UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1996
Commission File No.: 0-22192
PERFORMANCE FOOD GROUP COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 54-0402940
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
6800 Paragon Place, Suite 500
Richmond, Virginia 23230
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (804) 285-7340
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.
[X] Yes [ ] No
As of November 8, 1996, 11,663,015 shares of the Registrant's Common Stock
were outstanding.
Independent Auditor's Review Report
The Board of Directors and Shareholders
Performance Food Group Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Performance Food Group Company and subsidiaries as of September 28, 1996,
and the related condensed consolidated statements of earnings for the
three-month and nine-month periods ended September 28, 1996 and September 30,
1995, and the condensed consolidated statements of cash flows for the
nine-month periods ended September 28, 1996 and September 30, 1995. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Performance Food Group Company
and subsidiaries as of December 30, 1995, and the related consolidated
statements of earnings, shareholder's equity and cash flows for the year then
ended (not presented herein); and in our report dated February 7, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 30, 1995 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
KPMG PEAT MARWICK LLP
Richmond, Virginia
October 25, 1996
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 28, December 30,
1996 1995
(Unaudited)
Assets
Current assets:
Cash $ 4,037 $ 4,235
Trade accounts and notes receivable, net 48,729 44,264
Inventories 45,914 37,844
Other current assets 3,223 3,184
Total current assets 101,903 89,527
Property, plant and equipment, net 55,177 51,640
Intangible assets, net 12,905 13,213
Other assets 926 754
Total assets $ 170,911 $ 155,134
Liabilities and Shareholders' Equity
Current Liabilities:
Outstanding checks in excess of deposits $ 13,681 $ 13,791
Current installments of long-term debt 641 3,210
Accounts payable 37,337 31,943
Other current liabilities 11,291 10,284
Total current liabilities 62,950 59,228
Long-term debt, excluding current installments 3,808 31,766
Note payable to bank 2,726 5,243
Deferred income taxes 3,106 3,106
Total liabilities 72,590 99,343
Shareholders' equity 98,321 55,791
Total liabilities and shareholders' equity $ 170,911 $ 155,134
<FN>
See accompanying notes to unaudited condensed consolidated financial
statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
Net sales $ 202,401 $ 169,481 $ 567,911 $ 491,242
Cost of good sold 173,896 145,494 487,392 420,368
Gross profit 28,505 23,987 80,519 70,874
Operating expenses 23,266 19,619 66,892 59,300
Operating profit 5,239 4,368 13,627 11,574
Other income (expense):
Interest expense (82) (671) (516) (2,124)
Interest income - 1 - 6
Other, net 59 70 126 (25)
Other expense, net (23) (600) (390) (2,143)
Earnings before income
taxes 5,216 3,768 13,237 9,431
Income tax expense 2,057 1,476 5,227 3,690
Net earnings $ 3,159 $ 2,292 $ 8,010 $ 5,741
Net earnings per common
share $ .26 $ .23 $ .69 $ .60
Weighted average common
shares and common share
equivalents outstanding 12,083 9,763 11,567 9,645
<FN>
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 28, September 30,
1996 1995
Cash flows from operating activities:
Net earnings $ 8,010 $ 5,741
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 4,141 3,975
ESOP contributionsapplied to principal of
ESOP debt 303 269
Gain on disposal of property, plant and
equipment (49) (94)
Changes in operating assets and liabilities,
net of effects of companies purchased (6,173) (3,538)
Net cash provided by operating activities 6,232 6,353
Cash flows from investing activities
Purchases of property, plant and equipment (7,301) (8,011)
Proceeds from sale of property, plant and
equipement 128 350
Net cash paid for acquisitions - (22,378)
Increase in intangibles and other assets (320) (211)
Net cash used by investing activities (7,493) (30,250)
Cash flows from financing activities:
Increase in outstanding checks in excess of
deposits (110) 833
Net payments on note payable to banks (2,517) 1,396
Principal payments on long-term debt (30,527) (588)
Proceeds from issuance of long-term debt - 22,715
Proceeds from issuance of common stock 33,329 -
Stock option, incentive and employee stock
purchase plans 888 706
Net cash provided by financing activities 1,063 25,062
Net increase (decrease) in cash (198) 1,165
Cash at beginning of period 4,235 1,638
Cash at end of period $ 4,037 $ 2,803
<FN>
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
September 28, 1996 and September 30, 1995
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Performance
Food Group Company and subsidiaries (the "Company") are unaudited, with the
exception of the December 30, 1995 condensed consolidated balance sheet, which
was derived from the audited consolidated balance sheet in the Company's latest
annual report on Form 10-K. The unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting, and in accordance with Rule 10-01
of Regulation S-X. Certain amounts in the prior year have been reclassified
to conform to the current year's presentation.
