S-1 1 d126015ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on May 6, 2016.

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Performance Food Group Company

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   5141   43-1983182

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

12500 West Creek Parkway

Richmond, Virginia 23238

(804) 484-7700

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

A. Brent King

Senior Vice President, General Counsel and Secretary

Performance Food Group Company

12500 West Creek Parkway

Richmond, Virginia 23238

(804) 484-7700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Igor Fert, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue New York, NY 10017
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
 

Marc Jaffe, Esq.

Cathy Birkeland, Esq.

Latham & Watkins LLP

885 Third Avenue New York, NY 10022

Telephone: (212) 906-1200

Facsimile: (212) 751-4864

 

 

Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of
Securities To Be Registered
  Amount To Be
Registered(1)
  Proposed Maximum
Aggregate Offering
Price Per Share(1)
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Common Stock, par value $0.01 per share

 

13,800,000

  $26.05   $359,490,000   $36,200.64

 

 

(1) Includes shares/offering price of shares of common stock that the underwriters have the option to purchase. See “Underwriting.”
(2) These figures are estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, based on the average of high and low prices of the common stock on May 3, 2016 as reported on the New York Stock Exchange.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated May 6, 2016.

12,000,000 Shares

 

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Performance Food Group Company

Common Stock

 

 

The selling stockholders named in this prospectus are offering 12,000,000 shares of common stock of Performance Food Group Company. The selling stockholders will receive all of the net proceeds from this offering and we will not receive any proceeds from the sale of our common stock by the selling stockholders.

Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “PFGC”. On May 5, 2016, the closing sales price of our common stock as reported on the NYSE was $27.43 per share.

Investing in our common stock involves risk. See “Risk Factors” beginning on page 16 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

      

Per Share

    

Total

Public offering price

     $                  $            

Underwriting discounts and commissions(1)

     $                      $                

Proceeds, before expenses, to the selling stockholders

     $                          $                    

 

(1) See “Underwriting” for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than 12,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,800,000 shares from the selling stockholders at the public offering price less the underwriting discount and commissions. The selling stockholders will receive all of the proceeds from the sale of any such additional shares to the underwriters.

Delivery of the shares of common stock will be made on or about                     , 2016.

 

Credit Suisse   Barclays

Prospectus dated                        , 2016


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PFG Performance Food Group
Headquarters (Richmond, VA) Performance Foodservice (Broadline) Performance Foodservice (ROMA) Customized Vistar Quick Facts: $15,270,000,000 in FY2015 Sales Serving 150,000 customer locations Over 150,000 national and company branded products 69 distribution centers


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PFG Performance Food Group
Founded on food, focused on service.


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TABLE OF CONTENTS

     Page  

MARKET AND INDUSTRY DATA

     ii   

TRADEMARKS, SERVICE MARKS AND TRADENAMES

     ii   

BASIS OF PRESENTATION

     ii   

SUMMARY

     1   

RISK FACTORS

     16   

FORWARD-LOOKING STATEMENTS

     34   

USE OF PROCEEDS

     36   

PRICE RANGE OF COMMON STOCK

     37   

DIVIDEND POLICY

     38   

CAPITALIZATION

     39   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     40   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43   

INDUSTRY

     74   

 

     Page  

BUSINESS

     75   

MANAGEMENT

     93   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     131   

PRINCIPAL AND SELLING STOCKHOLDERS

     135   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     137   

DESCRIPTION OF CAPITAL STOCK

     143   

SHARES ELIGIBLE FOR FUTURE SALE

     151   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK

     153   

UNDERWRITING

     156   

LEGAL MATTERS

     162   

EXPERTS

     162   

WHERE YOU CAN FIND MORE INFORMATION

     162   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

Unless otherwise indicated or the context otherwise requires, financial data in this prospectus reflects the consolidated business and operations of Performance Food Group Company and its consolidated subsidiaries.

 

 

Neither we nor the selling stockholders have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we nor the selling stockholders take responsibility for, and cannot provide assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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MARKET AND INDUSTRY DATA

Market data and industry statistics and forecasts used throughout this prospectus are based on the good faith estimates of management, which in turn are based upon management’s reviews of independent industry publications, reports by market research firms, and other independent and publicly available sources. Unless we indicate otherwise, market data and industry statistics used throughout this prospectus with respect to the aggregate size of the US foodservice distribution industry are for the year ended December 31, 2015 and all other such information is for the year ended December 31, 2014. All references to our industry share refer to our net sales as compared to aggregate revenues for the U.S. foodservice distribution industry.

Although we are not aware of any misstatements regarding the industry data that we present in this prospectus, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

This prospectus contains some of our trademarks, trade names, and service marks, including the following: Performance Foodservice, PFG Customized, Vistar, West Creek, Silver Source, Braveheart 100% Black Angus, Empire’s Treasure, Brilliance, Heritage Ovens, Village Garden, Guest House, Piancone, Luigi’s, Ultimo, Corazo, and Assoluti. Each one of these trademarks, trade names, or service marks is either (i) our registered trademark, (ii) a trademark for which we have a pending application, (iii) a trade name or service mark for which we claim common law rights, or (iv) a registered trademark or application for registration which we have been licensed by a third party to use.

Solely for convenience, the trademarks, service marks, and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This prospectus contains additional trademarks, service marks, and trade names of others, which are the property of their respective owners. All trademarks, service marks, and trade names appearing in this prospectus are, to our knowledge, the property of their respective owners.

BASIS OF PRESENTATION

As used in this prospectus, unless otherwise noted or the context otherwise requires, (i) references to the “Company,” “we,” “our,” or “us” refer to Performance Food Group Company and its consolidated subsidiaries; (ii) references to the “Issuer” refer to Performance Food Group Company exclusive of its subsidiaries; (iii) references to “Blackstone” refer to certain investment funds affiliated with The Blackstone Group L.P.; (iv) references to “Wellspring Capital” are to investment funds affiliated with Wellspring Capital Management LLC; (v) references to the “Sponsors” are to Blackstone and Wellspring Capital; (vi) references to the “Investor Group” are, collectively, to the Sponsors, certain other investors, and certain members of our management; and (vii) references to the “underwriters” are to the firms listed on the cover page of this prospectus.

References to “fiscal 2016” are to the 53-week period ending July 2, 2016, references to “fiscal 2015” are to the 52-week period ended June 27, 2015, references to “fiscal 2014” are to the 52-week period ended June 28, 2014, references to “fiscal 2013” are to the 52-week period ended June 29, 2013, references to “fiscal 2012” are to the 52-week period ended June 30, 2012, references to “fiscal 2011” are to the 52-week period ended July 2, 2011, and references to “fiscal 2010” are to the 53-week period ended July 3, 2010.

 

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SUMMARY

This summary highlights certain significant aspects of our business and this offering. This is a summary of information contained elsewhere in this prospectus, is not complete, and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk Factors” and the consolidated financial statements and the notes thereto, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements as a result of certain factors such as those set forth in “Risk Factors” and “Forward-Looking Statements.” When making an investment decision, you should also read the discussion under “Basis of Presentation” for the definition of certain terms used in this prospectus and other matters described in this prospectus.

Our Company

We are the third largest player by revenue in the growing $268 billion U.S. foodservice distribution industry, which supplies the diverse $640 billion U.S. “food-away-from-home” industry. We market and distribute approximately 150,000 food and food-related products from approximately 70 distribution centers to over 150,000 customer locations across the United States. We serve a diverse mix of customers, from independent and chain restaurants to schools, business and industry locations, hospitals, vending distributors, office coffee service distributors, big box 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 more than 12,000 employees work across three segments: Performance Foodservice, PFG Customized, and Vistar.

We plan to continue executing the strategies that have successfully delivered net sales, industry share, and profit growth. In the fiscal year ended June 27, 2015, we generated $15.3 billion in net sales and $328.6 million in Adjusted EBITDA, representing compound annual growth rates of 9% and 11%, respectively, since fiscal 2010. In the fiscal year ended June 27, 2015, we generated $56.5 million in net income. During the first nine months of fiscal 2016, we generated $11.7 billion in net sales and $251.9 million in Adjusted EBITDA, representing growth rates of 4% and 11%, respectively, compared to the first nine months of fiscal 2015. During the first nine months of fiscal 2016, we generated $39.1 million in net income. In calendar year 2014, we had an estimated industry share of 6.0% and our sales growth rate since calendar year 2010 is approximately three times the growth rate of the foodservice distribution industry in that same time frame. We believe that our current industry share, the large size of the U.S. foodservice distribution industry, and our track record of growing industry share provide us a significant opportunity for continued sales growth. See “—Summary Historical Consolidated Financial Data” for our definition of “Adjusted EBITDA” and a reconciliation of Adjusted EBITDA to net income, which we believe is the most directly comparable financial measure calculated in accordance with GAAP.

We attribute our sales growth primarily to our customer-centric business model. For us, that means understanding our customers’ business operations and economics so that we can help them be successful; placing our decision-making on how best to serve customers at the local level; and partnering with our suppliers to develop our high quality proprietary brands, which are a key driver for us in winning, retaining, and developing customers. We believe that our customer-centric business model differentiates us from our competitors who make customer-facing decisions outside of the local market and also from competitors who often do not have the scale to develop proprietary brands, provide value-added services, and distribute as effectively as we do.

 

 

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Since fiscal 2010, our profit growth has outpaced our sales growth as a result of shifting towards a more profitable mix of products and customers, capturing operating efficiencies from our sales growth, and delivering productivity initiatives. Our mix shift is primarily attributable to increased sales of our proprietary brands and sales to independent restaurants, which represent our highest margin products and customers, respectively. In addition, we have established a set of productivity initiatives in the areas of procurement and operations called Winning Together, which, together with increased net sales, continues to drive meaningful profit growth.

Our Segments

We believe that we are well positioned to serve our customers from our three business segments, which are distinguished by their diverse distribution models, the inventory they carry, and the customers they serve: Performance Foodservice, PFG Customized, and Vistar.

Performance Food Group: Fiscal 2015

 

   

Net sales mix by operating segment

 

     Key statistics

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Net sales

   $15.3 billion
    

Adjusted EBITDA

   $328.6 million
    

Distribution Centers

   69
    

Customer Locations

  

150,000+

    

Products

  

150,000+

    

Suppliers

  

5,000+

    

Vehicles

  

2,500+

    

Employees

 

 

  

12,000+

 

 

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 25 broadline distribution centers, which supply a “broad line” of products, and 10 Roma distribution centers, which specialize in supplying independent pizzerias and other Italian-themed restaurants. Each of these distribution centers, which we refer to as operating companies or “OpCos,” 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. For fiscal 2015 and fiscal 2014, Performance Foodservice generated $9.1 billion and $8.1 billion, respectively, in net sales. For the first nine months of fiscal 2016, Performance Foodservice generated $7.0 billion in net sales. Over 75% of Performance Foodservice’s sales during each of these periods was to restaurants. 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 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: “Street” and multi-unit “Chain.” Street customers predominantly consist of independent restaurants. Chain customers are multi-unit restaurants with five or more

 

 

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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. Street customers utilize more of our value-added services, particularly in the areas of product selection and procurement, market trends, menu development, and operational strategy. Street customer purchases typically generate greater gross profit per case compared to sales to Chain customers. Sales to Street customers in fiscal 2015 accounted for 43% of Performance Foodservice sales compared to 37% in fiscal 2010. Case sales to Street customers in the first nine months of fiscal 2016 grew within our 6-10% growth goal range and accelerated modestly between our second and third quarters of fiscal 2016.

Our products consist of our proprietary-branded products, or “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. In fiscal 2015, Performance Brands accounted for 40% of the case volume sold to Street customers, up from 37% in fiscal 2010. Performance Brands accounted for over $2.0 billion of our Performance Foodservice net sales in fiscal 2015.

Performance Foodservice net sales for fiscal 2015 and fiscal 2014 were $9.1 billion and $8.1 billion, respectively, representing year-over-year growth of 12.1%. Performance Foodservice segment EBITDA for the same time period was $254.2 million and $207.5 million, representing year-over-year growth of 22.5%. Performance Foodservice net sales in the first nine months of fiscal 2016 and fiscal 2015 were $7.0 billion and $6.7 billion, respectively, representing year-over-year growth of 4.1%. Performance Foodservice segment EBITDA for the same time period was $206.9 million and $172.6 million, respectively, representing year-over-year growth of 19.9%.

 

Performance Foodservice: Fiscal 2015 Net Sales      

 

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PFG Customized. PFG Customized is a leading national distributor to the family and casual dining channel. We serve over 5,000 customer locations across the United States from nine 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 Bonefish Grill, Carrabba’s Italian Grill, Chili’s, Cracker Barrel, Joe’s Crab Shack, Logan’s Roadhouse, O’Charley’s, Outback Steakhouse, Ruby Tuesday, and TGI Friday’s, and we have recently entered into an agreement to serve

 

 

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Red Lobster. 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 recently began to utilize its distribution platform to serve fast casual chains such as Fuzzy’s Taco Shop, and PDQ, as well quick serve chains including Church’s Chicken and Wendy’s.

PFG Customized net sales for fiscal 2015 and fiscal 2014 were $3.8 billion and $3.3 billion, respectively, representing year-over-year growth of 13.7%. PFG Customized segment EBITDA for the same time periods was $36.5 million and $37.5 million, representing year-over-year decline of 2.7%. The majority of the increase in sales was attributable to the expansion of services provided to a single existing customer. PFG Customized net sales in the first nine months of fiscal 2016 and fiscal 2015 were $2.8 billion and $2.8 billion, respectively, representing year-over-year growth of 0.6%. PFG Customized segment EBITDA for the same time periods was $26.2 million and $25.6 million, representing year-over-year growth of 2.3%.

 

PFG Customized: Fiscal 2015 Net Sales      

 

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Vistar. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors, big box retailers, and theaters. The segment provides national distribution of approximately 20,000 different SKUs of candy, snacks, beverages, and other items to approximately 60,000 customer locations from our network of 25 Vistar OpCos and nine 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 distribution 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.

 

 

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Vistar net sales for fiscal 2015 and fiscal 2014 were $2.4 billion and $2.3 billion, respectively, representing year-over-year growth of 6.9%. Vistar segment EBITDA for the same time period was $105.5 million and $88.3 million, respectively, representing year-over-year growth of 19.5%. Vistar net sales for the first nine months of fiscal 2016 and fiscal 2015 were $1.9 billion and $1.8 billion, respectively, representing year-over-year growth of 8.7%. Vistar segment EBITDA for the same time period was $83.7 million and $79.2 million, respectively, representing year-over-year growth of 5.7%.

 

Vistar: Fiscal 2015 Net Sales      

 

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Our Industry

We distribute to the food-away-from-home industry, a large industry with attractive underlying growth trends. According to the U.S. Department of Commerce, consumer spending on food-away-from-home in the United States totaled $640 billion in 2014, making it one of the largest industries in the country. The industry grew from $331 billion in sales in 1999 to over $640 billion in sales in 2014, representing a compound annual growth rate of approximately 4.5%. Macroeconomic drivers of growth include increases in U.S. gross domestic product, employment levels, and personal consumption expenditures. Microeconomic drivers include increases in the number of restaurants, a continued shift toward value-added products and desire for convenience, smaller sized households, an aging population that spends more per capita at food-away-from-home establishments, and a rebound in the number of dual income households.

We operate in the U.S. foodservice distribution industry, which supplies the food-away-from-home industry and which totaled $268 billion in sales in 2015 according to Technomic. The U.S. foodservice distribution industry consists of four categories of distributors:

 

    Broadline distributors carry a “broad line” of products to serve the needs of many different types of food-away-from-home establishments;

 

    System distributors carry products that are typically specified by large national and regional chains;

 

    Specialized distributors carry a variety of products within specific categories, such as produce, meats, or seafood, or they focus on particular customer types, such as schools, vending operations, or fine dining; and

 

    Cash-and-carry centers where customers come to pick-up their orders.

We are distinguished from most of our competitors by operating in each of the four categories of distributors mentioned above.

 

 

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Broadline distribution is the largest segment in the U.S. foodservice distribution industry. According to Technomic, the “Power Distributors,” which they define as the 21 companies with annual sales greater than $250 million, grew sales by 6% from 2012 to 2013, or approximately twice the growth rate for the overall foodservice distribution industry, which we believe is representative of the benefits of scale.

We benefit from being one of the leading companies in the U.S. foodservice distribution industry. We believe that our current industry share, the large size of the U.S. foodservice distribution industry, and our track record of growing industry share provide us a significant opportunity for continued sales growth.

On December 8, 2013, the two largest companies in our industry, Sysco Corporation (“Sysco”) and US Foods, Inc. (“US Foods”), announced that they entered into an agreement and plan of merger. On February 2, 2015, we reached an agreement to purchase 11 US Foods facilities relating to the proposed merger. On February 19, 2015, the Federal Trade Commission filed suit seeking an injunction to prevent the proposed merger and, on June 23, 2015, the United States District Court for the District of Columbia granted the injunction. In June 2015, the proposed merger was terminated. As a result, our agreement to purchase the facilities was also terminated and we received a termination fee of $25 million.

Based on the industry size as estimated by the industry analyst Technomic, we had an estimated industry share of 6.0% for each of calendar 2013 and calendar 2014, and Sysco and US Foods had an estimated industry share of 20.0% and 10.0%, respectively, in calendar 2014.

Our Strengths

Leading Market Positions

We believe that our leading market positions within each of our business segments allow us to compete effectively in attracting new customers, to attract and retain industry talent, and to drive our growth as we execute our business strategy. We have a diverse business model that operates in three segments, allowing us to capitalize on the growth in food-away-from-home consumption. We believe our leading market positions are exhibited in the following way:

 

    Performance Foodservice. We are the third largest broadline distributor by revenue in the United States after Sysco and US Foods, according to Technomic. We have significant scale in markets along the Eastern Seaboard and in the Southeast. Within Performance Foodservice, we believe that our Roma products make us the leading distributor to independent pizzerias in the United States.

 

    PFG Customized. PFG Customized is a leading national distributor to family and casual dining restaurants, and we believe benefits from longstanding relationships with our customers, strong customer loyalty, and a network that is optimized to serve our customer base efficiently.

 

    Vistar. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors, big box retailers, and theater customers, whom we believe benefit from substantial product variety sold at competitive prices.

Scale Distribution Platforms

We believe we have a competitive advantage over smaller 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

 

 

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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 OpCo, which minimizes the cost of delivery. We believe these efficiencies and economies of scale will lead to continued improvements in our operating margins when combined with incremental fixed-cost advantage.

Customer-Centric Business Model

Our customer-centric business model is based on understanding our customers’ business operations and economics so that we can help them be successful, partnering with our suppliers to develop high quality proprietary brands specifically tailored to our customers’ needs, and placing our decision making on how best to serve customers at the local level so that we remain nimble at the point of transaction. The model embodies how we organize the Company, how our business processes work, and how we design our information systems. Over 12,000 PFG employees share our mission to grow sales by providing excellent service that is locally tailored to each customer. Over 5,000 of our employees interact with customers daily, either in sales or in making deliveries. Our sales associates receive extensive and ongoing product training and earn incentives primarily based on how effectively they grow our business with customers. Our customer-facing employees are supported by hundreds of employees who develop, source, and market over 150,000 food and related products from over 5,000 suppliers and by several thousand warehouse workers focused on filling customer orders accurately, efficiently, and in a timely manner. We believe that our customer-centric business model differentiates us from our competitors who make customer-facing decisions outside the local market and also from competitors who often do not have the scale to develop proprietary brands, provide value-added services, and distribute as effectively as we do.

Proven Ability to Increase Sales to Street Customers and Market our Proprietary Brands

We maintain a strong focus on growing sales to Street customers (our highest profit margin customers), growing sales of Performance Brands (our highest profit margin products), and attracting, retaining, and developing a more effective Street sales force. We believe that offering our Performance Brands enhances customer loyalty and attracts new customers, particularly Street customers. These Performance Brands include exclusive products offered across a wide variety of approximately 10,000 SKUs, which are developed in partnership with our suppliers and customers in order to satisfy the specific needs of our customer base.

From fiscal 2010 through fiscal 2015, we have grown the number of Street customers, case sales to Street customers, and case sales of Performance Brands to Street customers at compound annual growth rates of 8%, 11%, and 13%, respectively. In fiscal 2015, Performance Brands accounted for 40% of the case volume sold to Street customers, up from 37% in fiscal 2010.

Disciplined and Proven Acquirer

We have made 15 acquisitions over the past seven years, beginning with the merger of PFG and Vistar in 2008, when management integrated the two companies with significant synergies. Acquisitions have typically been completed at attractive valuation multiples and have been accretive to our Adjusted EBITDA margins on both a pre- and post-synergy basis.

In recent years, we have made four acquisitions in our Performance Foodservice business, which expanded our footprint in North and South Carolina, Kentucky, Illinois, and northern coastal California. Synergies from these acquisitions typically include introducing Performance Brands to the customers of the acquired company, reducing network mileage, implementing operational best practices, and achieving cost savings, such as expenses associated with insurance and benefit programs.

