthermore, our business model requires us to maintain an
inventory of products, and changes in price levels between the time that we acquire inventory from our suppliers and the time we sell
the inventory to our customers could lead to unexpected shifts in demand for our products or could require us to sell inventory at
lesser profit or a loss. In addition, product cost inflation may negatively affect consumer discretionary spending decisions within our
customers’ establishments, which could impact our sales. Our inability to quickly respond to inflationary and deflationary cost
pressures could have a material adverse impact on our business, financial condition, or results of operations.
Many of our customers are not obligated to continue purchasing products from us.
Many of our customers buy from us pursuant to individual purchase orders, and we often do not enter into long-term agreements
with these customers. Because such customers are not obligated to continue purchasing products from us, we cannot assure you that
the volume and/or number of our customers’ purchase orders will remain constant or increase or that we will be able to maintain our
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existing customer base. Significant decreases in the volume and/or number of our customers’ purchase orders or our inability to retain
or grow our current customer base may have a material adverse effect on our business, financial condition, or results of operations.
Group purchasing organizations may become more active in our industry and increase their efforts to add our customers as
members of these organizations.
Some of our customers, particularly our larger customers, purchase their products from us through group purchasing
organizations (“GPOs”) in an effort to lower the prices paid by these customers on their foodservice orders, and we have experienced
some pricing pressure from these purchasers. These GPOs have also made efforts to include smaller, independent restaurants. If these
GPOs are able to add a significant number of our customers as members, we may be forced to lower the prices we charge these
customers in order to retain their business, which would negatively affect our business, financial condition, or results of operations.
Additionally, if we are unable or unwilling to lower the prices we charge for our products to a level that is satisfactory to the GPOs,
we may lose the business of those of our customers that are members of these organizations, which could have a material adverse
impact on our business, financial condition, or results of operations
Changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of
operations.
Changes in consumer eating habits (such as a decline in consuming food away from home, a decline in portion sizes, or a shift
in preferences toward restaurants that are not our customers) could reduce demand for our products. Consumer eating habits could be
affected by a number of factors, including changes in attitudes regarding diet and health or new information regarding the health
effects of consuming certain foods. If consumer eating habits change significantly, we may be required to modify or discontinue sales
of certain items in our product portfolio, and we may experience higher costs associated with the implementation of those changes.
Changing consumer eating habits may reduce the frequency with which consumers purchase meals outside of the home. Additionally,
changes in consumer eating habits may result in the enactment of laws and regulations that affect the ingredients and nutritional
content of our food products, or laws and regulations requiring us to disclose the nutritional content of our food products. Compliance
with these laws and regulations, as well as others regarding the ingredients and nutritional content of our food products, may be costly
and time-consuming. Our inability to effectively respond to changes in consumer health perceptions or resulting new laws or
regulations or to adapt our menu offerings to trends in eating habits, which could materially and adversely affect our business,
financial condition, or results of operations.
Extreme weather conditions and natural disasters may interrupt our business or our customers’ businesses, which could have
a material adverse effect on our business, financial condition, or results of operations.
Many of our facilities and our customers’ facilities are located in areas that may be subject to extreme and occasionally
prolonged weather conditions, including hurricanes, blizzards, and extreme heat or cold. Such extreme weather conditions may
interrupt our operations and reduce the number of consumers who visit our customers’ facilities in such areas. Furthermore, such
extreme weather conditions may interrupt or impede access to our customers’ facilities, all of which could have a material adverse
effect on our business, financial condition, or results of operations.
We rely on third-party suppliers, and our business may be affected by interruption of supplies or increases in product costs.
We obtain substantially all of our foodservice and related products from third-party suppliers. We typically do not have long-
term contracts with our suppliers. Although our purchasing volume can sometimes provide an advantage when dealing with suppliers,
suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices requested. Our
suppliers may also be affected by higher costs to source or produce and transport food products, as well as by other related expenses
that they pass through to their customers, which could result in higher costs for the products they supply to us. Because we do not
control the actual production of most of the products we sell, we are also subject to material supply chain interruptions, delays caused
by interruption in production, and increases in product costs, including those resulting from product recalls or a need to find alternate
materials or suppliers, based on conditions outside our control. These conditions include work slowdowns, work interruptions, strikes
or other job actions by employees of suppliers, weather conditions or more prolonged climate change, crop conditions, water
shortages, transportation interruptions, unavailability of fuel or increases in fuel costs, competitive demands, contamination with mold,
bacteria or other contaminants, and natural disasters or other catastrophic events, including, but not limited to, the outbreak of e. coli
or similar food borne illnesses or bioterrorism in the United States. Our inability to obtain adequate supplies of foodservice and related
products as a result of any of the foregoing factors or otherwise could mean that we could not fulfill our obligations to our customers
and, as a result, our customers may turn to other distributors. Our inability to anticipate and react to changing food costs through our
sourcing and purchasing practices in the future could have a material adverse effect on our business, financial condition, or results of
operations.
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We face risks relating to labor relations, labor costs, and the availability of qualified labor.
As of June 30, 2018, we had more than 15,000 employees of whom approximately 1,000 were members of local unions
associated with the International Brotherhood of Teamsters or other unions. Although our labor contract negotiations have in the past
generally taken place with the local union representatives, we may be subject to increased efforts to engage us in multi-unit bargaining
that could subject us to the risk of multi-location labor disputes or work stoppages that would place us at greater risk of being
materially adversely affected by labor disputes. In addition, labor organizing activities could result in additional employees becoming
unionized, which could result in higher labor costs. Although we have not experienced any significant labor disputes or work
stoppages in recent history, and we believe we have satisfactory relationships with our employees, including those who are union
members, increased unionization or a work stoppage because of our failure to renegotiate union contracts could have a material
adverse effect on us.
We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of net sales, higher than in many
other industries, we may be significantly harmed by labor cost increases. In addition, labor is a significant cost of many of our
customers in the U.S. food-away-from-home industry. Any increase in their labor costs, including any increases in costs as a result of
increases in minimum wage requirements, could reduce the profitability of our customers and reduce demand for our products.
We rely heavily on our employees, particularly drivers, and any shortage of qualified labor could significantly affect our
business. Our recruiting and retention efforts and efforts to increase productivity may not be successful and we could encounter a
shortage of qualified drivers in future periods. Any such shortage would decrease our ability to serve our customers effectively. Such a
shortage would also likely lead to higher wages for employees and a corresponding reduction in our profitability.
Further, we continue to assess our healthcare benefit costs. Despite our efforts to control costs while still providing competitive
healthcare benefits to our associates, significant increases in healthcare costs continue to occur, and we can provide no assurance that
our cost containment efforts in this area will be effective. Our distributors and suppliers also may be affected by higher minimum
wage and benefit standards, which could result in higher costs for goods and services supplied to us. If we are unable to raise our
prices or cut other costs to cover this expense, such increases in expenses could materially reduce our operating profit.
Fluctuations in fuel costs and other transportation costs could harm our business.
The high cost of fuel can negatively affect consumer confidence and discretionary spending and, as a result, reduce the
frequency and amount spent by consumers within our customers’ establishments for food away from home. The high cost of fuel and
other transportation related costs, such as tolls, fuel taxes, and license and registration fees, can also increase the price we pay for
products as well as the costs incurred by us to deliver products to our customers. Furthermore, both the price and supply of fuel are
unpredictable and fluctuate based on events outside our control, including geopolitical developments, supply and demand for oil and
gas, actions by the Organization of Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil producing
countries and regions, regional production patterns, and environmental concerns. These factors in turn could have a material adverse
effect on our sales, margins, operating expenses, or results of operations.
From time to time, we may enter into arrangements to manage our exposure to fuel costs. Such arrangements, however, may not
be effective and may result in us paying higher than market costs for a portion of our fuel. In addition, while we have been successful
in the past in implementing fuel surcharges to offset fuel cost increases, we may not be able to do so in the future.
In addition, compliance with current and future environmental laws and regulations relating to carbon emissions and the effects
of global warming can be expected to have a significant impact on our transportation costs and could have a material adverse effect on
our business, financial condition, or results of operations.
If one or more of our competitors implements a lower cost structure, they may be able to offer lower prices to customers and
we may be unable to adjust our cost structure in order to compete profitably.
Over the last several decades, the retail food industry has undergone significant change as companies such as Wal-Mart and
Costco have developed a lower cost structure to provide their customer base with an everyday low-cost product offering. As a large-
scale foodservice distributor, we have similar strategies to remain competitive in the marketplace by reducing our cost structure.
However, if one or more of our competitors in the foodservice distribution industry adopted an everyday low price strategy, we would
potentially be pressured to lower prices to our customers and would need to achieve additional cost savings to offset these reductions.
We may be unable to change our cost structure and pricing practices rapidly enough to successfully compete in such an environment.
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If we fail to increase our sales in the highest margin portions of our business, our profitability may suffer.
Foodservice distribution is a relatively low margin industry. The most profitable customers within the foodservice distribution
industry are generally independent customers. In addition, our most profitable products are our Performance Brands. We typically
provide a higher level of services to our independent customers and are able to earn a higher operating margin on sales to independent
customers. Independent customers are also more likely to purchase our Performance Brands. Our ability to continue to penetrate this
key customer type is critical to achieving increased operating profits. Changes in the buying practices of independent customers or
decreases in our sales to independent customers or a decrease in the sales of our Performance Brands could have a material adverse
effect on our business, financial condition, or results of operations.
Changes in pricing practices of our suppliers could negatively affect our profitability.
Foodservice distributors have traditionally generated a significant percentage of their gross margins from promotional
allowances paid by their suppliers. Promotional allowances are payments from suppliers based upon the efficiencies that the
distributor provides to its suppliers through purchasing scale and through marketing and merchandising expertise. Promotional
allowances are a standard practice among suppliers to foodservice distributors and represent a significant source of profitability for us
and our competitors. Any change in such practices that results in the reduction or elimination of promotional allowances could be
disruptive to us and the industry as a whole and could have a material adverse effect on our business, financial condition, or results of
operations.
Our growth strategy may not achieve the anticipated results.
Our future success will depend on our ability to grow our business, including through increasing our independent sales,
expanding our Performance Brands, making strategic acquisitions, and achieving improved operating efficiencies as we continue to
expand and diversify our customer base. Our growth and innovation strategies require significant commitments of management
resources and capital investments and may not grow our net sales at the rate we expect or at all. As a result, we may not be able to
recover the costs incurred in developing our new projects and initiatives or to realize their intended or projected benefits, which could
have a material adverse effect on our business, financial condition, or results of operations.
We may not be able to realize benefits of acquisitions or successfully integrate the businesses we acquire.
From time to time, we acquire businesses that broaden our customer base, and/or increase our capabilities and geographic reach.
If we are unable to integrate acquired businesses successfully or to realize anticipated economic, operational, and other benefits and
synergies in a timely manner, our profitability could be adversely affected. Integration of an acquired business may be more difficult
when we acquire a business in a market in which we have limited expertise or with a company culture different from ours. A
significant expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and
operational resources. Additionally, we may be unable to retain qualified management and other key personnel employed by acquired
companies and may fail to build a network of acquired companies in new markets. We could face significantly greater competition
from broadline foodservice distributors in these markets than we face in our existing markets.
We also regularly evaluate opportunities to acquire other companies. To the extent our future growth includes acquisitions, we
cannot assure you that we will be able to obtain any necessary financing for such acquisitions, consummate such potential acquisitions
effectively, effectively and efficiently integrate any acquired entities, or successfully expand into new markets.
Our business is subject to significant governmental regulation, and costs or claims related to these requirements could
adversely affect our business.
Our operations are subject to regulation by state and local health departments, the USDA, and the FDA, which generally impose
standards for product quality and sanitation and are responsible for the administration of recent bioterrorism legislation affecting the
foodservice industry. These government authorities regulate, among other things, the processing, packaging, storage, distribution,
advertising, and labeling of our products. The FSMA requires that the FDA impose comprehensive, prevention-based controls across
the food supply, further regulates food products imported into the United States, and provides the FDA with mandatory recall
authority. Our seafood operations are also specifically regulated by federal and state laws, including those administered by the
National Marine Fisheries Service, established for the preservation of certain species of marine life, including fish and shellfish. Our
processing and distribution facilities must be registered with the FDA biennially and are subject to periodic government agency
inspections. State and/or federal authorities generally inspect our facilities at least annually. The Federal Perishable Agricultural
Commodities Act, which specifies standards for the sale, shipment, inspection, and rejection of agricultural products, governs our
relationships with our fresh food suppliers with respect to the grading and commercial acceptance of product shipments. We are also
subject to regulation by state authorities for the accuracy of our weighing and measuring devices. Additionally, the Surface
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Transportation Board and the Federal Highway Administration regulate our trucking operations, and interstate motor carrier
operations are subject to safety requirements prescribed by the U.S. Department of Transportation and other relevant federal and state
agencies. Our suppliers are also subject to similar regulatory requirements and oversight. The failure to comply with applicable
regulatory requirements could result in, among other things, administrative, civil, or criminal penalties or fines; mandatory or
voluntary product recalls; warning or untitled letters; cease and desist orders against operations that are not in compliance; closure of
facilities or operations; the loss, revocation, or modification of any existing licenses, permits, registrations, or approvals; or the failure
to obtain additional licenses, permits, registrations, or approvals in new jurisdictions where we intend to do business, any of which
could have a material adverse effect on our business, financial condition, or results of operations. These laws and regulations may
change in the future and we may incur material costs in our efforts to comply with current or future laws and regulations or in any
required product recalls.
In addition, our operations are subject to various federal, state, and local laws and regulations in many areas of our business,
such as, minimum wage, overtime, wage payment, wage and hour and employment discrimination, immigration, human health and
safety and relating to the protection of the environment, including those governing the discharge of pollutants into the air, soil, and
water; the management and disposal of solid and hazardous materials and wastes; employee exposure to hazards in the workplace; and
the investigation and remediation of contamination resulting from releases of petroleum products and other regulated materials. In the
course of our operations, we operate, maintain, and fuel fleet vehicles; store fuel in on-site above and underground storage tanks;
operate refrigeration systems, and use and dispose of hazardous substances and food wastes. We could incur substantial costs,
including fines or penalties and third-party claims for property damage or personal injury, as a result of any violations of
environmental or workplace safety laws and regulations or releases of regulated materials into the environment. In addition, we could
incur investigation, remediation, or other costs related to environmental conditions at our currently or formerly owned or operated
properties. Additionally, concern over climate change, including the impact of global warming, has led to significant U.S. and
international legislative and regulatory efforts to limit greenhouse gas emissions. Increased regulation regarding greenhouse gas
emissions, especially diesel engine emissions, could impose substantial costs upon us. These costs include an increase in the cost of
the fuel and other energy we purchase and capital costs associated with updating or replacing our vehicles prematurely.
If the products we distribute are alleged to cause injury or illness or fail to comply with governmental regulations, we may
need to recall our products and may experience product liability claims.
The products we distribute may be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to
cause injury or illness or if they are alleged to have been mislabeled, misbranded, or adulterated or to otherwise be in violation of
governmental regulations. We may also voluntarily recall or withdraw products that we consider not to meet our quality standards,
whether for taste, appearance, or otherwise, in order to protect our brand and reputation. If there is any future product withdrawal that
could result in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation, and lost sales
because of the unavailability of the product for a period of time, our business, financial condition, or results of operations may be
materially adversely affected.
We also may be subject to product liability claims if the consumption or use of our products is alleged to cause injury or illness.
While we carry product liability insurance, our insurance may not be adequate to cover all liabilities we may incur in connection with
product liability claims. For example, punitive damages may not be covered by insurance. In addition, we may not be able to continue
to maintain our existing insurance, to obtain comparable insurance at a reasonable cost, if at all, or to secure additional coverage,
which may result in future product liability claims being uninsured. If there is a product liability judgment against us or a settlement
agreement related to a product liability claim, our business, financial condition, or results of operations may be materially adversely
affected.
We rely heavily on technology in our business and any technology disruption or delay in implementing new technology could
adversely affect our business.
The foodservice distribution industry is transaction intensive. Our ability to control costs and to maximize profits, as well as to
serve customers effectively, depends on the reliability of our information technology systems and related data entry processes. We rely
on software and other technology systems, some of which are managed by third-party service providers, to manage significant aspects
of our business, including making purchases, processing orders, managing our warehouses, loading trucks in the most efficient
manner, and optimizing the use of storage space. The failure of our information technology systems to perform as we anticipate could
disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our
business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or
interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security
breaches, cyber attacks, and viruses. While we have invested and continue to invest in technology security initiatives and disaster
recovery plans, these measures cannot fully insulate us from technology disruption that could result in adverse effects on our
operations and profits.
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Information technology systems evolve rapidly and in order to compete effectively we are required to integrate new
technologies in a timely and cost effective manner. If competitors implement new technologies before we do, allowing such
competitors to provide lower priced or enhanced services of superior quality compared to those we provide, this could have an adverse
effect on our operations and profits.
A cyber security incident or other technology disruptions could negatively affect our business and our relationships with
customers.
We rely upon information technology networks and systems to process, transmit, and store electronic information, and to
manage or support virtually all of our business processes and activities. We also use mobile devices, social networking, and other
online activities to connect with our employees, suppliers, business partners, and customers. These uses give rise to cybersecurity
risks, including security breach, espionage, system disruption, theft, and inadvertent release of information. Our business involves the
storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including
customers’ and suppliers’ personal information, private information about employees, and financial and strategic information about us
and our business partners. Additionally, while we have implemented measures to prevent security breaches and other cyber incidents,
our preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation,
release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or
the technology systems of third parties on which we rely could result in business disruption, negative publicity, brand damage,
violation of privacy laws, loss of customers, potential liability, and competitive disadvantage.
We may be subject to or affected by product liability claims relating to products we distribute.
We, like any other seller of food, may be exposed to product liability claims in the event that the use of products we sell causes
injury or illness. While we believe we have sufficient primary and excess umbrella liability insurance with respect to product liability
claims we cannot assure you that our limits are sufficient to cover all our liabilities or that we will be able to obtain replacement
insurance on comparable terms, and any replacement insurance or our current insurance may not continue to be available at a
reasonable cost, or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and
insurance coverage from parties supplying products to us, but this indemnification or insurance coverage is limited, as a practical
matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If we do not
have adequate insurance or contractual indemnification available, product liability relating to defective products could adversely affect
our profitability.
Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our
business could reduce our profits or limit our ability to operate our business.
In the normal course of our business, we are involved in various legal proceedings. The outcome of these proceedings cannot be
predicted. If any of these proceedings were to be determined adversely to us or a settlement involving a payment of a material sum of
money were to occur, it could materially and adversely affect our profits or ability to operate our business. Additionally, we could
become the subject of future claims by third parties, including our employees; suppliers, customers, and other counterparties; our
investors; or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to
operate our business. Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third
parties fail to fulfill their contractual obligations.
Adverse publicity about us, lack of confidence in our products or services, and other risks could negatively affect our
reputation and affect our business.
Maintaining a good reputation and public confidence in the safety of the products we distribute or services we provide is critical
to our business, particularly to selling our Performance Brands products. Anything that damages our reputation, or the public’s
confidence in our products, services, facilities, delivery fleet, operations, or employees, whether or not justified, including adverse
publicity about the quality, safety, or integrity of our products, could quickly affect our net sales and profits. Reports, whether true or
not, of food-borne illnesses or harmful bacteria (such as e. coli, bovine spongiform encephalopathy, hepatitis A, trichinosis, listeria, or
salmonella) and injuries caused by food tampering could also severely injure our reputation or negatively affect the public’s
confidence in our products. We may need to recall our products if they become adulterated. If patrons of our restaurant customers
become ill from food-borne illnesses, our customers could be forced to temporarily close restaurant locations and our sales would be
correspondingly decreased. In addition, instances of food-borne illnesses, food tampering, or other health concerns, such as flu
epidemics or other pandemics, even those unrelated to the use of our products, or public concern regarding the safety of our products,
can result in negative publicity about the foodservice distribution industry and cause our sales to decrease dramatically. In addition, a
widespread health epidemic or food-borne illness, whether or not related to the use of our products, as well as terrorist events may
cause consumers to avoid public gathering places, like restaurants, or otherwise change their eating behaviors. Health concerns and
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negative publicity may harm our results of operations and damage the reputation of, or result in a lack of acceptance of, our products
or the brands that we carry or the services that we provide.
Our participation in a “multiemployer” pension plan could give rise to significant expenses and liabilities in the future.
We participate in a “multiemployer” pension plan administered by a labor union representing some of our employees. We make
periodic contributions to the plan to allow the plan to meet its pension benefit obligations to its participants. In the ordinary course of
our renegotiation of collective bargaining agreements with the labor union that maintains the plan, we could decide to discontinue
participation in the plan, and in that event we could face withdrawal liability. We could be treated as withdrawing from participation
in the plan if the number of our employees participating in the plan is reduced to a certain degree over certain periods of time. Such
reductions in the number of our employees participating in the plan could occur as a result of changes in our business operations, such
as facility closures or consolidations. In the event that we withdraw from participation in the plan, applicable law could require us to
make withdrawal liability contributions to the plan, and we would have to reflect that on our balance sheet. Our withdrawal liability
for the multiemployer plan would depend on the extent of the plan’s funding of vested benefits. If the multiemployer pension plan in
which we participate has significant underfunded liabilities, such underfunding will increase the size of our potential withdrawal
liability.
Our earnings may be reduced by amortization charges associated with any future acquisitions.
After we complete an acquisition, we must amortize any identifiable intangible assets associated with the acquired company
over future periods. We also must amortize any identifiable intangible assets that we acquire directly. Our amortization of these
amounts reduce our future earnings in the affected periods.
We have experienced losses because of the inability to collect accounts receivable in the past and could experience increases in
such losses in the future if our customers are unable to pay their debts to us when due.
Certain of our customers have from time to time experienced bankruptcy, insolvency, and/or an inability to pay their debts to us
as they come due. If our customers suffer significant financial difficulty, they may be unable to pay their debts to us timely or at all,
which could have a material adverse effect on our results of operations. It is possible that customers may contest their contractual
obligations to us under bankruptcy laws or otherwise. Significant customer bankruptcies could further adversely affect our net sales
and increase our operating expenses by requiring larger provisions for bad debt expense. In addition, even when our contracts with
these customers are not contested, if customers are unable to meet their obligations on a timely basis, it could adversely affect our
ability to collect receivables. Further, we may have to negotiate significant discounts and/or extended financing terms with these
customers in such a situation. If we are unable to collect upon our accounts receivable as they come due in an efficient and timely
manner, our business, financial condition, or results of operations may be materially adversely affected.
Periods of difficult economic conditions and heightened uncertainty in the financial markets affect consumer confidence,
which can adversely affect our business.
The foodservice industry is sensitive to national and regional economic conditions. From 2008 through the beginning of 2010,
deteriorating economic conditions and heightened uncertainty in the financial markets negatively affected consumer confidence and
discretionary spending. This led to reductions in the frequency of dining out and the amount spent by consumers for food-away-from-
home purchases. These conditions, in turn, negatively affected our results during these periods. The development of similar economic
conditions in the future or permanent changes in consumer dining habits as a result of such conditions would likely negatively affect
our operating results.
We are highly dependent upon senior management. Our failure to attract and retain key members of senior management
could have a material adverse effect on us.
We are highly dependent on the performance and continued efforts of our senior management team. Our future success depends
on our ability to continue to attract and retain qualified executive officers and senior management. Any inability to manage our
operations effectively could have a material adverse effect on our business, financial condition, or results of operations. Although we
have an employment agreement with our Chief Executive Officer, we cannot prevent him from terminating employment with us. Most
of our other executives are not bound by employment agreements with us. Losing the services of any of these individuals could
adversely affect our business, financial condition, and results of operations, and it may be difficult to replace them quickly with
executives of equal experience and capabilities.
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Federal, state, and local tax rules may adversely impact our business, financial condition, or results of operations.
We are subject to federal, state, and local taxes in the United States. Although we believe that our tax estimates are reasonable,
if the Internal Revenue Service (“IRS”) or any other taxing authority disagrees with the positions we have taken on our tax returns, we
could face additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final
adjudication of any disputes could have a material impact upon our business, financial condition, or results of operations. In addition,
complying with new tax rules, laws, or regulations could affect our business, financial condition, or results of operations, and
increases to federal or state statutory tax rates and other changes in tax laws, rules, or regulations may increase our effective tax rate.
Any increase in our effective tax rate could have a material impact on our business, financial condition, or results of operations.
Insurance and claims expenses could significantly reduce our profitability.
Our future insurance and claims expenses might exceed historic levels, which could reduce our profitability. We maintain high-
deductible insurance programs covering portions of general and vehicle liability and workers’ compensation. The amount in excess of
the deductibles is insured by third-party insurance carriers, subject to certain limitations and exclusions. We also maintain self-funded
group medical insurance.
We reserve for anticipated losses and expenses and periodically evaluate and adjust our claims reserves to reflect our
experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.
Although we believe our aggregate insurance limits should be sufficient to cover reasonably expected claims costs, it is possible
that the amount of one or more claims could exceed our aggregate coverage limits. Insurance carriers have raised premiums for many
businesses in our industry, including ours. As a result, our insurance and claims expense could increase. Our results of operations and
financial condition could be materially and adversely affected if (1) total claims costs significantly exceed our coverage limits, (2) we
experience a claim in excess of our coverage limits, (3) our insurance carriers fail to pay on our insurance claims, (4) we experience a
claim for which coverage is not provided or (5) a large number of claims may cause our cost under our deductibles to differ from
historic averages.
If we fail to maintain an effective system of disclosure control over financial reporting, our ability to produce timely and
accurate financial statements or comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act and requirements pursuant to Section 404 of the Sarbanes-
Oxley Act of 2002. We expect that these requirements will continue to cause significant legal, accounting, and financial compliance
costs, make some activities more difficult, time-consuming, and costly, and place strain on our personnel, systems, and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. We are also required to make a formal assessment and provide an annual management report
on the effectiveness of our internal control over financial reporting, which must be attested to by our independent registered public
accounting firm. In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial
reporting, we have expended, and anticipate that we will continue to expend, resources, including accounting-related costs and
management oversight.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our
business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future.
Any failure to maintain or develop effective controls or any difficulties encountered in their implementation or improvement could
harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial
statements for prior periods. Ineffective disclosure controls and procedures and internal control over financial reporting could cause
investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading
price of our common stock. If we identify any significant deficiencies or material weaknesses in the future, or encounter problems or
delays in the implementation of internal controls over financial reporting, we may be unable to conclude that our internal control over
financial reporting is effective.
