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 MARCH 28, 1998
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 May _8_, 1998, _12520098_ shares of the Registrant's Common Stock were
outstanding.
Independent Accountants' 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 March 28, 1998, and
the related condensed consolidated statements of earnings and cash flows for
the three-month periods ended March 28, 1998 and March 29, 1997. 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 27, 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated February 9,
1998, 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 27, 1997 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
April 24, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
March 28, December 27,
1998 1997
(Unaudited)
Assets
Current assets:
Cash $ 5,224 $ 3,653
Trade accounts and notes receivable, net 80,232 80,054
Inventories 73,503 72,951
Other current assets 2,944 2,936
Total current assets 161,903 159,594
Property, plant and equipment, net 73,327 71,810
Intangible assets, net 55,257 55,697
Other assets 1,696 1,782
Total assets $ 292,183 $ 288,883
Liabilities and Shareholders' Equity
Current liabilities:
Outstanding checks in excess of deposits $ 19,030 $ 19,859
Current installments of long-term debt 687 689
Accounts payable 77,601 67,455
Other current liabilities 20,423 18,807
Total current liabilities 117,741 106,810
Long-term debt, excluding current installments 33,724 44,577
Deferred income taxes 3,523 3,523
Total liabilities 154,988 154,910
Shareholders' equity 137,195 133,973
Total liabilities and shareholders' equity $ 292,183 $ 288,883
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
March 28, March 29,
1998 1997
Net sales $ 353,482 $ 268,537
Cost of goods sold 308,682 233,760
Gross profit 44,800 34,777
Operating expenses 39,887 30,619
Operating profit 4,913 4,158
Other income (expense):
Interest expense (757) (513)
Other, net 14 80
Other expense, net (743) (433)
Earnings before income taxes 4,170 3,725
Income tax expense 1,605 1,454
Net earnings $ 2,565 $ 2,271
Basic net earnings per common share $ 0.21 $ 0.19
Weighted average common shares outstanding 12,495 11,675
Diluted net earnings per common share $ 0.20 $ 0.19
Weighted average common shares and
potential dilutive common shares outstanding 13,024 12,166
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
March 28, March 29,
1998 1997
Cash flows from operating activities:
Net earnings $ 2,565 $ 2,271
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,319 1,750
ESOP contributions applied to principal
of ESOP debt 122 117
Gain on disposal of property, plant and
equipment (72) -
Gain on insurance settlement - (1,300)
Loss on writedown of leasehold improvements - 1,287
Changes in operating assets and liabilities,
net of effects of companies purchased 11,024 6,945
Net cash provided by operating activities 15,958 11,070
Cash flows from investing activities:
Purchases of property, plant and equipment (3,738) (2,360)
Proceeds from sale of property, plant and
equipment 455 29
Net cash paid for acquisitions - (31,965)
Net proceeds from insurance settlement - 4,200
(Increase) decrease in intangibles and other
assets 45 (48)
Net cash used by investing activities (3,238) (30,144)
Cash flows from financing activities:
Decrease in outstanding checks in excess of
deposits (829) (1,267)
Net borrowings (payments) on revolving credit
facility (3,408) 20,906
Principal payments on long-term debt (7,447) (160)
Stock option, incentive and employee stock
purchase plans 535 371
Net cash (used) provided by financing
activities (11,149) 19,850
Net increase in cash 1,571 776
Cash at beginning of period 3,653 5,557
Cash at end of period $ 5,224 $ 6,333
See accompanying notes to unaudited condensed consolidated financial statements.
PERFORMANCE FOOD GROUP COMPANY AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
March 28, 1998 and March 29, 1997
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 27, 1997 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.
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 December 30, 1996, the Company acquired certain net assets
of McLane Foodservice-Temple, Inc. ("McLane Foodservice"), a
wholly-owned subsidiary of McLane Company, Inc., based in Temple,
Texas. McLane Foodservice had 1996 net sales of approximately $180
million. The Company operates the former business of McLane
Foodservice as Performance Food Group of Texas, LP ("PFG of Texas")
through distribution centers in Temple and Victoria, Texas that provide
food and food-related products to traditional foodservice customers as
well as multi-unit chain restaurants and vending customers. The
purchase price of approximately $30.5 million was financed with
proceeds from an existing credit facility. Simultaneous with the closing,
the Company also purchased the distribution center located in Victoria,
Texas from an independent third party for approximately $1.5 million.