 

 

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In our Vistar segment, we entered the hotel pantry business through an acquisition, which we are using as a platform to expand further into the hospitality channel. Vistar also used an acquisition to better develop our small drop fulfillment technology to serve big box retailers with candy, snacks, beverages, and other items, a capability that we believe has application in other channels.

Experienced and Invested Management Team

Our senior management team has extensive experience and proven success in the foodservice industry. With 250 years of combined experience (over 20 years on average for the executive leadership team), we believe that our senior management team’s experience in all parts of the industry has enabled us to grow and diversify our business while improving operational efficiency. Members of management have previous experience at other leading foodservice distributors, including Sysco, US Foods, PYA Monarch, and Alliant Foodservice. Other management team members have experience elsewhere in the food industry, ranging from manufacturers and marketers to retailers and contract feeders. Management has invested over $21 million in the equity of the Company and the substantial majority of management’s incentive compensation is tied to our financial performance. We believe management’s investment and incentive structure align its interests with those of our stockholders.

Substantial Free Cash Flow Generation

Our cash flows benefit from a steady, recurring revenue stream supported by effective cost management and a leading market share in the United States foodservice distribution industry. A significant portion of our sales are based on contract pricing, as either a percentage or fixed fee above costs, which enables us to substantially mitigate cost inflation. In order to minimize costs, we leverage our national scale as the third-largest foodservice distributor in the United States and enter into supplier agreements that maximize promotional allowance rebates. We have made a focused effort to drive sales of our proprietary brands, which carry a higher selling margin per case than branded products.

While we experience some seasonal fluctuations in our working capital needs, we effectively manage them with our stable gross margins and our prudent liquidity management and borrowing practices. Because of the predictable nature of our business, our annual capital expenditure requirement is very moderate, averaging 0.5% of net sales from fiscal 2010 to fiscal 2015. Recently our primary capital expense has been IT and productivity investment, which had effects on cash flow that were offset by gross margin expansion. Our annual free cash flow, defined as Adjusted EBITDA minus capital expenditures, grew 17.6% year-over-year from fiscal 2014 to fiscal 2015.

Our Strategy

We intend to continue to expand our industry share and to grow sales and profits by executing on the following key elements of our strategy.

Continue to Grow Street and Performance Brand Sales

We believe that there is a significant and ongoing opportunity to grow sales to Street customers (our highest profit margin customers) and to expand sales of our Performance Brands (our highest profit margin products). We believe that providing customers with proprietary distributor brands such as Performance Brands has been a key driver for us in winning, retaining, and developing customers, especially Street customers. In addition, we believe that our ability to build and retain an increasingly effective sales force has complemented these results. Street business momentum facilitates further development of our Performance Brand portfolio, which in turn enables us to win and develop more Street customers. Smaller regional competitors often do not have the scale to develop their own distinctive brands, and we believe this is a key reason why our Performance Foodservice segment has increased its sales to Street customers. By continuing to focus on increasing sales to our Street customers and sales of our Performance Brands, we believe that we can continue to drive profitable growth.

 

 

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Continue to Grow our Customers and Channels

We intend to increase penetration within our existing channels, enter new channels, and continue to win new customers in all three business segments by using our scale, operational excellence, geographic presence, and customer-centric business model.

 

    Performance Foodservice. In addition to our success in growing our Street business, we believe significant opportunity remains to expand our customer base. For example, in the past three years we have won the fast-growing distribution business of Anthony’s Coal Fired Pizza, Blaze Pizza, Chuy’s, Habit Burger, Hwy 55 Burgers Shakes & Fries, Pollo Tropical, Shake Shack, and Taco Cabana. We believe significant opportunity remains to continue expanding our customer base through new multi-unit restaurant chains and other channels such as schools, hospitals, and commercial locations.

 

    PFG Customized. We intend to continue to grow our traditional customer base and to expand sales to new customer channels. We have recently expanded our customer base to include select fast casual customers including Fuzzy’s Taco Shop and PDQ and quick serve customers including Wendy’s.

 

    Vistar. We have utilized Vistar’s combination of inventory variety, distribution methods, and national scale to diversify our channel mix. This has enabled Vistar to serve new customers and channels including concessionaires (such as Minor League Baseball), corrections facilities, college bookstores, and hospitality, among others. Additionally, Vistar continues to grow within vending and office coffee service distribution, big box retailers, and theaters.

Expand Margins through Continuous Productivity Improvements

We are committed to expanding margins through operating efficiencies and specific productivity programs, which will complement the effect of selling a more profitable mix of customers and brands. We have established a program called Winning Together, which complements our sales growth with ongoing initiatives that take advantage of our scale and drive productivity in non-customer facing areas. Winning Together is led by teams whose primary responsibility is to improve our business processes, capture best practices, and maintain a continuous improvement culture in our procurement and operations functions.

The two key components of Winning Together are Winning Together Through Procurement and Winning Together Through Operations. Winning Together Through Procurement uses structured negotiations with our procurement partners, including selected national, regional, and local suppliers, to develop the mutual profitability of the relationship and to encourage suppliers to invest in our growth. Winning Together Through Operations seeks to accelerate efficiencies in our warehouses and our inbound and outbound logistics functions. This program leverages best practices and scale, implements new productivity software, and establishes a model OpCo as a proving ground for new technologies and business processes.

Winning Together drove meaningful cost-saving benefits in fiscal 2015, and we continue to benefit from this program in fiscal 2016.

Continue to Pursue Opportunistic Acquisitions

We have a strong track record of sourcing, executing, and integrating accretive acquisitions. We intend to continue pursuing selective acquisitions in order to further our competitive position in the industry and to allow us both to enter into new geographies and channels as well as to expand in existing ones.

Over the past seven years, we have made 15 acquisitions, including acquiring five broadline locations in Kentucky, North and South Carolina, Illinois, and northern coastal California. These acquisitions have expanded our broadline geographic reach, and we believe further meaningful opportunities exist that would enable us to reach additional customers. In Vistar, our acquisition focus remains on companies in adjacent channels that can benefit from the strength of our inventory and delivery method variety or that can add capabilities or technologies to our portfolio. We believe that there are a number of attractive potential acquisition opportunities in our industry.

 

 

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Risks Related to Our Business and Our Industry

Investing in our common stock involves substantial risks, and our ability to successfully operate our business and execute our growth plan is subject to numerous risks, including those that are generally associated with operating in the foodservice distribution industry. Some of the more significant challenges and risks include the following:

 

    competition in our industry is intense, and we may not be able to compete successfully;

 

    our industry has low margins, which may increase the volatility of our results of operations;

 

    we may not realize anticipated benefits from our operating cost reduction and productivity improvement efforts, including Winning Together;

 

    our profitability is directly affected by cost inflation or deflation and other factors;

 

    many of our customers are not obligated to continue purchasing products from us;

 

    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 consumer eating habits 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;

 

    our substantial indebtedness 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;

 

    affiliates of our Sponsors control us; the Sponsors’ interests may conflict with ours or yours in the future;

 

    upon completion of this offering, we will no longer be a “controlled company” within the meaning of the rules of the NYSE and the rules of the SEC; however, we may continue to rely on exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies during a one-year transition period; and

 

    other factors set forth under “Risk Factors” in this prospectus.

Before you participate in this offering, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.”

Recent Developments

Multi-Year Distribution Agreement with Red Lobster

In May 2016, we entered into a distribution agreement with Red Lobster, the world’s largest seafood restaurant company. Under the multi-year agreement, we will provide distribution solutions to all of Red Lobster’s more than 670 restaurants in the United States. PFG Customized expects to begin rolling out service to Red Lobster in the first and second quarters of fiscal 2017.

Executive Management Change

On May 3, 2016, Robert D. Evans notified the Company of his intent to retire from his position as Senior Vice President and Chief Financial Officer of the Company. Mr. Evans’s retirement will be effective on the date that the Company appoints a new Chief Financial Officer. The Company is working with an executive search

 

 

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firm to assist in the search for Mr. Evans’s successor. Following Mr. Evans’s retirement, Mr. Evans will remain available to provide transition and advisory services and consulting services to the Company for a specified period pursuant to a transition agreement with the Company.

Amendment and Restatement of ABL Facility

On February 1, 2016, we amended and restated the credit agreement governing our ABL facility (the “ABL Facility”) to increase the borrowing capacity 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. We estimate that approximately $6.6 million of fees and expenses have been 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, $5.6 million was paid during the nine months ended March 26, 2016. In connection with the closing of this amendment, we 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.

Initial Public Offering

On October 6, 2015, we completed an 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. We 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 offering was registered under the Securities Act of 1933, as amended (the “Securities Act”), on a registration statement on Form S-1 (Registration No. 333-198654).

We used the net offering proceeds to us, after deducting the underwriting discount and our direct offering expenses, to repay $223.0 million aggregate principal amount of indebtedness under our term loan facility (the “Term Facility”). We used the remainder of the net proceeds for general corporate purposes.

Corporate History and Information

The issuer was formed under the laws of the state of Delaware on September 23, 2002. Our principal executive office is located at 12500 West Creek Parkway, Richmond VA 23238. Our main telephone number is 804-484-7700.

Our Sponsors

Blackstone (NYSE: BX) is one of the world’s leading investment firms. Blackstone’s asset management businesses, with approximately $343.7 billion in assets under management as of March 31, 2016, include investment vehicles focused on private equity, real estate, public debt and equity, non-investment grade debt and secondary funds, all on a global basis. Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory, and fund placement services.

Wellspring Capital Management, a leading middle-market private equity firm, was founded in 1995. By teaming with strong management, Wellspring unlocks underlying value and pursues new growth opportunities through strategic initiatives, operating improvements, and add-on acquisitions. The firm functions as a strategic rather than tactical partner, providing management teams with top-line support, M&A experience, and financial expertise. Wellspring has approximately $3 billion of private equity capital under management.

Immediately after this offering of our common stock, affiliates of Blackstone and Wellspring will beneficially own approximately 47.1% and 15.9% of our common stock, respectively, or approximately 45.4% and 15.9%, respectively, if the underwriters exercise in full their option to purchase additional shares.

 

 

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THE OFFERING

 

Common stock offered by the selling stockholders


12,000,000 shares.

 

Option to purchase additional shares

The underwriters have an option to purchase up to 1,800,000 additional shares of our common stock from certain of the selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Common stock outstanding

102,614,707 shares, as of April 26, 2016.

 

Use of proceeds

The selling stockholders will receive all of the net proceeds from the sale of the shares of our common stock in this offering, including upon the sale of shares if the underwriters exercise their option to purchase additional shares, from the selling stockholders in this offering. We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders.

 

Dividend policy

We have no current plans to pay dividends on our common stock. 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 in our ABL Facility and Term Loan Facility, and other factors that our Board of Directors may deem relevant.

 

Risk factors

See “Risk Factors” beginning on page 16 for a discussion of risks you should carefully consider before deciding to invest in our common stock.

 

NYSE trading symbol

“PFGC.”

The number of shares of our common stock outstanding is based on 102,614,707 shares of common stock outstanding as of April 26, 2016, which includes 2,883,628 shares of restricted stock. The total number of outstanding shares does not give effect to options relating to 3,822,090 shares of common stock, 288,186 shares issuable pursuant to restricted stock units, 395,019 shares reserved for future issuance under our 2007 Management Option Plan (the “2007 Stock Option Plan”), and an additional 3,774,894 shares reserved for future issuance under the Performance Food Group 2015 Omnibus Incentive Plan (the “2015 Omnibus Incentive Plan”).

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables set forth our summary historical consolidated financial data for the periods and as of the dates indicated.

We derived the summary consolidated statement of operations data and the summary consolidated statement of cash flows data for the years ended June 27, 2015, June 28, 2014, and June 29, 2013 and the summary consolidated balance sheet data as of June 27, 2015 and June 28, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated balance sheet data as of June 29, 2013 from our unaudited financial statements not included in this prospectus. We derived the summary consolidated statement of operations data and the summary consolidated statement of cash flows data for the nine months ended March 26, 2016 and March 28, 2015 and the summary consolidated balance sheet data as of March 26, 2016 from our unaudited consolidated financial statements included elsewhere in this prospectus. The results from any interim period are not necessarily indicative of the results that may be expected for the full year. Our historical results are not necessarily indicative of the results expected for any future period.

The summary historical consolidated financial data set forth below should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

    For the nine months ended     For the fiscal year ended  
    March 26,
2016
    March 28,
2015
    June 27,
2015
    June 28,
2014
    June 29,
2013
 
    (unaudited)                    
    (dollars in millions, except per share data)  

Statement of Operations Data:

         

Net sales

  $ 11,731.9      $ 11,285.6      $ 15,270.0      $ 13,685.7      $ 12,826.5   

Cost of goods sold

    10,283.2        9,927.3        13,421.7        11,988.5        11,243.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,448.7        1,358.3        1,848.3        1,697.2        1,582.7   

Operating expenses

    1,313.3        1,251.4        1,688.2        1,581.6        1,468.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    135.4        106.9        160.1        115.6        114.7   

Interest expense, net(1)

    65.9        64.6        85.7        86.1        93.9   

Loss on extinguishment of debt

                  —          —          2.0   

Other, net

    3.7        3.2        (22.2     (0.7     (0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

    69.6        67.8        63.5        85.4        95.2   

Income before taxes

    65.8        39.1        96.6        30.2        19.5   

Income tax expense(2)

    26.7        16.8        40.1        14.7        11.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 39.1      $ 22.3      $ 56.5      $ 15.5      $ 8.4   

Per Share Data(3):

         

Basic net income per share

  $ 0.41      $ 0.26      $ 0.65      $ 0.18      $ 0.10   

Diluted net income per share

  $ 0.40      $ 0.25      $ 0.64      $ 0.18      $ 0.10   

Weighted-average number of shares used in per share amounts

         

Basic

    95,230,548        86,874,101        86,874,727        86,868,452        86,864,606   

Diluted

    96,750,311        87,664,715        87,613,698        87,533,324        87,458,530   

Other Financial Data:

         

EBITDA(4)

  $ 217.9      $ 195.4      $ 303.6      $ 249.0      $ 233.4   

Adjusted EBITDA(4)

    251.9        226.1        328.6        286.1        271.3   

Capital expenditures

    68.0        63.7        98.6        90.6        66.5   

Summary Statement of Cash Flows Data:

         

Net cash provided by (used in) continuing operations:

         

Operating activities

  $ 117.6      $ 28.4      $ 127.4      $ 119.7      $ 140.7   

Investing activities

    (107.5     (66.3     (100.7     (93.4     (150.0

Financing activities

    (8.6     39.4        (22.8     (35.1     12.3   

 

 

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     As of  
     March 26,
2016
     June 27,
2015
     June 28,
2014
     June 29,
2013
 
    

(unaudited)

                      
     (dollars in millions)  

Balance Sheet Data:

           

Cash and cash equivalents

   $ 10.7       $ 9.2       $ 5.3       $ 14.1   

Total assets

     3,440.1         3,390.9         3,239.8         3,055.4   

Total debt

     1,214.1         1,442.5         1,459.5         1,483.0   

Total shareholders’ equity

     769.8         493.0         434.1         420.0   

 

(1) Interest expense, net includes $5.6 million, $6.0 million, $8.0 million, $6.6 million and $11.1 million of reclassification adjustments for changes in fair value of interest rate swaps for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, respectively. In addition, includes $5.8 million loss on extinguishment and $5.5 million accelerated amortization of original issue discount and deferred financing costs during the nine months ended March 26, 2016.
(2) Income tax expense includes $2.2 million, $2.4 million, $3.1 million, $2.6 million, and $4.3 million tax benefit from reclassification adjustments for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, respectively, related to the reclassification adjustments for changes in fair value of interest rate swaps referred to in note (1).
(3) Share and per share amounts have been retroactively adjusted to reflect a reverse stock split of our common stock.
(4) Management measures operating performance based on our EBITDA, defined as net income (loss) before interest expense (net of interest income), income taxes, and depreciation and amortization. EBITDA is not defined under 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 believe this measure is a useful metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We use this measure to evaluate the performance of our segments and for business planning purposes. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. 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 prospectus, 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 (loss) before interest expense (net of interest income), income and franchise taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items permitted in calculating covenant compliance under our credit agreements (other than certain pro forma adjustments permitted under our credit agreements relating to the Adjusted EBITDA contribution of acquired entities or businesses prior to the acquisition date). Under our credit agreements, our ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and making restricted payments and other covenant compliance matters are tied to ratios based on Adjusted EBITDA (as defined in the credit agreements). Our definition of Adjusted EBITDA may not be the same as similarly titled measures used by other companies.

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 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 as further described under “Management—Executive Compensation.”

 

 

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We believe that the most directly comparable GAAP measure to Adjusted EBITDA is net income (loss). The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:

 

    For the nine months
ended
    For the fiscal year ended  
    March 26,
2016
    March 28,
2015
    June 27,
2015
    June 28,
2014
    June 29,
2013
    June 30,
2012
    July 2,
2011
 
   

(unaudited)

                               
    (dollars in millions)  

Net income

    $ 39.1        $22.3      $ 56.5      $ 15.5      $ 8.4      $ 21.0      $ 13.7   

Interest expense, net

    65.9        64.6        85.7        86.1        93.9        76.3        78.9   

Income tax expense

    26.7        16.8        40.1        14.7        11.1        12.9        10.9   

Depreciation

    58.3        57.1        76.3        73.5        58.7        46.4        43.2   

Amortization of intangible assets

    27.9        34.6        45.0        59.2        61.3        55.9        55.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    217.9        195.4        303.6        249.0        233.4        212.5        202.5   

Non-cash items(i)

    13.2        2.3        4.3        4.8        1.8        3.8        0.3   

Acquisition, integration and reorganization(ii)

    5.9        16.1        0.4        11.3        22.9        12.9        8.2   

Non-recurring items(iii)

    1.7               5.1        0.4        0.4        1.5        4.5   

Productivity initiatives(iv)

    7.7        6.9        8.3        16.3        3.1        1.5        —     

Multiemployer plan withdrawal(v)

           2.8        2.8        0.4        3.9        (0.1     0.8   

Other adjustment items(vi)

    5.5        2.6        4.1        3.9        5.8        8.8        3.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 251.9      $ 226.1      $ 328.6      $ 286.1      $ 271.3      $ 240.9      $ 220.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (i) Includes adjustments for non-cash charges arising from employee stock compensation, interest rate swap hedge ineffectiveness, adjustments to reflect certain assets held for sale to their net realizable value, and changes in fair value of fuel collar instruments. Stock compensation cost was $13.6 million and $0.9 million for the first nine months of fiscal 2016 and the first nine months of fiscal 2015, respectively. In addition, this includes a (decrease) increase in the LIFO reserve of $(2.5) million, $(0.4) million, $1.7 million, $3.0 million, and $0.8 million for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, respectively.
  (ii) Includes professional fees and other costs related to completed and abandoned acquisitions 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, legal fees related to our legal entity reorganization, and advisory fees paid to the Sponsors. 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, pre-acquisition worker’s compensation claims related to an insurance company that went into liquidation, transition costs related to IT outsourcing, certain severance costs, and the impact of business interruption due to hurricane and other weather related or one-time related events.
  (iv) Consists primarily of professional fees and related expenses associated with the Winning Together program and other productivity initiatives.
  (v) Includes amounts related to the withdrawal from multiemployer pension plans. For the first nine months of fiscal 2015, fiscal 2015, fiscal 2014 and fiscal 2013, this amount includes $2.8 million, $2.8 million, $0.4 million, and $3.7 million, respectively, for the expense 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 this prospectus.
  (vi) Consists primarily of costs related to settlements on our fuel collar derivatives, certain financing transactions, lease amendments, and franchise tax expense and other adjustments permitted by our credit agreements.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below and the other information contained in this prospectus, including our consolidated financial statements and the related notes, before you decide whether to purchase our common stock.

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. On December 8, 2013, these competitors entered into an agreement and plan of merger, which was later terminated as described under “Summary—Our Industry.” 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 ability to try to meet customer requirements 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 completely and accurately fill orders 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 (loss).

We may not realize anticipated benefits from our cost reduction and productivity improvement efforts, including our Winning Together program.

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, including our Winning Together program. Our future success and earnings growth depend upon our ability to achieve a lower cost structure and 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, including our Winning Together program, 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.

 

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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. 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 a loss. In addition, product cost inflation may negatively impact 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 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, or “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 recently increased their 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 the business, which would negatively affect our business, financial condition, or results of operations. Additionally, if we were unable or unwilling to lower the prices we charge for our products to a level that was 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 impact 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-

 

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consuming. We cannot make any assurances regarding our ability 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.

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, but not limited to, hurricanes, blizzards, and extreme 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 purchasing cooperatives, 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. We terminated our membership in our purchasing cooperative on February 29, 2016. As a result of such termination, the supplier and logistics contracts coordinated through such cooperative may be disrupted until we are able to secure replacements. Additionally, we will be required to negotiate pricing terms and replacement supplier and logistics contracts with individual providers. It is possible that some of such pricing terms and contracts may not be on terms as favorable as the ones we currently have through the purchasing cooperative. 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.