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Risks Relating to Our Indebtedness
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to
react to changes in the economy or in our industry, expose us to interest rate risk to the extent of our variable rate debt, and
prevent us from meeting our obligations under our indebtedness.
We are highly leveraged. As of June 30, 2018, we had $1,184.2 million of indebtedness. In addition, we had $854.2 million of
availability under our Second Amended and Restated Credit Agreement dated February 1, 2016, as amended by the First Amendment
to Second Amended and Restated Credit Agreement, dated August 3, 2017 (the “ABL Facility” and the “Credit Agreement”) after
giving effect to $121.3 million of outstanding letters of credit and $12.1 million of lenders’ reserves.
Our high degree of leverage could have important consequences for us, including:
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requiring us to utilize a substantial portion of our cash flows from operations to make payments on our indebtedness,
reducing the availability of our cash flows to fund working capital, capital expenditures, development activity, and other
general corporate purposes;
increasing our vulnerability to adverse economic, industry, or competitive developments;
exposing us to the risk of increased interest rates to the extent our borrowings are at variable rates of interest;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with
the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an
event of default under the agreements governing our indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt
service requirements, acquisitions, and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a
competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to
take advantage of opportunities that our leverage prevents us from exploiting.
A substantial portion of our indebtedness is floating rate debt. If interest rates increase, our debt service obligations on such
indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash
available for servicing our indebtedness, will correspondingly decrease. We may elect to enter into interest rate swaps to reduce our
exposure to floating interest rates as described below under “—We may utilize derivative financial instruments to reduce our
exposure to market risks from changes in interest rates on our variable rate indebtedness and we will be exposed to risks
related to counterparty creditworthiness or non-performance of these instruments.” However, we may not maintain interest rate
swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many
factors, some of which are not within our control.
Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to
generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory, and
other factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt and to meet our other
commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations, or raise additional
debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms, or at all,
and these actions may not be sufficient to meet our capital requirements. In addition, any refinancing of our indebtedness could be at a
higher interest rate, and the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives.
Our failure to make the required interest and principal payments on our indebtedness would result in an event of default under the
agreement governing such indebtedness, which may result in the acceleration of some or all of our outstanding indebtedness.
Despite our high indebtedness level, we and our subsidiaries will still be able to incur significant additional amounts of debt,
which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements
governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number
of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in
compliance with these restrictions could be substantial.
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The agreements governing our outstanding indebtedness contain restrictions that limit our flexibility in operating our
business.
The agreements governing our outstanding indebtedness contain various covenants that limit our ability to engage in specified
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types of transactions. These covenants limit the ability of our subsidiaries to, among other things:
incur, assume, or permit to exist additional indebtedness or guarantees;
incur liens;
make investments and loans;
pay dividends, make payments, or redeem or repurchase capital stock;
engage in mergers, liquidations, dissolutions, asset sales, and other dispositions (including sale leaseback transactions);
amend or otherwise alter terms of certain indebtedness;
enter into agreements limiting subsidiary distributions or containing negative pledge clauses;
engage in certain transactions with affiliates;
alter the business that we conduct;
change our fiscal year; or
engage in any activities other than permitted activities.
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As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt
or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness
we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these
covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross
default provisions, and, in the case of our ABL Facility, permit the lenders to cease making loans to us.
We may utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our
variable rate indebtedness and we will be exposed to risks related to counterparty credit worthiness or non-performance of
these instruments.
We may enter into pay-fixed interest rate swaps to limit our exposure to changes in variable interest rates. Such instruments may
result in economic losses should interest rates decline to a point lower than our fixed rate commitments. We will be exposed to credit-
related losses, which could affect the results of operations in the event of fluctuations in the fair value of the interest rate swaps due to
a change in the credit worthiness or non-performance by the counterparties to the interest rate swaps.
Risks Related to Ownership of Our Common Stock
Our stock price may change significantly, and you may not be able to resell shares of our common stock at or above the price
you paid or at all, and you could lose all or part of your investment as a result.
The trading price of our common stock is likely to continue to be volatile. The stock market routinely experiences periods of
large or extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular
companies. You may not be able to resell your shares at or above the price you paid due to a number of factors such as those listed in
“—Risks Related to Our Business and Industry” above and the following:
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results of operations that vary from the expectations of securities analysts and investors;
results of operations that vary from those of our competitors;
changes in expectations as to our future financial performance, including financial estimates and investment
recommendations by securities analysts and investors;
declines in the market prices of stocks generally, particularly those of foodservice distribution companies;
strategic actions by us or our competitors;
announcements by us or our competitors of significant contracts, new products, acquisitions, joint marketing relationships,
joint ventures, other strategic relationships, or capital commitments;
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changes in general economic or market conditions or trends in our industry or markets;
changes in business or regulatory conditions;
future sales of our common stock or other securities;
investor perceptions or the investment opportunity associated with our common stock relative to other investment
alternatives;
the public’s response to press releases or other public announcements by us or third parties, including our filings with the
SEC;
announcements relating to litigation;
guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;
the development and sustainability of an active trading market for our stock;
changes in accounting principles;
occurrences of extreme or inclement weather; and
other events or factors, including those resulting from natural disasters, war, acts of terrorism, or responses to these
events.
These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our
actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock
is low.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were
involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from
our business regardless of the outcome of such litigation.
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive
any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We intend to retain future earnings, if any, for future operations, expansion, and debt repayment and have no current plans to
pay any cash dividends for the foreseeable future. The declaration, amount, and payment of any future dividends on shares of common
stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic
conditions, our financial condition, and results of operations, our available cash and current and anticipated cash needs, capital
requirements, contractual, legal, tax, and regulatory restrictions, implications on the payment of dividends by us to our stockholders or
by our subsidiaries to us, and such other factors as our Board of Directors may deem relevant. In addition, our ability to pay dividends
is limited by covenants of our existing and outstanding indebtedness and may be limited by covenants of any future indebtedness we
or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our
common stock for a price greater than that which you paid for it.
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our
stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish
about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades
our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the
price of our stock could decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on us
regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
Future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause the market
price for our common stock to decline.
The sale of shares of our common stock in the public market, or the perception that such sales could occur, could harm the
prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it
more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of August 6, 2018, we had a total of 104,735,605 shares of common stock outstanding, which includes 1,460,287 shares of
restricted stock.
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Shares held by our directors, officers, employees, and other stockholders are eligible for resale, subject in certain cases to
volume, manner of sale, and other limitations under Rule 144 of the Securities Act (“Rule 144”).
As restrictions on resale end, the market price of our shares of common stock could drop significantly if the holders of these
shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise
additional funds through future offerings of our shares of common stock or other securities.
A total of 2,511,977 shares are issuable upon the exercise of options, 115,506 shares are issuable pursuant to restricted stock
units, and 2,028,343 shares are reserved for future issuance under the 2015 Omnibus Incentive Plan. These shares will become eligible
for sale in the public market once those shares are issued, subject to various vesting agreements, lock-up agreements, and Rule 144, as
applicable.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our
common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding
shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in
additional dilution to you.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-
takeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control
transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders.
These provisions provide for, among other things:
•
•
•
•
•
•
a classified Board of Directors with staggered three-year terms;
the ability of our Board of Directors to issue one or more series of preferred stock;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at
our annual meetings;
certain limitations on convening special stockholder meetings;
the removal of directors only for cause and only upon the affirmative vote of holders of at least 66 2/3% of the shares of
common stock entitled to vote generally in the election of directors; and
that certain provisions may be amended only by the affirmative vote of at least 66 2/3% of the shares of common stock
entitled to vote generally in the election of directors.
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third-party’s offer may be
considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium
for their shares.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole
and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit
our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or
stockholders.
Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the
State of Delaware is the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our Company,
(ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer or stockholder of our Company to the Company
or the Company’s stockholders, (iii) action asserting a claim against the Company or any director, officer or stockholder of the
Company arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of
incorporation or our amended and restated bylaws, or (iv) action asserting a claim against the Company or any director, officer or
stockholder of the Company governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any
interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and
restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim
in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such
lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended
and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
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proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect
our business and financial condition.
Item 1B. Unresolved Staff Comments
None
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Item 2. Properties
As of June 30, 2018, we operated 70 distribution centers across our three reportable segments and three distribution centers
through our Corporate and All Other segment. Of our 73 facilities, we owned 34 facilities and leased the remaining 39 facilities. Our
Performance Foodservice segment operated 37 distribution centers and had an average square footage of approximately 200,000
square feet per facility. Our PFG Customized segment operated eight distribution centers and had an average square footage of over
200,000 square feet per facility. Our Vistar segment operated 25 distribution centers and had an average square footage of over
100,000 square feet per facility. Our Corporate and All Other segment operated three distribution centers and had an average square
footage of approximately 50,000 square feet per facility.
State
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Illinois
Indiana
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nevada
New Jersey
North Carolina
Ohio
Oregon
Pennsylvania
South Carolina
Tennessee
Texas
Virginia
Total
Performance
Foodservice
Vistar
PFG
Customized
Corporate
and
All Other
Total
1
1
3
1
—
3
2
2
—
1
1
1
1
1
—
1
1
2
—
3
1
2
1
—
1
2
4
1
37
2
—
2
1
1
1
1
1
—
1
—
—
—
—
1
1
1
1
1
3
1
1
1
1
—
1
2
—
25
—
—
1
—
—
1
—
—
1
—
—
—
1
—
—
—
—
—
—
1
—
—
—
—
1
1
1
—
8
—
—
—
—
—
2
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
3
1
6
2
1
7
3
3
1
2
1
1
2
2
1
2
2
3
1
7
2
3
2
1
2
4
7
1
73
Our Performance Foodservice customers are generally located no more than 200 miles from one of our distribution facilities. Of
the 37 Performance Foodservice distribution centers, eight have meat cutting operations that provide custom-cut meat products to our
customers and one has a seafood processing operation that provides custom-cut and packed seafood to its customers and our other
distribution centers. Our PFG Customized customers are generally located no more than 450 miles from one of our distribution
facilities. In addition to the 25 distribution centers operated by Vistar, Vistar has seven cash-and-carry Merchant’s Mart facilities.
Customer orders are typically assembled in our distribution facilities and then sorted, placed on pallets, and loaded onto trucks and
trailers in delivery sequence. Deliveries are generally made in large tractor-trailers that we usually lease. We use integrated computer
systems to design and track efficient route sequences for the delivery of our products.
Our distribution center leases are on average 17.0 years in duration. Rent on our leases is typically set at a fixed annual rate, paid
monthly.
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Our properties also include a combined headquarters facility for our corporate offices and the Performance Foodservice segment
that is located in Richmond, Virginia; a headquarters facility for PFG Customized that is located in Tennessee; and a headquarters
facility for Vistar that is located in Colorado.
Item 3. Legal Proceedings
We are a party to various claims, lawsuits and other legal proceedings arising out of the ordinary course and conduct of our
business. We have insurance policies covering certain potential losses where such coverage is cost effective. For matters not
specifically discussed below, although the outcomes of the claims, lawsuits and other legal proceedings to which we are a party are
not determinable at this time, in our opinion, any additional liability that we might incur upon the resolution of the claims and lawsuits
beyond the amounts already accrued is not expected, individually or in the aggregate, to have a material adverse effect on our
consolidated financial condition, results of operations, or cash flows.
U.S. Equal Employment Opportunity Commission Lawsuit. In March 2009, the Baltimore Equal Employment Opportunity
Commission (“EEOC”) Field Office served us with company-wide (excluding, however, our Vistar and Roma Foodservice
operations) subpoenas relating to alleged violations of the Equal Pay Act and Title VII of the Civil Rights Act (“Title VII”), seeking
certain information from January 1, 2004 to a specified date in the first fiscal quarter of 2009. In August 2009, the EEOC moved to
enforce the subpoenas in federal court in Maryland, and we opposed the motion. In February 2010, the court ruled that the subpoena
related to the Equal Pay Act investigation was enforceable company-wide but on a narrower scope of data than the original subpoena
sought (the court ruled that the subpoena was applicable to the transportation, logistics, and warehouse functions of our broadline
distribution centers only and not to our PFG Customized distribution centers). We cooperated with the EEOC on the production of
information. In September 2011, the EEOC notified us that the EEOC was terminating the investigation into alleged violations of the
Equal Pay Act. In determinations issued in September 2012 by the EEOC with respect to the charges on which the EEOC had based
its company-wide investigation, the EEOC concluded that we engaged in a pattern of denying hiring and promotion to a class of
female applicants and employees into certain positions within the transportation, logistics, and warehouse functions within our
broadline division in violation of Title VII. In June 2013, the EEOC filed suit in federal court in Baltimore against us. The litigation
concerns two issues: (1) whether we unlawfully engaged in an ongoing pattern and practice of failing to hire female applicants into
operations positions; and (2) whether we unlawfully failed to promote one of the three individuals who filed charges with the EEOC
because of her gender. The EEOC seeks the following relief in the lawsuit: (1) to permanently enjoin us from denying employment to
female applicants because of their sex and denying promotions to female employees because of their sex; (2) a court order mandating
that we institute and carry out policies, procedures, practices and programs which provide equal employment opportunities for
females; (3) back pay with prejudgment interest and compensatory damages for a former female employee and an alleged class of
aggrieved female applicants; (4) punitive damages; and (5) costs. The court bifurcated the litigation into two phases. In the first phase,
the jury will decide whether we engaged in a gender-based pattern and practice of discrimination and the individual claims of one
former employee. If the EEOC prevails on all counts in the first phase, no monetary relief would be awarded, except possibly for the
single individual’s claims, which would be immaterial. The remaining individual claims would then be tried in the second phase. At
this stage in the proceedings, the Company cannot estimate either the number of individual trials that could occur in the second phase
of the litigation or the value of those claims. For these reasons, we are unable to estimate any potential loss or range of loss in the
event of an adverse finding in the first and second phases of the litigation.
In May 2018, the EEOC filed motions for sanctions against us alleging that we failed to preserve certain paper employment
applications and e-mails during 2004 – 2009. In the sanctions motions, the EEOC seeks a range of remedies, including but not limited
to, a default judgment against us, or alternatively, an order barring us from filing for summary judgment on the EEOC’s pattern and
practice claims. We are opposing the motions and will continue to vigorously defend ourselves.
Item 4. Mine Safety Disclosures
Not Applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market and Price Range of Common Stock
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “PFGC.” The following tables set
forth for the periods indicated the high and low reported sale prices per share for our common stock, as reported on the NYSE:
Fiscal Year Ended June 30, 2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended July 1, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
29.90 $
33.43 $
35.25 $
38.70 $
25.40
26.35
29.30
28.85
High
Low
28.07 $
25.44 $
24.40 $
29.13 $
23.07
19.95
21.70
23.20
$
$
$
$
$
$
$
$
Approximate Number of Common Shareholders
At the close of business on August 6, 2018, there were approximately 158 holders of record of our shares of common stock.
This stockholder figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers
and other financial institutions.
Dividends
We have no current plans to pay dividends on our common stock. In addition, our ability to pay dividends is limited by
covenants in the agreements governing our existing indebtedness and may be further limited by the agreements governing other
indebtedness we or our subsidiaries incur in the future. See Part II, Item 7. — "Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.” Any decision to declare and pay
dividends in the future will be made at the sole discretion of our Board of Directors and will depend on, among other things, our
results of operations, cash requirements, financial condition, contractual restrictions, and other factors that our Board of Directors may
deem relevant. Because we are a holding company, and have no direct operations, we will only be able to pay dividends from funds
we receive from our subsidiaries.
Recent Sales of Unregistered Securities
None.
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Purchases of Equity Securities by the Issuer
The following table provides information relating to our purchases of shares of the Company’s common stock during the fourth
quarter of fiscal 2018.
Period
April 1, 2018—April 28, 2018
April 29, 2018—May 26, 2018
May 27, 2018—June 30, 2018
Total
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
—
—
—
—
—
—
—
—
Total Number
of Shares
Purchased(1)
Average Price
Paid per
Share
145 $
—
1,571
1,716 $
30.85
—
35.62
35.34
(1) During the fourth quarter of fiscal 2018, the Company purchased 1,716 shares of the Company’s common stock in transactions
unrelated to a publicly announced plan or program. These transactions consisted of acquisitions of shares of the Company’s
common stock via share withholding for payroll tax obligations due from employees and former employees in connection with
the delivery of shares of the Company’s common stock under our incentive plans.
Stock Performance Graph
The performance graph below compares the cumulative total shareholder return of the Company’s common stock since October
1, 2015, the date the Company’s common stock began trading on the NYSE, with the cumulative total return for the same period of
the S&P 500 index and the S&P 400 Midcap Index. The graph assumes the investment of $100 in our common stock and each of the
indices as of the market close on October 1, 2015 and the reinvestment of dividends. Performance data for the Company, the S&P 500
index and the S&P 400 Midcap Index is provided as of the last trading day of each of our last three fiscal years. The stock price
performance graph is not necessarily indicative of future stock price performance.
Comparison of Shareholder Stock Return
Comparison of Shareholder Stock Return
October 1, 2015 - June 29, 2018
October 1, 2015 - June 29, 2018
Performance Food Group
S&P 500
S&P MidCap 400
Performance Food Group
S&P 500
S&P Mid Cap 400
$200
$200
$180
$180
$160
$160
$140
$140
$120
$120
$100
$100
$140
$140
$110
$110
$109
$109
$143
$143
$128
$128
$126
$126
$191
$191
$143
$143
$141
$141
$ 80
$80
10/1/15
10/1/15
7/1/16
7/1/16
6/30/17
6/30/17
6/29/18
6/29/18
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Item 6. Selected Financial Data
The selected statements of operations data for fiscal years 2018, 2017, and 2016, and the related selected balance sheet data as
of fiscal years ending in 2018 and 2017, have been derived from our audited consolidated financial statements included in Item 8. The
selected historical consolidated statement of operations data for fiscal years 2015, and 2014 and the selected balance sheet data as of
fiscal years ended 2016, 2015, and 2014, have been derived from our consolidated financial statements not included in this Form 10-
K. Our historical results are not necessarily indicative of the results expected for any future period.
You should read the selected consolidated financial data below together with our audited consolidated financial statements,
including the related notes thereto, included in Item 8, as well as “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in Part II, Item 7.
For the fiscal year ended (1)
June 30, 2018 July 1, 2017 July 2, 2016 June 27, 2015 June 28, 2014
(In millions, except per share data)
Statement of Operations Data:
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Interest expense(2)
Other, net
Other expense, net
Income before taxes
Income tax expense(3)
Net income
Per Share Data:
Basic net income per share
Diluted net income per share
Weighted-average number of shares used in per share
amounts
Basic
Diluted
Balance Sheet Data:
Cash
Total assets
Total debt
Total shareholders’ equity
$ 17,619.9 $ 16,761.8 $ 16,104.8 $ 15,270.0 $ 13,685.7
15,327.1 14,637.0 14,094.8 13,421.7 11,988.5
1,697.2
1,581.6
115.6
86.1
(0.7 )
85.4
30.2
14.7
15.5
2,010.0
1,807.8
202.2
83.9
3.8
87.7
114.5
46.2
68.3 $
2,292.8
2,039.3
253.5
60.4
(0.5 )
59.9
193.6
(5.1 )
198.7 $
1,848.3
1,688.2
160.1
85.7
(22.2 )
63.5
96.6
40.1
56.5 $
2,124.8
1,913.8
211.0
54.9
(1.6 )
53.3
157.7
61.4
96.3 $
$
$
$
1.95 $
1.90 $
0.96 $
0.93 $
0.71 $
0.70 $
0.65 $
0.64 $
0.18
0.18
102.0
104.6
100.2
103.0
96.4
98.1
86.9
87.6
86.9
87.5
As of
June 30, 2018 July 1, 2017 July 2, 2016 June 27, 2015 June 28, 2014
(dollars in millions)
$
7.5 $
4,000.9
1,184.2
1,135.3
8.1 $
3,804.1
1,297.6
925.5
10.9 $
3,455.4
1,145.5
802.8
9.2 $
3,353.5
1,422.6
493.0
5.3
3,199.6
1,435.1
434.1
(1) Fiscal years 2018, 2017, 2015, and 2014 contained 52 weeks consisting of 364 days and fiscal year 2016 contained 53 weeks
consisting of 371 days.
(2)
(3)
Interest expense includes (gains) or losses of $(0.6) million, $4.0 million, $7.3 million, $8.0 million, and $6.6 million related to
reclassification adjustments for changes in fair value of interest rate swaps for fiscal 2018, fiscal 2017, fiscal 2016, fiscal 2015,
and fiscal 2014, respectively. Fiscal 2016 also includes $9.4 million loss on extinguishment and $5.5 million accelerated
amortization of original issue discount and financing costs.
Income tax (benefit) expense also includes $(0.2) million, $1.5 million, $2.9 million, $3.1 million, and $2.6 million tax
(expense) benefit from reclassification adjustments for fiscal 2018, fiscal 2017, fiscal 2016, fiscal 2015, and fiscal 2014,
respectively, related to the reclassification adjustments for changes in fair value of interest rate swaps referred to in note (2).
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Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with Part II,
Item 6. — “Selected Financial Data” and the audited consolidated financial statements and the notes thereto included in Item 8. 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 Item 1A. Risk
Factors of this 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-K.
Our Company
We market and distribute over 150,000 food and food-related products to customers across the United States from
approximately 73 distribution facilities to over 150,000 customer locations in the “food-away-from-home” industry. We offer our
customers a broad assortment of products including our proprietary-branded products, nationally-branded products, and products
bearing our customers’ brands. Our product assortment ranges from “center-of-the-plate” items (such as beef, pork, poultry, and
seafood), frozen foods, and groceries to candy, snacks, and beverages. We also sell disposables, cleaning and kitchen supplies, and
related products used by our customers. 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.
We have three reportable segments: Performance Foodservice, PFG Customized, and Vistar. Our Performance Foodservice
segment distributes a broad line of national brands, customer brands, and our proprietary-branded food and food-related products, or
“Performance Brands.” Performance Foodservice sells to independent, or “Street,” and multi-unit, or “Chain,” restaurants and other
institutions such as schools, healthcare facilities, and business and industry locations. Our PFG Customized segment has provided
longstanding service to some of the most recognizable family and casual dining restaurant chains and recently expanded service into
fast casual and quick service restaurant chains. Our Vistar segment specializes in distributing candy, snacks, beverages, and other
items nationally to the vending, office coffee service, theater, retail, hospitality, 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.
The Company’s fiscal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year for fiscal 2018 and fiscal
2017 and a 53-week year for fiscal 2016. References to “fiscal 2018” are to the 52-week period ended June 30, 2018, references to
“fiscal 2017” are to the 52-week period ended July 1, 2017, and references to “fiscal 2016” are to the 53-week period ended July 2,
2016.
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. We believe that we gained industry share during fiscal 2018 given that we have
grown our sales more rapidly than the industry growth rate forecasted by Technomic, a research and consulting firm serving the food
and food related industry. Our Net income increased 106.3% and Adjusted EBITDA increased 9.2% from fiscal 2017 to fiscal 2018,
primarily driven by case growth and improved gross margin. Case volume grew 3.0% in fiscal 2018 compared to fiscal 2017. Gross
profit dollars rose 7.9% in fiscal 2018 versus the prior year, 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 fiscal 2018 compared to fiscal 2017 rose 6.6% as a result of increases in variable operational and selling expenses
associated with the increase in case volume, as well as an increase in fuel expense and investments in selling, warehouse, and delivery
personnel.
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 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 foodservice establishments. The
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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 that enhance our customers’ satisfaction and profitability. We believe that the relative growth of larger
foodservice distributors will continue to outpace that of smaller, independent players in our industry.
Our ability to successfully execute our segment strategies and implement our initiatives. Our performance will continue to
depend on our ability to successfully execute our segment strategies and to implement our current and future initiatives.
The key strategies include focusing on independent sales and Performance Brands, pursuing new customers for all three 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 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 U.S. generally accepted accounting principles
(“U.S. GAAP”) and is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S.
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 U.S. 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 indenture (other than certain pro forma adjustments
permitted under our credit agreement and indenture relating to the Adjusted EBITDA contribution of acquired entities or businesses
prior to the acquisition date). Under our credit agreement and indenture, 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 indenture). Our definition of Adjusted EBITDA may not be the same as similarly
titled measures used by other companies.
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Adjusted EBITDA is not defined under U.S. 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 (as defined below under “—Liquidity and Capital Resources”),
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 U.S. 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 items as permitted or required by our
credit agreement and indenture. Adjusted EBITDA among other things:
•
•
•
does not include non-cash stock-based employee compensation expense and certain other non-cash charges;
does not include cash and non-cash restructuring, severance, and relocation costs incurred to realize future cost savings
and enhance our operations; and
does not reflect management fees paid to Blackstone and Wellspring.
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
(dollars in millions, except per share data):
Fiscal Year Ended
Fiscal 2018
Fiscal 2017
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expense, net
Interest expense
Other, net
Other expense, net
Income before income taxes
Income tax (benefit) expense
Net income
EBITDA
Adjusted EBITDA
Weighted-average common shares outstanding:
$
$
$
June 30,
2018
July 1, 2017 July 2, 2016 Change
%
$ 17,619.9 $ 16,761.8 $ 16,104.8 $ 858.1
690.1
15,327.1 14,637.0 14,094.8
168.0
2,292.8 2,124.8 2,010.0
125.5
2,039.3 1,913.8 1,807.8
42.5
202.2
253.5
211.0
%
Change
5.1 $ 657.0
542.2
4.7
114.8
7.9
106.0
6.6
8.8
20.1
60.4
(0.5 )
59.9
193.6
(5.1 )
198.7 $
384.1 $
426.7 $
54.9
(1.6 )
53.3
157.7
61.4
96.3 $
338.7 $
390.7 $
5.5
83.9
1.1
3.8
6.6
87.7
35.9
114.5
46.2
(66.5 )
68.3 $ 102.4
45.4
36.0
317.0 $
366.6 $
10.0
68.8
12.4
22.8
N/M
106.3 $
13.4 $
9.2 $
(29.0 )
(5.4 )
(34.4 )
43.2
15.2
28.0
21.7
24.1
4.1
3.8
5.7
5.9
4.4
(34.6 )
N/M
(39.2 )
37.7
32.9
41.0
6.8
6.6
Basic
Diluted
Earnings per common share:
Basic
Diluted
102.0
104.6
100.2
103.0
96.4
98.1
1.8
1.6
1.8
1.6
3.8
4.9
3.9
5.0
$
$
1.95 $
1.90 $
0.96 $
0.93 $
0.71 $
0.70 $
0.99
0.97
103.1 $
104.3 $
0.25
0.23
35.2
32.9
29
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We believe that the most directly comparable U.S. 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:
For the fiscal year ended
June 30, 2018 July 1, 2017 July 2, 2016
(In millions)
Net income
$
Interest expense(1)
Income tax (benefit) expense
Depreciation
Amortization of intangible assets
EBITDA
Non-cash items(2)
Acquisition, integration and reorganization(3)
Non-recurring items(4)
Productivity initiatives(5)
Other adjustment items(6)
Adjusted EBITDA
$
198.7 $
60.4
(5.1 )
100.3
29.8
384.1
23.2
5.0
—
10.6
3.8
426.7 $
96.3 $
54.9
61.4
91.5
34.6
338.7
18.8
17.3
—
10.6
5.3
390.7 $
68.3
83.9
46.2
80.5
38.1
317.0
18.2
9.4
1.7
11.6
8.7
366.6
(1)
(2)
Includes a $9.4 million loss on extinguishment and $5.5 million of accelerated amortization of original issuance discount and
deferred financing costs during fiscal 2016.