During 1997, the Company completed the acquisitions of a
number of foodservice distributors, including the acquisition of Tenneva
Foodservice, Inc. ("Tenneva") on April 11, 1997, Central Florida Finer
Foods, Inc. ("CFFF") on May 12, 1997, W. J. Powell Company
("Powell") on June 28, 1997 and AFI Food Service Distributors, Inc.
("AFI") on October 31, 1997. The operations of Tenneva and CFFF
have been combined with the operations of certain of the Company's
existing subsidiaries. Collectively, these companies had 1996 net sales
of approximately $130 million. The aggregate purchase price of the
acquisitions was approximately $39 million, plus the assumption of
approximately $12 million of debt. The aggregate purchase price for the
acquisitions was financed by issuing 660,827 shares of the Company's
common stock, $7 million of promissory notes due January 2, 1998 and
the remainder with proceeds from an existing credit facility. The
aggregate consideration payable to the former shareholders of Powell and
AFI is subject to increase in certain circumstances.
These acquisitions have been accounted for using the purchase
method and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of tangible net assets
acquired in these acquisitions was approximately $44.2 million and is
being amortized on a straight-line basis over estimated lives ranging
from 5 to 40 years. The consolidated statements of earnings and cash
flows reflect the results of these acquired companies from the date of
acquisition through March 28, 1998.
3. Supplemental Cash Flow Information
Three Months Ended
(amounts in thousands)
March 28, March 29,
1998 1997
Cash paid during the period for:
Interest $ 748 $ 369
Income taxes $ 693 $ 380
Effects of purchase of companies:
Fair value of assets acquired, inclusive
of intangibles of $8,666 $ - $40,327
Liabilities assumed - (8,362)
Net cash paid for acquisitions $ - $31,965
4. Subsequent Event
On May 8, 1998, the Company issued $50.0 million of unsecured
6.77% Senior Notes due May 8, 2010 in a private placement. Proceeds
of the issue were used to repay amounts outstanding under an existing
credit facility and for general corporate purposes.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The Company derives its revenue primarily from the sale of food
and food-related products to the foodservice, or "away-from home
eating," industry. The foodservice industry consists of two major
customer types: "traditional" foodservice customers, consisting of
independent restaurants, hotels, cafeterias, schools, healthcare facilities
and other institutional customers and "multi-unit chain" customers,
consisting of regional and national quick-service restaurants and casual
dining restaurants. Products and services provided to the Company's
traditional and multi-unit chain customers are supported by identical
physical facilities, vehicles, equipment, systems and personnel. The
principal components of the Company's expenses include cost of goods
sold, which represents the amount paid to manufacturers and growers for
products sold, and operating expenses, which include primarily labor-
related expenses, delivery costs and occupancy expenses.
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
March 28, March 29,
1998 1997
Net sales 100.0 % 100.0 %
Cost of goods sold 87.3 87.0
Gross profit 12.7 13.0
Operating expenses 11.3 11.4
Operating profit 1.4 1.6
Other expense, net 0.2 0.2
Earnings before income taxes 1.2 1.4
Income tax expense 0.5 0.5
Net earnings 0.7 % 0.9 %
Comparison of Periods Ended March 28, 1998 to March 29, 1997.
Net sales increased 31.6% to $353.5 million for the three months
ended March 28, 1998 (the "1998 quarter") from $268.5 million for the
three months ended March 29, 1997 (the "1997 quarter"). Net sales in
the Company's existing operations increased 19% over the 1997 quarter
while acquisitions contributed the remaining 13% of the Company's total
sales growth. Inflation amounted to approximately 1% for the 1998
quarter.
Gross profit increased 28.8% to $44.8 million in the 1998 quarter
from $34.8 million in the 1997 quarter. Gross profit margin decreased to
12.7% in the 1998 quarter compared to 13.0% in the 1997 quarter. The
decline in gross profit margin was due primarily to the following factors.