We face risks relating to labor relations, labor costs, and the availability of qualified labor.

As of March 26, 2016, we had more than 12,000 employees of whom approximately 850 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

 

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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.

Further, potential changes in labor legislation, including the Employee Free Choice Act, or “EFCA,” could result in portions of our workforce, such as our delivery personnel, being subjected to greater organized labor influence. The EFCA could impact the nature of labor relations in the United States and how union elections and contract negotiations are conducted. The EFCA aims to facilitate unionization, and employers of unionized employees may face mandatory, binding arbitration of labor scheduling, costs, and standards, which could increase the costs of doing business. EFCA or similar labor legislation could have an adverse effect on our business, financial condition, or results of operations by imposing requirements that could potentially increase costs and reduce our operating flexibility.

We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of net sales, higher than 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 staff members, 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. Due to the breadth and complexity of federal healthcare legislation and the staggered implementation of its provisions and corresponding regulations, it is difficult to predict the overall impact of the healthcare legislation on our business over the coming years. These changes may require us to change the health benefits that we offer to our employees or may increase the cost of healthcare in general. 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. 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.

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 hedge our exposure to fuel costs. Such hedges, 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.

 

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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.

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 Street customers. In addition, our most profitable products are our Performance Brands. We typically provide a higher level of services to our Street customers and are able to earn a higher operating margin on sales to Street customers. Street 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 Street customers or decreases in our sales to Street 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 Street sales, expanding our Performance Brands, making strategic acquisitions, and achieving improved operating efficiencies as we continue to expand 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 opportunistically pursue acquisitions that broaden our customer base and/or geographic reach. If we are unable to integrate acquired businesses successfully or to realize anticipated

 

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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 U.S. Department of Agriculture, and the Food and Drug Administration, or 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. In late 2010, the FDA Food Safety Modernization Act, or the “FSMA,” was enacted. The FSMA represents a significant expansion of food safety requirements and FDA food safety authorities and, among other things, 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 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 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

 

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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 do not 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 due to 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 covered by insurance. In addition, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or 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.

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.

 

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A cyber-security incident and 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 cyber incidents, our preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or 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. We believe we have sufficient primary and excess umbrella liability insurance with respect to product liability claims. However, we cannot assure you 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, 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 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, 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

 

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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, may cause consumers to avoid public gathering places, like restaurants, or otherwise change their eating behaviors. Health concerns and 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.

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 will 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 due to 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 timely pay their debts to us.

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 and 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

 

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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. In addition, the vending portion of our Vistar business is sensitive to, and closely correlated with, the level of employment in the U.S. domestic manufacturing sector, which has experienced significant declines in employment over the past several years. Any declines in the level of employment, and any related declines in Vistar sales to the vending channel, could have a material adverse effect on our business, financial condition, or results of operations.

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.

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 impact 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, or (4) we experience a claim for which coverage is not provided.

 

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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 March 26, 2016, we had $1,215.1 million of indebtedness (not reflecting $1.0 million of unamortized original issue discount). In addition, we had $615.1 million of availability under our ABL Facility after giving effect to $97.7 million of outstanding letters of credit.

Our high degree of leverage could have important consequences for us, including:

 

    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 because substantially all of 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.

Our total interest expense, net was $65.9 million, $64.6 million, $85.7 million, $86.1 million, and $93.9 million for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, respectively.

Substantially all 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 swaps to reduce our exposure to floating interest rates as described 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 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

 

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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.

Our credit agreements 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 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.

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.

 

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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 impact 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 this Offering and Ownership of Our Common Stock

Our stock price may change significantly following the offering, 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 recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. We, the selling stockholders and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the offering price due to a number of factors such as those listed in “—Risks Related to Our Business and Industry” and the following:

 

    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;

 

    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 Securities and Exchange Commission (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.

 

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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 following this offering could cause the market price for our common stock to decline.

After this offering, 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 April 26, 2016, we had a total of 102,614,707 shares of common stock outstanding, which includes 2,883,628 shares of restricted stock. All shares sold in this offering and in the IPO will be freely tradable without registration under the Securities Act, and without restriction by persons other than our “affiliates” (as defined under Rule 144 of the Securities Act (“Rule 144”)), including our directors, executive officers, and other affiliates (including affiliates of Blackstone and Wellspring), whose shares may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

In connection with this offering, we, our directors and executive officers, the Sponsors and the Selling Stockholders of our common stock have each agreed, subject to certain exceptions, not to dispose of or hedge any of our or their common stock or securities convertible into or exchangeable for shares of common stock

 

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during the period from the date of this prospectus continuing through the date 75 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, shares held by Blackstone, Wellspring, and our directors, officers, employees, and other stockholders will be eligible for resale, subject to volume, manner of sale, and other limitations under Rule 144. In addition, pursuant to a registration rights agreement, Blackstone, Wellspring, and certain other stockholders will have the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act. By exercising their registration rights and selling a large number of shares, our existing owners could cause the prevailing market price of our common stock to decline. Following completion of this offering, the shares covered by registration rights would represent approximately 63.8% of our outstanding common stock (or 62.0%, if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

As restrictions on resale end or if these stockholders exercise their registration rights, 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 3,822,090 shares are issuable upon the exercise of options, 288,186 shares are issuable pursuant to restricted stock units, 395,019 shares are reserved for future issuance under the 2007 Stock Option Plan, and 3,774,894 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 addition, there are 2,883,628 shares of restricted stock outstanding.

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;

 

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    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 if Blackstone and its affiliates hold less than 30% of our outstanding shares of common stock; 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 if Blackstone and its affiliates hold less than 30% of our outstanding shares of common stock.

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. See “Description of Capital Stock.”

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 DGCL 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 proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Affiliates of the Sponsors will continue to be able to significantly influence our decisions after the completion of this offering and their interests may conflict with ours or yours in the future.

Immediately following this offering of common stock, affiliates of Blackstone and Wellspring will beneficially own approximately 47.1% and 15.9% of our common stock, respectively, or approximately 45.4% and 15.9%, respectively, if the underwriters exercise in full their option to purchase additional shares. As a result, investment funds associated with or designated by affiliates of the Sponsors have the ability to elect members of our Board of Directors and thereby continue to influence our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, the Sponsors may have an interest in pursuing acquisitions, divestitures, and other transactions that, in their respective judgment, could enhance their investment, even though such transactions might involve risks to you. For example, the Sponsors may have an interest in our making acquisitions that increase our indebtedness or selling revenue-generating assets. Additionally, in certain circumstances, acquisitions of debt at a discount by purchasers that are related to a debtor can give rise to cancellation of indebtedness income to such debtor for U.S. federal income tax purposes.

Blackstone and Wellspring are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us.

 

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Our amended and restated certificate of incorporation provides that none of Blackstone, Wellspring, any of their affiliates, or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates has any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsors also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. So long as either of our Sponsors continue to own a significant amount of our combined voting power, even if such amount is less than 50%, such Sponsor will continue to be able to strongly influence or effectively control our decisions and, so long as such Sponsor and its affiliates collectively own at least 5% of all outstanding shares of our stock entitled to vote generally in the election of directors, such Sponsor will be able to appoint individuals to our Board of Directors under our stockholders agreement. In addition, our Sponsors are able to influence the outcome of all matters requiring stockholder approval and could cause or prevent a change of control of the Company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of the Company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of the Company and ultimately might affect the market price of our common stock.

Upon completion of this offering, we will no longer be a “controlled company” within the meaning of the NYSE rules and the rules of the SEC. However, we may continue to rely on exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies during a one-year transition period.

Blackstone will no longer own a majority of our outstanding common stock after the completion of this offering. As a result, we will no longer be a “controlled company” within the meaning of the corporate governance standards contained in Section 303A of the NYSE Listed Company Manual. Consequently, the NYSE rules will require that we (i) appoint a majority of independent directors to our Board of Directors within one year of the date we no longer qualify as a “controlled company” and (ii) appoint at least one independent director to each of the compensation and nominating and governance committees on the date we no longer qualify as a “controlled company,” at least a majority of independent directors within 90 days of such date and that the compensation and nominating and governance committees be composed entirely of independent directors within one year of such date. During these transition periods, we may continue to utilize the available exemptions from certain corporate governance requirements as permitted by the NYSE rules.

In addition, on June 20, 2012, the SEC passed final rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 pertaining to compensation committee independence and the role and disclosure of compensation consultants and other advisers to the compensation committee. The SEC’s rules direct each of the national securities exchanges (including the NYSE on which we intend to list our common stock) to develop listing standards requiring, among other things, that:

 

    compensation committees be composed of fully independent directors, as determined pursuant to new independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel, and other committee advisors; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel, or other advisors, certain independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

We will not be fully subject to these compensation committee independence requirements until the end of the one-year transition period after we cease to be a “controlled company.”

 

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We may be unsuccessful in implementing required internal controls over financial reporting.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Our auditors have identified a significant deficiency in our internal controls over financial reporting relating to information technology controls. We have taken measures to remediate the deficiency, but it has not been fully remediated. Our management is required to report on, and our independent registered public accounting firm will be required to attest to, the effectiveness of our internal controls over financial reporting. If we are unable to remedy past deficiencies, or if we identify additional deficiencies in the future, we may be unable to conclude that our internal controls over financial reporting are effective.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts included in this prospectus, 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 referred to under “Prospectus Summary,” “Risk Factors,” “Dividend Policy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” are forward-looking statements. When used in this prospectus, the words “estimates,” “expects,” “contemplates,” “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 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 prospectus. Such risks, uncertainties, and other important factors include, among others, the risks, uncertainties, and factors set forth above under “Risk Factors,” and the following risks, uncertainties, and factors:

 

    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, including Winning Together;

 

    our profitability is directly affected by cost inflation or deflation and other factors;

 

    lack of 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 and purchasing cooperatives;

 

    labor risks and availability of qualified labor;

 

    volatility of fuel costs;

 

    changes in pricing practices of our suppliers;

 

    inability to adjust cost structure where one or more of our competitors successfully implement lower costs;

 

    risks relating to any future acquisitions;

 

    environmental, health, and safety costs;

 

    reliance on technology and risks associated with disruption or delay in implementation of new technology;

 

    difficult economic conditions affecting consumer confidence;

 

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    product liability claims relating to the products we distribute and other litigation;

 

    negative media exposure and other events that damage our reputation;

 

    anticipated multiemployer pension related liabilities and contributions to our multiemployer pension plan;

 

    impact of uncollectibility of accounts receivable; and

 

    departure of key members of senior management.

 

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USE OF PROCEEDS

The selling stockholders will receive all of the net proceeds from the sale of the shares of our common stock in this offering. Pursuant to the registration rights agreement entered into in connection with the IPO, we will pay all expenses (other than the underwriting discount and commissions) of the selling stockholders in connection with this offering. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling stockholders, including any sales pursuant to the option to purchase additional shares.

 

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PRICE RANGE OF COMMON STOCK

Our common stock is listed on the NYSE and is traded under the symbol “PFGC”. At the close of business on May 5, 2016, there were 213 holders of record of our shares of common stock. The last reported price of our common stock on the NYSE on May 5, 2016 was $27.43 per share.

The following table sets forth for the periods indicated the high and low reported sale prices per share for our common stock, as reported on the NYSE:

 

     High      Low  

Fiscal 2016

     

Second Quarter (from October 1, 2015)

   $ 25.22       $ 18.72   

Third Quarter

   $ 25.46       $ 20.00   

Fourth Quarter (through May 5, 2016)

   $ 27.52       $ 22.88   

 

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DIVIDEND POLICY

We have no current plans to pay dividends on our common stock. 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. In addition, our ability to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing other indebtedness we or our subsidiaries incur in the future. See “Description of Certain Indebtedness.”

In fiscal 2013, we paid dividends of $220.0 million to our stockholders. We did not pay any dividends in fiscal 2014, fiscal 2015 or the first nine months of fiscal 2016.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 26, 2016.

You should read this table in conjunction with the information contained in “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Certain Indebtedness,” as well as our audited consolidated financial statements included elsewhere in this prospectus and the notes thereto included elsewhere in this prospectus.

 

     As of March 26, 2016  
     (In millions, except share
and per share data)
 

Cash and cash equivalents

   $ 10.7   
  

 

 

 

Debt:

  

ABL Facility(1)

   $ 866.9   

Term Loan Facility(2)

     308.3   

Capital lease obligations

     34.5   

Other(3)

     5.4   
  

 

 

 

Total debt(2)

     1,215.1   

Shareholders’ equity:

  

Common stock, $0.01 par value, 1,000,000,000 shares authorized and 99,731,319 issued and outstanding(4)

     1.0   

Additional paid-in capital

     831.2   

Accumulated other comprehensive loss, net of tax benefit

     (4.0

Accumulated deficit

     (58.4
  

 

 

 

Total shareholders’ equity

     769.8   
  

 

 

 

Total capitalization

   $ 1,984.9   
  

 

 

 

 

(1) Our ABL Facility provides for aggregate borrowings of up to $1,600.0 million and the option to increase the amount available under our ABL Facility by up to $800.0 million, subject to certain conditions. As of March 26, 2016, we had $866.9 million of outstanding borrowings under our ABL Facility. As of the same date there was $97.7 million in letters of credit outstanding under the ABL Facility and excess availability was $615.1 million, net of $19.0 million of lenders’ reserves, subject to compliance with customary borrowing conditions. See “Description of Certain Indebtedness—Senior Secured Asset-Based Revolving Credit Facility.”
(2) Does not reflect $1.0 million of unamortized original issue discount.
(3) Does not reflect $0.6 million of fair value discount related to an unsecured subordinated promissory note.
(4) The total number of outstanding shares does not give effect to options relating to 3,822,090 shares of common stock, 288,186 shares issuable pursuant to restricted stock units, 395,019 shares reserved for future issuance under the 2007 Stock Option Plan), and an additional 3,774,894 shares reserved for future issuance under the 2015 Omnibus Incentive Plan.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

We derived the selected statement of operations data for the years ended June 27, 2015, June 28, 2014, and June 29, 2013 and the selected balance sheet data as of June 27, 2015 and June 28, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected statement of operations data for the years ended June 30, 2012 and July 2, 2011 and the selected balance sheet data as of June 29, 2013, June 30, 2012, and July 2, 2011 from our unaudited consolidated financial statements, which are not included in this prospectus. We derived the selected consolidated statement of operations data and the selected consolidated statement of cash flows data for the nine months ended March 26, 2016 and March 28, 2015 and the summary consolidated balance sheet data as of March 28, 2015 from our unaudited consolidated financial statements included elsewhere in this prospectus. The results from any interim period are not necessarily indicative of the results that may be expected for the full year. 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 included elsewhere in this prospectus including the related notes thereto appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Certain Indebtedness,” and the other financial information included elsewhere in this prospectus.

 

    For the nine months ended     For the fiscal year ended(1)  
    March 26,
2016
    March 28,
2015
    June 27,
2015
    June 28,
2014
    June 29,
2013
    June 30,
2012
    July 2,
2011
 
    (unaudited)                                
    (dollars in millions, except per share data)  

Statement of Operations Data:

             

Net sales

  $ 11,731.9      $ 11,285.6      $ 15,270.0      $ 13,685.7      $ 12,826.5      $ 11,505.9      $ 10,594.1   

Cost of goods sold

    10,283.2        9,927.3        13,421.7        11,988.5        11,243.8        10,101.9        9,276.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,448.7        1,358.3        1,848.3        1,697.2        1,582.7        1,404.0        1,317.8   

Operating expenses

    1,313.3        1,251.4        1,688.2        1,581.6        1,468.0        1,293.1        1,215.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    135.4        106.9        160.1        115.6        114.7        110.9        102.5   

Interest expense, net(2)

    65.9        64.6        85.7        86.1        93.9        76.3        78.9   

Loss on extinguishment of debt

    —          —          —          —          2.0        —          —     

Other, net

    3.7        3.2        (22.2     (0.7     (0.7     0.7        (1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

    69.6        67.8        63.5        85.4        95.2        77.0        77.9   

Income before taxes

    65.8        39.1        96.6        30.2        19.5        33.9        24.6   

Income tax expense(3)

    26.7        16.8        40.1        14.7        11.1        12.9        10.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 39.1      $ 22.3      $ 56.5      $ 15.5      $ 8.4      $ 21.0      $ 13.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Basic net income per share

  $ 0.41      $ 0.26      $ 0.65      $ 0.18      $ 0.10      $ 0.24      $ 0.16   

Diluted net income per share

  $ 0.40      $ 0.25      $ 0.64      $ 0.18      $ 0.10      $ 0.24      $ 0.16   

Weighted-average number of shares used in per share amounts

             

Basic

    95,230,548        86,874,101        86,874,727        86,868,452        86,864,606        86,827,483        86,759,805   

Diluted

    96,750,311        87,664,715        87,613,698        87,533,324        87,458,530        87,242,331        86,972,842   

Dividends declared per share

    —          —          —          —        $ 2.53      $ 1.15        —     

Other Financial Data:

         

EBITDA(4)

  $ 217.9      $ 195.4      $ 303.6      $ 249.0      $ 233.4      $ 212.5      $ 202.5   

Adjusted EBITDA(4)

    251.9        226.1        328.6        286.1        271.3        240.9        220.0   

Capital expenditures

    68.0        63.7        98.6        90.6        66.5        68.9        56.1   

 

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     As of  
     March 26,
2016
     June 27,
2015
     June 28,
2014
     June 29,
2013
     June 30,
2012
     July 2,
2011
 
     (unaudited)                                     
     (dollars in millions)  

Balance Sheet Data:

                    

Cash and cash equivalents

   $ 10.7       $ 9.2       $ 5.3       $ 14.1       $ 11.1       $ 14.9   

Total assets

     3,440.1         3,390.9         3,239.8         3,055.4         2,946.6         2,529.9   

Total debt

     1,214.1         1,442.5         1,459.5         1,483.0         1,208.3         800.2   

Total shareholders’ equity

     769.8         493.0         434.1         420.0         625.1         697.1   

 

(1) All fiscal years presented contained 52 weeks consisting of 364 days.
(2) Interest expense, net includes $5.6 million, $6.0 million, $8.0 million, $6.6 million, $11.1 million, $12.5 million, and $13.0 million of reclassification adjustments for changes in fair value of interest rate swaps for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, fiscal 2013, fiscal 2012, and fiscal 2011, respectively. Also includes $5.8 million loss on extinguishment and $5.5 million accelerated amortization of original issue discount and financing costs during the nine months ended March 26, 2016.
(3) Income tax expense includes $2.2 million, $2.4 million, $3.1 million, $2.6 million, $4.3 million, $4.9 million, and $5.1 million tax benefit from reclassification adjustments for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, fiscal 2013, fiscal 2012, and fiscal 2011, respectively, related to the reclassification adjustments for change in fair value of interest rate swaps referred to in note (2).
(4) See “Summary—Summary Historical Consolidated Financial Data” for our definitions of “EBITDA” and “Adjusted EBITDA.”

We believe that the most directly comparable GAAP measure to Adjusted EBITDA is net income (loss). The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:

 

    For the nine months
ended
    For the fiscal year ended  
    March 26,
2016
    March 28,
2015
    June 27,
2015
    June 28,
2014
    June 29,
2013
    June 30,
2012
    July 2,
2011
 
    (unaudited)                                
    (dollars in millions)  

Net income

  $ 39.1      $ 22.3      $ 56.5      $ 15.5      $ 8.4      $ 21.0      $ 13.7   

Interest expense, net

    65.9        64.6        85.7        86.1        93.9        76.3        78.9   

Income tax expense

    26.7        16.8        40.1        14.7        11.1        12.9        10.9   

Depreciation

    58.3        57.1        76.3        73.5        58.7        46.4        43.2   

Amortization of intangible assets

    27.9        34.6        45.0        59.2        61.3        55.9        55.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    217.9        195.4        303.6        249.0        233.4        212.5        202.5   

Non-cash items(i)

    13.2        2.3        4.3        4.8        1.8        3.8        0.3   

Acquisition, integration and reorganization(ii)

    5.9        16.1        0.4        11.3        22.9        12.9        8.2   

Non-recurring items(iii)

    1.7               5.1        0.4        0.4        1.5        4.5   

Productivity initiatives(iv)

    7.7        6.9        8.3        16.3        3.1        1.5        —     

Multiemployer plan withdrawal(v)

           2.8        2.8        0.4        3.9        (0.1     0.8   

Other adjustment items(vi)

    5.5        2.6        4.1        3.9        5.8        8.8        3.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 251.9      $ 226.1      $ 328.6      $ 286.1      $ 271.3      $ 240.9      $ 220.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (i) Includes adjustments for non-cash charges arising from employee stock compensation, interest rate swap hedge ineffectiveness, adjustments to reflect certain assets held for sale to their net realizable value, and changes in fair value of fuel collar instruments. Stock compensation cost was $13.6 million and $0.9 million for the first nine months of fiscal 206 and the first nine months of fiscal 2015, respectively. In addition, this includes a (decrease) increase of in the LIFO reserve of $(2.5) million, $(0.4) million, $1.7 million, $3.0 million, and $0.8 million, for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013 respectively.
  (ii) Includes professional fees and other costs related to completed and abandoned acquisitions, net of a $25.0 million termination fee in fiscal 2015 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, legal fees related to our legal entity reorganization, and advisory fees paid to the Sponsors. 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.