In the opinion of management, the unaudited condensed consolidated
financial statements contained in this report reflect all adjustments,
consisting of only normal recurring accruals, which are necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. The results of operations for any interim period
are not necessarily indicative of results for the full year.
These unaudited condensed consolidated financial statements, note
disclosures and other information should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K.
2. Business Combinations
On January 3, 1995, the Company purchased all of the outstanding capital
stock of Milton's Foodservice, Inc. ("Milton's"), a Georgia corporation.
Milton's, a broadline distributor located in Oakwood, Georgia, now operates as
a wholly-owned subsidiary of the Company. Milton's had 1994 net sales of
approximately $72.0 million. The aggregate consideration paid by the Company
for Milton's was $22.5 million in cash plus the assumption of $7.3 million of
indebtedness. On June 15, 1995, the Company acquired certain assets of Cannon
Foodservice, Inc. ("Cannon") for approximately $643,000. Cannon, a broadline
distributor located in Asheville, North Carolina, had 1994 net sales of
approximately $9.0 million. The operations of Cannon have been combined with
the operations of Milton's and all operations are being conducted through
Milton's distribution facility in Oakwood, Georgia.
These acquisitions have been accounted for using the purchase method
and, accordingly, the acquired assets and liabilities have been recorded at
their fair values at the dates of acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired related to these
acquisitions was approximately $13.1 million. The Company's intangible assets
related to these acquisitions are being amortized on a straight-line basis
ranging from 5 to 40 years. The goodwill component is being amortized
over 40 years, which reflects management's best estimate of the appropriate
period over which to amortize the goodwill associated with these acquisitions
and is consistent with current industry practice. The cost allocated to
non-competition agreements is being amortized over their contractual lives,
which range from five to six years. Cost allocated to customer lists is
being amortized over 15 years.
3. Shareholders' Equity
In March 1996, the Company completed a secondary offering of 1,944,549
shares of common stock, of which the Company sold 1,503,637 shares with the
remaining shares sold by selling shareholders. Net proceeds of the offering
were approximately $33.3 million which were used to repay a $30.0 million
term loan and approximately $3.3 million outstanding under the Company's line
of credit.
On June 13, 1996, the Company's Board of Directors declared a three-
for-two stock split effected in the form of a 50% stock dividend paid on July
15, 1996 to shareholders of record on July 1, 1996. The split resulted in the
issuance of 3,874,807 shares of common stock in July 1996. All references in
these financial statements to earnings per share and weighted average shares
have been restated to reflect the split.
4. Net Earnings per Common Share
Net earnings per common share are computed using the weighted average
number of common shares outstanding during each period, including common stock
equivalents, consisting of stock options, and calculated using the treasury
stock method, when dilutive.
As discussed in Note 3, the Company repaid a $30.0 million term loan with
the proceeds of its secondary offering of common stock completed in March 1996.
Pro forma net earnings per share for the nine month period ended September 28,
1996, assuming the offering was completed at the beginning of the period, would
have been $0.66 per share.
5. Note Payable to Bank
On July 8, 1996, the Company entered into a $50.0 million revolving credit
agreement (the "Credit Facility") with a commercial bank, of which approximately
$2,726,000 was outstanding at September 28, 1996. The Credit Facility bears
interest at LIBOR plus a spread over LIBOR, which varies based on the ratio of
funded debt to total capital. At September 28, 1996, interest on the Credit
Facility was 5.56%. The facility expires in July 1999. Additionally, the
Credit Facility requires the maintenance of certain financial ratios, as
defined, regarding debt to tangible net worth, cash flow coverage and current
assets to current liabilities.