Includes adjustments for non-cash charges arising from stock-based compensation, interest rate swap hedge ineffectiveness, and
gain/loss on disposal of assets. Stock-based compensation cost was $21.6 million, $17.3 million and $17.2 million for fiscal
2018, fiscal 2017 and fiscal 2016, respectively. In addition, this includes an increase (decrease) in the last-in, first-out (“LIFO”)
reserve of $0.3 million, $2.6 million and $(1.5) million for fiscal 2018, fiscal 2017, and fiscal 2016, respectively.
(3)
Includes professional fees and other costs related to completed and abandoned acquisitions, costs of integrating certain of our
facilities, facility closing costs, advisory fees and offering fees.
(4) Consists primarily of an expense related to our withdrawal from a purchasing cooperative of which we were a member, pre-
acquisition worker’s compensation claims related to an insurance company that went into liquidation, and amounts received
from business interruption insurance because of a weather-related event.
(5) Consists primarily of professional fees and related expenses associated with productivity initiatives.
(6) Consists primarily of amounts related to fuel collar derivatives, certain financing transactions, lease amendments, and franchise
tax expense and other adjustments permitted by our credit agreement.
Consolidated Results of Operations
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
Net Sales
Net sales growth is primarily 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 $858.1 million, or 5.1%, in fiscal 2018
compared to fiscal 2017. The increase in net sales was primarily attributable to sales growth in Vistar, particularly in the theater and
retail channels, case growth in Performance Foodservice, particularly in the independent channel, and recent acquisitions. Case
volume increased 3.0% in fiscal 2018 compared to fiscal 2017.
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Gross Profit
Gross profit increased $168.0 million, or 7.9%, for fiscal 2018 compared to fiscal 2017. Gross profit as a percentage of net sales
was 13.0% for fiscal 2018 compared to 12.7% for fiscal 2017. The increase in gross profit was the result of growth in cases sold and a
higher gross profit per case, which in turn was the result of selling an improved mix of channels and products. Within Performance
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 fiscal 2018,
Performance Foodservice grew our Performance Brand sales, which have higher gross profit per case compared to the other brands we
sell. See “—Segment Results—Performance Foodservice” below for additional discussion.
Operating Expenses
Operating expenses increased $125.5 million, or 6.6%, for fiscal 2018 compared to fiscal 2017. The increase in operating
expenses was primarily driven by the increase in acquired case volume and the resulting impact on variable operational and selling
expenses, as well as investments in selling, warehouse, and delivery personnel. Operating expenses also increased in fiscal 2018 as a
result of increases in fuel expense of $15.7 million and stock-based compensation expense of $4.3 million, partially offset by a $2.6
million decrease in advisory fees and a $1.8 million decrease in professional fees.
Depreciation and amortization of intangible assets increased from $126.1 million in fiscal 2017 to $130.1 million in fiscal 2018,
an increase of 3.2%. Depreciation of fixed assets increased as a result of capital outlays to support our growth, as well as recent
acquisitions. This increase was partially offset by decreases in amortization since certain intangibles are now fully amortized
compared to the prior year.
Net Income
Net income increased by $102.4 million, or 106.3%, to $198.7 million for fiscal 2018 compared to fiscal 2017. The increase in
net income was attributable to the $42.5 million increase in operating profit and the $66.5 million decrease in income tax expense,
partially offset by a $5.5 million increase in interest expense, and a $1.1 million decrease in other income.
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 the average interest rate and higher
average borrowings during fiscal 2018 compared to fiscal 2017. The $1.1 million decrease in other income related primarily to
derivative activity.
The decrease in income tax expense was primarily a result of the impact of the Tax Cuts and Jobs Act (the “Act”). Our effective
tax rate in fiscal 2018 was -2.6% compared to 39.0% in fiscal 2017. The Act was signed into law on December 22, 2017. Among its
numerous changes to the U.S. Internal Revenue Code, the Act reduces the U.S. federal corporate rate from 35% to 21%, which
resulted in a blended U.S. federal statutory rate of approximately 28% for fiscal 2018 for the Company. As a result of the Act, the
Company revalued its net deferred tax liability, resulting in a decrease to the net deferred tax liability of $38.5 million with a
corresponding net benefit to income tax expense for fiscal 2018. As a result of a blended statutory rate for fiscal 2018, the Company
recognized a tax benefit of $11.9 million for the rate differential related to temporary differences. Additionally, in fiscal 2018,
performance vesting criteria for certain stock-based compensation awards was met resulting in an excess tax benefit of $15.4 million.
Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
Net Sales
Net sales growth is primarily 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 $657.0 million, or 4.1%, in fiscal 2017
compared to fiscal 2016. The increase in net sales was primarily attributable to case growth in Performance Foodservice, particularly
in the independent channel, and sales growth in Vistar, particularly in the retail, theater, vending, and hospitality channels partially
offset by the 53rd week in fiscal year 2016. Net sales for the extra week in fiscal 2016 were approximately $312.4 million. Net sales
growth was driven by case volume growth of 4.1% in fiscal 2017 compared to fiscal 2016. Excluding the impact of the 53rd week in
fiscal 2016, case volume increased 6.2% compared to the prior year.
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Gross Profit
Gross profit increased $114.8 million, or 5.7%, for fiscal 2017 compared to fiscal 2016. The increase in gross profit was the
result of growth in cases sold and a higher gross profit per case, which in turn was the result of selling an improved mix of channels
and products, partially offset by the 53rd week in fiscal 2016. Within Performance 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 fiscal 2017, Performance Foodservice grew our Performance Brand sales,
which have higher gross profit per case compared to the other brands we sell. See “—Segment Results—Performance Foodservice”
below for additional discussion. The Company estimates that the gross profit for the extra week in fiscal 2016 was approximately
$40.1 million.
Operating Expenses
Operating expenses increased $106.0 million, or 5.9%, for fiscal 2017 compared to fiscal 2016. The increase in operating
expenses was primarily driven by the increase in case volume and the resulting impact on variable operational and selling expenses, as
well as investments associated with expansion of geographies served in the dollar store channel, transition of business within PFG
Customized and the opening of our automated retail facility within the Vistar segment. Additionally, operating expenses increased for
fiscal year 2017 as a result of an $8.4 million increase in insurance expense primarily related to workers compensation and
professional and legal fees including settlements of $3.0 million. The increase was partially offset by the 53rd week in fiscal 2016.
Operating expenses for the extra week is fiscal 2016 were approximately $35.3 million.
Depreciation and amortization of intangible assets increased from $118.6 million in fiscal 2016 to $126.1 million in fiscal 2017,
an increase of 6.3%. Depreciation of fixed assets increased as a result of larger capital outlays to support our growth, as well as recent
acquisitions. This increase was partially offset by decreases in amortization since certain intangibles are now fully amortized
compared to the prior year.
Net Income
Net income increased by $28.0 million, or 41.0%, to $96.3 million for fiscal 2017 compared to fiscal 2016. The increase in net
income was attributable to an $8.8 million increase in operating profit, a $29.0 million decrease in interest expense, and a $5.4 million
decrease in other expense, partially offset by a $15.2 million increase in income tax expense. The Company estimates that net income
for the extra week in fiscal 2016 was approximately $2.1 million.
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 decrease in interest expense was primarily the result of lower average interest rates during fiscal 2017
compared to fiscal 2016 and a $9.4 million loss on extinguishment of debt and $5.5 million of accelerated amortization of original
issuance discount and deferred financing costs in fiscal 2016.
The $5.4 million decrease in other expense related primarily to a $4.7 million decrease in expense related to settlements on our
derivatives and a $2.0 million increase in income from hedge ineffectiveness in fiscal 2017 compared to fiscal 2016. These increases
were partially offset by a $1.2 million decrease in non-cash income primarily related to the change in fair value of our derivatives for
fiscal 2017 compared to fiscal 2016.
The increase in income tax expense was primarily a result of the increase in income before taxes, partially offset by a decrease
in the effective tax rate. Our effective tax rate in fiscal 2017 was 39.0% compared to 40.3% in fiscal 2016. The decrease in the
effective tax rate was a result of an increase in other permanent deductions and a reduction in non-deductible expenses and state
income tax as a percentage of income before taxes. Since non-deductible expenses tend to be relatively constant, there is a favorable
rate impact as income before taxes increases.
Segment Results
We have three reportable segments as described above—Performance Foodservice, PFG Customized, and Vistar. Management
evaluates the performance of these segments based on their respective sales growth and EBITDA. For PFG Customized, EBITDA
includes certain allocated corporate expenses that are included in operating expenses. The allocated corporate expenses are determined
based on a percentage of total sales. This percentage is reviewed on a periodic basis to ensure that the allocation reflects a reasonable
rate of corporate expenses based on their use of corporate services.
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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, as well as the operations of certain recent acquisitions.
In the first quarter of fiscal 2018, the Company reorganized its information technology department, and expenses associated
with business application teams are now included in the segment results. The EBITDA for Performance Foodservice, Vistar and
Corporate & All Other for the fiscal years ended July 1, 2017 and July 2, 2016 have been adjusted to reflect this change.
The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):
Net Sales
Performance Foodservice
PFG Customized
Vistar
Corporate & All Other
Intersegment Eliminations
Total net sales
EBITDA
Performance Foodservice
PFG Customized
Vistar
Corporate & All Other
Total EBITDA
Fiscal Year Ended
Fiscal 2018
Fiscal 2017
June 30,
2018
July 1, 2017 July 2, 2016 Change
%
$ 10,431.2 $ 9,822.4 $ 9,616.3 $ 608.8
(162.3 )
3,658.5 3,820.8 3,782.1
337.4
3,341.0 3,003.6 2,701.5
101.6
220.5
(27.4 )
(215.6 )
$ 17,619.9 $ 16,761.8 $ 16,104.8 $ 858.1
449.4
(260.2 )
347.8
(232.8 )
%
Change
6.2 $ 206.1
38.7
(4.2 )
302.1
11.2
127.3
29.2
(17.2 )
(11.8 )
5.1 $ 657.0
2.1
1.0
11.2
57.7
(8.0 )
4.1
June 30,
2018
Fiscal Year Ended
July 1,
2017
July 2,
2016
Fiscal 2018
Fiscal 2017
Change
%
Change
%
$ 330.6 $ 320.0 $ 303.2 $
34.1
110.1
(130.4 )
$ 384.1 $ 338.7 $ 317.0 $
25.3
117.7
(124.3 )
29.5
133.1
(109.1 )
10.6
4.2
15.4
15.2
45.4
3.3 $
16.6
13.1
12.2
13.4 $
16.8
(8.8 )
7.6
6.1
21.7
5.5
(25.8 )
6.9
4.7
6.8
Segment Results—Performance Foodservice
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
Net Sales
Net sales for Performance Foodservice increased $608.8 million, or 6.2%, from fiscal 2017 to fiscal 2018. The increase in net
sales was attributable to growth in cases sold, as well as an increase in selling price per case as a result of inflation. Case growth in
fiscal 2018 was driven by securing new independent customers and further penetrating existing customers. Securing new and
expanded business with independent customers resulted in independent sales growth of approximately 8.4% in fiscal 2018 compared
to fiscal 2017. For fiscal 2018, independent sales as a percentage of total segment sales were 45.2%.
EBITDA
EBITDA for Performance Foodservice increased $10.6 million, or 3.3%, from fiscal 2017 to fiscal 2018. 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 by 6.0% in fiscal 2018, compared to the prior fiscal year, as a result of an increase in cases sold, as well as an
increase in the gross profit per case. The increase in gross profit per case was driven by a favorable shift in the mix of cases sold
toward independent customers and Performance Brands, as well as by an increase in procurement gains. Independent business has
higher gross margins than Chain customers within this segment.
Operating expenses excluding depreciation and amortization for Performance Foodservice increased by $77.1 million, or 6.8%,
from fiscal 2017 to fiscal 2018. 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 investments in selling, warehouse, and delivery personnel. Operating expenses
also increased as a result of a $10.3 million increase in fuel expense, which mostly occurred in the second half of fiscal 2018.
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Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $57.4 million in fiscal
2017 to $58.7 million in fiscal 2018. This increase was a result of recent acquisitions, computer software, capital leases and warehouse
expansion, partially offset by a decrease in amortization of intangible assets since certain intangibles are now fully amortized.
Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
Net Sales
Net sales for Performance Foodservice increased $206.1 million, or 2.1%, from fiscal 2016 to fiscal 2017. This increase in net
sales was attributable to growth in cases sold, partially offset by the 53rd week in fiscal 2016. Net sales for the extra week in fiscal
2016 were approximately $188.0 million. Case growth in fiscal 2017 was driven by securing new independent customers and further
penetrating existing customers. Securing new and expanded business with independent customers resulted in independent sales growth
of approximately 4.6% in fiscal 2017 compared to fiscal 2016. For fiscal 2017, independent sales as a percentage of total segment
sales were 44.4%.
EBITDA
EBITDA for Performance Foodservice increased $16.8 million, or 5.5%, from fiscal 2016 to fiscal 2017. 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 by 4.4% in fiscal 2017, compared to the prior fiscal year, as a result of an increase in cases sold, as well as an
increase in the gross profit per case, partially offset by gross profit of approximately $28.3 million in the extra week in fiscal 2016.
The increase in gross profit per case was driven by a favorable shift in the mix of cases sold toward independent customers and
Performance Brands, as well as by an increase in procurement gains. Independent business has higher gross margins than Chain
customers within this segment.
Operating expenses, excluding depreciation and amortization, for Performance Foodservice increased by $45.3 million, or 4.1%,
from fiscal 2016 to fiscal 2017. 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 cost of living and other increases in compensation and benefits and increase in
costs associated with insurance expense primarily related to workers’ compensation and vehicle liability of $5.9 million. These
increases were partially offset by the extra week in fiscal 2016. The Company estimates that operating expenses excluding
depreciation and amortization were approximately $21.2 million in the 53rd week of fiscal 2016.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment decreased from $63.2 million in
fiscal 2016 to $57.4 million in fiscal 2017, a decrease of 9.2%. These reductions were a result of a decrease in amortization of
intangible assets since certain intangibles are now fully amortized.
Segment Results—PFG Customized
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
Net Sales
Net sales for PFG Customized decreased $162.3 million, or 4.2%, from fiscal 2017 to fiscal 2018. The decrease in net sales was
primarily a result of the Georgia facility that was closed in the fourth quarter of fiscal 2017. Excluding the impact of the closed
Georgia facility, net sales would have increased $65.0 million in fiscal 2018 compared to the prior year as a result of an increase in
selling price per case driven by a favorable shift in customer mix.
EBITDA
EBITDA for PFG Customized increased $4.2 million, or 16.6%, from fiscal 2017 to fiscal 2018. Excluding the impact of the
closed Georgia facility, an increase in gross profit was offset by an increase in operating expenses, excluding depreciation and
amortization. Gross profit for PFG Customized increased primarily as a result of a favorable shift in customer mix.
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Operating expenses, excluding depreciation and amortization, decreased by $9.4 million, or 4.5%, in fiscal 2018, compared to
the prior year primarily as a result of the closed Georgia facility, partially offset by increases in personnel expenses and fuel expense.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment decreased from $16.1 million in
fiscal 2017 to $14.6 million in fiscal 2018. This decrease is primarily a result of lower amortization expense for certain customer
relationship intangible assets, which are now fully amortized.
Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
Net Sales
Net sales for PFG Customized increased $38.7 million, or 1.0%, from fiscal 2016 to fiscal 2017. The increase in net sales was
driven by the new business with Red Lobster in fiscal 2017, partially offset by the 53rd week in fiscal 2016. Net sales for the extra
week in fiscal 2016 were approximately $70.2 million.
EBITDA
EBITDA for PFG Customized decreased $8.8 million, or 25.8%, from fiscal 2016 to fiscal 2017. The decrease was primarily
attributable to a decrease in gross profit of $5.1 million, or 2.1%, and an increase in operating expenses, excluding depreciation and
amortization. Gross profit for PFG Customized decreased primarily as a result of the 53rd week in fiscal 2016 and planned exits of
some customers to free up capacity for the addition of the new business with Red Lobster. The Company estimates that gross profit
was approximately $4.4 million for the extra week in fiscal 2016. In the first quarter of fiscal 2017 we began providing distribution
solutions to a portion of Red Lobster’s restaurants and completed the transition during the second quarter of fiscal 2017.
Operating expenses, excluding depreciation and amortization, increased by $3.7 million, or 1.8%, in fiscal 2017, compared to
the prior year primarily driven by $5.2 million related to the closing of the Georgia facility, partially offset by $3.8 million of expense
in the 53rd week in fiscal 2016.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $15.4 million in fiscal
2016 to $16.1 million in fiscal 2017, an increase of 4.5%. The increase was primarily a result of the accelerated amortization of
customer relationship intangible assets in the first quarter of fiscal 2017 due to volume declines for certain customers.
Segment Results—Vistar
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
Net Sales
Net sales for Vistar increased $337.4 million, or 11.2%, from fiscal 2017 to fiscal 2018. This increase was driven by case sales
growth in the segment’s theater and retail channels, as well as recent acquisitions.
EBITDA
EBITDA for Vistar increased $15.4 million, or 13.1%, from fiscal 2017 to fiscal 2018. Gross profit dollar growth of $72.5
million, or 18.4% for fiscal 2018 compared to fiscal 2017, was driven by an increase in the number of cases sold, as well as an
increase in gross profit per case. The increase in gross profit per case was driven by a favorable shift in channel mix, as well as by an
increase in procurement gains.
Operating expenses, excluding depreciation and amortization, increased $57.7 million, or 20.9%, for fiscal 2018 compared to
the prior year. Operating expenses increased primarily as a result of an increase in case volume and the resulting impact on variable
operational and selling expenses, as well as cost of living and other increases in compensation and benefits. Operating expenses also
increased as a result of recent acquisitions.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $24.6 million in fiscal
2017 to $27.4 million in fiscal 2018. Amortization of intangible assets increased as a result of recent acquisitions.
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Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
Net Sales
Net sales for Vistar increased $302.1 million, or 11.2%, from fiscal 2016 to fiscal 2017. This increase was driven by case sales
growth in the segment’s retail, theater, vending, and hospitality channels and recent acquisitions, partially offset by net sales of
approximately $54.1 million in the 53rd week in fiscal 2016.
EBITDA
EBITDA for Vistar increased $7.6 million, or 6.9%, from fiscal 2016 to fiscal 2017. This increase in EBITDA was the result of
gross profit dollar growth increasing faster than operating expense dollar growth, excluding depreciation and amortization. Gross
profit dollar growth of $39.2 million, or 11.0% for fiscal 2017 compared to fiscal 2016, was driven by an increase in the number of
cases sold and recent acquisitions, partially offset by gross profit of approximately $7.0 million in the 53rd week in fiscal 2016.
Operating expenses, excluding depreciation and amortization, increased $30.9 million, or 12.6%, for fiscal 2017. Operating
expenses increased primarily as a result of investments associated with expansion of geographies served in the dollar store channel,
additional expenses related to recent acquisitions and an increase associated with the fourth quarter fiscal 2016 opening of our
automated retail facility, partially offset by the 53rd week in fiscal 2016. The Company estimates that operating expenses excluding
depreciation and amortization were approximately $4.9 million in the 53rd week of fiscal 2016.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $18.2 million in fiscal
2016 to $24.6 million in fiscal 2017, an increase of 35.2%. Amortization of intangible assets increased as a result of acquisitions over
the past year. Depreciation of fixed assets increased as a result of capital outlays primarily related to fleet.
Segment Results—Corporate & All Other
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
Net Sales
Net sales for Corporate & All Other increased $101.6 million from fiscal 2017 to fiscal 2018. The increase was primarily
attributable to recent acquisitions and an increase in logistics services provided to our other segments.
EBITDA
EBITDA for Corporate & All Other was a negative $109.1 million for fiscal 2018 compared to a negative $124.3 million for
fiscal 2017. The improvement in EBITDA was primarily driven by contributions from recent acquisitions and decreases in
professional and other services fees of $4.5 million, personnel expenses of $4.4 million, advisory fees of $2.6 million, and insurance
of $2.3 million, partially offset by an increase in stock-based compensation expense of $4.3 million.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $28.0 million in fiscal
2017 to $29.4 million in fiscal 2018. The increase was primarily a result of amortization related to recent acquisitions.
Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
Net Sales
Net sales for Corporate & All Other increased $127.3 million from fiscal 2016 to fiscal 2017. The increase was primarily
attributable to recent acquisitions and an increase in logistics services provided to our other segments, partially offset by net sales of
approximately $4.4 million in the 53rd week of fiscal 2016.
EBITDA
EBITDA for Corporate & All Other was a negative $124.3 million for fiscal 2017 compared to a negative $130.4 million for
fiscal 2016. The improvement in EBITDA was primarily driven by recent acquisitions and a $5.5 million decrease in other expenses
related to derivative activity, partially offset by an increase in personnel expenses and a $0.8 million increase in professional and legal
fees including settlements.
Depreciation of fixed assets and amortization of intangible assets recorded in this segment increased from $21.8 million in fiscal
2016 to $28.0 million in fiscal 2017. The increase was primarily a result of amortization related to recent acquisitions.
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Quarterly Results and Seasonality
Historically, the food-away-from-home and foodservice distribution industries are seasonal, with lower profit in the first and
third quarters of each calendar year. Consequently, we typically experience lower operating profit during our first and third fiscal
quarters, depending on the timing of acquisitions, if any.
Financial information for each quarter of fiscal 2018 and fiscal 2017 is set forth below:
Fiscal Year Ended June 30, 2018
(In millions, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expense, net:
Interest expense
Other, net
Other expense, net
Income before taxes
Income tax expense (benefit)
Net income
Weighted-average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
(In millions, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expense, net:
Interest expense
Other, net
Other expense, net
Income before taxes
Income tax expense
Net income
Weighted-average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
Fiscal Year Ended July 1, 2017
$
Q1
4,364.9 $
3,810.2
554.7
504.2
50.5
Q2
4,311.1 $
3,743.5
567.6
518.5
49.1
Q3
4,349.2 $
3,790.5
558.7
498.6
60.1
Q4
4,594.7
3,982.9
611.8
518.0
93.8
14.6
(0.3 )
14.3
36.2
13.6
22.6 $
15.1
(0.1 )
15.0
34.1
(43.9 )
78.0 $
15.2
0.1
15.3
44.8
11.1
33.7 $
15.5
(0.2 )
15.3
78.5
14.1
64.4
$
100.9
103.9
101.4
104.5
102.7
104.5
103.1
104.9
$
$
0.22 $
0.22 $
0.77 $
0.75 $
0.33 $
0.32 $
0.62
0.61
$
Q1
4,046.1 $
3,534.8
511.3
479.7
31.6
Q2
4,051.8 $
3,534.6
517.2
465.9
51.3
Q3
4,235.0 $
3,713.6
521.4
474.7
46.7
Q4
4,428.9
3,854.0
574.9
493.5
81.4
12.9
(0.8 )
12.1
19.5
7.3
12.2 $
13.6
(0.5 )
13.1
38.2
15.3
22.9 $
14.0
(0.2 )
13.8
32.9
12.1
20.8 $
14.4
(0.1 )
14.3
67.1
26.7
40.4
$
99.9
102.8
100.1
102.7
100.3
102.8
100.6
103.7
$
$
0.12 $
0.12 $
0.23 $
0.22 $
0.21 $
0.20 $
0.40
0.39
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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.
At June 30, 2018, our cash balance totaled $17.8 million, including restricted cash of $10.3 million, as compared to a cash
balance totaling $21.0 million, including restricted cash of $12.9 million, at July 1, 2017. This decrease in cash during fiscal 2018 was
attributable to net cash used in investing activities and financing activities of $209.4 million and $160.8 million, respectively, which
was partially offset by net cash provided by operating activities of $367.0 million. We borrow under the ABL 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 ABL 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.
On October 6, 2015, we completed our initial public offering (“IPO”) of 16,675,000 shares of common stock for an offering
price of $19.00 per share ($17.955 per share net of underwriting discounts), including the exercise in full by the underwriters of their
option to purchase additional shares. We sold an aggregate of 12,777,325 shares of such common stock and certain selling
stockholders sold 3,897,675 shares. The aggregate offering price of the amount of newly issued common stock was $242.8 million. In
connection with the offering, we paid the underwriters a discount of $1.045 per share, for a total underwriting discount of
$13.4 million. In addition, we incurred direct offering expenses consisting of legal, accounting, and printing costs of $5.8 million in
connection with the IPO, of which $3.0 million was paid during fiscal 2016. We used the net proceeds to us from the IPO after
deducting the underwriting discount and our direct offering expenses to repay $223.0 million aggregate principal amount of
indebtedness under a credit agreement providing for a term loan facility (the “Term Facility”). We used the remainder of the net
proceeds for general corporate purposes.
On February 1, 2016, Performance Food Group, Inc. amended and restated the ABL Facility to increase the aggregate principal
amount from $1.4 billion to $1.6 billion, lower interest rates for LIBOR based loans, extend the maturity from May 2017 to February
2021, and modify triggers and provisions related to certain reporting, financial, and negative covenants. The total size of the facility
immediately increased the effective borrowing capacity under the ABL Facility since borrowing base assets exceeded the facility size
prior to the amendment. Approximately $6.8 million of fees and expenses were incurred for the amendment, which were included as
deferred financing costs and will be amortized over the remaining term of the ABL Facility. Of this amount, $6.6 million was paid
during fiscal 2016. In connection with the closing of this amendment, Performance Food Group, Inc. borrowed $200.0 million under
the ABL Facility and used the proceeds to repay $200.0 million aggregate principal amount of loans under the Term Facility.