 

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  (iii) Consists primarily of an expense related to our withdrawal from a purchasing cooperative, pre-acquisition worker’s compensation claims related to an insurance company that went into liquidation, transition costs related to IT outsourcing, certain severance costs, and the impact of business interruption insurance due to hurricane and other weather related and other one-time events.
  (iv) Consists primarily of professional fees and related expenses associated with the Winning Together program and other productivity initiatives.
  (v) Includes amounts related to the withdrawal from multiemployer pension plans. For the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, this amount includes $2.8 million, $2.8 million, $0.4 million, and $3.7 million, respectively, for the expense 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 this prospectus.
  (vi) Consists primarily of costs related to settlements on our fuel collar derivatives, certain financing transactions, lease amendments, and franchise tax expense and other adjustments permitted by our credit agreements.

 

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MANAGEMENT’S 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 “Summary—Summary Historical Consolidated Financial Data,” “Selected Historical Consolidated Financial Data,” and our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus. In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this prospectus. Actual results may differ materially from those contained in any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Our Company

We market and distribute approximately 150,000 food and food-related products to customers across the United States from approximately 70 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.

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 the first nine months of fiscal 2016 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 Adjusted EBITDA grew 11.4% from the first nine months of fiscal 2015 to the first nine months of fiscal 2016, driven by case growth of 4.5% and improved profit per case. Gross margin dollars rose 6.7% for the first nine months of fiscal 2016 versus the comparable prior year period, 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 compared to the first nine months of fiscal 2015 rose 4.9%, which was slower than gross margin growth, as a result of initiatives undertaken to reduce operating expenses and from lower fuel prices.

 

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We have established a program called Winning Together, which complements our sales focus with specific initiatives to take advantage of our scale and to drive productivity in non-customer facing areas on an ongoing basis. Winning Together is led by teams whose primary responsibility is to improve our business processes, capture best practices, and maintain a continuous improvement culture in our procurement and operations functions.

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 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. We are the third largest foodservice distributer by revenue in the United States behind Sysco and US Foods, which are both national broadline distributors. The balance of the market consists of a wide spectrum of companies ranging from businesses selling a single category of product (e.g., produce) to large 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, including our Winning Together program. The key strategies include focusing on Street sales and Performance Brands, pursuing new customers for all three of our business segments, 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.

 

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EBITDA and Adjusted EBITDA

Management measures operating performance based on our EBITDA, defined as net income (loss) before interest expense (net of interest income), income taxes, and depreciation and amortization. EBITDA is not defined under 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 believe this measure is a useful metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We use this measure to evaluate the performance of our segments and for business planning purposes. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt and to undertake capital expenditures because it eliminates depreciation and amortization expense. 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 prospectus, 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 (loss) before interest expense (net of interest income), income and franchise taxes, and depreciation and amortization, further adjusted to exclude certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items permitted in calculating covenant compliance under our credit agreements (other than certain pro forma adjustments permitted under our credit agreements relating to the Adjusted EBITDA contribution of acquired entities or businesses prior to the acquisition date). Under our credit agreements, 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 agreements). Our definition of Adjusted EBITDA may not be the same as similarly titled measures used by other companies.

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 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 as further described under “Management—Executive Compensation.”

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 that are included in EBITDA and net income as permitted or required by our credit agreements. Adjusted EBITDA among other things:

 

    does not include non-cash stock-based employee compensation expense and certain other non-cash charges;

 

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    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 the Sponsors.

We have included the calculations of 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):

 

    Nine months ended                 Fiscal year ended     Fiscal 2015     Fiscal 2014  
    March 26,
2016
    March 28,
2015
    Change     %     June 27,
2015
    June 28,
2014
    June 29,
2013
    Change     %     Change     %  
    (unaudited)                                                        

Net sales

  $ 11,731.9      $ 11,285.6      $ 446.3        4.0      $ 15,270.0      $ 13,685.7      $ 12,826.5      $ 1,584.3        11.6      $ 859.2        6.7   

Cost of goods sold

    10,283.2        9,927.3        355.9        3.6        13,421.7        11,988.5        11,243.8        1,433.2        12.0        744.7        6.6   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

    1,448.7        1,358.3        90.4        6.7        1,848.3        1,697.2        1,582.7        151.1        8.9        114.5        7.2   

Operating expenses

    1,313.3        1,251.4        61.9        4.9        1,688.2        1,581.6        1,468.0        106.6        6.7        113.6        7.7   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating profit

    135.4        106.9        28.5        26.7        160.1        115.6        114.7        44.5        38.5        0.9        0.8   

Other expense (income)

                     

Interest expense, net

    65.9        64.6        1.3        2.0        85.7        86.1        93.9        (0.4     (0.5     (7.8     (8.3

Loss on extinguishment of debt

    —          —          —          —          —          —          2.0        —          N/A        (2.0     N/A   

Other, net

    3.7        3.2        0.5        15.6        (22.2     (0.7     (0.7     (21.5     3,071.4        —          —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other expense, net

    69.6        67.8        1.8        2.7        63.5        85.4        95.2        (21.9     (25.6     (9.8     (10.3
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income before income taxes

    65.8        39.1        26.7        68.3        96.6        30.2        19.5        66.4        219.9        10.7        54.9   

Income tax expense

    26.7        16.8        9.9        58.9        40.1        14.7        11.1        25.4        172.8        3.6        32.4   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income

  $ 39.1      $ 22.3      $ 16.8        75.3      $ 56.5      $ 15.5      $ 8.4      $ 41.0        264.5      $ 7.1        84.5   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

EBITDA

  $ 217.9      $ 195.4      $ 22.5        11.5      $ 303.6      $ 249.0      $ 233.4      $ 54.6        21.9      $ 15.6        6.7   

Adjusted EBITDA

  $ 251.9      $ 226.1      $ 25.8        11.4      $ 328.6      $ 286.1      $ 271.3      $ 42.5        14.9      $ 14.8        5.5   

Weighted-average common shares outstanding:

                     

Basic

    95,230,548        86,874,101            86,874,727        86,868,452        86,864,606           

Diluted

    96,750,311        87,664,715            87,613,698        87,533,324        87,458,530           

Earnings per common share:

                     

Basic

  $ 0.41      $ 0.26          $ 0.65      $ 0.18      $ 0.10           

Diluted

  $ 0.40      $ 0.25          $ 0.64      $ 0.18      $ 0.10           

 

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We believe that the most directly comparable GAAP measure to EBITDA and Adjusted EBITDA is net income (loss). The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:

 

     For the nine months ended      For the fiscal year ended  
     March 26,
2016
     March 28,
2015
     June 27,
2015
     June 28,
2014
     June 29,
2013
 
     (unaudited)                       
     (dollars in millions)  

Net income

   $ 39.1       $ 22.3       $ 56.5       $ 15.5       $ 8.4   

Interest expense, net(1)

     65.9         64.6         85.7         86.1         93.9   

Income tax expense

     26.7         16.8         40.1         14.7         11.1   

Depreciation

     58.3         57.1         76.3         73.5         58.7   

Amortization of intangible assets

     27.9         34.6         45.0         59.2         61.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     217.9         195.4         303.6         249.0         233.4   

Non-cash items(2)

     13.2         2.3         4.3         4.8         1.8   

Acquisition, integration and reorganization(3)

     5.9         16.1         0.4         11.3         22.9   

Non-recurring items(4)

     1.7         —           5.1         0.4         0.4   

Productivity initiatives(5)

     7.7         6.9         8.3         16.3         3.1   

Multiemployer plan withdrawal(6)

     —           2.8         2.8         0.4         3.9   

Other adjustment items(7)

     5.5         2.6         4.1         3.9         5.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 251.9       $ 226.1       $ 328.6       $ 286.1       $ 271.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes a $5.8 million loss on extinguishment and $5.5 million of accelerated amortization of original issuance discount and deferred financing costs during the nine months ended March 26, 2016.
(2) Includes adjustments for non-cash charges arising from employee stock compensation, interest rate swap hedge ineffectiveness, adjustments to reflect certain assets held for sale to their net realizable value, and changes in fair value of fuel collar instruments. Stock compensation cost was $13.6 million and $0.9 million for the first nine months of fiscal 2016 and the first nine months of fiscal 2015, respectively. In addition, this includes a (decrease) increase in the LIFO reserve of $(2.5) million, $(0.4) million, $1.7 million, $3.0 million, and $0.8 million for the first nine months of fiscal 2016, the first nine months of fiscal 2015, fiscal 2015, fiscal 2014, and fiscal 2013, respectively.
(3) Includes professional fees and other costs related to completed and abandoned acquisitions net of a $25.0 million termination fee in fiscal 2015 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, legal fees related to our legal entity reorganization, and advisory fees paid to the Sponsors. 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.
(4) Consists primarily of an expense related to our withdrawal from a purchasing cooperative, pre-acquisition worker’s compensation claims related to an insurance company that went into liquidation, transition costs related to IT outsourcing, certain severance costs, and the impact of business interruption insurance due to hurricane and other weather related and other one-time events.
(5) Consists primarily of professional fees and related expenses associated with the Winning Together program and other productivity initiatives.
(6) Includes amounts related to the withdrawal from multiemployer pension plans. For the first nine months of fiscal 2015, fiscal 2015, fiscal 2014 and fiscal 2013, this amount includes $2.8 million, $2.8 million, $0.4 million, and $3.7 million, respectively, for the expense 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 this prospectus.
(7) Consists primarily of costs related to settlements on our fuel collar derivatives, certain financing transactions, lease amendments, and franchise tax expense and other adjustments permitted by our credit agreements.

 

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Consolidated Results of Operations

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

Net Sales

Net sales growth is a function of case growth, pricing (which is primarily based on product inflation/deflation), and a changing mix of customers, channels, and product categories sold. Net sales increased $446.3 million, or 4.0%, for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. This increase was primarily the result of case growth in Performance Foodservice, particularly in the Street channel, and sales growth in Vistar, particularly their retail, theater, vending, and hospitality channels. Net sales growth was driven by case volume growth of 4.5% in the nine month period of fiscal 2016 compared to same period of fiscal 2015. This increase was partially offset by a 0.5% decrease in selling price per case for the nine months ended March 26, 2016, primarily as a result of deflation and mix. During the nine month period of fiscal 2016, we witnessed deflation in our cheese, beef, and seafood categories.

Gross Profit

Gross profit increased $90.4 million, or 6.7%, for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. The increases 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 Street customers positively affected gross profit per case. Street customers typically receive more services from us, cost more to serve, and pay a higher gross profit per case than other customers. Also, in the first nine months of fiscal 2016, 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 $61.9 million, or 4.9%, for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. The increase in operating expenses was primarily caused by the increase in case volume, an increased investment in our sales force, and increases in stock compensation, bonus, and workers’ compensation, auto and general liability insurance expenses, as discussed in the segment results below. The increase was partially offset by leverage of our fixed costs, improved productivity in our warehouse and transportation operations, and a decrease in fuel expense and amortization.

Depreciation and amortization of intangible assets decreased from $91.7 million for the nine month period of fiscal 2015 to $86.2 million for the nine month period of fiscal 2016, a decrease of 6.0%. Decreases in amortization of intangible assets, since certain intangibles are now fully amortized compared to the prior year, more than offset the increases in depreciation in fixed assets resulting from larger capital outlays to support our growth.

Net Income

Net income increased to $39.1 million for the nine month period of fiscal 2016 compared to net income of $22.3 million for the nine month period of fiscal 2015. This increase in net income was attributable to a $28.5 million increase in operating profit, partially offset by a $1.8 million increase in other expense, net and a $9.9 million increase in income tax expense. The increase in operating profit was a result of the increase in gross profit discussed above, partially offset by the increase in operating expenses. The $1.8 million increase in other expense, net related primarily to a $5.8 million loss on extinguishment of debt and a $2.9 million increase in expense related to settlements on our derivatives, partially offset by a decrease in interest expense in the amount of $4.5 million and a $2.4 million decrease in non-cash expense primarily related to the change in fair value of our derivatives for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. During the third quarter of fiscal 2016, 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

 

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Facility. The Company recognized a $5.8 million loss on extinguishment within interest expense related to the write-off of unamortized original issue discount and deferred financing costs on the Term Facility during the third quarter as a result of this repayment. The decrease in interest expense is primarily a result of lower average borrowings during the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015, partially offset by an acceleration of amortization of original issue discount and deferred financing costs of $5.5 million related to the repayment of $223.0 million aggregate principal amount of indebtedness under the Term Facility using the proceeds from the IPO. 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 the nine month period of fiscal 2016 was 40.6% compared to 43.1% in the nine month period of fiscal 2015. The decrease in the effective tax rate was a result of the reduction of 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.

Fiscal year ended June 27, 2015 compared to fiscal year ended June 28, 2014

Net Sales

Net sales increased $1.6 billion, or 11.6%, for fiscal 2015 compared to fiscal 2014. This increase is primarily attributable to new and expanding business with Street customers, which experienced approximately 13% growth for fiscal 2015 compared to fiscal 2014. The balance of the total net sales increase was primarily attributable to growth in Chain customers.

We grew case volume by 6.4% in fiscal 2015, which contributed to the increase in net sales. Inflation during fiscal 2015 increased at an estimated annual rate of 2.4% compared to an estimated annual rate of 1.7% in fiscal 2014. We calculate inflation and deflation by reference to the weighted average of changes in prices experienced by our product classes over the same relevant periods. Net sales growth is a function of case growth, product inflation, and a changing mix of customers, channels, and product categories sold.

Gross Profit

Gross profit increased $151.1 million, or 8.9%, for fiscal 2015 compared to fiscal 2014. This increase in gross profit was the result of growth in cases sold and a higher gross profit per case. Net sales from Performance Foodservice increased as a percentage of total net sales from 59.2% for fiscal 2014 to 59.4% for fiscal 2015. We earn higher gross profit per case in Performance Foodservice than Vistar and PFG Customized. Within Performance Foodservice, case growth to Street customers positively affected gross profit per case. Street customers typically receive more services from us, cost more to serve, and pay a higher gross profit per case than other customers. Also, within Performance Foodservice, we were able to grow our Performance Brand sales, which have higher gross profit per case compared to other brands, from fiscal 2014 to fiscal 2015. See “—Segment Results—Performance Foodservice” below for additional discussion.

Operating Expenses

Operating expenses increased $106.6 million, or 6.7%, for fiscal 2015 compared to fiscal 2014. The increase in operating expenses was primarily caused by the 6.4% increase in case volume and an increase in bonus expenses, professional fees, and IT expenses, partially offset by a decrease in fuel expense and amortization as discussed in the segment results below. Moreover, we believe that, during fiscal 2015, the operating expense reduction initiative within our Winning Together program approximately offset operating expense inflation associated with employees’ salaries and benefits, rent, utilities and other operating expenses. In addition, our estimated withdrawal liability was increased by $2.8 million during fiscal 2015 to reserve the full value of the withdrawal liability related to a multiemployer pension plan from which we had withdrawn during fiscal 2013. The estimated withdrawal liability for this multiemployer pension plan had increased by $0.4 million during fiscal 2014. All of these factors resulted in a net increase in operating expenses for fiscal 2015 compared to fiscal 2014.

 

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Depreciation and amortization of intangible assets decreased from $132.7 million in fiscal 2014 to $121.3 million in fiscal 2015, a decrease of 8.6%. The decrease in amortization of intangible assets, since certain intangibles are now fully amortized, more than offset the increases in depreciation in fixed assets resulting from capital outlays to support our growth.

Net Income

Net income increased by $41.0 million to $56.5 million for fiscal 2015 compared to fiscal 2014. This increase in net income was attributable to a $44.5 million increase in operating profit and a $21.9 million decrease in other expense, partially offset by a $25.4 million increase in income tax expense. The increase in operating profit was a result of the increase in gross profit discussed above, partially offset by an increase in operating expenses. The decrease in other expense, net related primarily to a $25.0 million termination fee in connection with the termination of the Sysco and US Foods merger and lower interest expense in the amount of $0.4 million for fiscal 2015. The decrease in interest expense was primarily a result of lower average interest rates partially offset by an increase in average borrowings during fiscal 2015 compared to fiscal 2014. These decreases in other expense, net were partially offset by $1.9 million less non-cash income related to the change in fair value of our derivatives for fiscal 2015 compared to fiscal 2014 and $1.2 million of expense during fiscal 2015 related to settlements on our derivatives.

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. The effective tax rate was 41.5% for fiscal 2015 compared to 48.7% for fiscal 2014. The decrease in the effective tax rate was a result of the reduction of non-deductible expenses and state income taxes 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.

Fiscal year ended June 28, 2014 compared to fiscal year ended June 29, 2013

Net Sales

Net sales increased $859.2 million, or 6.7%, for fiscal 2014 compared to fiscal 2013. This increase is primarily attributable to securing new Street customers and further penetrating existing customers. Net sales from acquisitions contributed approximately $158.1 million to the growth in fiscal 2014. We also secured new Chain customers. These increases were partially offset by the loss of some Chain customers and the effect on restaurant traffic from the severe weather in several parts of the country during the third quarter of fiscal 2014.

We grew case volume by 5.2% in fiscal 2014, which contributed to the increase in net sales. Inflation during fiscal 2014 increased at an estimated annual rate of 1.7% compared to an estimated annual rate of 1.3% in fiscal 2013. We calculate inflation and deflation by reference to the weighted average of changes in prices experienced by our product classes over the same relevant periods. Acquisitions accounted for approximately 140 basis points of case volume growth in fiscal 2014. Net sales growth is a function of case growth, product inflation, and a changing mix of customers, channels, and product categories sold.

Gross Profit

Gross profit increased $114.5 million, or 7.2%, for fiscal 2014 compared to fiscal 2013. This increase in gross profit was the result of growth in cases sold and a higher gross profit per case. Net sales from Performance Foodservice increased as a percentage of total net sales from 58.5% for fiscal 2013 to 59.2% for fiscal 2014. Net sales from Vistar and PFG Customized decreased as a percentage of total net sales from 16.7% and 24.7%, respectively, for fiscal 2013 to 16.6% and 24.1%, respectively, for fiscal 2014. We earn higher gross profit per case in Performance Foodservice than Vistar and PFG Customized. Within Performance Foodservice, case growth to Street customers positively affected gross profit per case. Street customers typically receive more services from us, cost more to serve, and pay a higher gross profit per case than other customers. Also, within Performance Foodservice, we were able to grow our Performance Brand sales, which have higher gross profit per

 

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case compared to other brands, from fiscal 2013 to fiscal 2014. See “—Segment Results—Performance Foodservice” below for additional discussion. Gross profit for fiscal 2013 was negatively affected by $11.2 million because of the initial fair value placed on the acquired inventory from the two acquisitions that closed during the fourth quarter of fiscal 2012 and the acquisition that closed during the second quarter of fiscal 2013.

Operating Expenses

Operating expenses increased $113.6 million, or 7.7%, for fiscal 2014 compared to fiscal 2013. The increase in operating expenses caused by the addition of a distribution center resulting from the acquisition that closed during the second quarter of fiscal 2013 was approximately $27.2 million. Other factors contributing to the increase were the increase in case volume and the resulting impact on variable costs, the severe weather in several parts of the country during the third quarter of fiscal 2014 that primarily affected delivery and warehouse costs, and an increase in professional fees and headcount largely associated with our Winning Together program, bonus expense, depreciation, and IT expenses, as discussed in the segment results below.

These increases were partially offset by a decrease in benefit costs related to withdrawal from a multiemployer pension plan. In fiscal 2013, we recorded an estimated withdrawal liability of $3.7 million for one of our multiemployer pension plans after it was determined that it was probable that we would withdraw from the plan. The estimated withdrawal liability for this multiemployer pension plan was increased by $0.4 million during fiscal 2014. All of these factors resulted in a net increase in operating expenses for fiscal 2014 compared to fiscal 2013.

Depreciation and amortization of intangible assets increased from $120.1 million in fiscal 2013 to $132.7 million in fiscal 2014, an increase of 10.5%. Increased depreciation in fixed assets resulting from larger capital outlays to support our growth more than offset decreases in amortization of intangible assets.

Net Income

Net income increased by $7.1 million to $15.5 million for fiscal 2014 compared to fiscal 2013. This increase in net income was attributable to a $0.9 million increase in operating profit and a $9.8 million decrease in other expense, partially offset by a $3.6 million increase in income tax expense. The increase in operating profit was a result of the increase in gross profit discussed above, partially offset by an increase in operating expenses. The decrease in other expense, net related primarily to lower interest expense in the amount of $7.8 million for fiscal 2014 and a $2.0 million loss on extinguishment of debt related to our senior notes in fiscal 2013. These were partially offset by $0.4 million less non-cash income related to the change in fair value of our derivatives for fiscal 2014 compared to fiscal 2013. The decrease in interest expense was primarily a result of lower average interest rates mainly attributable to the refinancing in May 2013 of our senior notes with a new term loan facility, partially offset by an increase in average borrowings during fiscal 2014 compared to fiscal 2013.