6. Supplemental Cash Flow Information
Nine Months Ended
September 28, September 30,
1996 1995
Cash paid during the period for:
Interest $ 705 $ 2,139
Income taxes $ 4,151 $ 3,499
Effects of purchase of companies:
Fair value of assets acquired, inclusive
of goodwill of $12,164 $ - $ 31,811
Liabilities assumed - (9,433)
Net cash paid for acquisitions $ - $ 22,378
7. Subsequent Events
On October 23, 1996, the Company entered into a definitive agreement
to purchase certain net assets of McLane Foodservice, a division of McLane
Company, Inc., based in Temple, Texas. The purchase price is approximately
$30 million, subject to certain closing adjustments, which will be financed
with an existing credit facility. McLane Foodservice operates distribution
centers in Temple and Victoria, Texas and provides products and services to
traditional foodservice customers as well as quick-service restaurants, health
care providers and vending customers. McLane Foodservice should generate
approximately $180 million in annualized sales.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Performance Food Group Company and subsidiaries (the "Company") derives
its revenues primarily from the sale of food and food-related products to
individual, quick-service, and multi-unit restaurant chains and other
institutional customers. The principal components of expenses
include cost of goods sold, which represents the amount paid to
manufacturers and growers for products sold, operating expenses, which
primarily include labor-related expenses, delivery costs and occupancy
expenses, and interest expense.
Results of Operations
The following table sets forth, for the periods indicated, the
components of the condensed consolidated statements of earnings expressed as a
percentage of net sales:
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 85.9 85.8 85.8 85.6
Gross profit 14.1 14.2 14.2 14.4
Operating expenses 11.5 11.6 11.8 12.1
Operating profit 2.6 2.6 2.4 2.3
Other expense, net 0.0 0.4 0.1 0.4
Earnings before income
taxes 2.6 2.2 2.3 1.9
Income tax expense 1.0 0.8 0.9 0.7
Net earnings 1.6 % 1.4 % 1.4 % 1.2 %
<FN>
Comparison of Periods Ended September 28, 1996 to September 30, 1995.
Net sales increased to $202.4 million for the three months ended
September 28, 1996 (the "1996 quarter") from $169.5 million for the three months
ended September 30, 1995 (the "1995 quarter"). Net sales increased to $567.9
million for the nine months ended September 28, 1996 (the "1996 period")
compared to $491.2 million for the nine months ended September 30, 1995 (the
"1995 period"). Net sales for the 1996 period were negatively impacted by
severe weather throughout the Eastern and Midwestern United States experienced
during February and March 1996. Additionally, net sales for the 1996 period
vs. 1995 included approximately 2% of deflation as lettuce prices returned to
more "normal" levels after the increase caused by flooding in California during
the second quarter of 1995. Despite the impacts of the weather, net sales
increased 19.4% for the 1996 quarter compared to the 1995 quarter and 15.6% for
the 1996 period compared to a year earlier. Substantially all of the increase
in net sales during the 1996 quarter and period was attributable to internal
growth. Inflation amounted to approximately 2.5% for the 1996 quarter and
1.0% for the 1996 period.
The Company's customer, Cracker Barrel Old Country Stores, Inc.
("Cracker Barrel"), is in the process of soliciting bids for long-term contracts
relating to the distribution of food service products and gift shop merchandise
to Cracker Barrel's restaurants. The Company expects that Cracker Barrel will
select a single supplier for all its restaurants. For the nine months ended
September 28, 1996, sales to Cracker Barrel accounted for approximately 30% of
the Company's net sales. Because of higher volumes and lower margins
associated with sales to large accounts, the impact of a potential loss of
Cracker Barrel business on the Company's gross margin and operating income
would be less than the impact on the Company's net sales. To address the risks
associated with the potential loss of the Cracker Barrel business, the Company
has expanded its business through acquisitions, such as the acquisition of
Milton's and the proposed acquisition of McLane Foodsevice, and the Company has
sought and obtained additional large customized distribution customers. The
Company was recently selected as the provider of customized distribution
services for two new customers that are anticipated to account for approximately
$40 million in incremental annualized sales. The Company intends to continue
to diversify its business to further reduce its dependence on any single
customer.