Sales increased during 1998 to certain of the Company's large multi-unit
chain customers which generally are higher-volume, lower gross-margin
accounts but also allow for more efficient deliveries and use of capital,
resulting in lower operating expenses. In addition, the Company's gross
profit margin was impacted by the renegotiation of its distribution
agreement with its largest multi-unit customer in early 1997.
Operating expenses increased 30.3% to $39.9 million in the 1998
quarter compared with $30.6 million in the 1997 quarter. As a
percentage of net sales, operating expenses declined to 11.3% in the
1998 quarter from 11.4% in the 1997 quarter. The decrease in operating
expenses as a percent of net sales primarily reflects better use of the
Company's facilities at the increased level of sales and the continued
shift in mix of sales to certain of the Company's rapidly growing multi-
unit chain customers discussed above. These improvements in
utilization were offset in part by increased labor costs including
recruiting and training additional personnel, primarily in the
transportation area which is an integral part of the Company's
distribution service. The Company expects these increased labor costs to
continue for the next several quarters. The Company leased a 75,000
square foot distribution center in Belcamp, Maryland to service the
continued growth of certain of the Company's multi-unit chain
customers, which became operational in February 1997. The Company
incurred certain start-up expenses for this facility in the 1997 quarter.
Additionally, the Company intends to expand certain of its distribution
centers that support its rapidly growing multi-unit chain customers
during 1998.
Operating profit increased 18.1% to $4.9 million in the 1998
quarter from $4.2 million in the 1997 quarter. Operating profit margin
declined to 1.4% for the 1998 quarter from 1.6% for the 1997 quarter.
Other expense increased to $743,000 in the 1998 quarter from
$433,000 in the 1997 quarter. Other expense includes interest expense,
which increased to $757,000 in the 1998 quarter from $513,000 in the
1997 quarter. The increase in interest expense is due to higher debt
levels during the 1998 quarter as a result of the Company's various
acquisitions. Other expense during the 1997 quarter also includes a $1.3
million gain from insurance proceeds related to covered assets at one of
the Company's processing and distribution facilities which offset a $1.3
million writedown of certain leasehold improvements associated with the
termination of the lease on one of the Company's distribution facilities.
Income tax expense increased to $1.6 million in the 1998 quarter
from $1.5 million in the 1997 quarter, as a result of higher pre-tax
earnings. As a percentage of earnings before income taxes, the provision
for income taxes was 38.5% and 39.0% for the 1998 and 1997 quarters,
respectively.
Net earnings increased 12.9% to $2.6 million in the 1998 quarter
compared to $2.3 million in the 1997 quarter. As a percentage of net
sales, net earnings decreased to 0.7% in the 1998 quarter versus 0.9% in
the 1997 quarter.
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 $16.0 million and
$11.1 million for the 1998 and 1997 quarters, respectively. The increase
in cash provided by operating activities resulted primarily from higher
net earnings and increased levels of trade payables.
Cash used by investing activities was $3.2 million and $30.1
million for the 1998 and 1997 quarters, respectively. Investing activities
consist primarily of additions to and disposals of property, plant and
equipment and the acquisition of businesses. The Company's total
capital expenditures for the 1998 quarter were $3.7 million including
approximately $1.8 million for expansion of the customized distribution
centers in Lebanon, Tennessee, Dallas, Texas and Gainesville, Florida.
The Company anticipates that its total capital expenditures, other than for
acquisitions, for fiscal 1998 will be approximately $20 million.
Investing activities during the 1997 quarters also included $32.0 million
expended for the acquisition of PFG of Texas, net of cash on hand, and
$4.2 million of insurance proceeds received to cover losses associated
with one of the Company's processing and distribution facilities.
Cash flows used by financing activities was $11.1 million in the
1998 quarter and provided by financing activities was $19.9 million for
the 1997 quarter. Cash flows in the 1998 period included net repayments
on a revolving credit facility ("Credit Facility") of $3.4 million, net of
the repayment of $7.3 million of promissory notes used to finance the
acquisition of AFI. Cash flows in the 1997 quarter included net
borrowings on the Credit Facility of $20.9 million which included the
$32.0 million acquisition of PFG of Texas, net of $11.1 million of
repayments as a result of the reduced working capital needs.