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. The effective tax rate was 48.7% for fiscal 2014 compared to 56.9% for fiscal 2013. The decrease in the effective tax rate was a result of the reduction of non-deductible expenses and state income taxes 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 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 corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of our internal logistics unit responsible for managing and allocating inbound logistics revenue and expense.

The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):

Net Sales

 

     Nine Months Ended  
   March 26,
2016
    March 28,
2015
    Change     %  

Performance Foodservice

   $ 6,983.4      $ 6,708.9      $ 274.5        4.1   

PFG Customized

     2,800.1        2,783.9        16.2        0.6   

Vistar

     1,944.6        1,788.3        156.3        8.7   

Corporate & All Other

     158.8        139.8        19.0        13.6   

Intersegment Eliminations

     (155.0     (135.3     (19.7     (14.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 11,731.9      $ 11,285.6      $ 446.3        4.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fiscal Year Ended     Fiscal 2015     Fiscal 2014  
     June 27,
2015
    June 28,
2014
    June 29,
2013
    Change     %     Change     %  

Performance Foodservice

   $ 9,085.0      $ 8,103.8      $ 7,504.3      $ 981.2        12.1      $ 599.5        8.0   

PFG Customized

     3,752.9        3,301.0        3,164.4        451.9        13.7        136.6        4.3   

Vistar

     2,426.1        2,269.0        2,141.1        157.1        6.9        127.9        6.0   

Corporate & All Other

     191.6        157.5        145.9        34.1        21.7        11.6        8.0   

Intersegment Eliminations

     (185.6     (145.6     (129.2     (40.0     (27.5     (16.4     (12.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 15,270.0      $ 13,685.7      $ 12,826.5      $ 1,584.3        11.6      $ 859.2        6.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

 

     Nine Months Ended  
   March 26,
2016
    March 28,
2015
    Change     %  

Performance Foodservice

   $ 206.9      $ 172.6      $ 34.3        19.9   

PFG Customized

     26.2        25.6        0.6        2.3   

Vistar

     83.7        79.2        4.5        5.7   

Corporate & All Other

     (98.9     (82.0     (16.9     (20.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 217.9      $ 195.4      $ 22.5        11.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fiscal Year Ended     Fiscal 2015     Fiscal 2014  
     June 27,
2015
    June 28,
2014
    June 29,
2013
    Change     %     Change     %  

Performance Foodservice

   $ 254.2      $ 207.5      $ 173.9      $ 46.7        22.5      $ 33.6        19.3   

PFG Customized

     36.5        37.5        37.3        (1.0     (2.7     0.2        0.5   

Vistar

     105.5        88.3        81.4        17.2        19.5        6.9        8.5   

Corporate & All Other

     (92.6     (84.3     (59.2     (8.3     (9.8     (25.1     (42.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 303.6      $ 249.0      $ 233.4      $ 54.6        21.9      $ 15.6        6.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Segment Results—Performance Foodservice

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

Net Sales

Net sales for Performance Foodservice increased 4.1%, or $274.5 million, from the nine month period of fiscal 2015 to the nine month period of fiscal 2016. This increase in net sales was attributable primarily to growth in cases sold, which in turn was driven by securing new Street customers and further penetrating existing customers. Securing new and expanded business with Street customers resulted in Street sales growth of approximately 6% in the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015.

EBITDA

EBITDA for Performance Foodservice increased $34.3 million, or 19.9%, from the nine month period of fiscal 2015 to the nine month period of fiscal 2016. 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 8.5% in the nine month period of fiscal 2016, 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 Street customers and Performance Brands, as well as by an increase in procurement gains from our Winning Together program.

Operating expenses excluding depreciation and amortization for Performance Foodservice increased by $43.8 million, or 5.8%, from the nine month period of fiscal 2015 to the nine month period of fiscal 2016. 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. These increases were partially offset by leverage on our fixed costs, improved productivity in our warehouse and transportation operations from our Winning Together program, and a decrease in fuel expense.

Depreciation and amortization of intangible assets recorded in this segment decreased from $49.7 million for the nine month period of fiscal 2015 to $46.2 million for the nine month period of fiscal 2016, a decrease of 7.0%. This reduction was a result of a decrease in amortization of intangible assets since certain intangibles are now fully amortized.

Fiscal year ended June 27, 2015 compared to fiscal year ended June 28, 2014

Net Sales

Net sales for Performance Foodservice increased 12.1%, or $981.2 million, to $9.1 billion from fiscal 2014 to fiscal 2015. This increase in net sales was attributable primarily to securing new Street and Chain customers, further penetrating existing customers, and inflation. Securing new and expanded business with Street customers resulted in Street sales growth of approximately 13% for fiscal 2015 compared to fiscal 2014. The balance of the total net sales increase was primarily attributable to growth in Chain customers.

EBITDA

EBITDA for Performance Foodservice increased $46.7 million, or 22.5%, from fiscal 2014 to fiscal 2015. 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 10.8% in fiscal 2015, compared to the prior fiscal year. The increase in gross profit is a result of increased net sales from increased sales to Street customers. As a percentage of total segment sales, the business from Street customers remains consistent at 43.4% for fiscal

 

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2015 and fiscal 2014. Street business has higher gross margins than Chain customers within this segment. Also, sales of Performance Brands, which have higher gross margins compared to other brands, increased by 15.2% in fiscal 2015.

Operating expenses excluding depreciation and amortization for Performance Foodservice increased by 8.1% from fiscal 2014 to fiscal 2015. Operating expenses increased as a result of an increase in case volume and the resulting impact on variable costs along with an increase in bonus expense and increased investment in our Street sales force. In addition, our estimated withdrawal liability was increased by $2.8 million during fiscal 2015 related to a multiemployer pension plan from which we had withdrawn during fiscal 2013. The estimated withdrawal liability for this multiemployer pension plan had increased by $0.4 million during fiscal 2014. These increases were partially offset by a decrease in fuel expense.

Depreciation and amortization of intangible assets recorded in this segment decreased from $81.7 million in fiscal 2014 to $65.8 million in fiscal 2015, a decrease of 19.5%. This decrease was a result of a decrease in amortization of intangible assets, which accounted for substantially all of this decrease, since certain intangibles are now fully amortized.

Fiscal year ended June 28, 2014 compared to fiscal year ended June 29, 2013

Net Sales

Net sales for Performance Foodservice increased 8.0%, or $599.5 million, to $8.1 billion from fiscal 2013 to fiscal 2014. This increase in net sales was attributable primarily to the carryover impact of an acquisition of approximately $158.1 million, securing new Street and Chain customers, further penetrating existing customers, and inflation. There will be no carryover impact to sales in fiscal 2015 for previously completed acquisitions. These increases were partially offset by the loss of Chain customers and severe weather in several parts of the country during the third quarter of fiscal 2014.

EBITDA

EBITDA for Performance Foodservice increased $33.6 million, or 19.3%, from fiscal 2013 to fiscal 2014. 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 8.9% in fiscal 2014, compared to the prior fiscal year. The increase in gross profit is a result of increased net sales from increased sales to Street customers as well as the carryover impact of integrating new customers from a prior fiscal year acquisition which accounted for approximately 250 basis points of the total gross profit increase. As a percentage of total segment sales, the business from Street customers increased from 41.3% in fiscal 2013 to 43.4% for fiscal 2014. Street business has higher gross margins than Chain customers within this segment. Also, sales of Performance Brands, which have higher gross margins compared to other brands, increased by 14.0% in fiscal 2014. Gross profit for fiscal 2013 was negatively affected by $10.0 million because of the initial fair value of inventory that was acquired as part of two acquisitions. We believe that some of the key factors that contributed to the growth in EBITDA for Performance Foodservice in fiscal 2014, including growth in accounts and growth in sales of Performance Brands, continue to persist in the current fiscal year.

Operating expenses excluding depreciation and amortization for Performance Foodservice increased by 6.9% from fiscal 2013 to fiscal 2014. This increase in operating expenses was related to the addition of a distribution center resulting from a recent acquisition accounting for 290 basis points of the operating expense increase. In addition, operating expenses increased as a result of the higher percentage of business from Street customers mentioned above, which cost more to serve, the severe weather in several parts of the country during the third quarter of fiscal 2014 that affected delivery and warehouse costs, and an increase in bonus expense. These increases were partially offset by the estimated withdrawal liability of $3.7 million recorded during fiscal 2013 for a multiemployer pension plan after we determined that it was probable that we would withdraw from the plan. The estimated withdrawal liability for this multiemployer pension plan increased by $0.4 million during fiscal 2014.

 

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Depreciation and amortization of intangible assets recorded in this segment increased from $74.7 million in fiscal 2013 to $81.7 million in fiscal 2014, an increase of 9.4%. Increases of depreciation of fixed assets from our increased capital investments, which should continue in the future, were partially offset by decreases in amortization of intangible assets as certain intangibles have now been fully amortized.

Segment Results—PFG Customized

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

Net Sales

Net sales for PFG Customized increased $16.2 million, or 0.6%, from the nine month period of fiscal 2015 to the nine month period of fiscal 2016. The increase in net sales over the nine month period was the result of the effect of an amendment to an agreement with an existing customer partially offset by a decrease in case volume.

Based on the amendment to the agreement relating to a certain product that became effective during the first quarter of fiscal 2015, we now recognize the revenue for this product on a gross basis because we now serve as the principal. Under the amended agreement, we will purchase the product and resell it to our customer. Previously, the Company was only responsible for delivering the product that the customer had ordered from its vendor. This factor accounted for approximately 96% of the total sales increase for the first quarter of fiscal 2016 and had no impact on the third quarter of fiscal 2016. The amended agreement with the customer is not expected to have an effect on net sales for the remainder of the fiscal year.

EBITDA

EBITDA for PFG Customized increased $0.6 million, or 2.3%, from $25.6 million for the nine month period of fiscal 2015 to $26.2 million for the nine month period of fiscal 2016. The increase for the nine month period ended was primarily attributable to a decrease in operating expenses excluding depreciation and amortization of $3.2 million, or 2.1%, partially offset by a decrease in gross profit of $2.6 million, or 1.4%. Gross profit for PFG Customized decreased from the nine month periods of fiscal 2015 to the nine month periods of fiscal 2016, primarily as a result of a decrease in case volume.

Operating expenses, excluding depreciation and amortization, decreased by 2.0% for the nine month period of fiscal 2016, compared to the prior year primarily because of lower case sales, productivity improvement, and a decrease in fuel expense, partially offset by an increase in transportation wages, an increase in costs associated with upgrading a portion of the segment’s fleet, and an increase in insurance expense related to general and auto liability.

Depreciation and amortization of intangible assets recorded in this segment decreased from $11.7 million for the nine month period of fiscal 2015 to $11.5 million for the nine month period of fiscal 2016, a decrease of 1.7%. The decrease in the nine month period is primarily a result of a decrease in amortization of intangible assets, since certain intangibles are now fully amortized, partially offset by increases of depreciation in fixed assets.

Fiscal year ended June 27, 2015 compared to fiscal year ended June 28, 2014

Net Sales

Net sales for PFG Customized increased $451.9 million, or 13.7%, from fiscal 2015 to fiscal 2014. The increase in net sales over this period was a result of an amended agreement with an existing customer, the addition of new customers, and inflation.

Based on an amendment to an agreement relating to a certain product, we now recognize the revenue for this product on a gross basis because we now serve as the principal. Under the amended agreement, we will purchase the product and resell it to our customer. Previously, the Company was only responsible to deliver the product

 

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that the customer had ordered from its vendor. This factor accounted for approximately 10% of the total sales increase and will continue to affect sales growth into the first quarter of fiscal 2016. This change has no effect on our case growth rates cited above.

EBITDA

EBITDA for PFG Customized decreased $1.0 million, or 2.7%, from $37.5 million in fiscal 2014 to $36.5 million in fiscal 2015. This decrease was primarily attributable to an increase in operating expenses excluding depreciation and amortization, partially offset by an increase in gross profit. Gross profit for PFG Customized increased 0.9% from fiscal 2014 to fiscal 2015, primarily as a result of increased sales from the addition of new customers during fiscal 2015.

Operating expenses, excluding depreciation and amortization, increased by 1.6% in fiscal 2015, compared to the prior year. The increase in operating expenses was primarily because of higher case sales, an increase in personnel expenses, and allocated corporate charges, partially offset by a decrease in fuel expense.

Depreciation and amortization of intangible assets recorded in this segment increased from $15.1 million for fiscal 2014 to $15.7 million for fiscal 2015, an increase of 4.0%. Increases of depreciation in fixed assets were partially offset by decreases in amortization of intangible assets.

Fiscal year ended June 28, 2014 compared to fiscal year ended June 29, 2013

Net Sales

Net sales for PFG Customized increased $136.6 million, or 4.3%, from fiscal 2014 to fiscal 2013. The increase in net sales over this period was driven by the addition of new customers and inflation, which was partially offset by the effect on restaurant traffic from the severe weather in several parts of the country during the third quarter of fiscal 2014.

EBITDA

EBITDA for PFG Customized increased $0.2 million, or 0.5%, from $37.3 million in fiscal 2013 to $37.5 million in fiscal 2014. This increase was primarily attributable to an increase in gross profit, partially offset by an increase in operating expenses excluding depreciation and amortization. Gross profit for PFG Customized increased 3.3% from fiscal 2013 to fiscal 2014. This increase in gross profit is primarily a result of increased sales.

Operating expenses, excluding depreciation and amortization, increased by 3.9% in fiscal 2014, compared to the prior year. The increase in operating expenses was primarily because of an increase in insurance related to workers compensation and auto liability, personnel costs, and allocated corporate charges, along with the severe weather experienced in several parts of the country during the third quarter of fiscal 2014 that affected delivery and warehouse costs. In addition, during the third quarter of fiscal 2014 a distribution center experienced a partial roof collapse when the facility was experiencing adverse weather, damaging the refrigeration systems and temporarily shutting that facility down. As a result, PFG Customized’s operating expenses increased as other, more remote distribution centers served the customers of the damaged facility. Insurance recoveries partially offset these added expenses. These increases in operating expenses were partially offset by the absence of transition costs associated with a distribution facility that it had taken over from Performance Foodservice in fiscal 2012.

Depreciation and amortization of intangible assets recorded in this segment increased from $15.0 million for fiscal 2013 to $15.1 million for fiscal 2014, an increase of 0.7%. Increases of depreciation in fixed assets were partially offset by decreases in amortization of intangible assets.

 

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Segment Results—Vistar

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

Net Sales

Net sales for Vistar increased 8.7%, or $156.3 million, from the nine month period of fiscal 2015 to the nine month period of fiscal 2016. This increase in sales was primarily driven by case sales growth in the segment’s retail, theater, vending, and hospitality channels along with recent acquisitions.

EBITDA

EBITDA for Vistar increased $4.5 million, or 5.7%, for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. This increase in EBITDA was the result of gross profit dollar growth increasing faster than operating expense dollar growth, excluding depreciation and amortization.

Operating expense dollar growth, excluding depreciation and amortization, increased $9.9 million, or 6.0% for the nine month period of fiscal 2016, and was driven primarily by an increase in the number of cases sold and investments in additional sales force capacity, partially offset by the benefits of our Winning Together program and reduced fuel expenditures.

Gross profit dollar growth of $14.4 million, or 5.9% for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015, was driven primarily by an increase in the number of cases sold, a favorable shift in the mix of cases sold toward higher gross margin per case channels than the prior year, and the benefits of our operational improvements from our Winning Together program, partially offset by a shift toward higher cost to serve customers and by inflation-based inventory gains in the prior year.

Depreciation and amortization of intangible assets recorded in this segment increased from $12.2 million for the nine month period of fiscal 2015 to $12.8 million for the nine month period of fiscal 2016, an increase of 4.9%. Depreciation of fixed assets increased as a result of capital outlays to support our growth.

Fiscal year ended June 27, 2015 compared to fiscal year ended June 28, 2014

Net Sales

Net sales for Vistar increased 6.9%, or $157.1 million, from fiscal 2014 to fiscal 2015. This increase in sales related primarily to an increase in sales to the segment’s retail, theater, vending, and hospitality channels and inflation.

EBITDA

EBITDA for Vistar increased $17.2 million, or 19.5%, from fiscal 2014 to fiscal 2015. This increase in EBITDA 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 10.0% in fiscal 2015 compared to the prior year. The increase in gross profit relates primarily to increased sales, the benefits of Winning Together and other programs, plus a change in the mix of business generated by the various channels within the Vistar segment. Net sales from the theater, retail, and hospitality channels increased as a percentage of total Vistar net sales in fiscal 2015 compared to fiscal 2014, while the percent of net sales from the vending channel declined as a percentage of total Vistar net sales during the same time period. The theater, retail, and hospitality channels have higher gross margins than the vending channel within this segment.

Operating expenses excluding depreciation and amortization increased 5.9% for fiscal 2015 compared to fiscal 2014. The increase in operating expenses was primarily the result of higher case sales and a channel mix shift toward the theater, retail, and hospitality channels, which cost more to serve, and an increase in bonus

 

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expense. These increases were partially offset by a decrease in fuel expense. In addition, operating expenses for fiscal 2014 also included additional expenses related to a prior acquisition that partially offset these increases.

Depreciation and amortization of intangible assets recorded in this segment increased from $13.8 million for fiscal 2014 to $16.4 million for fiscal 2015, an increase of 18.8%. Increases of depreciation in fixed assets were partially offset by decreases in amortization of intangible assets.

Fiscal year ended June 28, 2014 compared to fiscal year ended June 29, 2013

Net Sales

Net sales for Vistar increased 6.0%, or $127.9 million, from fiscal 2013 to fiscal 2014. This increase in sales related primarily to an increase in sales to the segment’s retail, theater, vending, and hospitality channels and inflation. This was partially offset by the impact of severe weather in several parts of the country during the third quarter of fiscal 2014.

EBITDA

EBITDA for Vistar increased $6.9 million, or 8.5%, from fiscal 2013 to fiscal 2014. This increase in EBITDA 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 6.3% in fiscal 2014 compared to the prior year. The increase in gross profit relates primarily to increased sales plus a change in the mix of business generated by the various channels within the Vistar segment. Net sales from the retail and hospitality channels increased as a percentage of total Vistar net sales in fiscal 2014 compared to the prior year, while the percent of net sales from the vending channel, which represents the largest channel within Vistar, declined as a percentage of total Vistar net sales during the same time period. The retail and hospitality channels have a higher gross margin than the vending channel within this segment. Gross profit for fiscal 2013 was negatively affected by $1.2 million because of the initial fair value of inventory from the acquisition that closed during the fourth quarter of fiscal 2012.

Operating expenses excluding depreciation and amortization increased 5.4% for fiscal 2014 compared to fiscal 2013. The increase in operating expenses was primarily the result of higher case sales and a channel mix shift toward the retail and hospitality channels, which cost more to serve. Operating expenses for fiscal 2014 were also affected by expenses related to the relocation of three facilities and additional expenses related to a prior acquisition.

Depreciation and amortization of intangible assets recorded in this segment decreased from $13.9 million for fiscal 2013 to $13.8 million for fiscal 2014, a decrease of 0.7%. Increases of depreciation in fixed assets were offset by decreases in amortization of intangible assets.

Segment Results—Corporate & All Other

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

Net Sales

Net sales for Corporate & All Other increased $19.0 million for the nine month period of fiscal 2016 compared to the nine month period of fiscal 2015. The increase in net sales was primarily attributable to an increase in logistics services provided to our other segments.

EBITDA

EBITDA for Corporate & All Other decreased from a negative $82.0 million for the nine month period of fiscal 2015 to a negative $98.9 million for the nine month period of fiscal 2016. The decrease in EBITDA was

 

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primarily driven by an increase in stock compensation expense, bonus expense and insurance expense related to workers compensation liability, along with higher corporate overhead associated with personnel costs related to benefits.

Depreciation and amortization of intangible assets recorded in this segment decreased from $18.1 million in the nine month period of fiscal 2015 to $15.7 million in the nine month period of fiscal 2016. This decrease was primarily a result of a decrease in amortization of intangible assets, which accounted for substantially all of this decrease, since certain intangibles are now fully amortized.

Fiscal year ended June 27, 2015 compared to fiscal year ended June 28, 2014

Net Sales

Net sales for Corporate & All Other increased $34.1 million from fiscal 2014 to fiscal 2015. The increase in sales was primarily attributable to an increase in logistics services provided to our other segments.

EBITDA

EBITDA for Corporate & All Other was a negative $84.3 million for fiscal 2014 compared to a negative $92.6 million for fiscal 2015. The decrease in EBITDA was primarily driven by increased investment in headcount primarily associated with Winning Together, higher corporate overhead associated with personnel costs related to benefits, and an increase in bonus expense, IT expenses, and professional fees.