Gross profit increased 18.8% to $28.5 million in the 1996 quarter from
$24.0 million in the 1995 quarter. Gross profit increased 13.6% to $80.5 million
for the 1996 period from $70.9 million in the 1995 period. Gross profit margin
decreased to 14.1% in the 1996 quarter compared to 14.2% in the 1995 quarter and
decreased to 14.2% from 14.4% for the 1996 and 1995 periods, respectively.
The decline in gross profit margin was primarily due to increased sales during
1996 in the Company's customized distribution operations. Customized
distribution sales are generally higher-volume, lower margin sales, which
require fewer, but larger deliveries than other types of customers. Customized
sales allow for a more efficient use of trucks and personnel, and typically
result in decreased operating expenses as a percentage of sales which generally
offsets the lower gross margins. Gross margins during the 1995 period were
also adversely impacted by the inflated cost of lettuce. During the second
quarter of 1995, California experienced adverse weather conditions which
created significant fluctuations in the price and availability of lettuce and,
as a result, lettuce prices during April and May of 1995 inflated four to five
times their "normal" cost per pound. The Company was able to maintain a
steady, consistent supply of lettuce from California and was generally able to
pass along the increased cost to its customers. Although the Company was able
to successfully pass these higher costs on to its customers, the gross profit
dollars per pound remained relatively comparable to normal conditions. Thus,
although produce processing sales increased significantly during the 1995
period, gross margins did not increase proportionately.
Operating expenses increased 18.6% to $23.3 million in the 1996 quarter
compared with $19.6 million in the 1995 quarter and increased 12.8% to $66.9
million from $59.3 million for the 1996 and 1995 periods, respectively. As a
percentage of net sales, operating expenses declined to 11.5% in the 1996
quarter from 11.6% in the 1995 quarter and declined to 11.8% for the 1996
period from 12.1% for the 1995 period. The decrease in operating expenses as
a percent of sales reflects better use of the Company's facilities at the
increased level of sales. These improvments in utilization were offset in part
by increased costs related to the severe weather experienced in the East and
Midwest during the first quarter of 1996. In addition, the Company completed
construction of a 75,000 square foot customized distribution center in
McKinney, Texas (a suburb of Dallas) which became operational in February 1996.
The Company incurred certain start-up expenses for the McKinney facility during
the 1996 period, which partially offset the improved operating efficiencies
gained in the Company's other operations. The expanded customized distribution
centers should give the Company the capacity to efficiently service this
rapidly growing division of the business. The Company anticipates opening a
new distribution center in the Mid-Atlantic region to service the Mid-Atlantic
and Northeastern United States within the next year.
Operating profit increased 19.9% to $5.2 million in the 1996 quarter
from $4.4 million in the 1995 quarter. Additionally, operating profit increased
17.7% to $13.6 million for the 1996 period from $11.6 million in the 1995
period. Operating profit margin remained flat at 2.6% for both the 1996 and 1995
quarters and 2.4% for the 1996 period vs. 2.3% for the 1995 period.
Other expense decreased to $23,000 in the 1996 quarter from $600,000
in the 1995 quarter and to $390,000 in the 1996 period from $2.1 million in
the 1995 period. Other expense includes interest expense, which decreased to
$82,000 in the 1996 quarter from $671,000 in the 1995 quarter. Interest expense
decreased to $516,000 for the 1996 period from $2.1 million for the 1995 period.
The decrease in interest expense is due to reduced debt levels as a result of
the Company's secondary stock offering completed in March 1996.
Income tax expense increased to $2.1 million in the 1996 quarter from
$1.5 million in the 1995 quarter and increased to $5.2 million in the 1996
period from $3.7 million for the 1995 period, as a result of higher pre-tax
earnings. As a percentage of earnings before income taxes, the provision for
income taxes was 39.4% and 39.2% for the 1996 and 1995 quarters, respectively,
and 39.5% and 39.1% for the 1996 and 1995 periods, respectively.