On May 17, 2016, Performance Food Group, Inc. issued and sold $350.0 million aggregate principal amount of its 5.500%
Senior Notes due 2024 (the “Notes”), pursuant to an indenture dated as of May 17, 2016, that is jointly and severally guaranteed by
PFGC, Inc. (“PFGC”), a wholly-owned subsidiary of the Company, and all domestic direct and indirect wholly-owned subsidiaries of
PFGC (other than captive insurance subsidiaries and other excluded subsidiaries). The proceeds from the Notes were used to pay in
full the remaining outstanding $306.4 million aggregate principal amount of loans under the Term Facility and to terminate the Term
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. Approximately $7.2 million of fees and expenses were incurred and paid
during fiscal 2016 in connection with the Notes. Of the amount of fees incurred, $2.5 was included as deferred financing costs and
will be amortized over the remaining term of the Notes, $2.1 million was included in loss on extinguishment of debt within interest
expense related to the portion of the Term Facility repayment deemed an extinguishment, and $2.6 million was recorded to Operating
expenses for the portion of the Term Facility deemed a modification.
On August 3, 2017, PFGC, Inc. and Performance Food Group, Inc., each a wholly-owned subsidiary of the Company, entered
into the First Amendment to Second Amended and Restated Credit Agreement (the “Amendment”) with Wells Fargo Bank, National
Association, as Administrative Agent and Collateral Agent, and the other lenders party thereto, which amended the ABL Facility. The
Amendment amended the ABL Facility by, among other things, (i) increasing the aggregate principal amount under the ABL Facility
from $1.6 billion to $1.95 billion by increasing Tranche A Commitments by $325.0 million and the Tranche A-1 Commitments by
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$25.0 million and (ii) maintaining the level of additional commitments permitted, excluding the additional commitments effected
pursuant to the Amendment, at $800.0 million under uncommitted incremental facilities.
Operating Activities
Fiscal year ended June 30, 2018 compared to fiscal year ended July 1, 2017
During fiscal 2018 and fiscal 2017, our operating activities provided cash flow of $367.0 million and $201.7 million,
respectively. The increase in cash flows provided by operating activities in fiscal 2018 compared to fiscal 2017 was largely driven by
higher operating income, improved working capital management and lower taxes paid.
Fiscal year ended July 1, 2017 compared to fiscal year ended July 2, 2016
During fiscal 2017 and fiscal 2016, our operating activities provided cash flow of $201.7 million and $228.5 million,
respectively.
Fiscal 2016 cash flows provided by operating activities included a $25.0 million break-up fee payment received related to the
terminated agreement to acquire 11 US Foods facilities from Sysco and US Foods. Excluding this fee, cash flows provided by
operating activities during fiscal 2016 were $203.5 million. The remaining $1.8 million decrease, excluding the break-up fee payment,
in cash flows provided by operating activities for fiscal 2017 compared to fiscal 2016 was largely driven by an increase in our net
working capital investment, partially offset by lower cash income tax payments as a result of timing of the payments and lower cash
interest payments as a result of debt pay down associated with the IPO and subsequent refinancings, as well as changes in the timing
of payments. Our net working capital, which includes accounts receivable, inventories, accounts payable and outstanding checks in
excess of deposits, fluctuates with our sales growth.
Investing Activities
Cash used in investing activities totaled $209.4 million in fiscal 2018 compared to $332.0 million in fiscal 2017 and
$157.6 million in fiscal 2016. These investments consisted primarily of capital purchases of property, plant, and equipment of
$140.1 million, $140.2 million and $119.7 million for fiscal years 2018, 2017 and 2016, respectively, and payments for business
acquisitions of $71.1 million, $192.9 million and $39.0 million for fiscal years 2018, 2017 and 2016, respectively. In fiscal 2018,
purchases of property, plant, and equipment primarily consisted of equipment, transportation and information technology, as well as
outlays for warehouse expansions and improvements.
The following table presents the capital purchases of property, plant, and equipment by segment:
Fiscal Year Ended
(Dollars in millions)
Performance Foodservice
PFG Customized
Vistar
Corporate & All Other
Total capital purchases of property, plant and equipment
June 30, 2018 July 1, 2017 July 2, 2016
$
83.8 $
16.6
18.4
21.3
140.1 $
91.6 $
9.5
6.4
32.7
140.2 $
67.5
8.2
13.4
30.6
119.7
$
As of June 30, 2018, the Company had commitments of $7.0 million for capital projects related to warehouse expansion and
improvements, warehouse equipment and information technology equipment and software. The Company anticipates using cash flows
from operations or borrowings from the ABL Facility to fulfill these commitments.
Financing Activities
During fiscal 2018, net cash used in financing activities was $160.8 million, which consisted primarily of $119.8 million in net
payments under our ABL Facility and cash paid for shares withheld to cover taxes of $28.2 million related to restricted stock vestings.
During fiscal 2017, net cash provided by financing activities was $127.5 million, which consisted primarily of $134.9 million in
net borrowings under our ABL Facility.
During fiscal 2016, net cash used in financing activities was $76.5 million, which consisted primarily of payments of
$736.9 million on our Term Loan Facility, partially offset by $350.0 million in proceeds from the issuance of Notes, $226.4 million in
net proceeds from our IPO and $99.3 million in net borrowings under our ABL Facility.
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The following describes our financing arrangements as of June 30, 2018:
ABL Facility: PFGC, Inc. (“PFGC”), a wholly-owned subsidiary of the Company, is a party to the ABL Facility, which has an
aggregate principal amount of $1.95 billion and matures February 2021. The ABL Facility is secured by the majority of the tangible
assets of PFGC and its subsidiaries. Performance Food Group, Inc., a wholly-owned subsidiary of PFGC, is the lead borrower under
the ABL Facility, which is jointly and severally guaranteed by 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, at Performance 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 ranging from 0.25%
to 0.375%.
The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:
(Dollars in millions)
Aggregate borrowings
Letters of credit
Excess availability, net of lenders’ reserves
of $12.1 and $11.2, respectively
Average interest rate
As of
June 30, 2018
$
780.1 $
121.3
As of
July 1, 2017
899.9
105.5
854.2
3.52 %
594.6
2.59 %
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) $160.0 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: On May 17, 2016, Performance Food Group, Inc. issued and sold $350.0 million aggregate principal amount of its
5.500% Senior Notes due 2024 (the “Notes”), pursuant to an indenture dated as of May 17, 2016. The Notes 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 are not guaranteed by Performance Food Group Company.
The proceeds from the Notes 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.
The Notes were issued at 100.0% of their par value. The Notes 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 will have the right to require Performance Food Group,
Inc. to repurchase each holder’s Notes 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. may redeem all or a
part of the Notes at any time prior to June 1, 2019 at a redemption price equal to 100% of the principal amount of the Notes being
redeemed plus a make-whole premium and accrued and unpaid interest, if any, to, but not including, the redemption date. In addition,
beginning on June 1, 2019, Performance Food Group, Inc. may redeem all or a part of the Notes at a redemption price equal to
102.750% of the principal amount redeemed. The redemption price decreases to 101.325% and 100.000% of the principal amount
redeemed on June 1, 2020 and June 1, 2021, respectively. In addition, at any time prior to June 1, 2019, Performance Food Group, Inc.
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may redeem up to 40% of the Notes 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 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 also contain
customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes to become or be
declared due and payable.
The ABL Facility and the indenture governing the Notes contain customary restrictive covenants under which all of the net
assets of PFGC and its subsidiaries were restricted from distribution to Performance Food Group Company, except for approximately
$486.0 million of restricted payment capacity available under such debt agreements, as of June 30, 2018. Such minimum estimated
restricted payment capacity is calculated based on the most restrictive of our debt agreements and may fluctuate from period to period,
which fluctuations may be material. Our restricted payment capacity under other debt instruments to which the Company is subject
may be materially higher than the foregoing estimate.
As of June 30, 2018, we were in compliance with all of the covenants under the ABL Facility and Notes.
Unsecured Subordinated Promissory Note. In connection with an acquisition, Performance Food Group, Inc. issued a
$6.0 million interest only, unsecured subordinated promissory note on December 21, 2012, bearing an interest rate of 3.5%. The
$6.0 million promissory note was paid off in December 2017.
Contractual Cash Obligations
The following table sets forth our significant contractual cash obligations as of June 30, 2018. The years below represent our
fiscal years.
(Dollars in millions)
Long-term debt
Capital and finance lease obligations(1)
Property, plant, and equipment, financed
Unrecognized tax benefits and interest(2)
Interest payments related to long-term debt(3)
Long-term operating leases
Purchase obligations(4)
Multiemployer pension plan(5)
Total contractual cash obligations
Total
1,130.1 $
82.9
2.8
1.4
181.5
450.4
26.4
5.1
1,880.6 $
$
$
Payments Due by Period
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
— $
12.1
2.8
0.2
44.6
91.5
14.1
0.3
165.6 $
780.1 $
19.6
—
—
79.1
146.8
6.0
0.7
1,032.3 $
— $
17.7
—
—
38.5
92.6
1.6
0.7
151.1 $
350.0
33.5
—
—
19.3
119.5
4.7
3.4
530.4
(1) The amounts reflected in the table include the interest component of the lease payments.
(2)
Includes unrecognized tax benefits under accounting standards related to uncertain tax positions. As of June 30, 2018, we had a
liability of $1.2 million for unrecognized tax benefits for all tax jurisdictions and less than $0.2 million for related interest that
could result in cash payments. We are not able to reasonably estimate the timing of payments of the amount by which the
liability will increase or decrease over time. Accordingly, we only reflected the balances we could reasonably estimate in the
“Payments Due by Period” section of the table.
(3)
Includes payments on our floating rate debt based on rates as of June 30, 2018, assuming the amount remains unchanged until
maturity. The impact of our outstanding floating-to-fixed interest rate swap on the floating rate debt interest payments is
included as well based on the floating rates in effect as of June 30, 2018.
(4) For purposes of this table, purchase obligations include agreements for purchases related to capital projects and services in the
normal course of business, for which all significant terms have been confirmed. The amounts included above are based on
estimates. Purchase obligations also include amounts committed to various capital projects in process or scheduled to be
completed in the coming year, as well as a minimum amount due for various Company meetings and conferences.
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(5) Represents the voluntary withdrawal liability recorded related to the withdrawal from the Central States Southeast and
Southwest Areas Pension Fund (“Central States Pension Fund”) and excludes normal contributions required under our collective
bargaining agreements. See Note 15 Commitments and Contingencies to our audited consolidated financial statements included
in Item 8 for further discussion.
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 discussed below exclude intercompany receivables between segments.
Total Assets by Segment
Total assets for Performance Foodservice increased $106.7 million from $2,161.2 million as of July 1, 2017 to $2,267.9 million
as of June 30, 2018. During this time period, this segment increased its property, plant, and equipment and inventory, which was
partially offset by a decrease in intangible assets.
Total assets for PFG Customized decreased $22.8 million from $667.1 million as of July 1, 2017 to $644.3 million as of June
30, 2018. During this time period, this segment decreased its accounts receivable.
Total assets for Vistar increased $84.5 million from $654.5 million as of July 1, 2017 to $739.0 million as of June 30, 2018.
During this time period, this segment increased its accounts receivable, goodwill, and intangible assets, primarily due to acquisitions.
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.
Accounts Receivable
Accounts receivable are primarily comprised of trade receivables from customers in the ordinary course of business, are
recorded at the invoiced amount, and primarily do not bear interest. Receivables are recorded net of the allowance for doubtful
accounts on the accompanying consolidated balance sheets. We evaluate the collectability of our accounts receivable based on a
combination of factors. We regularly analyze our significant customer accounts, and when we become aware of a specific customer’s
inability to meet its financial obligations to us, such as a bankruptcy filing or a deterioration in the customer’s operating results or
financial position, we record a specific reserve for bad debt to reduce the related receivable to the amount we reasonably believe is
collectible. We also record reserves for bad debt for other customers based on a variety of factors, including the length of time the
receivables are past due, macroeconomic considerations, and historical experience. If circumstances related to specific customers
change, our estimates of the recoverability of receivables could be further adjusted.
Inventory Valuation
Our inventories consist primarily of food and non-food products. We primarily value inventories at the lower of cost or market
using the first-in, first-out method (“FIFO”). FIFO was used for approximately 91% of total inventories at June 30, 2018. The
remainder of the inventory was valued using LIFO method using the link chain technique of the dollar value method. We adjust our
inventory balances for slow-moving, excess, and obsolete inventories. These adjustments are based upon inventory category,
inventory age, specifically identified items, and overall economic conditions.
Insurance Programs
We maintain high-deductible insurance programs covering portions of general and vehicle liability and workers’ compensation.
The amounts in excess of the deductibles are insured by third-party insurance carriers, subject to certain limitations and exclusions.
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We also maintain self-funded group medical insurance. We accrue our estimated liability for these deductibles, including an estimate
for incurred but not reported claims, based on known claims and past claims history. The estimated short-term portion of these
accruals is included in Accrued expenses on our consolidated balance sheets, while the estimated long-term portion of the accruals is
included in Other long-term liabilities. The provisions for insurance claims include estimates of the frequency and timing of claims
occurrence, as well as the ultimate amounts to be paid. These insurance programs are managed by a third party, and the deductibles for
general and vehicle liability and workers compensation are primarily collateralized by letters of credit and restricted cash.
Income Taxes
We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Income
Taxes—Overall, which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Future tax benefits, including net operating loss carry-forwards, are recognized to the extent that
realization of such benefits is more likely than not. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light
of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statutes of limitations.
Such adjustments are reflected in the tax provision as appropriate.
Vendor Rebates and Other Promotional Incentives
We participate in various rebate and promotional incentives with our suppliers, either unilaterally or in combination with
purchasing cooperatives and other procurement partners, that consist primarily of volume and growth rebates, annual and multi-year
incentives, and promotional programs. Consideration received under these incentives is generally recorded as a reduction of cost of
goods sold. However, in certain limited circumstances the consideration is recorded as a reduction of costs incurred by us.
Consideration received may be in the form of cash and/or invoice deductions. Changes in the estimated amount of incentives to be
received are treated as changes in estimates and are recognized in the period of change.
Consideration received for volume and growth rebates, annual incentives, and multi-year incentives are recorded as a reduction
of cost of goods sold. We systematically and rationally allocate the consideration for these incentives to each of the underlying
transactions that results in progress by the Company toward earning the incentives. If the incentives are not probable and reasonably
estimable, we record the incentives as the underlying objectives or milestones are achieved. We record annual and multi-year
incentives when earned, generally over the agreement period. We use current and historical purchasing data, forecasted purchasing
volumes, and other factors in estimating whether the underlying objectives or milestones will be achieved. Consideration received to
promote and sell the supplier’s products is typically a reimbursement of marketing costs incurred by the Company and is recorded as a
reduction of our operating expenses. If the amount of consideration received from the suppliers exceeds our marketing costs, any
excess is recorded as a reduction of cost of goods sold. We follow the requirements of FASB ASC 605-50-25-10, Revenue
Recognition—Customer Payments and Incentives—Recognition—Customer’s Accounting for Certain Consideration Received from a
Vendor and ASC 605-50-45-16, Revenue Recognition—Customer Payments and Incentives—Other Presentation Matters—Reseller’s
Characterization of Sales Incentives Offered to Customers by Manufacturers.
Acquisitions, Goodwill, and Other Intangible Assets
We account for acquired businesses using the acquisition method of accounting. Our financial statements reflect the operations
of an acquired business starting from the completion of the acquisition. Goodwill and other intangible assets represent the excess of
cost of an acquired entity over the amounts specifically assigned to those tangible net assets acquired in a business combination. Other
identifiable intangible assets typically include customer relationships, trade names, technology, non-compete agreements, and
favorable lease assets. Goodwill and intangibles with indefinite lives are not amortized. Intangibles with definite lives are amortized
on a straight-line basis over their useful lives, which generally range from two to eleven years. Annually, or when certain triggering
events occur, the Company assesses the useful lives of its intangibles with definite lives. Certain assumptions, estimates, and
judgments are used in determining the fair value of net assets acquired, including goodwill and other intangible assets, as well as
determining the allocation of goodwill to the reporting units. Accordingly, we may obtain the assistance of third-party valuation
specialists for significant tangible and intangible assets. The fair value estimates are based on available historical information and on
future expectations and assumptions deemed reasonable by management, but are inherently uncertain. Significant estimates and
assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of
future cash flows (including expected growth rates and profitability), economic barriers to entry, a brand’s relative market position,
and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which
could affect the accuracy or validity of the estimates and assumptions.
We are required to test goodwill and other intangible assets with indefinite lives for impairment annually or more often if
circumstances indicate. Indicators of goodwill impairment include, but are not limited to, significant declines in the markets and
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industries that buy our products, changes in the estimated future cash flows of its reporting units, changes in capital markets, and
changes in its market capitalization.
We apply the guidance in FASB Accounting Standards Update (“ASU”) 2011-08 “Intangibles—Goodwill and Other—Testing
Goodwill for Impairment,” which provides entities with an option to perform a qualitative assessment (commonly referred to as “step
zero”) to determine whether further quantitative analysis for impairment of goodwill is necessary. In performing step zero for our
goodwill impairment test, we are required to make assumptions and judgments, including but not limited to the following: the
evaluation of macroeconomic conditions as related to our business, industry and market trends, and the overall future financial
performance of our reporting units and future opportunities in the markets in which they operate. If impairment indicators are present
after performing step zero, we would perform a quantitative impairment analysis to estimate the fair value of goodwill.
During fiscal 2018 and fiscal 2017, we performed the step zero analysis for our goodwill impairment test. As a result of our step
zero analysis, no further quantitative impairment test was deemed necessary for fiscal 2018 and fiscal 2017. There were no
impairments of goodwill or intangible assets with indefinite lives for fiscal 2018 and fiscal 2017.
Recently Issued Accounting Pronouncements
Refer to Note 3 Recently Issued Accounting Pronouncements within the Notes to Consolidated Financial Statements included in
Item 8 for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected
effects on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
All of our market sensitive instruments are entered into for purposes other than trading.
Interest Rate Risk
We are exposed to interest rate risk related to changes in interest rates for borrowings under our ABL Facility. Although we
hedge a portion of our interest rate risk through interest rate swaps, any borrowings under our ABL Facility in excess of the notional
amount of the swaps will be subject to variable interest rates.
As of June 30, 2018, our subsidiary, Performance Food Group, Inc., had eight interest rate swaps with a combined value of
$650.0 million notional amount that were designated as cash flow hedges of interest rate risk. See Note 9 Derivatives and Hedging
Activities within the Notes to Consolidated Financial Statements included in Item 8 for further discussion of these interest rate swaps.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in
accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted
transaction impacts earnings. The ineffective portion of the change in fair value of derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest
payments are made on our variable-rate debt. During the next twelve months, we estimate that gains of approximately $4.1 million
will be reclassified as a decrease to interest expense.
Based on the fair values of these interest rate swaps as of June 30, 2018, a hypothetical 100 bps decrease in LIBOR would result
in a loss of $9.0 million and a hypothetical 100 bps increase in LIBOR would result in a gain of $8.7 million within accumulated other
comprehensive income.
Assuming an average daily balance on our ABL Facility of approximately $950.0 million, approximately $350.0 million of our
outstanding long-term debt is fixed through interest rate swap agreements over the next twelve months and approximately $600.0
million represents variable-rate debt. A hypothetical 100 bps increase in LIBOR on our variable-rate debt would lead to an increase of
approximately $6.0 million in annual cash interest expense.
Fuel Price Risk
We seek to minimize the effect of higher diesel fuel costs both by reducing fuel usage and by taking action to offset higher fuel
prices. We reduce usage by designing more efficient truck routes and by increasing miles per gallon through on-board computers that
monitor and adjust idling time and maximum speeds and through other technologies. In our PFG Customized segment, we have
limited exposure to fuel costs since our sales contracts often transfer fuel price volatility to our customers. In our Performance
Foodservice and Vistar segments, we seek to manage fuel prices through diesel fuel surcharges to our customers and through the use
of costless collars.
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As of June 30, 2018, we had collars in place for approximately 13% of the gallons we expect to use over the twelve months
following June 30, 2018. These fuel collars do not qualify for hedge accounting treatment for reasons discussed in Note 9. Derivatives
and Hedging Activities within the Notes to Consolidated Financial Statements included in Item 8. Therefore, these collars are recorded
at fair value as either an asset or liability on the balance sheet. Any changes in fair value are recorded in the period of the change as
unrealized gains or losses on fuel hedging instruments. A hypothetical 10% increase or decrease in expected diesel fuel prices would
result in an immaterial gain or loss for these derivative instruments.
Our fuel purchases occur at market prices. Using published market price projections for diesel and estimates of fuel
consumption, a 10% hypothetical increase in diesel prices from the market price would result in a potential increase of approximately
$11.1 million in fuel costs included in Operating expenses. As discussed above, this increase in fuel costs would be partially offset by
fuel surcharges passed through to our customers.
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Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements as of June 30, 2018 and July 1, 2017 and for the fiscal years
ended June 30, 2018, July 1, 2017 and July 2, 2016
Audited Consolidated Financial Statements as of June 30, 2018 and July 1, 2017 and for the fiscal years
ended June 30, 2018, July 1, 2017 and July 2, 2016
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ........................................ 47
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ........................................ 47
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements .................................................... 48
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements .................................................... 48
Consolidated Balance Sheets ................................................................................................................................................................. 49
Consolidated Balance Sheets ................................................................................................................................................................. 49
Consolidated Statements of Operations ................................................................................................................................................. 50
Consolidated Statements of Operations ................................................................................................................................................. 50
Consolidated Statements of Comprehensive Income ............................................................................................................................ 51
Consolidated Statements of Comprehensive Income ............................................................................................................................ 51
Consolidated Statements of Shareholders’ Equity ................................................................................................................................ 52
Consolidated Statements of Shareholders’ Equity ................................................................................................................................ 52
Consolidated Statements of Cash Flows ............................................................................................................................................... 53
Consolidated Statements of Cash Flows ............................................................................................................................................... 53
Notes to Consolidated Financial Statements ......................................................................................................................................... 55
Notes to Consolidated Financial Statements ......................................................................................................................................... 55
Schedule 1—Registrant’s Condensed Financial Statements ................................................................................................................. 83
Schedule 1—Registrant’s Condensed Financial Statements ................................................................................................................. 83
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of
Performance Food Group Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Performance Food Group Company and subsidiaries (the “Company”)
as of June 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control — Integrated
Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the fiscal year ended June 30, 2018, of the Company and our report
dated August 16, 2018 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
August 16, 2018
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of
Performance Food Group Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Performance Food Group Company and subsidiaries (the
“Company”) as of June 30, 2018 and July 1, 2017, and the related consolidated statements of operations, comprehensive income,
shareholders’ equity and cash flows for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, and the related notes and
the schedule listed in the Index at Item 8 (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and July 1, 2017, and the
results of its operations and its cash flows for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of June 30, 2018, based on the criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated August 16, 2018 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
August 16, 2018
We have served as the Company’s auditor since 2007.
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PERFORMANCE FOOD GROUP COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
ASSETS
Current assets:
Cash
Accounts receivable, less allowances of $19.3 and $17.0
Inventories, net
Prepaid expenses and other current assets
Total current assets
Goodwill
Other intangible assets, net
Property, plant and equipment, net
Restricted cash
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Outstanding checks in excess of deposits
Trade accounts payable
Accrued expenses and other current liabilities
Long-term debt—current installments
Capital lease obligations—current installments
Total current liabilities
Long-term debt
Deferred income tax liability, net
Capital lease obligations, excluding current installments
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Shareholders’ equity:
$
$
$
Common Stock: $0.01 par value per share, 1.0 billion shares authorized,
103.2 million shares issued and outstanding as of June 30, 2018;
1.0 billion shares authorized, 100.8 million shares issued and outstanding as of July
1, 2017
Additional paid-in capital
Accumulated other comprehensive income, net of tax expense
of $2.9 and $1.5
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
As of
June 30, 2018
As of
July 1, 2017
7.5 $
1,065.6
1,051.9
78.5
2,203.5
740.5
193.8
795.5
10.3
57.3
4,000.9 $
260.8 $
973.0
227.8
-
8.4
1,470.0
1,123.0
106.3
52.8
113.5
2,865.6
1.0
861.2
8.3
264.8
1,135.3
4,000.9 $
8.1
1,028.5
1,013.3
35.0
2,084.9
718.6
201.1
740.7
12.9
45.9
3,804.1
218.2
907.1
246.3
5.8
5.9
1,383.3
1,241.9
103.0
44.0
106.4
2,878.6
1.0
855.5
2.4
66.6
925.5
3,804.1
See accompanying notes to consolidated financial statements, which are an integral part of these audited
consolidated financial statements.
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PERFORMANCE FOOD GROUP COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Net sales
Cost of goods sold
Gross profit
Operating expenses
Operating profit
Other expense, net:
Interest expense
Other, net
Other expense, net
Income before taxes
Income tax (benefit) expense
Net income
Weighted-average common shares outstanding:
Basic
Diluted
Earnings per common share:
Basic
Diluted
$
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
17,619.9 $
15,327.1
2,292.8
2,039.3
253.5
16,761.8 $
14,637.0
2,124.8
1,913.8
211.0
16,104.8
14,094.8
2,010.0
1,807.8
202.2
60.4
(0.5 )
59.9
193.6
(5.1 )
198.7 $
54.9
(1.6 )
53.3
157.7
61.4
96.3 $
102.0
104.6
100.2
103.0
1.95 $
1.90 $
0.96 $
0.93 $
83.9
3.8
87.7
114.5
46.2
68.3
96.4
98.1
0.71
0.70
$
$
$
See accompanying notes to consolidated financial statements, which are an integral part of these audited
consolidated financial statements.
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PERFORMANCE FOOD GROUP COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Net income
Other comprehensive income (loss), net of tax:
Interest rate swaps:
Change in fair value, net of tax
Reclassification adjustment, net of tax
Other comprehensive income (loss)
Total comprehensive income
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
$
198.7 $
96.3 $
68.3
5.8
(0.4 )
5.4
204.1 $
5.7
2.5
8.2
104.5 $
(5.7 )
4.4
(1.3 )
67.0
$
See accompanying notes to consolidated financial statements, which are an integral part of these audited
consolidated financial statements.