Depreciation and amortization of intangible assets recorded in this segment increased from $22.1 million in fiscal 2014 to $23.4 million in fiscal 2015. Increases in depreciation in fixed assets, primarily because of IT capital expenditures, were partially offset by a decrease in amortization of intangible assets.

Fiscal year ended June 28, 2014 compared to fiscal year ended June 29, 2013

Net Sales

Net sales for Corporate & All Other increased $11.6 million from fiscal 2013 to fiscal 2014. The increase in sales was primarily attributable to an increase in logistics services provided to our other segments.

EBITDA

EBITDA for Corporate & All Other was a negative $59.2 million for fiscal 2013 compared to a negative $84.3 million for fiscal 2014. The decrease in EBITDA was primarily driven by an increase of $16.3 million in professional and consulting fees and an increase in headcount primarily associated with Winning Together, along with an increase in IT expenses and bonus expense.

Depreciation and amortization of intangible assets recorded in this segment increased from $16.5 million in fiscal 2013 to $22.1 million in fiscal 2014. Increases in depreciation in fixed assets, primarily because of IT capital expenditures, were partially offset by a decrease in amortization of intangible assets.

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.

 

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Financial information for the first three quarters of fiscal 2016 and each quarter for fiscal 2015 and fiscal 2014 is set forth below:

 

 

Fiscal Year Ending July 2, 2016

(dollars in millions, except per share data)

   Q1      Q2      Q3       

Net sales

   $ 3,928.9       $ 3,893.9       $ 3,909.1      

Cost of goods sold

     3,447.8         3,407.1         3,428.3      
  

 

 

    

 

 

    

 

 

    

 

Gross profit

     481.1         486.8         480.8      

Operating expenses

     437.1         433.0         443.2      
  

 

 

    

 

 

    

 

 

    

 

Operating profit

     44.0         53.8         37.6      
  

 

 

    

 

 

    

 

 

    

 

Other expense:

           

Interest expense

     21.0         23.3         21.6      

Other, net

     2.2         1.0         0.5      
  

 

 

    

 

 

    

 

 

    

 

Other expense, net

     23.2         24.3         22.1      
  

 

 

    

 

 

    

 

 

    

 

Income before taxes

     20.8         29.5         15.5      

Income tax expense

     8.6         12.0         6.1      
  

 

 

    

 

 

    

 

 

    

 

Net income

   $ 12.2       $ 17.5       $ 9.4      
  

 

 

    

 

 

    

 

 

    

 

Weighted-average common shares outstanding:

           

Basic

     86,885,548         99,107,828         99,695,267      

Diluted

     87,653,160         100,367,528         101,360,286      

Earnings per common share:

           

Basic

   $ 0.14       $ 0.18       $ 0.09      

Diluted

   $ 0.14       $ 0.17       $ 0.09      

Dividends declared per common share:

     —           —           —        

 

Fiscal Year Ended June 27, 2015

 

(dollars in millions, except per share data)

   Q1      Q2      Q3      Q4  

Net sales

   $ 3,697.6       $ 3,792.5       $ 3,795.5       $ 3,984.4   

Cost of goods sold

     3,248.2         3,335.2         3,343.9         3,494.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     449.4         457.3         451.6         490.0   

Operating expenses

     416.7         410.2         424.5         436.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     32.7         47.1         27.1         53.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other expense:

           

Interest expense

     21.2         21.8         21.6         21.1   

Other, net

     0.2         2.7         0.3         (25.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Other expense, net

     21.4         24.5         21.9         (4.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     11.3         22.6         5.2         57.5   

Income tax expense

     4.7         9.8         2.3         23.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 6.6       $ 12.8       $ 2.9       $ 34.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding:

           

Basic

     86,874,101         86,874,101         86,874,101         86,876,606   

Diluted

     87,600,174         87,637,135         87,706,396         87,637,541   

Earnings per common share:

           

Basic

   $ 0.08       $ 0.15       $ 0.03       $ 0.39   

Diluted

   $ 0.08       $ 0.15       $ 0.03       $ 0.39   

Dividends declared per common share:

     —           —           —           —     

 

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Fiscal Year Ended June 28, 2014

 

(dollars in millions, except per share data)

   Q1     Q2     Q3     Q4  

Net sales

   $ 3,342.7      $ 3,327.4      $ 3,373.1      $ 3,642.5   

Cost of goods sold

     2,930.4        2,907.3        2,956.2        3,194.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     412.3        420.1        416.9        447.9   

Operating expenses

     391.7        389.1        398.6        402.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     20.6        31.0        18.3        45.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense:

        

Interest expense

     22.9        21.9        20.6        20.7   

Other, net

     (0.3     (0.1     (0.1     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

     22.6        21.8        20.5        20.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     (2.0     9.2        (2.2     25.2   

Income tax (benefit) expense

     (0.7     4.2        (1.6     12.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1.3   $ 5.0      $ (0.6   $ 12.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     86,865,662        86,866,882        86,868,927        86,872,338   

Diluted

     87,503,836        87,522,189        87,514,854        87,688,862   

Earnings (loss) per common share:

        

Basic

   $ (0.01   $ 0.06      $ (0.01   $ 0.14   

Diluted

   $ (0.01   $ 0.06      $ (0.01   $ 0.14   

Dividends declared per common share:

     —          —          —          —     

Liquidity and Capital Resources

We have historically financed our operations and growth primarily with cash flows from operations, borrowings under our credit facilities, operating and capital leases, and normal trade credit terms. We have typically funded our acquisitions with additional borrowings under our credit facilities. During fiscal 2013, we increased the amount of indebtedness outstanding under our senior notes because of acquisition activity. The senior notes were redeemed in full in May 2013 with the proceeds from a new term loan facility. Proceeds from this new term loan facility were also used to pay a dividend to our stockholders. 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 twelve months and to maintain sufficient liquidity for normal operating purposes.

At March 26, 2016, our cash balance totaled $10.7 million, while our cash balance totaled $9.2 million at June 27, 2015. This increase in cash during the first nine months of fiscal 2016 was attributable to net cash provided by operating activities of $117.6 million, partially offset by net cash used in investing activities of $107.5 million and financing activities of $8.6 million. We borrow under our 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 and our major stockholders, including our Sponsors, may from time to time, depending upon market conditions, seek to repurchase our securities or loans in privately negotiated or open market transactions, by tender offer or otherwise.

On October 6, 2015, we completed our 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

 

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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 the nine months ended March 26, 2016. We used the net offering proceeds to us after deducting the underwriting discount and our direct offering expenses to repay $223.0 million aggregate principal amount of indebtedness under the Term Loan Facility. We used the remainder of the net proceeds for general corporate purposes.

On February 1, 2016, Performance Food Group, Inc., a wholly-owned subsidiary of the Company amended and restated the ABL Facility to increase the borrowing capacity 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. We estimate that approximately $6.6 million of fees and expenses have been incurred for the amendment, which is included as deferred financing costs and will be amortized over the remaining term of the ABL Facility. Of this amount, $5.6 million was paid during the nine months ended March 26, 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 Loan Facility.

Operating Activities

Nine months ended March 26, 2016 compared to nine months ended March 28, 2015

During the nine months ended March 26, 2016 and March 28, 2015, our operating activities provided cash flow of $117.6 million and $28.4 million, respectively.

The increase in cash flows provided by operating activities for the nine months ended March 26, 2016 compared to the nine months ended March 28, 2015 was largely driven by changes in our net working capital investment from the prior period, partially offset by an increase in cash used in accrued expenses and other liabilities that was primarily associated with higher bonus payments made during fiscal 2016, which were associated with the results for fiscal 2015.

Fiscal year ended June 27, 2015 compared to the fiscal year ended June 28, 2014

During fiscal 2015, our operating activities provided cash flow of $127.4 million, while during fiscal 2014 our operating activities provided cash flow of $119.7 million, an increase of $7.7 million, or 6.4%.

The increase in cash flows provided by operating activities in fiscal 2015 compared to fiscal 2014 was largely because of the continued growth in our business. This was partially offset by an increase in our net working capital investment from the prior period and a decrease in cash provided by accrued expenses and other liabilities that was primarily associated with higher bonus payments made during fiscal 2015.

Fiscal year ended June 28, 2014 compared to the fiscal year ended June 29, 2013

During fiscal 2014, our operating activities provided cash flow of $119.7 million, while during fiscal 2013 our operating activities provided cash flow of $140.7 million, a decrease of $21.0 million, or 14.9%.

The decrease in cash flows provided by operating activities in fiscal 2014 compared to fiscal 2013 was largely because of the continued growth in our sales and the corresponding impact that has on our accounts receivable from customers. Primarily this is attributable to expanded sales volume; however, on average, the

 

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number of days sales outstanding increased by approximately 2.1 days in fiscal 2014 as compared to a decline of 1.7 days in fiscal 2013. The fluctuation in the days sales outstanding is largely driven by the timing of acquisitions, which determines the point at which acquired working capital is included in the balance sheet and also driven by the mix of customers and their related payment terms. The increase in accounts receivable was partially offset by the amount that the increase in accounts payable and outstanding checks in excess of deposits exceeded the increase in inventory that it supported and by an increase in accrued expenses and other liabilities that was primarily associated with lower bonus payments made during the fiscal 2014, which were associated with the results for fiscal 2013.

Investing Activities

Cash used in investing activities totaled $107.5 million in the first nine months of fiscal 2016 compared to $66.3 million in the first nine months of fiscal 2015. These investments consisted primarily of capital purchases of property, plant, and equipment of $68.0 million and $63.7 million for the first nine months of fiscal 2016 and the first nine months of fiscal 2015, respectively, and cash paid for business acquisitions of $40.2 million for the first nine months of fiscal 2016. For the first nine months of fiscal 2016, purchases of property, plant, and equipment primarily consisted of transportation and information technology equipment, as well as outlays for warehouse expansions and improvements. The following table presents the capital purchases of property, plant, and equipment by segment:

 

      Nine Months Ended  

(Dollars in millions)

   March 26, 2016      March 28, 2015  
     (unaudited)  

Performance Foodservice

   $ 30.9       $ 26.5   

PFG Customized

     5.5         6.3   

Vistar

     9.1         6.7   

Corporate & All Other

     22.5         24.2   
  

 

 

    

 

 

 

Total capital purchases of property, plant and equipment

   $ 68.0       $ 63.7   
  

 

 

    

 

 

 

Cash used in investing activities totaled $100.7 million in fiscal 2015 compared to $93.4 million in fiscal 2014 and $150.0 million in fiscal 2013. These investments consisted primarily of capital purchases of property, plant, and equipment of $98.6 million, $90.6 million and $66.5 million for fiscal years 2015, 2014 and 2013, respectively, and new business acquisitions of $0.4 million, $0.9 million, and $86.0 million, for fiscal years 2015, 2014, and 2013, respectively. In fiscal 2015, purchases of property, plant, and equipment primarily consisted of warehouse expansions and improvements, as well as the purchase of warehouse, transportation, and information technology.

The following table presents the capital purchases of property, plant, and equipment by segment:

 

     Fiscal Year Ended  

(Dollars in millions)

   June 27, 2015      June 28, 2014      June 29, 2013  

Performance Foodservice

   $ 41.8       $ 38.8       $ 27.3   

PFG Customized

     7.8         12.2         4.9   

Vistar

     14.5         20.7         13.0   

Corporate & All Other

     34.5         18.9         21.3   
  

 

 

    

 

 

    

 

 

 

Total capital purchases of property, plant and equipment

   $ 98.6       $ 90.6       $ 66.5   
  

 

 

    

 

 

    

 

 

 

Financing Activities

During the first nine months of fiscal 2016, net cash used in financing activities was $8.6 million, which consisted primarily of payments of $428.6 million on our Term Loan Facility, partially offset by $226.4 million in net proceeds from our initial public offering and $201.2 million in net proceeds under our ABL Facility.

 

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During the first nine months of fiscal 2015, our financing activities provided cash flow of $39.4 million, which consisted primarily of $45.7 million in net proceeds related to our ABL Facility and $3.5 million in proceeds from our sale-leaseback transaction, partially offset by payments of $5.6 million on our Term Loan Facility.

During fiscal 2015, our financing activities used cash flow of $22.8 million, which consisted primarily of $13.9 million in net payments on our ABL Facility, $7.5 million in payments on our Term Loan Facility, and $3.1 million in payments on our capital and finance lease obligations, partially offset by $3.5 million in proceeds from our sale-leaseback transaction.

During fiscal 2014, our financing activities used cash flow of $35.1 million, which consisted primarily of $21.2 million in net payments on our ABL Facility, $5.6 million in payments on our Term Loan Facility, $2.8 million in payments related to acquisitions, and $1.8 million in payments on financed property, plant, and equipment.

During fiscal 2013, our financing activities provided cash flow of $12.3 million, which consisted primarily of $746.3 million in net proceeds related to the inception of our Term Loan Facility and the issuance of $50.0 million of additional senior notes, partially offset by a payment of $500.0 million to redeem the senior notes in full, a payment of a $220.0 million dividend to our stockholders, net payments on our ABL Facility of $30.5 million, $5.1 million in payments related to acquisitions, and $27.2 million of fees associated with issuing, extinguishing, or modifying our debt.

The following describes our financing arrangements as of March 26, 2016:

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, governing the ABL Facility. 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.

On February 1, 2016, PFGC amended and restated the ABL Facility to increase the borrowing capacity 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. We estimate that approximately $6.6 million of fees and expenses have been 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, $5.6 million was paid during the nine months ended March 26, 2016. In connection with the closing of this amendment, PFGC 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 Loan Facility.

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%.

 

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The following table summarizes outstanding borrowings, availability, and the average interest rate under the ABL Facility:

 

(Dollars in millions)

   As of
March 26, 2016
    As of
June 27, 2015
 
     (unaudited)        

Aggregate borrowings

   $ 866.9      $ 665.7   

Letters of credit

     97.7        102.5   

Excess availability, net of lenders’ reserves of $21.2 and $19.7

     615.1        631.8   

Average interest rate

     2.06     1.94

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) $130.0 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 such agreement available under the ABL Facility may be exercised, including rights with respect to the collateral securing the obligations under such agreement.

Term Loan Facility. Performance Food Group, Inc. entered into a Credit Agreement providing for the Term Loan Facility on May 14, 2013. Performance Food Group, Inc. borrowed an aggregate principal amount of $750.0 million under the Term Loan Facility that is jointly and severally guaranteed by PFGC and all domestic direct and indirect wholly-owned subsidiaries of PFGC (other than captive insurance subsidiaries and other excluded subsidiaries) Net proceeds to Performance Food Group, Inc. were $746.3 million. The proceeds from the Term Loan Facility were used to redeem the Company’s then outstanding senior notes in full; to pay the fees, premiums, expenses, and other transaction costs incurred in connection with the Term Loan Facility and a previous ABL Facility amendment; and to pay a $220 million dividend to our stockholders. A portion of the Term Loan Facility was considered a modification of the senior notes.

The Term Loan Facility matures in November 2019 and bears interest, at Performance Food Group, Inc.’s option, at a rate equal to a margin over either (a) a Base Rate determined by reference to the higher of (1) the rate of interest published by Credit Suisse (AG), Cayman Islands Branch, as its “prime lending rate,” (2) the federal funds rate plus 0.50%, and (3) one-month LIBOR rate plus 1.00% or (b) a LIBOR rate determined by reference to the service selected by Credit Suisse (AG), Cayman Islands Branch that has been nominated by the British Bankers’ Association (or any successor thereto). The applicable margin for the term loans under the Term Loan Facility may be reduced subject to attaining a Total Net Leverage ratio below 4.25x. The applicable margin for borrowings was 5.0% for loans based on a LIBOR rate and 4.0% for loans based on the Base Rate, as of March 26, 2016, reflecting the 25 basis point reduction due to the Total Net Leverage ratio below 4.25x. The LIBOR rate for term loans is subject to a 1.00% floor and the Base Rate for term loans is subject to a floor of 2.00%. Interest is payable quarterly in arrears in the case of Base Rate loans, and at the end of the applicable interest period (but no less frequently than quarterly) in the case of the LIBOR loans. Performance Food Group, Inc. can incur additional loans under the Term Loan Facility with the aggregate amount of the incremental loans not exceeding the sum of (i) $140.0 million plus (ii) additional amounts so long as the Consolidated Secured Net Leverage Ratio (as defined in the credit agreement governing the Term Loan Facility) does not exceed 5.90: 1.00 and so long as the proceeds are not used to finance restricted payments that include any dividend or distribution payments.

PFGC is required to repay an aggregate principal amount equal to 0.25% of the aggregate principal amount of $750 million on the last business day of each calendar quarter, beginning September 30, 2013, which amounted to $5.6 million in both the nine months ended March 26, 2016 and March 28, 2015. The Term Loan Facility is prepayable at par. On October 6, 2015, the Company completed its IPO and used the net proceeds therefrom to repay $223.0 million aggregate principal amount of indebtedness under the Term Loan Facility. On February 1,

 

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2016, we amended and restated the ABL Facility as described above. In connection with the closing of this amendment, we 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 Loan Facility, bringing the total payment amount to $428.6 million during the nine months ended March 26, 2016.

As of March 26, 2016, aggregate borrowings outstanding were $308.3 million with unamortized original issue discount of $1.0 million. Original issue discount is being amortized as additional interest expense. Deferred financing costs on the Term Loan Facility, which is included in Other intangible assets, net, is also being amortized as additional interest expense. The nine months ended March 26, 2016 includes $5.5 million of accelerated amortization of original issue discount and deferred financing costs because of the repayment of the $223.0 million aggregate principal amount of indebtedness mentioned above. Additionally, we recognized a $5.8 million loss on extinguishment within interest expense during the third quarter of fiscal 2016, related to the write-off of unamortized original issue discount and deferred financing costs on the Term Loan Facility, because of the repayment of $200.0 million aggregate principal amount of indebtedness mentioned above.

Interest expense related to the amortization of deferred financing costs and original issue discount for the Term Loan Facility was as follows:

 

(In millions)

   Nine months
ended
March 26, 2016
     Nine months
ended
March 28, 2015
 

Deferred financing costs amortization

   $ 12.5       $ 3.4   

Original issue discount amortization

     1.7         0.4   
  

 

 

    

 

 

 

Total amortization included in interest expense

   $ 14.2       $ 3.8   
  

 

 

    

 

 

 

The ABL Facility and the Term Loan Facility 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 $153.2 million of restricted payment capacity available under such debt agreements, as of March 26, 2016.

As of March 26, 2016, we were in compliance with all of the covenants under the Term Loan Facility and the ABL Facility.

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%. Interest is payable quarterly in arrears. The $6.0 million principal is due in a lump sum in December 2017. All amounts outstanding under this promissory note become immediately due and payable upon the occurrence of a change in control of the Company or PFGC, which includes the sale, lease, or transfer of all or substantially all of the assets of PFGC. This promissory note was initially recorded at its fair value of $4.2 million. The difference between the principal and the initial fair value of the promissory note is being amortized as additional interest expense on a straight-line basis over the life of the promissory note, which approximates the effective yield method. For the first nine months of fiscal 2016 and 2015, interest expense included $0.3 million related to this amortization. As of March 26, 2016, the carrying value of the promissory note was $5.4 million.

 

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Contractual Cash Obligations

The following table sets forth our significant contractual cash obligations as of June 27, 2015. The years below represent our fiscal years. There have been no material changes to our specified contractual obligations through March 26, 2016, except for (i) the repayment of $223.0 million aggregate principal amount of indebtedness under the Term Loan Facility with the proceeds from the IPO and associated changes in interest payments and (ii) the amendment and restatement to the ABL Facility on February 1, 2016, the borrowing of $200.0 million under the ABL Facility and use of such proceeds to repay $200.0 million aggregate principal amount of loans under the Term Loan Facility and the associated changes in maturity and interest payments.

 

(Dollars in millions)

   Payments Due by Period  
   Total      < 1 Year      1-3 Years      3-5 Years      More than
5 Years
 

Long-term debt(1)

   $ 1,405.2       $ 9.4       $ 686.7       $ 712.5       $ —     

Capital and finance lease obligations(2)

     56.7         6.3         9.4         7.6         33.4   

Unrecognized tax benefits and interest(3)

     1.0         —           —           —           —     

Interest payments related to long-term debt(4)

     248.7         78.5         108.4         61.8         —     

Long-term operating leases

     405.9         83.8         141.5         104.7         75.9   

Purchase obligations(5)

     14.7         10.6         4.1         —           —     

Multiemployer pension plan(6)

     6.1         0.3         0.7         0.7         4.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 2,141.7       $ 188.9       $ 950.8       $ 887.3       $ 113.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Since June 27, 2015, (a) we used a portion of the net proceeds of the IPO to repay $223.0 million aggregate principal amount of indebtedness under the Term Loan Facility and (b) in February 2016, we 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 Loan Facility. Giving effect to such repayments of borrowings under the Term Loan Facility and borrowing under the ABL Facility, we would have had total long-term debt of $1,182.2 million as of June 27, 2015.
(2) The amounts reflected in the table include the interest component of the lease payments.
(3) Unrecognized tax benefits relate to uncertain tax positions recorded under accounting standards related to uncertain tax positions. As of June 27, 2015, we had a liability of $0.9 million for unrecognized tax benefits for all tax jurisdictions and $0.1 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, the related balances have not been reflected in “Payments Due by Period” section of the table.
(4) Includes payments on our floating rate debt based on rates as of June 27, 2015, 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 27, 2015. Giving effect to the amendment and restatement of the ABL Facility in February 2016 and the transactions described in note (1) above would have correspondingly reduced interest payments related to our long-term debt.
(5) For purposes of this table, purchase obligations include agreements for purchases of non-inventory products or 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 a minimum amounts due for various Company meetings and conferences.
(6) 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 elsewhere in this prospectus for further discussion.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Total Assets by Segment

Total assets by segment discussed below exclude intercompany receivables between segments.