Net earnings increased 37.8% to $3.2 million in the 1996 quarter
compared to $2.3 million in the 1995 quarter. Net earnings increased 39.5% to
$8.0 million for the 1996 period from $5.7 million for the 1995 period. As a
percentage of sales, net earnings increased to 1.6% in the 1996 quarter versus
1.4% in the 1995 quarter and 1.4% in the 1996 period from 1.2% in the 1995
period.
Liquidity and Capital Resources
The Company has historically financed its operations and growth
primarily with cash flow from operations, borrowings under its credit facility,
operating leases, normal trade credit terms and the sale of the Company's common
stock. Despite the Company's large sales volume, working capital needs are
minimized because the Company's investment in inventory is financed principally
with accounts payable.
Cash provided by operating activities was $6.2 million and $6.4 million
for the 1996 and 1995 periods, respectively. The increase in cash generated by
higher net earnings was substantially offset by increased levels of receivables
and inventory net of payables.
Cash used by investing activities was $7.5 million and $30.3 million
for the 1996 and 1995 periods, respectively. Investing activities consist of
additions to and disposals of property, plant and equipment and the acquisition
of businesses. The Company's total capital expenditures for the 1996 period
were $7.3 million including approximately $1.9 million for expansion of the
broadline distribution center in Oakwood, Georgia, and approximately $1.9
million for construction of the customized distribution center in McKinney,
Texas. The Company anticipates that its total capital expenditures, other than
for acquisitions, for the remainder of fiscal 1996 and early 1997 will be
approximately $2.5 million. Investing activities during the 1995 period
included the $22.4 million for the acquisition of businesses, net of cash on
hand at the acquired companies.
In March 1996, the Company completed a secondary offering of 1.9 million
shares of common stock, of which the Company sold 1.5 million shares with the
remainder sold by selling shareholders. The net proceeds to the Company from
the offering were approximately $33.3 million which was used to repay the $30.0
million term loan used to finance the acquisition of Milton's and to repay
approximately $3.3 million outstanding on the Company's line of credit.
On July 8, 1996, the Company entered into a $50.0 million revolving
credit agreement (the "Credit Facility") with a commercial bank, of which
approximately $47.3 million remained unused at September 28, 1996. The Credit
Facility bears interest at LIBOR plus a spread over LIBOR, which varies based
on the ratio of funded debt to total capital. At September 28, 1996, the Credit
Facility bore interest at 5.56%. The facility expires in July 1999.
Additionally, the Credit Facility requires the maintenance of certain financial
ratios, as defined, regarding debt to tangible net worth, cash flow coverage
and current assets to current liabilities.
On October 23, 1996, the Company entered into a definitive agreement
to purchase certain net assets of McLane Foodservice, a division of McLane
Company, Inc., based in Temple, Texas. The purchase price is approximately
$30 million, subject to certain closing adjustments, which will be financed
with borrowings under the Credit Facility.
The Company believes that cash flows from operations and borrowings
under its Credit Facility will be sufficient to finance its operations and
anticipated growth for the foreseeable future.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of," and SFAS No. 123, "Accounting for Stock-Based Compensation," have been
adopted by the Company for the fiscal year ending December 28, 1996. The
adoption of these accounting standards did not have a material impact on the
Company's financial position or results of operations.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
quarter ended September 28, 1996.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
10.53 Revolving Credit Agreement dated as of July 8,
1996 between Performance Food Group Company and
First Union National Bank of Virginia.
15 Letter regarding unaudited financial information
from KPMG Peat Marwick LLP.
27 Article 5 Financial Data Schedule for 3rd Qtr 10-Q.
( b.) No reports on Form 8-K were filed during the quarter
ended September 28, 1996.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERFORMANCE FOOD GROUP COMPANY
(Registrant)
By: /s/ Roger L. Boeve
Roger L. Boeve
Executive Vice President &
Chief Financial Officer
Date: November 12, 1996