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PERFORMANCE FOOD GROUP COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
Other
Accumulated
(Deficit)
Comprehensive
Income (Loss) Earnings
Common Stock Paid-in
Shares Amount Shares ` Amount Shares Amount Capital
86.9 $
0.9 — $ — — $ — $
Common Stock
Class B
Additional
594.1 $
Class A
Total
Shareholders’
Equity
— — — — 0.2 —
— — — — — —
(86.9 )
(0.9 ) — — 86.9
0.9
0.4
—
—
(4.5 ) $
(97.5 ) $
493.0
—
—
—
—
—
—
0.4
—
—
— — — — 12.8
0.1
223.5
—
—
223.6
— — — — — —
— — — — — —
— — — — — —
— — — — — —
— — — — 99.9
1.0
— — — — 0.9 —
— — — — — —
— — — — — —
— — — — — —
— — — — — —
— — — — 100.8
1.0
— — — — 2.4 —
— — — — — —
— — — — — —
— — — — — —
— — — — — —
— $ — — $ — 103.2 $
1.0 $
1.6
—
—
17.2
836.8
0.5
—
—
17.3
0.9
855.5
(15.9 )
—
—
21.6
—
861.2 $
—
—
(1.3 )
—
(5.8 )
—
—
8.2
—
—
2.4
—
—
5.4
—
0.5
8.3 $
—
68.3
—
—
(29.2 )
—
96.3
—
—
(0.5 )
66.6
—
198.7
—
—
(0.5 )
264.8 $
1.6
68.3
(1.3 )
17.2
802.8
0.5
96.3
8.2
17.3
0.4
925.5
(15.9 )
198.7
5.4
21.6
—
1,135.3
(In millions)
Balance as of June 27, 2015
Issuance of common stock under stock-
based compensation plans
Repurchase of incremental shares of
common stock
Reclassification of Class A and Class B
common stock into a single class
Issuance of common stock in initial
public offering, net of underwriter
commissions and offering costs
Tax benefit from exercise of stock
options
Net income
Interest rate swaps
Stock-based compensation expense
Balance as of July 2, 2016
Issuance of common stock under stock-
based compensation plans
Net income
Interest rate swaps
Stock-based compensation expense
Change in accounting principle(1)
Balance as of July 1, 2017
Issuance of common stock under stock-
based compensation plans
Net income
Interest rate swaps
Stock-based compensation expense
Change in accounting principle(2)
Balance as of June 30, 2018
(1) As of the beginning of fiscal 2017, the Company elected to early adopt the provisions of ASU 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Company has made a policy election to
account for forfeitures as they occur and recorded a cumulative-effect adjustment to Accumulated Deficit as of the date of adoption.
(2)
In the fourth quarter of fiscal 2018, the Company elected to early adopt ASU 2018-02, Income Statement—Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The Company reclassified
the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive income to retrained
earnings. Refer to Note 3. Recently Issued Accounting Pronouncements for further discussion of the adoption of ASU 2018-02.
See accompanying notes to consolidated financial statements, which are an integral part of these audited consolidated financial
statements.
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PERFORMANCE FOOD GROUP COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017 (1)
Fiscal year
ended
July 2, 2016 (1)
$
198.7
$
96.3
$
68.3
($ in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation
Amortization of intangible assets
Amortization of deferred financing costs and other
Provision for losses on accounts receivables
Expense related to modification and extinguishment of debt
Stock compensation expense
Deferred income tax expense (benefit)
Change in fair value of derivative assets and liabilities
Other
Changes in operating assets and liabilities, net
Accounts receivable
Inventories
Prepaid expenses and other assets
Trade accounts payable
Outstanding checks in excess of deposits
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Net cash paid for acquisitions
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net (payments) borrowings under ABL Facility
Payments on Promissory Note
Payments on Term Facility
Borrowings on Notes
Payments on financed property, plant and equipment
Net proceeds from initial public offering
Cash paid for debt issuance, extinguishment and modifications
Cash paid for acquisitions
Payments under capital and finance lease obligations
Proceeds from exercise of stock options
Tax benefits from exercise of equity awards
Cash paid for shares withheld to cover taxes
Net cash (used in) provided by financing activities
100.3
29.8
4.6
12.1
—
21.6
1.4
(0.2 )
8.5
(33.9 )
(21.8 )
(44.3 )
57.1
42.6
(9.5 )
367.0
(140.1 )
(71.1 )
1.8
(209.4 )
(119.8 )
(6.0 )
—
—
(1.9 )
—
(1.3 )
(9.0 )
(6.9 )
12.3
—
(28.2 )
(160.8 )
(3.2 )
21.0
17.8
$
91.5
34.6
4.5
6.0
0.1
17.3
6.3
(1.8 )
(1.1 )
(35.7 )
(63.8 )
10.3
(23.2 )
57.8
2.6
201.7
(140.2 )
(192.9 )
1.1
(332.0 )
134.9
—
—
—
(1.0 )
—
(0.2 )
(1.3 )
(5.4 )
4.0
—
(3.5 )
127.5
(2.8 )
23.8
21.0
$
80.5
38.1
20.6
7.5
4.6
17.2
(0.4 )
(0.8 )
1.5
(1.2 )
(29.6 )
(34.9 )
17.8
31.7
7.6
228.5
(119.7 )
(39.0 )
1.1
(157.6 )
99.3
—
(736.9 )
350.0
—
226.4
(13.9 )
—
(3.4 )
1.3
1.6
(0.9 )
(76.5 )
(5.6 )
29.4
23.8
Net decrease in cash and restricted cash
Cash and restricted cash, beginning of period
Cash and restricted cash, end of period
$
(1)
The consolidated statements of cash flows for the fiscal years ended July 1, 2017 and July 2, 2016 have been adjusted to reflect the
adoption of ASU 2016-08, Statement of Cash Flows (Topic 230): Restricted Cash. The consolidated statements of cash flows explain the
change during the periods in the total of cash and restricted cash. Therefore, restricted cash activity is included with cash when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Cash payments of $7.3
million in fiscal 2016 related to insurance claims paid using restricted cash is classified as a change in Accrued expenses and other
liabilities within Net cash provided by operating activities. Refer to Note 3 for further discussion.
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The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to
the total of the same such amounts shown in the consolidated statements of cash flows:
(In millions)
Cash
Restricted cash(2)
Total cash and restricted cash
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
$
$
7.5 $
10.3
17.8 $
8.1
12.9
21.0
(2) Restricted cash represents the amounts required by insurers to collateralize a part of the deductibles for the Company’s workers’
compensation and liability claims.
Supplemental disclosures of non-cash transactions are as follows:
(In millions)
Debt assumed through capital lease obligations
Disposal of property, plant and equipment under sale-leaseback transaction
Purchases of property, plant and equipment, financed
Purchases of property, plant and equipment, accrued
$
Supplemental disclosures of cash flow information are as follows:
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
18.2 $
—
4.2
4.0
23.4 $
3.2
0.5
—
0.1
—
1.0
3.8
(In millions)
Cash paid during the year for:
Interest
Income taxes, net of refunds
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
$
57.5 $
33.3
51.1 $
45.7
69.4
56.8
See accompanying notes to consolidated financial statements, which are an integral part of these audited
consolidated financial statements.
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PERFORMANCE FOOD GROUP COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Business Activities
1.
Business Overview
Performance Food Group Company (the “Company”), through its subsidiaries, markets and distributes national and company-
branded food and food-related products to customer locations across the United States. The Company serves both of the major
customer types in the restaurant industry: (i) independent, or “Street” customers, and (ii) multi-unit, or “Chain” customers, which
include regional and national family and casual dining restaurant chains, fast casual chains, and quick-service restaurants. The
Company also serves schools, healthcare facilities, business and industry locations, and other institutional customers.
Fiscal Years
The Company’s fiscal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year for fiscal 2018 and fiscal
2017 and a 53-week year for fiscal 2016. References to “fiscal 2018” are to the 52-week period ended June 30, 2018, references to
“fiscal 2017” are to the 52-week period ended July 1, 2017, and references to “fiscal 2016” are to the 53-week period ended July 2,
2016.
Initial Public Offering
On October 6, 2015, the Company completed a registered initial public offering (“IPO”) of 16,675,000 shares of common stock
for a cash offering price of $19.00 per share ($17.955 per share net of underwriting discounts), including the exercise in full by
underwriters of their option to purchase additional shares. The Company sold an aggregate of 12,777,325 shares of such common
stock and certain selling stockholders sold 3,897,675 shares (including the shares sold pursuant to the underwriters’ option to purchase
additional shares). The Company’s common stock is listed on the New York Stock Exchange under the ticker symbol “PFGC.”
The aggregate offering price of the amount of newly issued common stock sold was $242.8 million. In connection with the
offering, the Company paid the underwriters a discount of $1.045 per share, for a total underwriting discount of $13.4 million. In
addition, the Company incurred direct offering expenses consisting of legal, accounting, and printing costs of $5.8 million in
connection with the IPO, of which $3.0 million was paid during fiscal 2016.
The Company used the net offering proceeds of the IPO, after deducting the underwriting discount and direct offering expenses,
to repay $223.0 million aggregate principal amount of indebtedness under a credit agreement providing for a term loan facility (the
“Term Facility”). The Company used the remainder of the net proceeds for general corporate purposes.
Secondary Offerings
On May 24, 2016, certain selling stockholders of the Company sold 12,000,000 shares of the Company’s common stock at a
public offering price of $24.25 per share in a secondary public offering (the “Offering”). The selling stockholders granted the
underwriters of the Offering an option to purchase an additional 1,800,000 shares at a price of $23.3406 per share. The underwriters
exercised their option in full and, on May 27, 2016, purchased an additional 1,800,000 shares from the selling stockholders. The
selling stockholders received all of the net proceeds from the Offering and the sale of the additional 1,800,000 shares. No shares were
sold by the Company.
In November 2016, January 2017, February 2017, and May 2017 certain selling stockholders sold an aggregate of 47,592,206
shares of the Company’s common stock in transactions registered under the Securities Act. The Company did not receive any
proceeds from these sales. As a result of these sales, The Blackstone Group L.P. (“Blackstone”) no longer beneficially owns any
shares of the Company’s common stock.
In September 2017, November 2017 and December 2017 Wellspring Capital Management (“Wellspring”) sold an aggregate of
16,272,914 shares of the Company’s common stock in transactions registered under the Securities Act. The Company did not receive
any proceeds from these sales. As a result of these sales, Wellspring no longer beneficially owns any shares of the Company’s
common stock.
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Summary of Significant Accounting Policies and Estimates
2.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company balances and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. The most significant estimates used by management are related to the accounting for the
allowance for doubtful accounts, reserve for inventories, impairment testing of goodwill and other intangible assets, acquisition
accounting, reserves for claims and recoveries under insurance programs, vendor rebates and other promotional incentives, bonus
accruals, depreciation, amortization, determination of useful lives of tangible and intangible assets, and income taxes. Actual results
could differ from these estimates.
Cash
The Company maintains its cash primarily in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At
times, the Company’s cash balance may be in amounts that exceed the FDIC insurance limits.
Restricted Cash
The Company is required by its insurers to collateralize a part of the deductibles for its workers’ compensation and liability
claims. The Company has chosen to satisfy these collateral requirements primarily by depositing funds in trusts or by issuing letters of
credit. All amounts in restricted cash at June 30, 2018 and July 1, 2017 represent funds deposited in insurance trusts, and
$10.3 million and $10.2 million, respectively, represent Level 1 fair value measurements.
Accounts Receivable
Accounts receivable are comprised of trade receivables from customers in the ordinary course of business, are recorded at the
invoiced amount, and primarily do not bear interest. Accounts receivable also includes other receivables primarily related to various
rebate and promotional incentives with the Company’s suppliers. Receivables are recorded net of the allowance for doubtful accounts
on the accompanying consolidated balance sheets. The Company evaluates the collectability of its accounts receivable based on a
combination of factors. The Company regularly analyzes its significant customer accounts, and when it becomes aware of a specific
customer’s inability to meet its financial obligations to the Company, such as bankruptcy filings or deterioration in the customer’s
operating results or financial position, the Company records a specific reserve for bad debt to reduce the related receivable to the
amount it reasonably believes is collectible. The Company also records reserves for bad debt for other customers based on a variety of
factors, including the length of time the receivables are past due, macroeconomic considerations, and historical experience. If
circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could be further
adjusted. As of June 30, 2018 and July 1, 2017, the allowance for doubtful accounts related to trade receivables was approximately
$11.5 million and $11.0 million, respectively, and $7.8 million and $6.0 million, respectively related to other receivables. The
Company recorded $12.1 million, $6.0 million, and $7.5 million in provision for doubtful accounts in fiscal 2018, fiscal 2017, and
fiscal 2016, respectively.
Inventories
The Company’s inventories consist primarily of food and non-food products. The Company values inventories primarily at the
lower of cost or market using the first-in, first-out (“FIFO”) method. At June 30, 2018, the Company’s inventory balance of $1,051.9
million consists primarily of finished goods, $954.8 million of which was valued at FIFO. As of June 30, 2018, $97.1 million of the
inventory balance was valued at last-in, first-out (“LIFO”) using the link chain technique of the dollar value method. At June 30, 2018
and July 1, 2017, the LIFO balance sheet reserves were $6.9 million and $6.6 million, respectively. Costs in inventory include the
purchase price of the product and freight charges to deliver the product to the Company’s warehouses and are net of certain
consideration received from vendors in the amount of $24.3 million and $22.9 million as of June 30, 2018 and July 1, 2017,
respectively. The Company adjusts its inventory balances for slow-moving, excess, and obsolete inventories. These adjustments are
based upon inventory category, inventory age, specifically identified items, and overall economic conditions. As of June 30, 2018 and
July 1, 2017, the Company had adjusted its inventories by approximately $4.0 million and $4.5 million, respectively.
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Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of property, plant and equipment, including capital lease assets, is
calculated primarily using the straight-line method over the estimated useful lives of the assets, which range from two to 39 years, and
is included primarily in operating expenses on the consolidated statement of operations.
Certain internal and external costs related to the development of internal use software are capitalized within property, plant, and
equipment during the application development stage.
When assets are retired or otherwise disposed, the costs and related accumulated depreciation are removed from the accounts.
The difference between the net book value of the asset and proceeds from disposition is recognized as a gain or loss. Routine
maintenance and repairs are charged to expense as incurred, while costs of betterments and renewals are capitalized.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company, including intangible assets with definite lives, are tested for recoverability
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the Company compares the carrying value of the asset or asset group to the
projected, undiscounted future cash flows expected to be generated by the long-lived asset or asset group. Based on the Company’s
assessments, no impairment losses were recorded in fiscal 2018, fiscal 2017, or fiscal 2016.
Acquisitions, Goodwill, and Other Intangible Assets
The Company accounts for acquired businesses using the acquisition method of accounting. The Company’s financial
statements reflect the operations of an acquired business starting from the completion of the acquisition. Goodwill and other intangible
assets represent the excess of cost of an acquired entity over the amounts specifically assigned to those tangible net assets acquired in
a business combination. Other identifiable intangible assets typically include customer relationships, trade names, technology, non-
compete agreements, and favorable lease assets. Goodwill and intangibles with indefinite lives are not amortized. Intangibles with
definite lives are amortized on a straight-line basis over their useful lives, which generally range from two to eleven years. Annually,
or when certain triggering events occur, the Company assesses the useful lives of its intangibles with definite lives. Certain
assumptions, estimates, and judgments are used in determining the fair value of net assets acquired, including goodwill and other
intangible assets, as well as determining the allocation of goodwill to the reporting units. Accordingly, the Company may obtain the
assistance of third-party valuation specialists for the valuation of significant tangible and intangible assets. The fair value estimates are
based on available historical information and on future expectations and assumptions deemed reasonable by management but that are
inherently uncertain. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace
participants and include the amount and timing of future cash flows (including expected growth rates and profitability), economic
barriers to entry, a brand’s relative market position, and the discount rate applied to the cash flows. Unanticipated market or
macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions.
The Company is required to test goodwill and other intangible assets with indefinite lives for impairment annually, or more
often if circumstances indicate. Indicators of goodwill impairment include, but are not limited to, significant declines in the markets
and industries that buy the Company’s products, changes in the estimated future cash flows of its reporting units, changes in capital
markets, and changes in its market capitalization. For goodwill and indefinite-lived intangible assets, the Company’s policy is to
assess impairment at the end of each fiscal year.
The Company applies the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
2011-08 “Intangibles—Goodwill and Other—Testing Goodwill for Impairment,” which provides entities with an option to perform a
qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of
goodwill is necessary. In performing step zero for the Company’s goodwill impairment test, the Company is required to make
assumptions and judgments including but not limited to the following: the evaluation of macroeconomic conditions as related to the
Company’s business, industry and market trends, and the overall future financial performance of its reporting units and future
opportunities in the markets in which they operate. If impairment indicators are present after performing step zero, the Company
would perform a quantitative impairment analysis to estimate the fair value of goodwill.
During fiscal 2018 and fiscal 2017, the Company performed the step zero analysis for its goodwill impairment test. As a result
of the Company’s step zero analysis, no further quantitative impairment test was deemed necessary for fiscal 2018 and fiscal 2017.
There were no impairments of goodwill or intangible assets with indefinite lives for fiscal 2018, fiscal 2017, or fiscal 2016.
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Insurance Program
The Company maintains high-deductible insurance programs covering portions of general and vehicle liability and workers’
compensation. The amounts in excess of the deductibles are fully insured by third-party insurance carriers and subject to certain
limitations and exclusions. The Company also maintains self-funded group medical insurance. The Company accrues its estimated
liability for these deductibles, including an estimate for incurred but not reported claims, based on known claims and past claims
history. The estimated short-term portion of these accruals is included in Accrued expenses on the Company’s consolidated balance
sheets, while the estimated long-term portion of the accruals is included in Other long-term liabilities. The provisions for insurance
claims include estimates of the frequency and timing of claims occurrence, as well as the ultimate amounts to be paid. These insurance
programs are managed by a third party, and the deductibles for general and vehicle liability and workers compensation are primarily
collateralized by letters of credit and restricted cash.
Other Comprehensive Income (Loss) (“OCI”)
Other comprehensive income (loss) is defined as all changes in equity during each period except for those resulting from net
income (loss) and investments by or distributions to shareholders. Other comprehensive income (loss) consists primarily of gains or
losses from derivative financial instruments that are designated in a hedging relationship. For derivative instruments that qualify as
cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other
comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects
earnings.
Revenue Recognition
The Company recognizes revenue from the sale of a product when it is considered realized or realizable and earned. The
Company determines these requirements to be met when the product has been delivered to the customer, the price is fixed and
determinable, and there is reasonable assurance of collection of the sales proceeds. The Company grants certain customers sales
incentives such as rebates or discounts and treats these as a reduction of sales at the time the sale is recognized. The Company
recognizes revenues net of applicable sales tax. Sales returns are recorded as reductions of sales.
Revenue is accounted for in accordance with FASB ASC 605-45, “Reporting Revenue Gross as a Principal versus Net as an
•
Agent” (“ASC 605-45”), which addresses reporting revenue either on a gross basis as a principal or a net basis as an agent depending
upon the nature of the sales transactions. The Company recognizes revenue on a gross basis when the Company determines the sale
meets the conditions of ASC 605-45. The Company weighs the following factors in making its determination:
who is the primary obligor to provide the product or services desired by our customers;
who has discretion in supplier selection;
who has latitude in establishing price;
who retains credit risk; and
who bears inventory risk.
•
•
•
•
When the Company determines that it does not meet the criteria for gross revenue recognition under ASC 605-45 on the basis of
these factors, the Company reports the revenue on a net basis. When there is a change to an agreement with a customer or vendor,
pursuant to the Company’s revenue recognition policy, the Company reevaluates the reporting of the revenue based on the factors
outlined above to determine if there has been a change in the Company’s relationship in acting as the principal or an agent.
Cost of Goods Sold
Cost of goods sold includes amounts paid to manufacturers for products sold, the cost of transportation necessary to bring the
products to the Company’s facilities, plus depreciation related to processing facilities and equipment.
Operating Expenses
Operating expenses include warehouse, delivery, occupancy, insurance, depreciation, amortization, salaries and wages, and
employee benefits expenses.
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Vendor Rebates and Other Promotional Incentives
The Company participates in various rebate and promotional incentives with its suppliers, primarily including volume and
growth rebates, annual and multi-year incentives, and promotional programs. Consideration received under these incentives is
generally recorded as a reduction of cost of goods sold. However, as described below, in certain limited circumstances the
consideration is recorded as a reduction of operating expenses incurred by the Company. Consideration received may be in the form of
cash and/or invoice deductions. Changes in the estimated amount of incentives to be received are treated as changes in estimates and
are recognized in the period of change.
Consideration received for incentives that contain volume and growth rebates and annual and multi-year incentives are recorded
as a reduction of cost of goods sold. The Company systematically and rationally allocates the consideration for these incentives to
each of the underlying transactions that results in progress by the Company toward earning the incentives. If the incentives are not
probable and reasonably estimable, the Company records the incentives as the underlying objectives or milestones are achieved. The
Company records annual and multi-year incentives when earned, generally over the agreement period. The Company uses current and
historical purchasing data, forecasted purchasing volumes, and other factors in estimating whether the underlying objectives or
milestones will be achieved. Consideration received to promote and sell the supplier’s products is typically a reimbursement of
marketing costs incurred by the Company and is recorded as a reduction of the Company’s operating expenses. If the amount of
consideration received from the suppliers exceeds the Company’s marketing costs, any excess is recorded as a reduction of cost of
goods sold. The Company follows the requirements of FASB ASC 605-50-25-10, Revenue Recognition—Customer Payments and
Incentives—Recognition—Customer’s Accounting for Certain Consideration Received from a Vendor and ASC 605-50-45-16,
Revenue Recognition—Customer Payments and Incentives—Other Presentation Matters—Reseller’s Characterization of Sales
Incentives Offered to Customers by Manufacturers.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are included in net sales. Estimated shipping and handling costs incurred by the
Company of $884.5 million, $807.7 million, and $752.0 million are recorded in operating expenses in the consolidated statement of
operations for fiscal 2018, fiscal 2017, and fiscal 2016, respectively.
Stock-Based Compensation
The Company participates in the Performance Food Group Company 2007 Management Option Plan (the “2007 Option Plan”)
and the Performance Food Group Company 2015 Omnibus Incentive Plan (the “2015 Incentive Plan”) and follows the fair value
recognition provisions of FASB ASC 718-10-25, Compensation—Stock Compensation—Overall—Recognition. This guidance
requires that all stock-based compensation be recognized as an expense in the financial statements. The Company recognizes expense
for its stock-based compensation based on the fair value of the awards that are granted. The Company estimates the fair value of
service-based options using a Black-Scholes option pricing model. The fair values of service-based restricted stock, restricted stock
with performance conditions and restricted stock units are based on the Company’s stock price on the date of grant. The Company
estimates the fair value of options and restricted stock with market conditions using a Monte Carlo simulation. Compensation cost is
recognized ratably over the requisite service period. For those options and restricted stock that have a performance condition,
compensation expense is based upon the number of option or shares, as applicable, expected to vest after assessing the probability that
the performance criteria will be met. The Company has made a policy election to account for forfeitures as they occur.
Income Taxes
The Company follows FASB ASC 740-10, Income Taxes—Overall, which requires the use of the asset and liability method of
accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the tax bases of assets and liabilities and their reported amounts. Future tax benefits, including net
operating loss carry-forwards, are recognized to the extent that realization of such benefits is more likely than not. Uncertain tax
positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax
audits, developments in case law, and closings of statutes of limitations. Such adjustments are reflected in the tax provision as
appropriate.
Derivative Instruments and Hedging Activities
As required by FASB ASC 815-20, Derivatives and Hedging—Hedging—General, the Company records all derivatives on the
balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative,
whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the
hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company primarily uses derivative contracts
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to manage the exposure to variability in expected future cash flows. A portion of these derivatives is designated and qualify as cash
flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging
instrument with the recognition of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may
enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not
apply or the Company elects not to apply hedge accounting under FASB ASC 815-20. In the event that the Company does not apply
the provisions of hedge accounting, the derivative instruments are recorded as an asset or liability on the consolidated balance sheets
at fair value, and any changes in fair value are recorded as unrealized gains or losses and included in Other expense in the
accompanying consolidated statement of operations. See Note 9 Derivatives and Hedging Activities for additional information on the
Company’s use of derivative instruments.
The Company discloses derivative instruments and hedging activities in accordance with FASB ASC 815-10-50, Derivatives
and Hedging—Overall—Disclosure. FASB ASC 815-10-50 sets forth the disclosure requirements with the intent to provide users of
financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under FASB ASC 815-20, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and cash flows. FASB ASC 815-10-50 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses
on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
Fair Value Measurements
Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The accounting guidance establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are
as follows:
•
•
•
Level 1—Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly for
substantially the full term of the asset or liability; and
Level 3—Unobservable inputs in which there are little or no market data, which include management’s own assumption
about the risk assumptions market participants would use in pricing an asset or liability.
The Company’s derivative instruments are carried at fair value and are evaluated in accordance with this hierarchy.
Contingent Liabilities
The Company records a liability related to contingencies when a loss is considered to be probable and a reasonable estimate of
the loss can be made. This estimate would include legal fees, if applicable.
3.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU
requires an entity to measure most inventory at the lower of cost and net realizable value. When evidence exists that the net realizable
value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. The
ASU is effective for public companies prospectively for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years. The Company adopted this ASU as of the beginning of fiscal 2018 and concluded that it did not have a
material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or
extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination,
proceeds from the settlement of certain insurance claims, and distributions received from equity method investees. This ASU is
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption
permitted. An entity that elects early adoption must adopt all of the amendments in the same period using the retrospective transition
method. The Company elected to early adopt ASU 2016-15 as of the beginning of fiscal 2018. Based on our review of the ASU, the
Company concluded that it has historically classified the specified cash receipts and cash payments in accordance with the clarified
guidance. This ASU did not have a material impact on the Company’s consolidated financial statements.
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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years, with early adoption permitted. The ASU requires a retrospective transition method for each period
presented. The Company elected to early adopt ASU 2016-18 as of the beginning of fiscal 2018. The statements of cash flows for
the fiscal years ended July 1, 2017 and July 2, 2016 include restricted cash with cash when reconciling the beginning-of-period and
end-of-period total amounts. As a result of the adoption of ASU 2016-18, cash payments of $7.3 million in fiscal 2016 related to
insurance claims paid using restricted cash is classified as a change in Accrued expenses and other liabilities within Net cash provided
by operating activities.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. This ASU eliminates Step 2 of the goodwill impairment test, which is performed by estimating the fair value of
individual assets and liabilities of the reporting unit to calculate the implied fair value of goodwill. Instead, an entity will record a
goodwill impairment charge based on the excess of a reporting unit’s carrying value over its estimated fair value, not to exceed the
carrying amount of goodwill. This ASU is effective for annual and interim goodwill impairment tests in fiscal years beginning after
December 15, 2019 and should be applied prospectively. Early adoption is permitted. The Company elected to early adopt ASU 2017-
04 as of the beginning of fiscal 2018. Upon adoption of the ASU, the Company concluded that it did not have a material impact on its
consolidated financial statements. The Company will apply ASU 2017-04 on a prospective basis when analyzing goodwill
impairment.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU amends ASC 220, “Income
Statement—Reporting Comprehensive Income,” to allow a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the Act. In addition, under the ASU, an entity will be required to provide certain
disclosures regarding stranded tax effects. The ASU is effective for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years, with early adoption permitted. The Company elected to early adopt ASU 2018-02 in the fourth
quarter of fiscal 2018 on a prospective basis. This ASU did not have a material impact on the Company’s consolidated financial
statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and has issued subsequent
amendments to this guidance. This ASU is a comprehensive new revenue recognition model that requires a company to recognize
revenue that represents the transfer of promised goods or services to a customer in an amount that reflects the consideration it expects
to receive in exchange for those goods or services.