Total assets for Performance Foodservice increased $22.7 million from $1,922.5 million as of March 28, 2015 to $1,945.2 million as of March 26, 2016. Total assets for Performance Foodservice increased $29.5 million from $1,915.7 million as of June 27, 2015 to $1,945.2 million as of March 26, 2016. During both time periods, this segment increased its accounts receivable, inventory, and property, plant, and equipment, which was partially offset by a decrease in the balance of intangible assets.

Total assets for Performance Foodservice increased $62.1 million from $1,853.6 million as of June 28, 2014 to $1,915.7 million as of June 27, 2015. This segment increased its accounts receivable inventory, property, plant, and equipment, and cash during this time period, which was partially offset by a decline in intangible assets.

Total assets for PFG Customized decreased $26.3 million from $675.8 million at March 28, 2015 to $649.5 million at March 26, 2016. During this time period, this segment decreased its accounts receivable, inventory, property, plant and equipment, and intangible assets. Total assets for PFG Customized decreased $0.3 million from $649.8 million at June 27, 2015 to $649.5 million at March 26, 2016. During this time period, this segment decreased its property, plant, and equipment, and intangible assets, which was partially offset by increases in accounts receivable and inventory.

Total assets for PFG Customized increased $8.8 million from $641.0 million at June 28, 2014 to $649.8 million at June 27, 2015. This segment increased its accounts receivable during fiscal 2015, which was partially offset by a decline in inventory, intangible assets, and property, plant, and equipment.

Total assets for Vistar increased $77.8 million from $522.2 million as of March 28, 2015 to $600.0 million as of March 26, 2016. Total assets for Vistar increased $60.8 million from $539.2 million as of June 27, 2015 to $600.0 million as of March 26, 2016. During both time periods, this segment increased its accounts receivable, inventory, and property, plant, and equipment. In addition, goodwill and intangible assets increased during both time periods primarily as a result of recent acquisitions.

Total assets for Vistar increased $37.9 million from $501.3 million as of June 28, 2014 to $539.2 million as of June 27, 2015. This segment increased its accounts receivable, property, plant, and equipment, and inventory during this time period, which was partially offset by a decline in intangible assets.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risk related to changes in interest rates for borrowings under our ABL Facility and Term Loan Facility. Although we hedge a portion of our interest rate risk through interest rate swaps, any borrowings under our credit facilities in excess of the notional amount of the swaps will be subject to floating interest rates.

As of March 26, 2016, our subsidiary, Performance Food Group, Inc., had five interest rate swaps with a combined value of $750.0 million notional amount, of which three were designated as cash flow hedges of interest rate risk. See Note 6 Derivative and Hedging Activities to our unaudited consolidated financial statements included elsewhere in this prospectus.

 

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Performance Food Group, Inc. enters into costless collar arrangements to hedge its exposure to variability in cash flows expected to be paid for forecasted purchases of diesel fuel. As of March 26, 2016, Performance Food Group, Inc. was a party to seven such arrangements, with an aggregate 12.0 million gallon notional amount, to hedge its exposure to variability in cash flows expected to be paid for forecasted purchases of diesel fuel. See Note 6 Derivative and Hedging Activities to our unaudited consolidated financial statements included elsewhere in this prospectus.

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 (“FIFO”) method. FIFO was used for approximately 92% of total inventories at June 27, 2015. The remainder of the inventory was valued using the last-in, first-out (“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. 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 collateralized by letters of credit and restricted cash.

 

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Income Taxes

We follow 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 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. 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

 

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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 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.

In fiscal 2013, we adopted 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 2015 and fiscal 2014, 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 2015 and fiscal 2014. There were no impairments of goodwill or intangible assets with indefinite lives for the fiscal 2015 and fiscal 2014.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This Update 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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to Topic 606 in ASU 2016-08 are intended to improve the operability and understandability of the implementation guidance on principle versus agent considerations.

Companies may use either a full retrospective or modified retrospective approach for adoption of Topic 606. Topic 606, as amended by ASU 2015-14, Revenue from Contracts with Customers—Deferral of the Effective Date, is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are in the process of evaluating the impact the new standard will have on our future financial statements, but do not believe the impact will be material. We plan to implement the new standard using the modified retrospective approach.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public entities, this Update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. This Update is to be applied on a retrospective basis and represents a change in accounting principle. We plan to early adopt this Update during the fourth quarter of fiscal 2016 and do not believe it will have a material impact on our financial statements at the date of adoption.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This Update requires an entity to measure most inventory at the lower of cost and net realizable value.

 

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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. This Update is effective for public companies prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not believe this Update will have a material impact on our future financial statements at the date of adoption.

In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest. This Update clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. This Update clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. For public entities, this Update is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We plan to early adopt this Update during the fourth quarter of fiscal 2016 and do not believe this Update will have an impact on our financial statements at the date of adoption.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. This Update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. This Update requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public entities, this Update is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This Update is to be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not yet been made available for issuance. We do not believe this Update will have a material impact on our future financial statements at the date of adoption.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This Update requires a company to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position. For public entities, this Update is effective for financial statements issued for annual periods beginning after December 15, 2016 and for interim periods within those annual periods. We plan to early adopt this Update during the fourth quarter of fiscal 2016 and do not believe it will have a material impact on our financial statements at the date of adoption.

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. For public entities, the ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Companies are required to recognize and measure leases at the beginning of the earliest period presented in its financial statements using a modified retrospective approach. We are in the process of evaluating the impact of this ASU on our future financial statements and believe that it will have a material impact on our future financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal

 

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years. Early adoption is permitted, including adoption in an interim period. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. We do not believe this Update will have a material impact on our future financial statements at the date of adoption.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. We do not believe this Update will have a material impact on our future financial statements at the date of adoption.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The Update includes provisions intended to simplify several aspects of how share-based payments are accounted for and presented in the financial statements. Such provisions include recognizing income tax effects of awards in the income statement when the awards vest or are settled, allowing an employer to withhold shares in an amount up to the employee’s maximum individual tax rate without resulting in liability classification of the award, allowing entities to make a policy election to account for forfeitures as they occur, and changes to the classification of tax-related cash flows resulting from share-based payments and cash payments made to taxing authorities on the employee’s behalf on the statement of cash flows. The amendments to this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are in the process of evaluating the impact this Update will have on our future financial statements.

 

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INDUSTRY

We distribute to the food-away-from-home industry, a large industry with attractive underlying growth trends. According to the U.S. Department of Commerce, consumer spending on food-away-from-home in the United States totaled $640 billion in 2014, making it one of the largest industries in the country. The industry grew from $331 billion in sales in 1999 to over $640 billion in sales in 2014, representing a compound annual growth rate of approximately 4.5%. Macroeconomic drivers of growth include increases in U.S. gross domestic product, employment levels, and personal consumption expenditures. Microeconomic drivers include increases in the number of restaurants, a continued shift toward value-added products and desire for convenience, smaller sized households, an aging population that spends more per capita at food-away-from-home establishments, and a rebound in the number of dual income households.

We operate in the U.S. foodservice distribution industry, which supplies the food-away-from-home industry and which totaled $268 billion in sales in 2015 according to Technomic. The U.S. foodservice distribution industry consists of four categories of distributors:

 

    Broadline distributors carry a “broad line” of products to serve the needs of many different types of food-away-from-home establishments;

 

    System distributors carry products that are typically specified by large national and regional chains;

 

    Specialized distributors carry a variety of products within specific categories, such as produce, meats, or seafood, or they focus on particular customer types, such as schools, vending operations, or fine dining; and

 

    Cash-and-carry centers where customers come to pick-up their orders.

We are distinguished from most of our competitors by operating in each of the four categories of distributors mentioned above.

Broadline distribution is the largest segment in the U.S. foodservice distribution industry. According to Technomic, the “Power Distributors,” which they define as the 21 companies with annual sales greater than $250 million, grew sales by 6% from 2012 to 2013, or approximately twice the growth rate for the overall foodservice distribution industry, which we believe is representative of the benefits of scale.

We benefit from being one of the leading companies in the U.S. foodservice distribution industry. We believe that our current industry share, the large size of the U.S. foodservice distribution industry, and our track record of growing industry share provide us a significant opportunity for continued sales growth.

On December 8, 2013, the two largest companies in our industry, Sysco and US Foods, announced that they entered into an agreement and plan of merger. On February 2, 2015, we reached an agreement to purchase 11 US Foods facilities relating to the proposed merger. On February 19, 2015, the Federal Trade Commission filed suit seeking an injunction to prevent the proposed merger and, on June 23, 2015, the United States District Court for the District of Columbia granted the injunction. In June 2015, the proposed merger was terminated. As a result, our agreement to purchase the facilities was also terminated and we received a termination fee of $25 million.

Based on the industry size as estimated by the industry analyst Technomic, we had an estimated industry share of 6.0% for each of calendar 2013 and calendar 2014, and Sysco and US Foods had an estimated industry share of 20.0% and 10.0%, respectively, in 2014. However, we believe that we will continue to be able to successfully differentiate ourselves from our competitors and compete in our industry as we continue to execute our business strategy.

 

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BUSINESS

We are the third largest player by revenue in the growing $268 billion U.S. foodservice distribution industry, which supplies the diverse $640 billion U.S. “food-away-from-home” industry. We market and distribute approximately 150,000 food and food-related products from approximately 70 distribution centers to over 150,000 customer locations across the United States. We serve a diverse mix of customers, from independent and chain restaurants to schools, business and industry locations, hospitals, vending distributors, office coffee service distributors, big box 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 more than 12,000 employees work across three segments: Performance Foodservice, PFG Customized, and Vistar.

We plan to continue executing the strategies that have successfully delivered net sales, industry share, and profit growth. In the fiscal year ended June 27, 2015, we generated $15.3 billion in net sales and $328.6 million in Adjusted EBITDA, representing compound annual growth rates of 9% and 11%, respectively, since fiscal 2010. In the fiscal year ended June 27, 2015, we generated $56.5 million in net income. During the first nine months of fiscal 2016, we generated $11.7 billion in net sales and $251.9 million in Adjusted EBITDA, representing growth rates of 4% and 11%, respectively, compared to the first nine months of fiscal 2015. During the first nine months of fiscal 2016, we generated $39.1 million in net income. In calendar year 2014 we had an estimated industry share of 6.0% and our sales growth rate since calendar year 2010 is approximately three times the growth rate of the foodservice distribution industry in that same time frame. We believe that our current industry share, the large size of the U.S. foodservice distribution industry, and our track record of growing industry share provide us a significant opportunity for continued sales growth. See “—Summary Historical Consolidated Financial Data” for our definition of “Adjusted EBITDA” and a reconciliation of Adjusted EBITDA to net income, which we believe is the most directly comparable financial measure calculated in accordance with GAAP.

We attribute our sales growth primarily to our customer-centric business model. For us, that means understanding our customers’ business operations and economics so that we can help them be successful; placing our decision-making on how best to serve customers at the local level; and partnering with our suppliers to develop our high quality proprietary brands, which are a key driver for us in winning, retaining, and developing customers. We believe that our customer-centric business model differentiates us from our competitors who make customer-facing decisions outside of the local market and also from competitors who often do not have the scale to develop proprietary brands, provide value-added services, and distribute as effectively as we do.

Since fiscal 2010, our profit growth has outpaced our sales growth as a result of shifting towards a more profitable mix of products and customers, capturing operating efficiencies from our sales growth, and delivering productivity initiatives. Our mix shift is primarily attributable to increased sales of our proprietary brands and sales to independent restaurants, which represent our highest margin products and customers, respectively. In addition, we have established a set of productivity initiatives in the areas of procurement and operations called Winning Together, which, together with increased net sales, continues to drive meaningful profit growth.

 

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Our Segments

We believe that we are well positioned to serve our customers from our three business segments, which are distinguished by their diverse distribution models, the inventory they carry, and the customers they serve: Performance Foodservice, PFG Customized, and Vistar.

Performance Food Group: Fiscal 2015

 

   

Net sales mix by operating segment

 

     Key statistics

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     Net sales    $15.3 billion
     Adjusted EBITDA    $328.6 million
     Distribution Centers    69
     Customer Locations    150,000+
    

Products

   150,000+
     Suppliers    5,000+
     Vehicles    2,500+
    

Employees

 

 

  

12,000+

 

 

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 25 broadline distribution centers, which supply a “broad line” of products, and 10 Roma distribution centers, which specialize in supplying independent pizzerias and other Italian-themed restaurants. Each of these distribution centers, which we refer to as operating companies or “OpCos,” 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. For fiscal 2015 and fiscal 2014, Performance Foodservice generated $9.1 billion and $8.1 billion, respectively, in net sales. For the first nine months of fiscal 2016, Performance Foodservice generated $7.0 billion in net sales. Over 75% of Performance Foodservice’s sales during each of these periods was to restaurants. 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 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: “Street” and multi-unit “Chain.” Street customers predominantly consist of independent restaurants. 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. Street customers utilize more of our value-added services, particularly in the areas of product selection and procurement, market trends, menu development, and operational strategy. Street customer purchases typically generate greater gross profit per case compared to sales to Chain customers. Sales to Street customers in fiscal 2015 accounted for 43% of Performance Foodservice sales compared to 37% in fiscal 2010. Case sales to Street customers in the first nine months of fiscal 2016 grew within our 6-10% growth goal range and accelerated modestly between our second and third quarters of fiscal 2016.

Our products consist of our proprietary-branded products, or “Performance Brands,” as well as nationally- branded products and products bearing our customers’ brands. Our Performance Brands typically generate higher

 

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gross profit per case than other brands. In fiscal 2015, Performance Brands accounted for 40% of the case volume sold to Street customers, up from 37% in fiscal 2010. Performance Brands accounted for over $2.0 billion of our Performance Foodservice net sales in fiscal 2015.

Performance Foodservice net sales for fiscal 2015 and fiscal 2014 were $9.1 billion and $8.1 billion, respectively, representing year-over-year growth of 12.1%. Performance Foodservice segment EBITDA for the same time period was $254.2 million and $207.5 million, representing year-over-year growth of 22.5%. Performance Foodservice net sales in the first nine months of fiscal 2016 and fiscal 2015 were $7.0 billion and $6.7 billion, respectively, representing year-over-year growth of 4.1%. Performance Foodservice segment EBITDA for the same time period was $206.9 million and $172.6 million, respectively, representing year-over-year growth of 19.9%.

 

Performance Foodservice: Fiscal 2015 Net Sales      

 

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PFG Customized. PFG Customized is a leading national distributor to the family and casual dining channel. We serve over 5,000 customer locations across the United States from nine 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 Bonefish Grill, Carrabba’s Italian Grill, Chili’s, Cracker Barrel, Joe’s Crab Shack, Logan’s Roadhouse, O’Charley’s, Outback Steakhouse, Ruby Tuesday, and TGI Friday’s, and we have recently entered into an agreement to serve Red Lobster. 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 recently began to utilize its distribution platform to serve fast casual chains such as Fuzzy’s Taco Shop and PDQ, as well quick serve chains including Church’s Chicken and Wendy’s.

 

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PFG Customized net sales for fiscal 2015 and fiscal 2014 were $3.8 billion and $3.3 billion, respectively, representing year-over-year growth of 13.7%. PFG Customized segment EBITDA for the same time periods was $36.5 million and $37.5 million, representing year-over-year decline of 2.7%. The majority of the increase in sales was attributable to the expansion of services provided to a single existing customer. PFG Customized net sales in the first nine months of fiscal 2016 and fiscal 2015 were $2.8 billion and $2.8 billion, respectively, representing year-over-year growth of 0.6%. PFG Customized segment EBITDA for the same time periods was $26.2 million and $25.6 million, representing year-over-year growth of 2.3%.

 

PFG Customized: Fiscal 2015 Net Sales      

 

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Vistar. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors, big box retailers, and theaters. The segment provides national distribution of approximately 20,000 different SKUs of candy, snacks, beverages, and other items to approximately 60,000 customer locations from our network of 24 Vistar OpCos and nine 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 distribution 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.

 

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Vistar net sales for fiscal 2015 and fiscal 2014 were $2.4 billion and $2.3 billion, respectively, representing year-over-year growth of 6.9%. Vistar segment EBITDA for the same time period was $105.5 million and $88.3 million, respectively, representing year-over-year growth of 19.5%. Vistar net sales for the first nine months of fiscal 2016 and fiscal 2015 were $1.9 billion and $1.8 billion, respectively, representing year-over-year growth of 8.7%. Vistar segment EBITDA for the same time period was $83.7 million and $79.2 million, respectively, representing year-over-year growth of 5.7%.

 

Vistar: Fiscal 2015 Net Sales      

 

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Our Strengths

Leading Market Positions

We believe that our leading market positions within each of our business segments allow us to compete effectively in attracting new customers, to attract and retain industry talent, and to drive our growth as we execute our business strategy. We have a diverse business model that operates in three segments, allowing us to capitalize on the growth in food-away-from-home consumption. We believe our leading market positions are exhibited in the following way:

 

    Performance Foodservice. We are the third largest broadline distributor by revenue in the United States after Sysco and US Foods, according to Technomic. We have significant scale in markets along the Eastern Seaboard and in the Southeast. Within Performance Foodservice, we believe that our Roma products make us the leading distributor to independent pizzerias in the United States.

 

    PFG Customized. PFG Customized is a leading national distributor to family and casual dining restaurants, and we believe benefits from longstanding relationships with our customers, strong customer loyalty, and a network that is optimized to serve our customer base efficiently.

 

    Vistar. Vistar is a leading national distributor of candy, snacks, and beverages to vending and office coffee service distributors, big box retailers, and theater customers, whom we believe benefit from substantial product variety sold at competitive prices.

Scale Distribution Platforms

We believe we have a competitive advantage over smaller 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

 

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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 OpCo, which minimizes the cost of delivery. We believe these efficiencies and economies of scale will lead to continued improvements in our operating margins when combined with incremental fixed-cost advantage.

Customer-Centric Business Model

Our customer-centric business model is based on understanding our customers’ business operations and economics so that we can help them be successful, partnering with our suppliers to develop high quality proprietary brands specifically tailored to our customers’ needs, and placing our decision making on how best to serve customers at the local level so that we remain nimble at the point of transaction. The model embodies how we organize the Company, how our business processes work, and how we design our information systems. Over 12,000 PFG employees share our mission to grow sales by providing excellent service that is locally tailored to each customer. Over 5,000 of our employees interact with customers daily, either in sales or in making deliveries. Our sales associates receive extensive and ongoing product training and earn incentives primarily based on how effectively they grow our business with customers. Our customer-facing employees are supported by hundreds of employees who develop, source, and market over 150,000 food and related products from over 5,000 suppliers and by several thousand warehouse workers focused on filling customer orders accurately, efficiently, and in a timely manner. We believe that our customer-centric business model differentiates us from our competitors who make customer-facing decisions outside the local market and also from competitors who often do not have the scale to develop proprietary brands, provide value-added services, and distribute as effectively as we do.

Proven Ability to Increase Sales to Street Customers and Market our Proprietary Brands

We maintain a strong focus on growing sales to Street customers (our highest profit margin customers), growing sales of Performance Brands (our highest profit margin products), and attracting, retaining, and developing a more effective Street sales force. We believe that offering our Performance Brands enhances customer loyalty and attracts new customers, particularly Street customers. These Performance Brands include exclusive products offered across a wide variety of approximately 10,000 SKUs, which are developed in partnership with our suppliers and customers in order to satisfy the specific needs of our customer base.

From fiscal 2010 through fiscal 2015, we have grown the number of Street customers, case sales to Street customers, and case sales of Performance Brands to Street customers at compound annual growth rates of 8%, 11%, and 13%, respectively. In fiscal 2015, Performance Brands accounted for 40% of the case volume sold to Street customers, up from 37% in fiscal 2010.