The Company has $60.0 million of borrowing capacity under its
Credit Facility with a commercial bank which expires in February 2001.
Approximately $30.9 million was outstanding under the Credit Facility
at March 28, 1998. The Credit Facility also supports up to $5.0 million
of letters of credit. At March 28, 1998, the Company was contingently
liable for $4.2 million of outstanding letters of credit which reduce
amounts available under the Credit Facility. At March 28, 1998, the
Company had $24.9 million available under the Credit Facility. 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 March 28,
1998, the Credit Facility bore interest at 5.86%. 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 September 12, 1997, the Company completed a $42.0 million
master operating lease agreement to construct or purchase four
distribution centers planned to become operational in 1998. Under this
agreement, the lessor owns the distribution centers, incurs the related
debt to construct the facilities and thereafter leases each facility to the
Company. The Company has entered into a commitment to lease each
facility for a period beginning upon the completion of each facility and
ending on September 12, 2002, including extensions. Upon the
expiration of each lease, the Company has the option to renegotiate the
lease, sell the facility to a third party or to purchase the facility at its
original cost. If the Company does not exercise its purchase options, the
Company has significant residual value guarantees of each property. The
Company expects the fair value of the properties included in this
agreement to eliminate or substantially reduce the Company's exposure
under the residual value guarantee. At March 28, 1998, construction has
commenced on two facilities with expenditures to date of approximately
$3.5 million.
On May 8, 1998, the Company issued $50.0 million of unsecured
6.77% Senior Notes due May 8, 2010 in a private placement. Proceeds
of the issue were used to repay amounts outstanding under the Credit
Facility and for general corporate purposes.
Business Combinations
On December 30, 1996, the Company acquired certain net assets
of McLane Foodservice-Temple, Inc. ("McLane Foodservice"), a
wholly-owned subsidiary of McLane Company, Inc., based in Temple,
Texas. McLane Foodservice had 1996 net sales of approximately $180
million. The Company operates the former business of McLane
Foodservice as Performance Food Group of Texas, LP ("PFG of Texas")
through distribution centers in Temple and Victoria, Texas that provide
food and food-related products to traditional foodservice customers as
well as multi-unit chain restaurants and vending customers. The
purchase price of approximately $30.5 million was financed with
proceeds from an existing credit facility. Simultaneous with the closing,
the Company also purchased the distribution center located in Victoria,
Texas from an independent third party for approximately $1.5 million.
During 1997, the Company completed the acquisitions of a
number of foodservice distributors, including the acquisition of Tenneva
on April 11, 1997, CFFF on May 12, 1997, Powell on June 28, 1997 and
AFI on October 31, 1997. The operations of Tenneva and CFFF have
been combined with the operations of certain of the Company's existing
subsidiaries. Collectively, these companies had 1996 net sales of
approximately $130 million. The aggregate purchase price of the
acquisitions was approximately $39 million, plus the assumption of
approximately $12 million of debt. The aggregate purchase price for the
acquisitions was financed by issuing 660,827 shares of the Company's
common stock, $7 million of promissory notes due January 2, 1998 and
the remainder with proceeds from an existing credit facility. The
aggregate consideration payable to the former shareholders of Powell and
AFI is subject to increase in certain circumstances.
These acquisitions have been accounted for using the purchase
method and, accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of tangible net assets
acquired was approximately $44.2 million and is being amortized on a
straight-line basis over estimated lives ranging from 5 to 40 years.
Recently Issued Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which are
effective for periods beginning after December 15, 1997. The impact of
these accounting pronouncements is not expected to 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 March 28, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
10.35 Amendment No. 3 to Revolving Credit Agreement dated
as of July 8, 1996 by and among Performance Food Group
Company and First Union National Bank.
15 Letter regarding unaudited financial information from
KPMG Peat Marwick LLP.
27 Financial Data Schedule (SEC only)
27.1 Financial Data Schedule (SEC only)
(b.) No reports on Form 8-K were filed during the quarter ended
March 28, 1998.
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: May __11___, 1998