The Company adopted this standard at the beginning of fiscal year 2019 using the modified retrospective approach. The
Company has completed its analysis of the new standard and determined that the Company’s customer contracts include one
performance obligation which is satisfied once the products are delivered to the customer. Revenue will be recognized at the point in
time in which the Company transfers control of the products to the customer. This is consistent with the Company’s current practice of
recognizing revenue upon delivery to the customer. For the first quarter of fiscal 2019, the Company will be required to make
enhanced revenue disclosures, which will include relevant information about contracts with customers, disaggregated revenues,
performance obligations and other items requiring significant judgments and estimates used to recognize revenue. The Company has
revised its relevant policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of Topic
606 and has updated internal controls accordingly.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU is a comprehensive new lease accounting
model that requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about
leasing arrangements. As part of the implementation of this new standard, the Company is in the process of reviewing current
accounting policies and assessing the practical expedients allowed under this new guidance. The Company is currently evaluating the
impact that the adoption of this ASU will have on its consolidated financial statements, as well as on its systems, processes, and
controls to properly account for its leases. The Company is in the process of identifying the complete population of leases affected and
determining and gathering all the necessary information required to calculate the lease liabilities and right-of-use assets. In addition
the Company is in the process of implementing software to assist with future reporting. For public entities, the ASU is effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt the
guidance in fiscal 2020. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided
companies with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method
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companies would apply the new lease standard at the date of adoption and recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. ASC 842, as originally issued, required companies to use a modified
retrospective transition approach as of the beginning of the earliest comparable period presented in a company’s financial statements.
The Company is in the process of determining which transition method to apply. The Company believes adoption of this standard will
have a significant impact on our consolidated financial statements. Information about our undiscounted future lease payments and the
timing of those payments is in Note 12. Leases in this Annual Report on Form 10-K (“Form 10-K”).
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The pronouncement changes the impairment model for most financial assets and will require the use
of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the
lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset,
resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal
years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company plans to adopt the new
standard in fiscal 2021. Companies are required to apply the standard using a modified retrospective approach, with a cumulative-
effect adjustment recorded to beginning retained earnings on the effective date. The Company is in the process of evaluating the
impact of this ASU on our future consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU clarifies the definition of a business in order to assist companies in the evaluation of whether transactions should be
accounted for as acquisitions or disposals of assets or businesses. The amended guidance also removes the existing evaluation of a
market participant’s ability to replace missing elements and narrows the definition of output to achieve consistency with other
topics. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years
and should be applied on a prospective basis. Early adoption is permitted. Adoption of this ASU is not expected to have a material
impact on the Company’s financial statements at the date of adoption.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities. This ASU expands hedge accounting for both financial and non-financial risk components to better align hedge
accounting with a company’s risk management strategies, simplify the application of hedge accounting, and increase transparency as
to the scope and results of hedging programs. It also amends the presentation and disclosure requirements and changes how companies
assess effectiveness. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years, with early adoption permitted. For cash flow hedges existing at the adoption date, the standard requires adoption on a modified
retrospective basis with a cumulative-effect adjustment to the Consolidated Balance Sheet as of the beginning of the year of adoption.
The amendments to presentation guidance and disclosure requirements are required to be adopted prospectively. The Company elected
to early adopt ASU 2017-12 as of the beginning of fiscal 2019. Upon adoption of the ASU, the Company concluded that it did not
have a material impact on its consolidated financial statements.
4.
Business Combinations
During fiscal year 2018, the Company paid cash of $72.7 million for two acquisitions. During fiscal year 2017, the Company
paid cash of $193.6 million for seven acquisitions and during fiscal 2016, the Company paid cash of $39.0 million for two acquisition.
These acquisitions did not materially affect the Company’s results of operations.
The following table summarizes the preliminary purchase price allocation for each major class of assets acquired and liabilities
assumed for the fiscal 2018 acquisitions.
(In millions)
Net working capital
Goodwill
Other intangible assets
Property, plant and equipment
Total purchase price
Fiscal 2018
$
$
24.9
21.3
24.7
1.8
72.7
Subsequent to June 30, 2018, the Company paid $31.5 million for an acquisition. The Company is in the process of determining
the fair values of the assets acquired and liabilities assumed.
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5. Goodwill and Other Intangible Assets
The Company recorded additions to goodwill in connection with its acquisitions. The goodwill is a result of expected synergies
from combined operations of the acquisitions and the Company. The following table presents the changes in the carrying amount of
goodwill:
(In millions)
Balance as of July 2, 2016
Acquisitions—current year
Adjustment related to prior year acquisitions
Balance as of July 1, 2017
Acquisitions—current year
Adjustment related to prior year acquisitions
Balance as of June 30, 2018
Performance
Foodservice
PFG
Customized
$
$
405.3 $
22.9
—
428.2
—
0.3
428.5 $
166.5 $
—
—
166.5
—
—
166.5 $
Vistar
Other
Total
63.0 $
2.3
(0.4 )
64.9
21.3
—
86.2 $
39.2 $
19.8
—
59.0
—
0.3
59.3 $
674.0
45.0
(0.4 )
718.6
21.3
0.6
740.5
The fiscal 2018 adjustment related to prior year acquisitions is the result of net working capital adjustments.
The following table presents the Company’s intangible assets by major category as of June 30, 2018 and July 1, 2017:
(In millions)
Intangible assets with definite lives:
Customer relationships
Trade names and trademarks
Deferred financing costs
Non-compete
Leases
Technology
Total intangible assets with definite lives
Intangible assets with indefinite lives:
Goodwill
Trade names
Total intangible assets with indefinite lives
As of June 30, 2018
As of July 1, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Range of
Lives
$ 477.3 $
106.0
45.5
31.2
12.5
26.1
$ 698.6 $
$ 740.5 $
39.5
$ 780.0 $
(360.4 ) $ 116.9 $ 457.0 $
106.0
10.6
44.2
7.5
26.8
13.4
12.5
5.9
—
26.1
(544.3 ) $ 154.3 $ 672.6 $
(95.4 )
(38.0 )
(17.8 )
(6.6 )
(26.1 )
(337.4 ) $ 119.6 4 – 11 years
4 – 9 years
13.7
(92.3 )
Debt term
9.0
(35.2 )
2 – 5 years
(14.0 )
12.8
6.5 Lease term
(6.0 )
5 – 7 years
—
(26.1 )
(511.0 ) $ 161.6
— $ 740.5 $ 718.6 $
—
39.5
— $ 780.0 $ 758.1 $
39.5
— $ 718.6
—
39.5
— $ 758.1
Indefinite
Indefinite
For the intangible assets with definite lives, the Company recorded amortization expense of $33.3 million for fiscal 2018, $37.7
million for fiscal 2017, and $42.3 million for fiscal 2016. For the next five fiscal periods and thereafter, the estimated future
amortization expense on intangible assets with definite lives are as follows:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total amortization expense
$
$
33.7
30.4
29.4
24.2
12.4
24.2
154.3
6.
Concentration of Sales and Credit Risk
The Company had no customers that comprised more than 10% of consolidated net sales for fiscal 2018, fiscal 2017, or fiscal
2016. At June 30, 2018 and July 1, 2017, respectively, the Company had no customers that comprised more than 10% of consolidated
accounts receivable. The Company maintains an allowance for doubtful accounts for which details are disclosed in the accounts
receivable portion of Note 2, Summary of Significant Accounting Policies and Estimates—Accounts Receivable.
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Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts
receivable. The Company’s customer base includes a large number of individual restaurants, national and regional chain restaurants,
and franchises and other institutional customers. The credit risk associated with accounts receivable is minimized by the Company’s
large customer base and ongoing monitoring of customer creditworthiness.
7.
Property, Plant, and Equipment
Property, plant, and equipment as of June 30, 2018 and July 1, 2017 consisted of the following:
(In millions)
Buildings and building improvements
Land
Transportation equipment
Warehouse and plant equipment
Office equipment, furniture, and fixtures
Leasehold improvements
Construction-in-process
Less: accumulated depreciation and amortization
Property, plant and equipment, net
$
As of
June 30, 2018
As of
July 1, 2017 Range of Lives
$
477.1 $
48.7
152.6
257.5
279.7
114.0
85.2
1,414.8
(619.3 )
795.5 $
452.7
47.9
136.4
242.3
247.8
108.3
10 – 39 years
—
2 – 10 years
3 – 20 years
2 – 10 years
Lease term(1)
50.8
1,286.2
(545.5 )
740.7
(1) Leasehold improvements are depreciated over the shorter of the useful life of the asset or the lease term.
Total depreciation expense for the fiscal 2018, fiscal 2017, and fiscal 2016 was $100.3 million, $91.5 million, and
$80.5 million, respectively, and is included in operating expenses on the consolidated statement of operations.
8.
Debt
The Company is a holding company and conducts its operations through its subsidiaries, which have incurred or guaranteed
indebtedness as described below.
Debt consisted of the following:
(In millions)
ABL Facility
5.500% Notes due 2024
Promissory Note
Less: Original issue discount and deferred financing costs
Long-term debt
Capital and finance lease obligations
Total debt
Less: current installments
Total debt, excluding current installments
$
As of
June 30, 2018
$
As of
July 1, 2017
899.9
350.0
6.0
(8.2 )
1,247.7
49.9
1,297.6
(11.7 )
1,285.9
780.1 $
350.0
—
(7.1 )
1,123.0
61.2
1,184.2
(8.4 )
1,175.8 $
ABL Facility
PFGC, Inc. (“PFGC”), a wholly-owned subsidiary of the Company, is a party to the Second Amended and Restated Credit
Agreement dated February 1, 2016, as amended by the First Amendment to Second Amended and Restated Credit Agreement dated
August 3, 2017 (the “ABL Facility”). The ABL Facility has an aggregate principal amount of $1.95 billion and matures February
2021. The ABL Facility is secured by the majority of the tangible assets of PFGC and its subsidiaries. Performance Food Group, Inc.,
a wholly-owned subsidiary of PFGC, is the lead borrower under the ABL Facility, which is jointly and severally guaranteed by 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
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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, at Performance 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 ranging from 0.25%
to 0.375%.
The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:
(Dollars in millions)
Aggregate borrowings
Letters of credit
Excess availability, net of lenders’ reserves
of $12.1 and $11.2, respectively
Average interest rate
As of
June 30, 2018
$
780.1 $
121.3
As of
July 1, 2017
899.9
105.5
854.2
3.52 %
594.6
2.59 %
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) $160.0 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
On May 17, 2016, Performance Food Group, Inc. issued and sold $350.0 million aggregate principal amount of its 5.500%
Senior Notes due 2024 (the “Notes”), pursuant to an indenture dated as of May 17, 2016. The Notes 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 are not guaranteed by Performance Food Group Company.
The proceeds from the Notes were used to pay in full the remaining outstanding aggregate principal amount of the Term 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.
The Notes were issued at 100.0% of their par value. The Notes 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 will have the right to require Performance Food Group,
Inc. to repurchase each holder’s Notes 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. may redeem all or a
part of the Notes at any time prior to June 1, 2019 at a redemption price equal to 100% of the principal amount of the Notes being
redeemed plus a make-whole premium and accrued and unpaid interest, if any, to, but not including, the redemption date. In addition,
beginning on June 1, 2019, Performance Food Group, Inc. may redeem all or a part of the Notes at a redemption price equal to
102.750% of the principal amount redeemed. The redemption price decreases to 101.325% and 100.000% of the principal amount
redeemed on June 1, 2020 and June 1, 2021, respectively. In addition, at any time prior to June 1, 2019, Performance Food Group, Inc.
may redeem up to 40% of the Notes 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 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
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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 also contain
customary events of default, the occurrence of which could result in the principal of and accrued interest on the Notes to become or be
declared due and payable.
The ABL Facility and the indenture governing the Notes contain customary restrictive covenants under which all of the net
assets of PFGC and its subsidiaries were restricted from distribution to Performance Food Group Company, except for approximately
$486.0 million of restricted payment capacity available under such debt agreements, as of June 30, 2018. Such minimum estimated
restricted payment capacity is calculated based on the most restrictive of our debt agreements and may fluctuate from period to period,
which fluctuations may be material. Our restricted payment capacity under other debt instruments to which the Company is subject
may be materially higher than the foregoing estimate.
Term Facility
In fiscal 2016, the Company used the proceeds from its IPO, borrowings under the ABL Facility, and a portion of the proceeds
from the Notes issuance to repay the outstanding aggregate principal amount of the Term Facility and to terminate the facility. As a
result of these payments, a $9.4 million loss on extinguishment and $5.5 million of accelerated amortization of original issuance
discount and deferred financing costs was recorded in fiscal 2016.
Unsecured Subordinated Promissory Note
In connection with an acquisition, Performance Food Group, Inc. issued a $6.0 million interest only, unsecured subordinated
promissory note on December 21, 2012. The $6.0 million promissory note was paid off in December 2017.
Fiscal year maturities of long-term debt, excluding capital and finance lease obligations, are as follows:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total long-term debt, excluding capital and finance lease
obligations
$
—
—
780.1
—
—
350.0
$
1,130.1
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Capital and Finance Lease Obligations
Performance Food Group, Inc. is a party to facility leases at two Performance Foodservice distribution facilities and several
equipment leases that are accounted for as capital leases in accordance with FASB ASC 840-30, Leases—Capital Leases. The charge
to income resulting from amortization of these leases is included with depreciation expense in the consolidated statement of
operations. The gross and net book values of assets under capital leases on the balance sheet as of June 30, 2018 were $84.9 million
and $52.3 million, respectively. The gross and net book values of assets under capital leases on the balance sheet as of July 1, 2017
were $69.7 million and $41.8 million, respectively. Future minimum lease payments under non-cancelable capital lease obligations
were as follows as of June 30, 2018:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
Less: interest
Present value of future minimum lease payments
Capital
Leases
12.1
10.0
9.6
9.4
8.3
33.5
82.9
21.7
61.2
$
$
During the first quarter of fiscal 2015, Performance Food Group, Inc. sold and simultaneously leased back a Vistar distribution
facility for a period of two years. As a result of continuing involvement with the property, this transaction did not meet the criteria to
qualify as a sale-leaseback. In accordance with FASB ASC 840-40, Leases—Sale Leaseback Transactions, the building and related
assets subject to the lease continued to be reflected on the Company’s balance sheet and depreciated over their remaining useful lives.
The proceeds received from the sale of the building were recorded as financing lease obligations. This lease ended during fiscal 2017,
and, as a result, the net book value of the assets subject to the lease and the corresponding financing obligation was reversed.
9. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company
principally manages its exposures to a wide variety of business and operational risks through management of its core business
activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into
derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future
known and uncertain cash amounts, the value of which are determined by interest rates and diesel fuel costs. The Company’s
derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and payments related to the Company’s borrowings and diesel fuel purchases.
The effective portion of changes in the fair value of derivatives that are both designated and qualify as cash flow hedges is
recorded in other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction occurs.
The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to
interest rate movements. Since the Company has a substantial portion of its debt in variable-rate instruments, it accomplishes this
objective with interest rate swaps. These swaps are designated as cash flow hedges and involve the receipt of variable-rate amounts
from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount. All of the Company’s interest rate swaps are designated and qualify as cash flow hedges.
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As of June 30, 2018, Performance Food Group, Inc. had eight interest rate swaps with a combined $650.0 million notional
amount. The following table summarizes the outstanding Swap Agreements as of June 30, 2018 (in millions):
Effective Date
August 9, 2013
June 30, 2017
June 30, 2017
June 30, 2017
June 30, 2017
August 9, 2018
August 9, 2018
June 30, 2020
Maturity Date
August 9, 2018 $
June 30, 2019
June 30, 2020
June 30, 2020
June 30, 2020
August 9, 2021
August 9, 2021
December 31, 2021
Notional
Amount
Fixed Rate
Swapped
200.0
50.0
50.0
50.0
50.0
75.0
75.0
100.0
1.51 %
1.13 %
1.23 %
1.25 %
1.26 %
1.21 %
1.20 %
2.16 %
The tables below present the effect of the interest rate swaps designated in hedging relationships on the consolidated statement
of operations for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016:
(in millions)
Amount of (gain) loss recognized in OCI, pre-tax
Tax expense (benefit)
Amount of (gain) loss recognized in OCI, after-tax
Amount of gain (loss) reclassified from OCI into interest
expense, pre-tax
Tax (expense) benefit
Amount of gain (loss) reclassified from OCI into interest
expense, after-tax
$
$
$
$
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
9.3
(3.6 )
5.7
(9.3 ) $
3.6
(5.7 ) $
(4.0 ) $
1.5
(7.3 )
2.9
(7.9 ) $
2.1
(5.8 ) $
0.6 $
(0.2 )
0.4 $
(2.5 ) $
(4.4 )
As interest payments are made on the Company’s variable rate debt, amounts are reclassified from Accumulated other
comprehensive income to Interest expense. The Company recorded a loss of $0.1 million, a gain of $1.5 million, and a loss of $0.5
million related to ineffectiveness on interest rate swaps during the fiscal years ended 2018, 2017, and 2016, respectively. During the
twelve months ending June 29, 2019, the Company estimates that gains of approximately $4.1 million will be reclassified to interest
expense.
Hedges of Forecasted Diesel Fuel Purchases
From time to time, Performance Food Group, Inc. enters into costless collar arrangements to manage its exposure to variability
in cash flows expected to be paid for its forecasted purchases of diesel fuel. As of June 30, 2018, Performance Food Group, Inc. was a
party to three such arrangements, with an aggregate 4.5 million gallon original notional amount. The 4.5 million gallon forecasted
purchases of diesel fuel are expected to be made between July 1, 2018 and December 31, 2018.
The fuel collar instruments do not qualify for hedge accounting. Accordingly, the derivative instruments are recorded as an asset
or liability on the balance sheet at fair value and any changes in fair value are recorded in the period of change as unrealized gains or
losses on fuel hedging instruments and included in Other, net in the accompanying consolidated statement of operations.
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The Company does not currently have a payable or receivable related to cash collateral for its derivatives, and therefore it has
not established an accounting policy for offsetting the fair value of its derivatives against such balances. The table below presents the
fair value of the derivative financial instruments as well as their classification on the balance sheet as of June 30, 2018 and July 1,
2017:
(in millions)
Assets
Derivatives designated as hedges:
Interest rate swaps
Interest rate swaps
Derivatives not designated as hedges:
Diesel fuel collars
Total assets
Liabilities
Derivatives designated as hedges:
Interest rate swaps
Total liabilities
Balance Sheet Location
Prepaid expenses and other current assets
Other assets
Prepaid expenses and other current assets
Accrued expenses and other current liabilities
Fair Value
as of
June 30, 2018
Fair Value
as of
July 1, 2017
$
$
$
$
4.0 $
8.4
0.1
12.5 $
0.3
5.0
—
5.3
— $
— $
0.3
0.3
All of the Company’s derivative contracts are subject to a master netting arrangement with the respective counterparties that
provide for the net settlement of all derivative contracts in the event of default or upon the occurrence of certain termination events.
Upon exercise of termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and
the positive value or “in the money” transactions are netted against the negative value or “out of the money” transactions, and (iii) the
only remaining payment obligation is of one of the parties to pay the netted termination amount.
The Company has elected to present the derivative assets and derivative liabilities on the balance sheet on a gross basis for periods
ended June 30, 2018 and July 1, 2017. The tables below present the derivative assets and liability balance, before and after the effects
of offsetting, as of June 30, 2018 and July 1, 2017:
Gross
Amounts
Presented
in the
Consolidated
Balance Sheet
June 30, 2018
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
Subject to
Netting
Agreements
Gross Amounts
Presented in
the Consolidated
Balance Sheet
Net
Amounts
July 1, 2017
Gross Amounts
Not Offset in
the Consolidated
Balance Sheet
Subject to
Netting
Agreements
Net
Amounts
$
12.5 $
—
— $
—
12.5 $
—
5.3 $
0.3
— $
—
5.3
0.3
(In millions)
Total asset derivatives:
Total liability derivatives:
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The derivative instruments are the only assets or liabilities that are recorded at fair value on a recurring basis. The fuel collars
are exchange-traded commodities and their fair value is derived from valuation models based on certain assumptions regarding market
conditions, some of which may be unobservable. Based on the lack of significance of these unobservable inputs, the Company has
concluded that these instruments represent Level 2 on the fair value hierarchy. The fair values of the Company’s interest rate swap
agreements are determined using a valuation model with several inputs and assumptions, some of which may be unobservable. A
specific unobservable input used by the Company in determining the fair value of its interest rate swaps is an estimation of both the
unsecured borrowing spread to LIBOR for the Company as well as that of the derivative counterparties. Based on the lack of
significance of this estimated spread component to the overall value of the Company’s interest rate swaps, the Company has
concluded that these swaps represent Level 2 on the hierarchy.
There have been no transfers between levels in the hierarchy from July 1, 2017 to June 30, 2018.
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that provide that if the Company either defaults or is
capable of being declared in default on any of its indebtedness, the Company can also be declared in default on its derivative
obligations.
As of June 30, 2018, the aggregate fair value amount of all derivative instruments that contain contingent features were in a net
asset position.
10.
Insurance Program Liabilities
The Company maintains high-deductible insurance programs covering portions of general and vehicle liability, workers’
compensation, and group medical insurance. The amounts in excess of the deductibles are fully insured by third-party insurance
carriers, subject to certain limitations. A summary of the activity in all types of deductible liabilities appears below:
(In millions)
Balance at June 27, 2015
Charged to costs and expenses
Payments
Balance at July 2, 2016
Charged to costs and expenses
Payments
Balance at July 1, 2017
Charged to costs and expenses
Payments
Balance at June 30, 2018
$
$
$
$
84.0
146.7
(143.4 )
87.3
165.2
(154.7 )
97.8
164.5
(154.9 )
107.4
11. Fair Value of Financial Instruments
The carrying values of cash, accounts receivable, outstanding checks in excess of deposits, trade accounts payable, and accrued
expenses approximate their fair values because of the relatively short maturities of those instruments. The derivative assets and
liabilities are recorded at fair value on the balance sheet. The fair value of long-term debt, which has a carrying value of $1,123.0
million and $1,247.7 million, is $1,126.7 million and $1,258.3 million at June 30, 2018 and July 1, 2017, respectively, and is
determined by reviewing current market pricing related to comparable debt issued at the time of the balance sheet date, and is
considered a Level 2 measurement.
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12. Leases
Subsidiaries of the Company lease various warehouse and office facilities and certain equipment under long-term operating
lease agreements that expire at various dates. Rent expense for operating leases includes any rent increases, rent holidays, or landlord
concessions on a straight-line basis over the lease term. As of June 30, 2018, subsidiaries of the Company are obligated under non-
cancelable operating lease agreements to make future minimum lease payments as follows:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
91.5
81.2
65.6
52.9
39.7
119.5
450.4
Rent expense for operating leases was $119.9 million for fiscal 2018, $115.7 million for fiscal 2017, and $105.7 million for
fiscal 2016. A subsidiary of the Company has posted letters of credit as collateral supporting certain leases. These letters of credit are
included in the total outstanding letters of credit under the ABL Facility as discussed in Note 8, Debt.
Subsidiaries of the Company have residual value guarantees to their lessors under certain of their operating leases. These
guarantees are discussed in Note 15 Commitments and Contingencies. These residual value guarantees are not included in the above
table of future minimum lease payments.
A subsidiary of the Company is a party to several capital leases. See Note 8, Debt for discussion of these leases.
13.
Income Taxes
Income tax expense for fiscal 2018, fiscal 2017 and fiscal 2016 consisted of the following:
(In millions)
Current income tax (benefit) expense:
Federal
State
Total current income tax (benefit) expense
Deferred income tax (benefit) expense:
Federal
State
Total deferred income tax expense (benefit)
Total income tax (benefit) expense, net
$
For the fiscal
year ended
June 30, 2018
For the fiscal
year ended
July 1, 2017
For the fiscal
year ended
July 2, 2016
$
(8.6 ) $
2.1
(6.5 )
(7.2 )
8.6
1.4
(5.1 ) $
45.8 $
9.3
55.1
3.6
2.7
6.3
61.4 $
40.2
6.4
46.6
(1.1 )
0.7
(0.4 )
46.2
The determination of the Company’s overall effective tax rate requires significant judgment, the use of estimates and the
interpretation and application of complex tax laws. The effective tax rate reflects the income earned and taxed in various United
States federal and state jurisdictions. Tax law changes, increases and decreases in temporary and permanent differences between book
and tax items, tax credits, and the Company’s change in income in each jurisdiction all affect the overall effective tax rate. It is the
Company’s practice to recognize interest and penalties related to uncertain tax positions in income tax expense.
On December 22, 2017, the Act was signed into law. The Act makes broad and complex changes to the U.S. Internal Revenue
Code including, but not limited to: reducing the U.S. federal corporate tax rate from 35% to 21%; creating a new limitation on
deductible interest expense; repealing the domestic production activity deduction; providing for bonus depreciation that will allow for
full expensing of certain qualified property; and limiting other deductions.
The Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides
guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year
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from the Act enactment date for companies to complete the accounting under FASB ASC 740, Income Taxes (“ASC 740”). In
accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under
ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it is able
to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a
provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of
the tax laws that were in effect immediately before the enactment of the Act. The Company has not identified any items for which the
income tax effects of the Act have not been substantially completed.
The Company’s effective income tax rate for continuing operations for fiscal 2018, fiscal 2017 and fiscal 2016 was (2.6)%,
39.0%, and 40.3%, respectively. As a result of the reduction in the federal corporate income tax rate to 21% from 35% under the Act,
the Company has a blended federal statutory rate of 28% for the fiscal year ending June 30, 2018. Actual income tax (benefit)
expense differs from the amount computed by applying the applicable U.S. federal statutory corporate income tax rate of 28% in fiscal
2018 and 35% in fiscal 2017 and fiscal 2016 to earnings before income taxes as follows:
(In millions)
Federal income tax expense computed at
statutory rate
Increase (decrease) in income taxes resulting from:
For the fiscal
year ended
June 30, 2018
For the fiscal
year ended
July 1, 2017
For the fiscal
year ended
July 2, 2016
$
54.3 $
55.2 $
40.0
State income taxes, net of federal income tax benefit
Non-deductible expenses and other
Tax law change
Stock-based compensation
Other
Total income tax (benefit) expense, net
$
10.4
1.7
(50.4 )
(20.6 )
(0.5 )
(5.1 ) $
7.5
3.4
—
(4.7 )
—
61.4 $
4.8
2.7
—
(1.3 )
—
46.2
During the fiscal year ended June 30, 2018, performance vesting criteria for certain stock-based compensation awards was met
resulting in a significant permanent tax deduction difference. The impact to the provision for stock-based compensation and the
impact of the reduction in tax rate under the Act are summarized as follows:
Fiscal year ended June 30, 2018
(Dollars in millions)
Income tax (benefit), reported
Revaluation of net deferred income tax liability
Other impact of tax law change
Stock-based compensation - performance vesting
Income tax expense, excluding benefits
Income Tax Expense
(5.1 )
$
38.5
11.9
15.4
60.7
$
Effective Tax
Rate
-2.6 %
19.9 %
6.1 %
8.0 %
31.4 %
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Deferred income taxes are recorded based upon the tax effects of differences between the financial statement and tax bases of
assets and liabilities and available tax loss and credit carry-forwards. Temporary differences and carry-forwards that created
significant deferred tax assets and liabilities were as follows:
(In millions)
Deferred tax assets:
Allowance for doubtful accounts
Inventories
Accrued employee benefits
Self-insurance reserves
Net operating loss carry-forwards
Stock-based compensation
Deferred rent
Other assets
Total gross deferred tax assets
Less: Valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Property, plant, and equipment
Other comprehensive income
Basis difference in intangible assets
Prepaid expenses
Other
As of
June 30, 2018
As of
July 1, 2017
$
3.1 $
4.3
6.9
1.6
5.8
6.4
0.6
0.9
29.6
(0.4 )
29.2
82.8
2.9
34.1
15.6
0.1
135.5
106.3 $
4.0
7.0
9.8
2.5
4.2
12.0
1.0
2.6
43.1
—
43.1
86.8
1.5
51.1
6.5
0.2
146.1
103.0
Total deferred tax liabilities
Total net deferred income tax liability
$
The state net operating loss carry-forwards expire in fiscal years 2018 through 2037. For the fiscal year ending June 30, 2018,
the Company established a valuation allowance of $0.4 million, net of federal tax benefit, against deferred tax assets related to certain
net operating losses which are not likely to be realized due to limitations on utilization.
The Company records a liability for Uncertain Tax Positions in accordance with FASB ASC 740-10-25, Income Taxes—
General—Recognition. The following table summarizes the activity related to unrecognized tax benefits:
(In millions)
Balance as of June 27, 2015
Increases due to current year positions
Settlements with taxing authorities
Expiration of statutes of limitations
Balance as of July 2, 2016
Increases due to current year positions
Increases due to prior years positions
Expiration of statutes of limitations
Balance as of July 1, 2017
Increases due to current year positions
Decreases due to prior years positions
Expiration of statutes of limitations
Balance as of June 30, 2018
$
$
0.9
—
(0.1 )
(0.4 )
0.4
0.5
0.6
(0.2 )
1.3
0.2
(0.2 )
(0.1 )
1.2
Included in the balance as of June 30, 2018 and July 1, 2017, is $1.2 million and $1.3 million, respectively, of unrecognized tax
benefits that could affect the effective tax rate for continuing operations. The balance in unrecognized tax benefits relates primarily to
transfer pricing and state tax issues.
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As of June 30, 2018, substantially all federal, state and local, and foreign income tax matters have been concluded for years
through fiscal 2014. The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve
months will have a significant impact on its results of operations or financial position.
It is the Company’s practice to recognize interest and penalties related to uncertain tax positions in income tax expense.
Approximately $0.2 million and $0.1 million was accrued for interest related to uncertain tax positions as of June 30, 2018 and July 1,
2017, respectively. Net interest expense of less than $0.1 million was recognized in tax expense for fiscal 2018, fiscal 2017 and fiscal
2016.
14. Retirement Plans
Employee Savings Plans
The Company sponsors the Performance Food Group Employee Savings Plan (the “PFG Savings Plan”). The PFG Savings Plan
consists of two components: a defined contribution plan covering substantially all employees (the “401(k) Plan”) and a profit sharing
plan. Under the latter, the Company can make a discretionary contribution in a given year, although there is no requirement to do so,
and no such contribution was made in fiscal years 2018 or 2017. As of January 1, 2009, the 401(k) plan merged with the Self-Directed
Tax Advantaged Retirement (STAR) Plan of PFGC, Inc. (the “STAR Plan”). Employees participating in the 401(k) Plan may elect to
contribute between 1% and 50% of their qualified compensation, up to a maximum dollar amount as specified by the provisions of the
Internal Revenue Code. The Company matched 100% of the first 3.5% of the employee contributions, resulting in matching
contributions of $17.9 million for fiscal 2018, $16.5 million for fiscal 2017, and $16.0 million for fiscal 2016. Associates that were
eligible for the annual STAR Plan contribution (an annual amount based on the employee’s salary and years of service) as of
December 31, 2008 remained eligible to receive STAR Plan contributions under the merged PFG Savings Plan. STAR Plan
contributions made by the Company were $3.9 million for fiscal 2018, $3.9 million for fiscal 2017, and $4.2 million for fiscal 2016.
15. Commitments and Contingencies
Purchase Obligations
The Company had outstanding contracts and purchase orders for capital projects and services totaling $26.4 million at June 30,
2018. Amounts due under these contracts were not included on the Company’s consolidated balance sheet as of June 30, 2018.
Withdrawn Multiemployer Pension Plans
Until May 2013, Performance Food Group, Inc. participated in the Central States Southeast and Southwest Areas Pension Fund
(“Central States Pension Fund”), a multiemployer pension plan administered by the Teamsters Union, pursuant to which Performance
Food Group, Inc. was required to make contributions on behalf of certain union employees. The Central States Pension Fund is
underfunded and is in critical status as determined by the Pension Benefit Guaranty Corporation. In connection with a renegotiation of
the collective bargaining agreement that had previously required the Company’s participation in the Central States Pension Fund, the
Company negotiated the termination of its participation in the Central States Pension Fund and the Company has withdrawn. As of
June 30, 2018, the outstanding withdrawal liability totaled $5.1 million.
Guarantees
Subsidiaries of the Company have entered into numerous operating leases, including leases of buildings, equipment, tractors,
and trailers. Certain of the leases for tractors, trailers, and other vehicles and equipment, provide for residual value guarantees to the
lessors. Circumstances that would require the subsidiary to perform under the guarantees include either (1) default on the leases with
the leased assets being sold for less than the specified residual values in the lease agreements, or (2) decisions not to purchase the
assets at the end of the lease terms combined with the sale of the assets, with sales proceeds less than the residual value of the leased
assets specified in the lease agreements. Residual value guarantees under these operating lease agreements typically range between 7%
and 20% of the value of the leased assets at inception of the lease. These leases have original terms ranging from 4 to 8 years and
expiration dates ranging from 2018 to 2025. As of June 30, 2018, the undiscounted maximum amount of potential future payments for
lease guarantees totaled approximately $26.1 million, which would be mitigated by the fair value of the leased assets at lease
expiration. The assessment as to whether it is probable that subsidiaries of the Company will be required to make payments under the
terms of the guarantees is based upon their actual and expected loss experience. Consistent with the requirements of FASB ASC 460-
10-50, Guarantees-Overall-Disclosure, the Company has recorded $0.3 million of the potential future guarantee payments on its
consolidated balance sheet as of June 30, 2018.
The Company participates in a purchasing alliance that was formed to obtain better pricing, to expand product options, to reduce
internal costs, and to achieve greater inventory turnover. The Company has entered into an agreement to guarantee a portion of the
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trade payables for such purchasing alliance to their various suppliers as an inducement for these suppliers to extend additional trade
credit to the purchasing alliance. In the event of default by the purchasing alliance of their respective trade payables obligations, these
suppliers may proceed directly against the Company to collect their trade payables. The terms of this guarantee have an expiration
date of June 30, 2019. As of June 30, 2018, the undiscounted maximum amount of potential payments covered by this guarantee
totaled $4.0 million. The Company believes that the likelihood of payment under this guarantee is remote and that any fair value
attributable to this guarantee is immaterial; therefore, no liability has been recorded for this obligation in the Company’s consolidated
balance sheets.
In addition, the Company from time to time enters into certain types of contracts that contingently require it to indemnify
various parties against claims from third parties. These contracts primarily relate to: (i) certain real estate leases under which
subsidiaries of the Company may be required to indemnify property owners for environmental and other liabilities and other claims
arising from their use of the applicable premises; (ii) certain agreements with the Company’s officers, directors, and employees under
which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship; and
(iii) customer agreements under which the Company may be required to indemnify customers for certain claims brought against them
with respect to the supplied products.
Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with
these types of agreements are not explicitly stated, the overall maximum amount of the obligation cannot be reasonably estimated.
Historically, the Company has not been required to make payments under these obligations and, therefore, no liabilities have been
recorded for these obligations in the Company’s consolidated balance sheets.
Litigation
The Company is engaged in various legal proceedings that have arisen but have not been fully adjudicated. The likelihood of
loss arising from these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to
reasonably possible to probable. When losses are probable and reasonably estimable, they have been accrued. Based on estimates of
the range of potential losses associated with these matters, management does not believe that the ultimate resolution of these
proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or
results of operations of the Company. However, the final results of legal proceedings cannot be predicted with certainty and, if the
Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s
current estimates of the range of potential losses, the Company’s consolidated financial position or results of operations could be
materially adversely affected in future periods.
U.S. Equal Employment Opportunity Commission Lawsuit. In March 2009, the Baltimore Equal Employment Opportunity
Commission (“EEOC”) Field Office served us with company-wide (excluding, however, our Vistar and Roma Foodservice
operations) subpoenas relating to alleged violations of the Equal Pay Act and Title VII of the Civil Rights Act (“Title VII”), seeking
certain information from January 1, 2004 to a specified date in the first fiscal quarter of 2009. In August 2009, the EEOC moved to
enforce the subpoenas in federal court in Maryland, and we opposed the motion. In February 2010, the court ruled that the subpoena
related to the Equal Pay Act investigation was enforceable company-wide but on a narrower scope of data than the original subpoena
sought (the court ruled that the subpoena was applicable to the transportation, logistics, and warehouse functions of our broadline
distribution centers only and not to our PFG Customized distribution centers). We cooperated with the EEOC on the production of
information. In September 2011, the EEOC notified us that the EEOC was terminating the investigation into alleged violations of the
Equal Pay Act. In determinations issued in September 2012 by the EEOC with respect to the charges on which the EEOC had based
its company-wide investigation, the EEOC concluded that we engaged in a pattern of denying hiring and promotion to a class of
female applicants and employees into certain positions within the transportation, logistics, and warehouse functions within our
broadline division in violation of Title VII. In June 2013, the EEOC filed suit in federal court in Baltimore against us. The litigation
concerns two issues: (1) whether we unlawfully engaged in an ongoing pattern and practice of failing to hire female applicants into
operations positions; and (2) whether we unlawfully failed to promote one of the three individuals who filed charges with the EEOC
because of her gender. The EEOC seeks the following relief in the lawsuit: (1) to permanently enjoin us from denying employment to
female applicants because of their sex and denying promotions to female employees because of their sex; (2) a court order mandating
that we institute and carry out policies, procedures, practices and programs which provide equal employment opportunities for
females; (3) back pay with prejudgment interest and compensatory damages for a former female employee and an alleged class of
aggrieved female applicants; (4) punitive damages; and (5) costs. The court bifurcated the litigation into two phases. In the first phase,
the jury will decide whether we engaged in a gender-based pattern and practice of discrimination and the individual claims of one
former employee. If the EEOC prevails on all counts in the first phase, no monetary relief would be awarded, except possibly for the
single individual’s claims, which would be immaterial. The remaining individual claims would then be tried in the second phase. At
this stage in the proceedings, the Company cannot estimate either the number of individual trials that could occur in the second phase
of the litigation or the value of those claims. For these reasons, we are unable to estimate any potential loss or range of loss in the
event of an adverse finding in the first and second phases of the litigation.
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In May 2018, the EEOC filed motions for sanctions against us alleging that we failed to preserve certain paper employment
applications and e-mails during 2004 – 2009. In the sanctions motions, the EEOC seeks a range of remedies, including but not limited
to, a default judgment against us, or alternatively, an order barring us from filing for summary judgment on the EEOC’s pattern and
practice claims. We are opposing the motions and will continue to vigorously defend ourselves.
Tax Liabilities
The Company is subject to customary audits by authorities in the jurisdictions where it conducts business in the United States,
which may result in assessments of additional taxes.
16. Related-Party Transactions
Transaction and Advisory Fee Agreement
The Company was a party to an advisory fee agreement pursuant to which affiliates of Blackstone and Wellspring provided
management certain strategic and structuring advice and certain monitoring, advising, and consulting services to the Company. The
advisory fee agreement provided for the payment by the Company of an annual advisory fee and the reimbursement of out of pocket
expenses. The payments made under this agreement totaled $3.0 million, $5.6 million and $5.0 million for fiscal 2018, fiscal 2017,
and fiscal 2016, respectively.
Under its terms, this agreement terminated on October 6, 2017.
Other
The Company participates in and has an equity method investment in a purchasing alliance that was formed to obtain better
pricing, to expand product options, to reduce internal costs, and to achieve greater inventory turnover. The Company’s investment in
the purchasing alliance was $4.3 million as of June 30, 2018 and $4.6 million as of July 1, 2017. For fiscal 2018, fiscal 2017, and
fiscal 2016, the Company recorded purchases of $827.9 million, $802.8 million, and $514.8 million, respectively, through the
purchasing alliance.
17. Earnings Per Share (“EPS”)
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-
average number of common shares outstanding during the period. Diluted EPS is calculated using the weighted-average number of
common shares and dilutive potential common shares outstanding during the period. In computing diluted EPS, the average closing
stock price for the period is used in determining the number of shares assumed to be purchased with the proceeds from the exercise of
stock options under the treasury stock method. For fiscal 2018 and fiscal 2017, potential common shares of 0.7 million and 0.6
million, respectively, were not included in computing diluted earnings per share because the effect would have been antidilutive.
A reconciliation of the numerators and denominators for the basic and diluted EPS computations is as follows:
(In millions, except per share amounts)
Numerator:
Net Income
Denominator:
Weighted-average common shares outstanding
Dilutive effect of share-based awards
Weighted-average dilutive shares outstanding
Basic earnings per share
Diluted earnings per share
For the fiscal
year ended
June 30, 2018
For the fiscal
year ended
July 1, 2017
For the fiscal
year ended
July 2, 2016
$
198.7 $
96.3 $
68.3
102.0
2.6
104.6
1.95 $
1.90 $
100.2
2.8
103.0
0.96 $
0.93 $
96.4
1.7
98.1
0.71
0.70
$
$
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18. Stock-based Compensation
Performance Food Group Company provides compensation benefits to employees and non-employee directors under share-
based payment arrangements. These arrangements are designed to promote the long-term growth and profitability of the Company by
providing employees and consultants who are or will be involved in the Company’s growth with an opportunity to acquire an
ownership interest in the Company, thereby encouraging them to contribute to and participate in the success of the Company.
The Performance Food Group Company 2007 Management Option Plan (the “2007 Option Plan”)
The 2007 Option Plan allowed for the granting of awards to employees, officers, directors, consultants, and advisors of the
Company or its affiliates in the form of nonqualified options. The terms and conditions of awards granted under the 2007 Option Plan
were determined by the Board of Directors. The contractual term of the options is ten years. The Company no longer grants awards
from this plan.
Each of the employee awards under the 2007 Option Plan is divided into three equal portions. Tranche I options are subject to
time vesting. Tranche II and Tranche III options are subject to both time and performance vesting, including performance criteria
based on the internal rate of return and sponsor cash inflows as outlined in the 2007 Option Plan.
Because of the existence of the repurchase rights in the 2007 Option Plan, the weighted average service period initially exceeded
the contractual term of the options. The repurchase option feature of this plan terminated upon the date of our IPO and the Company’s
management determined that the requisite service period should be reduced from 10.7 years to the 5 year service vesting period. As a
result, compensation costs of $3.8 million were recorded in fiscal 2016 related to this change for Tranche I awards.
On July 30, 2015, the Company approved amendments to the 2007 Option Plan to modify the vesting terms of all of the Tranche
II and Tranche III options granted pursuant to the 2007 Option Plan. Prior to this amendment, the Company’s assessment of the
performance criteria indicated that satisfaction of the performance criteria was not probable and therefore, no compensation expense
had been recognized for Tranche II and Tranche III options. The time-based vesting condition did not change and will continue to be
satisfied with respect to 20% of the shares underlying these options annually, based on the participant’s continued employment with
the Company. The performance-based vesting condition was reduced to reflect changes in the macro-economic conditions following
the 2008 recession. In addition, as part of the amendments to the 2007 Option Plan, individuals holding these unvested time and
performance-vesting options were allowed the right to exercise such options into restricted shares of the Company’s common stock
and to receive a new grant of time and performance-vesting options. On September 30, 2015, 3.73 million options were exchanged for
2.27 million restricted shares and 1.46 million new options.
On December 7, 2017, Wellspring sold all of their remaining interest in shares of the Company’s common stock and the
Company determined that the performance criteria for the Tranche II and III awards had been met, resulting in the vesting of 2.1
million shares of restricted stock and 1.4 million options. In the second quarter of fiscal 2018, the Company recognized approximately
$6.3 million of accelerated compensation expense in connection with the vesting of the Tranche II and III awards. Based on the
performance achieved, total compensation expense for the Tranche II and III awards was $24.9 million.
No Tranche I options were granted from the 2007 Option Plan in fiscal 2018 and 2017. The Company estimated the fair value of
the Tranche I time vesting options granted in fiscal 2016 below using a Black-Scholes option pricing model with the following
weighted average assumptions:
Risk-free Interest Rate
Dividend Yield
Expected Volatility
Expected Term (in years)
Weighted Average Fair Value of Options Granted
For the fiscal year
ended July 2, 2016
1.72 %
0.00 %
38.00 %
6.5
8.99
$
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected holding period. The
Company assumed a dividend yield of zero percent when valuing the grants in fiscal 2016 under the 2007 Option Plan because the
Company announced that it did not intend to pay dividends on its common stock. Expected volatility is based on the expected
volatilities of comparable peer companies that are publicly traded. The expected term represents the period of time that awards granted
are expected to be outstanding. For grants in fiscal 2016, the Company elected to use the simplified method to estimate the expected
holding period because we did not have sufficient information to understand post vesting exercise behavior.
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No Tranche II and III options were granted from the 2007 Option Plan in fiscal 2018 and 2017. With the assistance of a
specialist, the Company estimated the fair value of the Tranche II and III options and restricted shares with a market condition using a
Monte Carlo simulation with the following weighted average assumptions:
For the fiscal year ended July 2, 2016
Options
Market Condition
Restricted Shares
Risk-free Interest Rate
Dividend Yield
Expected Volatility
Expected Term (in years)
Weighted Average Fair Value of Awards Granted
$
1.23 %
0.00 %
30.00 %
6.38
4.20 $
1.23 %
0.00 %
30.00 %
2.71
8.43
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected holding period. The
Company assumed a dividend yield of zero percent when valuing the grants in fiscal 2016 under the 2007 Option Plan because the
Company announced that it does not intend to pay dividends on its common stock. Expected volatility is based on the historical equity
volatility of comparable peer companies that are publicly traded. This historical equity volatility was un-levered using the company
specific capital structure of the comparable peer companies and was re-levered using the capital structure of the Company. The
expected term represents the period of time that awards granted are expected to be outstanding, as determined with the assistance of a
specialist based on the vesting term and contractual term.
In total, compensation cost that has been charged against income for the Company’s 2007 Option Plan was $9.5 million,
$6.7 million and $13.2 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively, and it is included within operating expenses in
the consolidated statements of operations. The total income tax benefit recognized in the consolidated statements of operations
was $3.1 million, $2.6 million and $5.1 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. The total unrecognized
compensation cost for all awards under the 2007 Option Plan is $0.8 million as of June 30, 2018. This cost is expected to be
recognized over a weighted-average period of 1.7 years.
The following table summarizes the stock option activity for fiscal 2018 under the 2007 Option Plan.
Outstanding as of July 1, 2017
Exercised
Forfeited
Expired
Outstanding as of June 30, 2018
Vested or expected to vest as of June 30, 2018
Exercisable as of June 30, 2018
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in millions)
14.92
13.90
19.10
10.38
15.31
15.31
14.81
5.26 $
5.26 $
5.03 $
37.9
37.9
34.3
Number of
Options
2,746,041 $
(890,855 ) $
(68,243 ) $
(15,264 ) $
1,771,679 $
1,771,679 $
1,567,063 $
The intrinsic value of exercised options was $17.1 million, $14.4 million, and $5.7 million for fiscal 2018, fiscal 2017, and
fiscal 2016, respectively.
The following table summarizes the changes in nonvested restricted shares for fiscal 2018 under the 2007 Option Plan.
Nonvested as of July 1, 2017
Vested
Forfeited
Nonvested as of June 30, 2018
Shares
2,180,278 $
(2,124,792 ) $
(44,260 ) $
11,226 $
Weighted Average
Grant Date Fair Value
8.36
8.36
8.35
8.38
78
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The Performance Food Group Company 2015 Omnibus Incentive Plan (the “2015 Incentive Plan”)
In July 2015, the Company approved the 2015 Incentive Plan. The 2015 Incentive Plan allows for the granting of awards to
current employees, officers, directors, consultants, and advisors of the Company. The terms and conditions of awards granted under
the 2015 Option Plan are determined by the Board of Directors. There are 4,850,000 shares of common stock reserved for issuance
under the 2015 Incentive Plan, including non-qualified stock options and incentive stock options, stock appreciation rights, restricted
shares (time-based and performance-based), and other equity based or cash-based awards. As of June 30, 2018, there are 2,024,518
shares available for grant under the 2015 Incentive Plan. The contractual term of the options granted under the 2015 Incentive Plan is
ten years.
Options and time-based restricted shares vest ratably over four years from the date of grant. Performance-based restricted shares
vest upon the achievement of a specified Return on Invested Capital (“ROIC”), a performance condition, and a specified Relative
Total Shareholder Return (“Relative TSR”), a market condition, at the end of a three year performance period. Actual shares earned
range from 0% to 150% of the initial grant, depending upon performance relative to the ROIC and Relative TSR goals.
The fair values of time-based restricted shares and restricted shares with a performance condition were based on the Company’s
stock price as of the date of grant. With the assistance of a specialist, the fair value of 59,779 restricted shares granted in fiscal 2018
with a market condition was estimated using a Monte Carlo simulation, which approximated 92% of the Company’s stock price on the
date of grant.
The Company estimated the fair value of options granted in the fiscal years below using a Black-Scholes option pricing model
with the following weighted average assumptions:
For the fiscal
year
ended June
30, 2018
For the fiscal
year
ended July 1,
2017
For the fiscal
year
ended July 2,
2016
Risk-free Interest Rate
Dividend Yield
Expected Volatility
Expected Term (in years)
Weighted Average Fair Value of Awards Granted $
2.00 %
0.00 %
32.00 %
6.25
10.22 $
1.30 %
0.00 %
33.00 %
6.25
9.10 $
1.56 %
0.00 %
37.94 %
6.25
7.55
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected holding period. The
Company assumed a dividend yield of zero percent when valuing the grants under the 2015 Incentive Plan because the Company
announced that it does not intend to pay dividends on its common stock. Expected volatility is based on the expected volatilities of
comparable peer companies that are publicly traded. The expected term represents the period of time that awards granted are expected
to be outstanding. The Company elected to use the simplified method to estimate the expected holding period because we do not have
sufficient information to understand post vesting exercise behavior. As such, we will continue to use this methodology until such time
we have sufficient history to provide a reasonable basis on which to estimate the expected term.
The compensation cost that has been charged against income for the Company’s 2015 Incentive Plan was $12.1 million for
fiscal 2018, $10.6 million for fiscal 2017 and $4.0 million for fiscal 2016, and it is included within operating expenses in the
consolidated statement of operations. The total income tax benefit recognized in the consolidated statements of operations
was $3.9 million in fiscal 2018, $4.1 million in fiscal 2017, and $1.6 million in fiscal 2016. Total unrecognized compensation cost for
all awards under the 2015 Incentive Plan is $26.5 million as of June 30, 2018. This cost is expected to be recognized over a weighted-
average period of 2.5 years.
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The following table summarizes the stock option activity for fiscal 2018 under the 2015 Incentive Plan.
Outstanding as of July 1, 2017
Granted
Exercised
Forfeited
Outstanding as of June 30, 2018
Vested or expected to vest as of June 30, 2018
Exercisable as of June 30, 2018
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in millions)
24.62
28.80
24.24
24.75
26.21
26.21
23.60
8.34 $
8.44 $
7.73 $
9.0
9.0
1.9
Number of
Options
574,717 $
323,430 $
(24,491 ) $
(20,006 ) $
853,650 $
853,650 $
148,275 $
The following table summarizes the changes in nonvested restricted shares and restricted stock units for fiscal 2018 under the
2015 Incentive Plan.
Nonvested as of July 1, 2017
Granted
Vested
Forfeited
Nonvested as of June 30, 2018
Shares
1,110,457 $
578,726 $
(282,903 ) $
(102,402 ) $
1,303,878 $
Weighted Average
Grant Date Fair Value
22.50
28.64
21.89
24.13
25.23
The total fair value of shares vested was $8.1 million, $9.2 million, and $0.6 million for fiscal 2018, fiscal 2017, and fiscal 2016,
respectively.
19. Segment Information
The Company has three reportable segments, as defined by ASC 280 Segment Reporting. The Performance Foodservice (“PFS”)
segment markets and distributes food and food-related products to independent restaurants, Chain restaurants, and other institutional
“food-away-from-home” locations. The PFG Customized segment principally serves the family and casual dining channel but also
serves fine dining, fast casual, and quick serve restaurant chains. The Vistar segment distributes candy, snack, beverage, and other
products to customers in the vending, office coffee services, theater, retail, and other channels. The accounting policies of the
segments are the same as those described in Note 2 Summary of Significant Accounting Policies and Estimates. Intersegment sales
represent sales between the segments, which are eliminated in consolidation. Management evaluates the performance of each
operating segment based on various operating and financial metrics, including total sales and EBITDA. For PFG Customized,
EBITDA includes certain allocated corporate charges that are included in operating expenses. The allocated corporate charges are
determined based on a percentage of total sales. This percentage is reviewed on a periodic basis to ensure that the segment is allocated
a reasonable rate of corporate expenses based on their use of corporate services.
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Corporate & All Other is comprised of corporate overhead and certain operations that are not considered separate reportable
segments based on their size. This includes the operations of the Company’s internal logistics unit responsible for managing and
allocating inbound logistics revenue and expense, as well as the operations of certain recent acquisitions.
In the first quarter of fiscal 2018, the Company reorganized its information technology department, and expenses associated
with business application teams are now included in the segment results. The EBITDA for Performance Foodservice, Vistar, and
Corporate & All Other for the fiscal years ended July 1, 2017 and July 2, 2016 has been adjusted to reflect this change.
(In millions)
For fiscal year ended June 30, 2018
Net external sales
Inter-segment sales
Total sales
EBITDA
Depreciation and amortization
Capital expenditures
For fiscal year ended July 1, 2017
Net external sales
Inter-segment sales
Total sales
EBITDA
Depreciation and amortization
Capital expenditures
For fiscal year ended July 2, 2016
Net external sales
Inter-segment sales
Total sales
EBITDA
Depreciation and amortization
Capital expenditures
PFS
PFG
Customized
Vistar
Corporate
& All Other Eliminations Consolidated
0.4
10.8
$ 10,420.4 $ 3,658.1 $ 3,338.5 $
2.5
10,431.2 3,658.5 3,341.0
133.1
27.4
18.4
330.6
58.7
83.8
29.5
14.6
16.6
9.1
1.3
$ 9,813.3 $ 3,819.5 $ 3,001.0 $
2.6
9,822.4 3,820.8 3,003.6
117.7
24.6
6.4
320.0
57.4
91.6
25.3
16.1
9.5
7.4
1.0
$ 9,608.9 $ 3,781.1 $ 2,698.8 $
2.7
9,616.3 3,782.1 2,701.5
110.1
18.2
13.4
303.2
63.2
67.5
34.1
15.4
8.2
202.9 $
246.5
449.4
(109.1 )
29.4
21.3
128.0 $
219.8
347.8
(124.3 )
28.0
32.7
16.0 $
204.5
220.5
(130.4 )
21.8
30.6
— $ 17,619.9
—
(260.2 )
(260.2 ) 17,619.9
384.1
130.1
140.1
—
—
—
— $ 16,761.8
—
(232.8 )
(232.8 ) 16,761.8
338.7
126.1
140.2
—
—
—
— $ 16,104.8
—
(215.6 )
(215.6 ) 16,104.8
317.0
118.6
119.7
—
—
—
Total assets by reportable segment, excluding intercompany receivables between segments, are as follows:
(In millions)
PFS
PFG Customized
Vistar
Corporate & All Other
Total assets
As of
June 30, 2018
As of
July 1, 2017
2,161.2
667.1
654.5
321.3
3,804.1
2,267.9 $
644.3
739.0
349.7
4,000.9 $
$
$
81
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The sales mix for the Company’s principal product and service categories is as follows:
(In millions)
Center of the plate
Frozen foods
Refrigerated and dairy products
Canned and dry groceries
Beverage
Paper products and cleaning supplies
Candy
Snack
Produce
Theater and concession
Merchandising and other services
Total
$
For the fiscal
year ended
July 1, 2017
For the fiscal
year ended
June 30, 2018
For the fiscal
year ended
July 2, 2016
5,187.5
2,101.3
2,081.7
2,172.8
1,315.2
1,241.4
687.2
578.6
507.7
144.2
87.2
$ 17,619.9 $ 16,761.8 $ 16,104.8
5,693.4 $
2,365.0
2,217.3
2,205.1
1,495.2
1,351.8
773.4
730.9
511.1
190.0
86.7
5,520.5 $
2,195.3
2,093.7
2,146.6
1,433.5
1,291.6
706.8
627.2
490.6
156.0
100.0
82
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SCHEDULE 1—Registrant’s Condensed Financial Statements
PERFORMANCE FOOD GROUP COMPANY
Parent Company Only
CONDENSED BALANCE SHEETS
(In millions per share data)
ASSETS
Current assets:
Cash
Income tax receivable
Total current assets
Investment in wholly owned subsidiary
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Intercompany payable
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common Stock
Common Stock: $0.01 par value per share, 1.0 billion shares authorized,
103.2 million shares issued and outstanding as of June 30, 2018;
1.0 billion shares authorized, 100.8 million shares issued and outstanding as of
July 1, 2017
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
As of
June 30, 2018
As of
July 1, 2017
$
$
$
— $
11.6
11.6
1,184.2
1,195.8 $
60.5
60.5
1.0
861.2
273.1
1,135.3
1,195.8 $
—
10.7
10.7
956.2
966.9
41.4
41.4
1.0
855.5
69.0
925.5
966.9
See accompanying notes to condensed financial statements.
83
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PERFORMANCE FOOD GROUP COMPANY
Parent Company Only
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Operating expenses
Operating loss
Income tax benefit
Loss before equity in net income of subsidiary
Equity in net income of subsidiary, net of tax
Net income
Other comprehensive income (loss)
Total comprehensive income
Fiscal year ended
June 30, 2018
Fiscal year ended
July 1, 2017
Fiscal year ended
July 2, 2016
$
$
3.3 $
(3.3 )
(1.0 )
(2.3 )
201.0
198.7
5.4
204.1 $
5.8 $
(5.8 )
(2.2 )
(3.6 )
99.9
96.3
8.2
104.5 $
5.3
(5.3 )
(1.9 )
(3.4 )
71.7
68.3
(1.3 )
67.0
See accompanying notes to condensed financial statements.
84
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PERFORMANCE FOOD GROUP COMPANY
Parent Company Only
CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Equity in net income of subsidiary
Changes in operating assets and liabilities, net
Intercompany payables
Income tax receivable
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Capital contributed to subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Net proceeds from initial public offering
Cash paid for shares withheld to cover taxes
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and restricted cash(1)
Cash and restricted cash, beginning of period(1)
Cash and restricted cash, end of period(1)
$
Fiscal year
ended
June 30, 2018
Fiscal year
ended
July 1, 2017
Fiscal year
ended
July 2, 2016
$
198.7 $
96.3 $
68.3
(201.0 )
(99.9 )
(71.7 )
19.1
(0.9 )
15.9
—
—
12.3
—
(28.2 )
(15.9 )
—
—
— $
5.2
(2.1 )
(0.5 )
7.9
(1.9 )
2.6
—
—
(229.4 )
(229.4 )
4.0
—
(3.5 )
0.5
—
—
— $
1.3
226.4
(0.9 )
226.8
—
—
—
(1) The condensed statements of cash flows for the fiscal years ended July 1, 2017 and July 2, 2016 have been adjusted to reflect
the adoption of ASU 2016-08, Statement of Cash Flows (Topic 230): Restricted Cash. Refer to Note 3 for further discussion.
See accompanying notes to condensed financial statements.
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Notes to Condensed Parent Company Only Financial Statements
1. Description of Performance Food Group Company
Performance Food Group Company (the “Parent”) was incorporated in Delaware on July 23, 2002 to effect the purchase of all
the outstanding equity interests of PFGC, Inc. (“PFGC”). The Parent has no significant operations or significant assets or liabilities
other than its investment in PFGC. Accordingly, the Parent is dependent upon distributions from PFGC to fund its obligations.
However, under the terms of PFGC’s various debt agreements, PFGC’s ability to pay dividends or lend to the Parent is restricted,
except that PFGC may pay specified amounts to the Parent to fund the payment of the Parent’s franchise and excise taxes and other
fees, taxes, and expenses required to maintain its corporate existence.
2. Basis of Presentation
The accompanying condensed financial statements (parent company only) include the accounts of the Parent and its investment
in PFGC, Inc. accounted for in accordance with the equity method, and do not present the financial statements of the Parent and its
subsidiary on a consolidated basis. These parent company only financial statements should be read in conjunction with the
Performance Food Group Company consolidated financial statements. The Parent is included in the consolidated federal and certain
unitary, consolidated and combined state income tax returns with its subsidiaries. The Parent’s tax balances reflect its share of such
filings.
86
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Regulations under the Exchange Act, require public companies, including us, to maintain “disclosure controls and procedures,”
which are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act to mean a company’s controls and other procedures
that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and
principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required or
necessary disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure
controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our
management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls
and procedures. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Form 10-K, an
evaluation was carried out under the supervision and with the participation of the Company’s management, including its principal
executive officer and principal financial officer, of the effectiveness of its disclosure controls and procedures. Based on that
evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls
and procedures, as of the end of the period covered by this Form 10-K, were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
In order to evaluate the effectiveness of internal control over financial reporting, management, with the participation of the Company’s
principal executive officer and principal financial officer, has conducted an assessment, including testing, using the criteria established
in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
The Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, is a process
designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes
those policies and procedures that:
i.
ii.
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only
in accordance with authorizations of management and our board of directors; and
iii.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our assessment, under the criteria established in Internal Control—Integrated Framework (2013) issued by the COSO,
management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2018. In
addition, the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, which appears in
Item 8.
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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) under the
Exchange Act), that occurred during the fiscal quarter ended June 30, 2018 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in our definitive proxy statement for the 2018 Annual Meeting of
Stockholders and is incorporated herein by reference. We expect to file such definitive proxy statement with the SEC pursuant to
Regulation 14A within 120 days after our fiscal year ended June 30, 2018.
Item 11. Executive Compensation
The information required by this item will be included in our definitive proxy statement for the 2018 Annual Meeting of
Stockholders and is incorporated herein by reference. We expect to file such definitive proxy statement with the SEC pursuant to
Regulation 14A within 120 days after our fiscal year ended June 30, 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in our definitive proxy statement for the 2018 Annual Meeting of
Stockholders and is incorporated herein by reference. We expect to such definitive proxy statement with the SEC pursuant to
Regulation 14A within 120 days after our fiscal year ended June 30, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our definitive proxy statement for the 2018 Annual Meeting of
Stockholders and is incorporated herein by reference. We expect to such definitive proxy statement with the SEC pursuant to
Regulation 14A within 120 days after our fiscal year ended June 30, 2018.
Item 14. Principal Accountant Fees and Services
The information required by this item will be included in our definitive proxy statement for the 2018 Annual Meeting of
Stockholders and is incorporated herein by reference. We expect to file such definitive proxy statement with the SEC pursuant to
Regulation 14A within 120 days after our fiscal year ended June 30, 2018.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed, or incorporated by reference, as part of this Form 10-K:
PART IV
1.
2.
3.
All financial statements. See Index to Consolidated Financial Statements on page 56 of this Form 10-K.
All financial statement schedules are omitted because they are not present, not present in material amounts, or
presented within the Consolidated Financial Statements or Notes thereto within Item 8.
Exhibits. See the Exhibit Index immediately following Item 16. Form 10-K Summary, which is incorporated by
reference as if fully set forth herein.
8/28/18 11:59 AM
Item 16. Form 10-K Summary
None.
PFG_10K_2018_FINAL_96pages.indd 88
88
88
89
90
Exhibit No.
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5*
10.6*
10.10*
10.11
10.12*
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference as Exhibit 3.1 to the
Company’s Current Report on Form 8-K (File No. 001-37578) filed with the Securities and Exchange Commission on
October 6, 2015).
Amended and Restated By-Laws of the Registrant (incorporated by reference as Exhibit 3.2 to the Company’s Current
Report on Form 8-K (File No. 001-37578) filed with the Securities and Exchange Commission on October 6, 2015).
Indenture, dated as of May 17, 2016, by and among Performance Food Group, Inc., the subsidiary guarantors named
therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K (File No. 001-37578) filed with the Securities and Exchange Commission on May 17,
2016).
Form of 5.500% Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on
Form 8-K (File No. 001-37578) filed with the Securities and Exchange Commission on May 17, 2016).
Supplemental Indenture, dated as of December 13, 2016, among T.F. Kinnealey & Co., Inc., Larry Kline Wholesale
Meats and Provisions, Inc. and U.S. Bank, National Association, as trustee, relating to the Company’s 5.50% Senior
Notes due 2024 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q (File
No. 001-37578) filed with the Securities and Exchange Commission on February 8, 2017).
Second Amended and Restated Credit Agreement, dated February 1, 2016, among Performance Food Group, Inc., the
other borrowers thereto, and Wells Fargo Bank, National Association (incorporated by reference as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q (File No. 001-37578), filed with the Securities and Exchange
Commission on February 3, 2016).
Credit Agreement, dated May 14, 2013, among Performance Food Group Inc., PFGC, Inc., Credit Suisse AG,
Cayman Islands Branch, as administrative and collateral agent, Credit Suisse Securities (USA) LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, BMO Capital Markets, Barclays Bank PLC, J.P. Morgan Securities LLC, and
Wells Fargo Securities LLC, as joint lead arrangers and joint bookrunners, and the other lenders party thereto
(incorporated by reference as Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File 333-198654),
filed with the Securities and Exchange Commission on September 9, 2014).
Amended and Restated Stockholders’ Agreement, dated as of October 6, 2015, among Performance Food Group
Company and the other parties thereto (incorporated by reference as Exhibit 10.1 to the Company’s Current Report on
Form 8-K (File No. 001-37578), filed with the Securities and Exchange Commission on October 6, 2015).
Amended and Restated Registration Rights Agreement dated as of October 6, 2015, among the Performance Food
Group Company and the other parties thereto (incorporated by reference as Exhibit 10.2 to the Company’s Current
Report on Form 8-K (File No. 001-37578), filed with the Securities and Exchange Commission on October 6, 2015).
Amended and Restated 2007 Management Option Plan (incorporated by reference as Exhibit 10.7 to Amendment No.
4 to the Company’s Registration Statement on Form S-1 (File 333-198654), filed with the Securities and Exchange
Commission on August 5, 2015).
2015 Omnibus Incentive Plan (incorporated by reference as Exhibit 10.8 to Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File 333-198654), filed with the Securities and Exchange Commission on
August 5, 2015).
Employment Letter Agreement, dated September 6, 2002, between George L. Holm and Performance Food Group
Company (f/k/a Wellspring Distribution Corp.) (incorporated by reference as Exhibit 10.8 to the Company’s
Registration Statement on Form S-1 (File 333-198654), filed with the Securities and Exchange Commission on
September 9, 2014).
Amended and Restated Advisory Fee Agreement between Performance Food Group Company, Blackstone
Management Partners LLC and Wellspring Capital Management, LLC (incorporated by reference as Exhibit 10.10 to
Amendment No. 7 to the Company’s Registration Statement on Form S-1 (File 333-198654), filed with the Securities
and Exchange Commission on September 21, 2015).
Employment Letter Agreement, dated April 7, 2014, between Jim Hope and Performance Food Group (incorporated
by reference as Exhibit 10.11 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File 333-
198654), filed with the Securities and Exchange Commission on July 1, 2015).
91
89
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Exhibit No.
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21
10.22*
10.23*
10.24*
10.25*
Description
Employment Letter Agreement, dated December 11, 2014, between David Flitman and Performance Food Group
Company (incorporated by reference as Exhibit 10.12 to Amendment No. 3 to the Company’s Registration Statement
on Form S-1 (File 333-198654), filed with the Securities and Exchange Commission on July 1, 2015).
Non-Qualified Stock Option Award Agreement, dated April 12, 2010, between Douglas M. Steenland and
Performance Food Group Company (formerly known as Wellspring Distribution Corp.) (incorporated by reference as
Exhibit 10.13 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File 333-198654), filed
with the Securities and Exchange Commission on August 5, 2015).
Form of Option Award Agreement for Named Executive Officers under the 2007 Management Option Plan
(incorporated by reference as Exhibit 10.14 to Amendment No. 5 to the Company’s Registration Statement on Form
S-1 (File 333-198654), filed with the Securities and Exchange Commission on August 31, 2015).
Form of Severance Letter Agreement (incorporated by reference as Exhibit 10.15 to Amendment No. 4 to the
Company’s Registration Statement on Form S-1 (File 333-198654), filed with the Securities and Exchange
Commission on August 5, 2015).
Form of Time-Based Restricted Stock Agreement under the 2015 Omnibus Incentive Plan (incorporated by reference
as Exhibit 10.16 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File 333-198654), filed
with the Securities and Exchange Commission on August 31, 2015).
Form of Performance-Based Restricted Stock Agreement under the 2015 Omnibus Incentive Plan (incorporated by
reference as Exhibit 10.17 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File 333-
198654), filed with the Securities and Exchange Commission on August 31, 2015).
Form of Option Grant under the 2015 Omnibus Incentive Plan (incorporated by reference as Exhibit 10.18 to
Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File 333-198654), filed with the Securities
and Exchange Commission on August 31, 2015).
Transition Agreement, dated May 3, 2016, between Performance Food Group Company and Robert D. Evans
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 4, 2016 (File
001-37578)).
First Amendment to Second Amended and Restated Credit Agreement, dated August 3, 2017, among Performance
Food Group, Inc., the other borrowers thereto, and Wells Fargo, National Association (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-37578), filed with the Securities and
Exchange Commission on August 4, 2017).
Letter Agreement, dated August 19, 2016, between Performance Food Group Company and Thomas G. Ondrof
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-37578), filed
with the Securities and Exchange Commission on September 22, 2016).
Restricted Stock Unit Award Agreement (Equity Award), dated July 30, 2015, between David Flitman and
Performance Food Group Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q (File No. 001-37578), filed with the Securities and Exchange Commission on November 8, 2016).
Restricted Stock Unit Award Agreement (Buyout Award), dated July 30, 2015, between David Flitman and
Performance Food Group Company (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q (File No. 001-37578), filed with the Securities and Exchange Commission on November 8, 2016).
Form of Restricted Stock Unit Agreement (Non-Employee Director) under the 2015 Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37578),
filed with the Securities and Exchange Commission on November 8, 2016).
10.26*
10.27*
Letter Agreement, dated December 14, 2017, between Performance Food Group Company and Thomas G. Ondrof
(incorporated by reference to Exhibit 10.1 to Company’s Quarterly Report on Form 10-Q (File No. 001-37578), filed
with the Securities and Exchange Commission on February 7, 2018).
Form of Deferred Stock Unit Agreement (Non-Employee Director) under the 2015 Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-37578), filed with the
Securities and Exchange Commission on February 7, 2018).
21.1
Subsidiaries of the Registrant
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Exhibit No.
23.1
Consent of Deloitte & Touche LLP
Description
24.1
31.1
31.2
32.1
32.2
Power of Attorney (included on signature pages to this Annual Report on Form 10-K)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
*Identifies exhibits that consist of a management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other
disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them
for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made
solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the
date they were made or at any other time.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly authorized on the 16th day of August, 2018.
SIGNATURES
PERFORMANCE FOOD GROUP COMPANY
(Registrant)
By:
Name:
/s/ George L. Holm
George L. Holm
Title: Chief Executive Officer & President
(Principal Executive Officer and Authorized Signatory)
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POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below hereby constitutes and appoints A. Brent
King and Jeffery Fender, and each of them, as his or her true and lawful attorneys-in-fact and agents, with power to act with or
without the others and with full power of substitution and resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents and each of them may deem necessary or desirable to enable the registrant to comply with
the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange
Commission thereunder in connection with the registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the
“Annual Report”), including specifically, but without limiting the generality of the foregoing, power and authority to sign the name of
the registrant and the name of the undersigned, individually and in his or her capacity as a director or officer of the registrant, to the
Annual Report as filed with the Securities and Exchange Commission, to any and all amendments thereto, and to any and all
instruments or documents filed as part thereof or in connection therewith; and each of the undersigned hereby ratifies and confirms all
that said attorneys and agents and each of them shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on the 16th day of August, 2018.
Signatures
Title
/s/ George L. Holm
George L. Holm
/s/ James D. Hope
James D. Hope
/s/ Christine Vlahcevic
Christine Vlahcevic
/s/ Meredith Adler
Meredith Adler
/s/ William F. Dawson Jr.
William F. Dawson Jr.
/s/ Manuel A. Fernandez
Manuel A. Fernandez
/s/ Kimberly S. Grant
Kimberly S. Grant
/s/ Jeffrey Overly
Jeffrey Overly
/s/ Randall N. Spratt
Randall N. Spratt
/s/ Douglas M. Steenland
Douglas M. Steenland
/s/ Arthur B. Winkleblack
Arthur B. Winkleblack
/s/ John J. Zillmer
John J. Zillmer
Chief Executive Officer & President; Director
(Principal Executive Officer)
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
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Non-GAAP Financial Measures
Refer to Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations included in
the annual report on Form 10-K for the fiscal year ended June 30, 2018 for statements regarding our use of non-GAAP financial
measures and the definitions of such non-GAAP financial measures. 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:
June 30,
2018
July 1,
2017
For the fiscal year ended
June 27,
2015
July 2,
2016
June 28,
2014
June 29,
2013
Net income ..............................................................
Interest expense ............................................
Income tax (benefit) expense ........................
Depreciation ..................................................
Amortization of intangible assets .................
$ 198.7
60.4
(5.1)
100.3
29.8
$
EBITDA ..................................................................
Non-cash items(i) ..........................................
Acquisition, integration and
384.1
23.2
reorganization(ii) .....................................
Non-recurring items(iii) ................................
Productivity initiatives(iv) ............................
Multiemployer plan withdrawal(v) ...............
Other adjustment items(vi) ...........................
5.0
—
10.6
—
3.8
$
96.3
54.9
61.4
91.5
34.6
338.7
18.8
$
68.3
83.9
46.2
80.5
38.1
317.0
18.2
17.3
—
10.6
9.4
1.7
11.6
— —
8.7
5.3
56.5
85.7
40.1
76.3
45.0
303.6
2.5
0.4
5.1
8.3
2.8
5.9
$
15.5
86.1
14.7
73.5
59.2
249.0
4.9
11.3
0.4
16.3
0.4
3.8
$
8.4
93.9
11.1
58.7
61.3
233.4
2.4
22.9
0.4
3.1
3.9
5.2
Adjusted EBITDA ...................................................$
426.7 $ 390.7
$ 366.6
$ 328.6
$ 286.1
$ 271.3
(i)
(ii)
Includes adjustments for non-cash charges arising from stock-based compensation, interest rate swap hedge
ineffectiveness, and gain/loss on disposal of assets. Stock-based compensation cost was $21.6 million, $17.3 million,
$17.2 million, $1.2 million, $0.7 million, and $1.1 million for fiscal 2018, fiscal 2017, fiscal 2016, fiscal 2015, fiscal
2014, and fiscal 2013, respectively. In addition, this includes an increase (decrease) in the LIFO reserve of $0.3
million,$2.6 million, $(1.5) million, $1.7 million, $3.0 million, and $0.8 million for fiscal 2018, fiscal 2017, fiscal
2016, fiscal 2015, fiscal 2014, and fiscal 2013, respectively.
Includes professional fees and other costs related to completed and abandoned acquisitions; in fiscal 2015 these fees
are net of a $25.0 million termination fee related to the terminated agreement to acquire 11 US Foods facilities from
Sysco and US Foods, costs of integrating certain of our facilities, facility closing costs, advisory fees paid to
Blackstone and Wellspring, and offering fees. For fiscal 2013, this also includes $11.2 million for the impact of the
initial fair value of inventory that was acquired as part of acquisitions.
(iii) Consists primarily of an expense related to our withdrawal from a purchasing cooperative of which we were a
member, pre-acquisition worker’s compensation claims related to an insurance company that went into liquidation, a
legal settlement expense, transition costs related to IT outsourcing, certain severance costs, and the impact of business
interruption because of weather related or one-time events.
(iv) Consists primarily of professional fees and related expenses associated with productivity initiatives.
(v)
Includes amounts related to the withdrawal from the Central States Southeast and Southwest Areas Pension Fund. See
Note 15 Commitments and Contingencies to the audited consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data of the annual report on Form 10-K for the fiscal year ended June 30,
2018.
(vi) Consists primarily of amounts related to fuel collar derivatives, certain financing transactions, lease amendments, and
franchise tax expense and other adjustments permitted by our credit agreements.
PFG_10K_2018_FINAL_96pages.indd 94
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94
BOARD OF DIRECTORS
DOUGLAS M. STEENLAND
MANUEL A. FERNANDEZ
JEFFREY M. OVERLY
ARTHUR B. WINKLEBLACK
Chairman of the
Board of Directors
Compensation and Human
Resources Committee
(Chairperson)
MEREDITH ADLER
Director
Audit Committee
Nominating and Corporate
Governance Committee
WILLIAM F. DAWSON, JR.
Director
Director
Director
Director
Compensation and Human
Resources Committee
Technology Committee
(Chairperson)
Compensation and Human
Resources Committee
Nominating and Corporate
Governance Committee
KIMBERLY S. GRANT
RANDALL N. SPRATT
Director
Audit Committee
Technology Committee
Director
Audit Committee
Technology Committee
GEORGE L. HOLM
President and
Chief Executive Officer
Director
Audit Committee (Chairperson)
Technology Committee
JOHN J. ZILLMER
Director
Compensation and Human
Resources Committee
Nominating and Corporate
Governance Committee
(Chairperson)
STOCKHOLDER INFORMATION
C ORP ORATE
HE ADQUARTERS
TRANSFER AGENT
AND REGISTRAR
ANNUAL MEETING
OF STOCKHOLDERS
Performance Food Group
Computershare Investor Services
Tuesday, November 13, 2018
12500 West Creek Parkway
P.O. Box 505000
9:00 a.m.
Richmond, Virginia 23238
Louisville, Kentucky 40233
Hilton Richmond Hotel & Spa/
STOCK EXCHANGE LISTING
PFG’s common stock is traded on the
New York Stock Exchange under the
symbol “PFGC.”
804 -484-7700
OFFICE OF
INVESTOR RELATIONS
Michael Neese
12500 West Creek Parkway
Richmond, Virginia 23238
804 -287-8126
michael.neese@pfgc.com
INDEPENDENT AUDITORS
Short Pump
Deloitte & Touche LLP
Richmond, Virginia
12042 West Broad Street
Richmond, Virginia 23233
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HELPS REDUCE COSTS
Please visit us at www.pfgc.com.
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©2018 Performance Food Group Company
O U R FA M I LY O F F O O D S E R V I C E D I S T R I B U TO R S
Performance Food Group
12500 West Creek Parkway
Richmond, Virginia 23238
www.pfgc.com