Substantial Free Cash Flow Generation

Our cash flows benefit from a steady, recurring revenue stream supported by effective cost management and a leading market share in the United States foodservice distribution industry. A significant portion of our sales are based on contract pricing, as either a percentage or fixed fee above costs, which enables us to substantially mitigate cost inflation. In order to minimize costs, we leverage our national scale as the third-largest foodservice distributor in the United States and enter into supplier agreements that maximize promotional allowance rebates. We have made a focused effort to drive sales of our proprietary brands, which carry a higher selling margin per case than branded products.

While we experience some seasonal fluctuations in our working capital needs, we effectively manage them with our stable gross margins and our prudent liquidity management and borrowing practices. Because of the predictable nature of our business, our annual capital expenditure requirement is very moderate, averaging 0.5%

 

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of net sales from fiscal 2010 to fiscal 2015. Recently our primary capital expense has been IT and productivity investment, which had effects on cash flow that were offset by gross margin expansion. Our annual free cash flow, defined as Adjusted EBITDA minus capital expenditures, grew 17.6% year-over-year from fiscal 2014 to fiscal 2015.

Disciplined and Proven Acquirer

We have made 15 acquisitions over the past seven years, beginning with the merger of PFG and Vistar in 2008, when management integrated the two companies with significant synergies. Acquisitions have typically been completed at attractive valuation multiples and have been accretive to our Adjusted EBITDA margins on both a pre- and post-synergy basis.

In recent years, we have made four acquisitions in our Performance Foodservice business, which expanded our footprint in North and South Carolina, Kentucky, Illinois, and northern coastal California. Synergies from these acquisitions typically include introducing Performance Brands to the customers of the acquired company, reducing network mileage, implementing operational best practices, and achieving cost savings, such as expenses associated with insurance and benefit programs.

In our Vistar segment, we entered the hotel pantry business through an acquisition, which we are using as a platform to expand further into the hospitality channel. Vistar also used an acquisition to better develop our small drop fulfillment technology to serve big box retailers with candy, snacks, beverages, and other items, a capability that we believe has application in other channels.

Experienced and Invested Management Team

Our senior management team has extensive experience and proven success in the foodservice industry. With 250 years of combined experience (over 20 years on average for the executive leadership team), we believe that our senior management team’s experience in all parts of the industry has enabled us to grow and diversify our business while improving operational efficiency. Members of management have previous experience at other leading foodservice distributors, including Sysco, US Foods, PYA Monarch, and Alliant Foodservice. Other management team members have experience elsewhere in the food industry, ranging from manufacturers and marketers to retailers and contract feeders. Management has invested over $21 million in the equity of the Company and the substantial majority of management’s incentive compensation is tied to our financial performance. We believe management’s investment and incentive structure align its interests with those of our stockholders.

Our Strategy

We intend to continue to expand our industry share and to grow sales and profits by executing on the following key elements of our strategy.

Continue to Grow Street and Performance Brand Sales

We believe that there is a significant and ongoing opportunity to grow sales to Street customers (our highest profit margin customers) and to expand sales of our Performance Brands (our highest profit margin products). We believe that providing customers with proprietary distributor brands such as Performance Brands has been a key driver for us in winning, retaining, and developing customers, especially Street customers. In addition, we believe that our ability to build and retain an increasingly effective sales force has complemented these results. Street business momentum facilitates further development of our Performance Brand portfolio, which in turn enables us to win and develop more Street customers. Smaller regional competitors often do not have the scale to develop their own distinctive brands, and we believe this is a key reason why our Performance Foodservice segment has increased its sales to Street customers. By continuing to focus on increasing sales to our Street customers and sales of our Performance Brands, we believe that we can continue to drive profitable growth.

 

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Continue to Grow our Customers and Channels

We intend to increase penetration within our existing channels, enter new channels, and continue to win new customers in all three business segments by using our scale, operational excellence, geographic presence, and customer-centric business model.

 

    Performance Foodservice. In addition to our success in growing our Street business, we believe significant opportunity remains to expand our customer base. For example, in the past three years we have won the fast-growing distribution business of Anthony’s Coal Fired Pizza, Blaze Pizza, Chuy’s, Habit Burger, Hwy 55 Burgers Shakes & Fries, Pollo Tropical, Shake Shack, and Taco Cabana. We believe significant opportunity remains to continue expanding our customer base through new multi-unit restaurant chains and other channels such as schools, hospitals, and commercial locations.

 

    PFG Customized. We intend to continue to grow our traditional customer base and to expand sales to new customer channels. We have recently expanded our customer base to include select fast casual customers including Fuzzy’s Taco Shop and PDQ and quick serve customers including Wendy’s.

 

    Vistar. We have utilized Vistar’s combination of inventory variety, distribution methods, and national scale to diversify our channel mix. This has enabled Vistar to serve new customers and channels including concessionaires (such as Minor League Baseball), corrections facilities, college bookstores, and hospitality, among others. Additionally, Vistar continues to grow within vending and office coffee service distribution, big box retailers, and theaters.

Expand Margins through Continuous Productivity Improvements

We are committed to expanding margins through operating efficiencies and specific productivity programs, which will complement the effect of selling a more profitable mix of customers and brands. We have established a program called Winning Together, which complements our sales growth with ongoing initiatives that take advantage of our scale and drive productivity in non-customer facing areas. Winning Together is led by teams whose primary responsibility is to improve our business processes, capture best practices, and maintain a continuous improvement culture in our procurement and operations functions.

The two key components of Winning Together are Winning Together Through Procurement and Winning Together Through Operations. Winning Together Through Procurement uses structured negotiations with our procurement partners, including selected national, regional, and local suppliers, to develop the mutual profitability of the relationship and to encourage suppliers to invest in our growth. Winning Together Through Operations seeks to accelerate efficiencies in our warehouses and our inbound and outbound logistics functions. This program leverages best practices and scale, implements new productivity software, and establishes a model OpCo as a proving ground for new technologies and business processes.

Winning Together drove meaningful cost-saving benefits in fiscal 2015, and we continue to benefit from this program in fiscal 2016.

Continue to Pursue Opportunistic Acquisitions

We have a strong track record of sourcing, executing, and integrating accretive acquisitions. We intend to continue pursuing selective acquisitions in order to further our competitive position in the industry and to allow us both to enter into new geographies and channels as well as to expand in existing ones.

Over the past seven years, we have made 15 acquisitions, including acquiring five broadline locations in Kentucky, North and South Carolina, Illinois, and northern coastal California. These acquisitions have expanded our broadline geographic reach, and we believe further meaningful opportunities exist that would enable us to reach additional customers. In Vistar, our acquisition focus remains on companies in adjacent channels that can benefit from the strength of our inventory and delivery method variety or that can add capabilities or technologies to our portfolio. We believe that there are a number of attractive potential acquisition opportunities in our industry.

 

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Customers and Marketing

We serve different types of customers through each of our three business segments. Our Performance Foodservice segment serves two types of customers—Street customers and 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, big box retailers, and theaters, 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 Street 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 2014 or fiscal 2015.

Street Customers. Our Performance Foodservice segment serves our Street customers, which predominantly include independent restaurants, along with hotels, cafeterias, schools, healthcare facilities, and other institutional customers. We seek to increase the mix of our total sales to Street 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. Street customers use more value-added services, particularly in the areas of product selection and procurement, market trends, menu development, and operational strategy. In addition, Street customers also use more of our Performance Brands, which are our highest margin products. Our Performance Foodservice segment supports sales to Street 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 include various locations of Anthony’s Coal Fired Pizza, Blaze Pizza, Chuy’s, Pollo Tropical, Shake Shack, Subway, and many others. Our PFG Customized segment customers include many of the most recognizable family and casual dining restaurant chains including Bonefish Grill, Carrabba’s Italian Grill, Chili’s, Cracker Barrel, Joe’s Crab Shack, Logan’s Roadhouse, O’Charley’s, Outback Steakhouse, Ruby Tuesday, and TGI Friday’s. PFG Customized recently began to leverage its distribution platform to serve fast casual chains such as Fuzzy’s Taco Shop, and PDQ, as well as quick serve chains including Church’s Chicken, Wendy’s, Hwy 55 Burgers Shakes & Fries, and Yum! Brands. Sales to Chain customers are typically lower gross margin, but have larger deliveries than those to Street 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 are the largest Vistar 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 beverage products, including 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

 

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sizes are too small to be served effectively by our distribution 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 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 and 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, and Assoluti. 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, Street, 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 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.

 

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Suppliers

We purchase from over 5,000 suppliers, none of which accounted for more than 4% of our aggregate purchases in fiscal 2015 or the first nine months of fiscal 2016. Many of our suppliers provide products to all three business 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, particularly on a regional basis, from smaller suppliers, particularly those who specialize in produce and other perishable commodities. Many of our suppliers provide sales material and sales call support for the products that they sell us. In addition, our purchasing cooperative administers certain freight transactions and provides other logistical support for our operations.

Operations and Properties

As of March 26, 2016, we operated 69 distribution centers across our three business segments. Of our 69 facilities, we owned 29 facilities and leased the remaining 40 facilities. Our Performance Foodservice segment operated 35 distribution centers and had an average square footage of approximately 200,000 square feet per facility. Our PFG Customized segment operated nine 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 approximately 120,000 square feet per facility.

 

 

     Performance Foodservice      Vistar      PFG
Customized
     Total  

State

   Broadline      Roma      Total           

Arizona

     —           1         1         2         —           3   

Arkansas

     1         —           1         —           —           1   

California

     1         2         3         3         1         7   

Colorado

     —           1         1         1         —           2   

Connecticut

     —           —           —           1         —           1   

Florida

     2         1         3         2         1         6   

Georgia

     2         —           2         1         1         4   

Illinois

     2         —           2         1         —           3   

Indiana

     —           —           —           —           1         1   

Kentucky

     1         —           1         1         —           2   

Louisiana

     1         —           1         —           —           1   

Maine

     1         —           1         —           —           1   

Maryland

     1         —           1         —           1         2   

Massachusetts

     1         —           1         —           —           1   

Michigan

     —           —           —           1         —           1   

Minnesota

     —           1         1         1         —           2   

Mississippi

     1         —           1         —           —           1   

Missouri

     1         1         2         1         —           3   

New Jersey

     3         —           3         2         1         6   

North Carolina

     1         —           1         1         —           2   

Ohio

     —           —           —           1         —           1   

Oregon

     —           1         1         1         —           2   

Pennsylvania

     —           —           —           1         —           1   

South Carolina

     1         —           1         —           1         2   

Tennessee

     2         —           2         2         1         5   

Texas

     2         2         4         2         1         7   

Virginia

     1         —           1         —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25         10         35         25         9         69   

 

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Our Performance Foodservice customers are generally located no more than 200 miles from one of our distribution facilities. Of the 35 Performance Foodservice distribution centers, six 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 nine cash-and-carry Merchant’s Mart facilities. Customer orders in all three segments 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 16.7 years in duration. Rent on our leases is typically set at a fixed annual rate, paid monthly.

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.

As of March 26, 2016, we operated a fleet of more than 2,500 vehicles of which approximately 82% are leased and 18% are owned. The fleet primarily consists of tractor and trailer combinations, most of which are either wholly or partially refrigerated for the transportation of frozen or perishable food.

Winning Together Program

We have established a program called Winning Together, which complements our sales growth with specific initiatives that take advantage of our scale and drive productivity in non-customer facing areas on an ongoing basis. Winning Together is led by teams whose primary responsibility is to improve our business processes, capture best practices, and maintain a continuous improvement culture in our procurement and operations functions. The two key components of Winning Together are Winning Together Through Procurement and Winning Together Through Operations.

Winning Together Through Procurement comprises four interwoven programs, including:

 

    Structured supplier negotiations rely on a data driven process to develop the mutual profitability of the relationship and to encourage national and regional suppliers to invest in our growth. Where appropriate, the agreements span our segments and OpCos.

 

    e-Sourcing is a program that uses electronic sourcing of selected categories and SKUs to obtain the most favorable price for products with specifications rigorously determined by our category managers and quality assurance managers.

 

    Enhanced marketing support encourages suppliers to invest resources with us to increase sales of their products to our customers in the form of special programs, training, joint sales calls, and other means.

 

    Inbound logistics lowers the cost of shipping products from suppliers to our warehouses by expanding our backhaul network across our three segments and better managing third-party carriers.

Winning Together Through Operations comprises three interwoven programs including:

 

    Best practices drive efficiencies in warehousing, transportation, and safety and risk management by gathering the operational practices and management routines from the best performing OpCos and deploying them in other facilities.

 

    Not for resale leverages our purchasing scale to lower costs for items not resold to customers, including items such as trucks, material handling equipment, parts and supplies, construction materials, and services used in our operations.

 

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    Established a Model OpCo as a proving ground for operational best practices, technologies, and business processes that can be implemented across our entire organization.

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 by both 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 offset higher fuel prices through diesel fuel surcharges to our customers and through the use of costless collars. As of March 26, 2016, we had collars in place for approximately 21% of the gallons we expect to use over the twelve months following March 26, 2016. These fuel collars do not qualify for hedge accounting treatment for reasons discussed in our financial statement footnotes. 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 with national footprints. On December 8, 2013, these competitors entered into an agreement and plan of merger, which was later terminated as described under “Summary—Our Industry.” In addition, there are numerous smaller 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 ability to try to meet customer requirements 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 completely and accurately fill orders and provide timely deliveries.

Information Systems

We operate three core mainframe 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 core 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

 

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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.

Employees

As of March 26, 2016, we had more than 12,000 full-time employees. As of March 26, 2016, unions represented approximately 850 of our employees. We have entered into nine 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 to 2025. See “Risk Factors—Risks Relating to Our Business and Industry—We face risks relating to labor relations and the availability of qualified labor.”

We have recently made investments to increase the size of our sales force and currently employ over 2,000 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 asset 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.

Regulation

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. In late 2010, the FDA Food Safety Modernization Act, or the “FSMA,” was enacted. The FSMA represents a significant expansion of food safety requirements and FDA food safety authorities and, among other things, 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

 

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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 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.

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.

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. As discussed below, we have accrued an aggregate of $5.1 million of anticipated settlement costs with respect to certain pending claims. 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.

 

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U.S. Equal Employment Opportunity Commission Investigation. In March 2009, the Baltimore Equal Employment Opportunity Commission, or the “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, 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 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 being female. The parties are engaged in discovery. We intend to vigorously defend ourselves. An estimate of potential loss, if any, cannot be determined at this time.

Laumea v. Performance Food Group, Inc. In May 2014, a former employee of our Roma of Southern California distribution center filed a putative class action lawsuit in the San Bernardino County, California Superior Court against us. We removed the case to the United States District Court for the Central District of California. In September 2014, the plaintiff filed a first amended complaint. There are different counts for which the putative classes differ. The first class is proposed to be all former and current employees employed by our Performance Foodservice and Vistar segments in California in non-exempt positions at any time during the period beginning May 30, 2010 to the present, or the “California Class.” With respect to the California Class, the lawsuit alleges that we (1) failed to pay overtime as required by California statute, (2) failed to provide meal periods and to pay compensation for such meal periods, (3) failed to provide accurate itemized wage statements, and (4) that we engaged in unfair trade practices by failing to pay overtime or to provide meal periods, or pay compensation in lieu thereof. The lawsuit further alleges the plaintiff is entitled to penalties and attorney fees pursuant to the California Private Attorney General Act. The second putative class is proposed to be all members of the California Class who separated from employment at any time during the period from May 30, 2011 to the present, or the “California Subclass.” With respect to the California Subclass, the lawsuit alleges that we failed to pay all compensation due upon termination of employment and within the period due. The third putative class is proposed to be all current or former employees employed by us in the United States in non-exempt positions at any time during the period beginning May 30, 2011 to the present, or the “Nationwide Class.” With respect to the Nationwide Class, the lawsuit alleges we willfully failed to pay overtime compensation required under the Fair Labor Standards Act.

In June 2015, we engaged in mediation with the plaintiff, subject to the limitation that the interests of the Nationwide Class would not be mediated except to the extent members of the Nationwide Class worked in California during the applicable period, and the plaintiff agreed. The mediator proposed the parties settle the lawsuit on the basis of a settlement fund of $1,350,000, on a claims-made basis with a floor of 60% payout net of attorney fees, administrative fees and enhancements. In July 2015, we indicated our non-binding agreement to the mediator’s proposal, subject to negotiation of a mutually agreeable settlement. The plaintiff also indicated its agreement to the mediator’s proposal. Therefore, this amount was accrued in June 2015. Should the parties fail to negotiate a mutually acceptable agreement, we intend to continue to vigorously defend ourselves.

Perez v. Performance Food Group, Inc., et al. In April 2015, a former employee of our Performance Foodservice—Southern California distribution center filed a putative class action lawsuit in the Alameda County, California Superior Court against us. We removed the case to the United States District Court for the Northern

 

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District of California. In June 2015, the plaintiff filed a first amended complaint. The lawsuit alleges on behalf of a proposed class of all hourly employees in California (excluding drivers) in our Performance Foodservice and Vistar segments that we failed to provide second meal periods and to pay compensation for such meal periods. The lawsuit further alleges on behalf of a proposed class of all employees in California (excluding drivers) who earned non-discretionary compensation that we failed to pay all overtime wages due, and to pay all premium wages for missed meal periods, by failing to include all compensation required in the regular rate of pay calculation, and failed to pay wages for all time worked. The lawsuit further alleges on behalf of a proposed class of all employees in California (excluding drivers) that we failed to pay out vested vacation time in the form of paid holidays. The lawsuit further alleges on behalf of a proposed class of all employees described above that we (1) failed to provide accurate itemized wage statements; (2) failed to pay all compensation due upon termination of employment and within the period due; and (3) engaged in unfair trade practices. Each of the proposed classes for the preceding claims are for the time period from April 20, 2011 to the present. The lawsuit further alleges on behalf of all of our hourly employees in the United States (excluding drivers) in non-exempt positions, that we failed to pay appropriate overtime compensation pursuant to our compensation policy, and to keep records required under the Fair Labor Standards Act, for the period from April 20, 2012 to the present. Finally, the lawsuit alleges plaintiff is entitled to penalties and attorney fees pursuant to the California Private Attorney General Act. In July 2015, we filed a Motion to Dismiss or Strike the Complaint. In March 2016, the court granted our motion to dismiss all claims except for the claim alleging we failed to provide accurate wage statements. The court gave the plaintiff 21 days to amend his complaint. The plaintiff filed a second amended complaint on April 13, 2016. The plaintiff’s claims in the second amended complaint include substantially the same claims and allegations as the original lawsuit.

We believe that the exposure created by this lawsuit, if any, is largely duplicative of the exposure, if any, created by the Laumea litigation described above, and that settlement of the Laumea litigation will compromise all but one of the claims of the Perez litigation (failure to pay out vested vacation time in the form of paid holidays). Furthermore, like the Laumea litigation, the Perez litigation includes a nationwide Fair Labor Standards Act cause of action. Because compromise of that claim in the Laumea litigation would be limited to California employees, the same claim in the Perez litigation would not be compromised for non-California employees in the Perez litigation. Except as already stated, we are currently assessing our options regarding defenses of this case.

Contreras v. Performance Food Group, Inc., et al. In June 2014, a former employee of our Roma of Southern California distribution center filed a putative class action lawsuit in the Alameda County, California Superior Court against us. The putative class is proposed to be all drivers employed in any of our California locations in our Performance Foodservice and Vistar segments at any time during the period beginning June 17, 2010 to the present. In August 2014, the plaintiff filed a first amended complaint. The lawsuit alleges that we engaged in unfair trade practices and that we, with respect to the putative class, failed to (1) provide timely off-duty meal and rest breaks and to pay compensation for such breaks as required by California law, (2) pay compensation for all hours worked and to pay a minimum wage for such hours, (3) provide accurate itemized wage statements, (4) pay all compensation within the period due at the time of termination of employment, and (5) pay compensation in timely fashion. The lawsuit further alleges that the plaintiff is entitled to penalties and attorney fees pursuant to the California Private Attorney General Act and that failure to provide meal and rest breaks and to pay a minimum wage for all hours worked constitute unfair business practices.

In June 2015, we engaged in mediation with the plaintiff. The mediator proposed the parties settle the lawsuit on the basis of a fully paid settlement fund of $3,750,000. In July 2015, the parties agreed to the mediator’s proposal, subject to negotiation of a mutually agreeable settlement. Therefore, this amount was accrued in June 2015. The parties executed a settlement agreement which received final approval on May 4, 2016. We anticipate paying out the settlement fund in June 2016.

Vengris v. Performance Food Group, Inc. In May 2015, an employee of our Performance Foodservice—Northern California distribution center filed a putative class action lawsuit in the Alameda County, California Superior Court against us. In July 2015, the Company removed the case to the United States District Court for the Northern District of California. The putative class is proposed to be all current and former drivers employed in

 

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any of our, our subsidiaries’ or affiliated companies’ California locations since May 2, 2011. The lawsuit alleges that we (1) engaged in wage theft or time shaving by auto-deducting thirty minutes from class members’ work days even if the class members worked during some or all of such meal periods; (2) failed to pay class members for all time worked when class members worked during first or second meal periods; (3) failed to pay premium wages to class members for missed meal periods; (4) failed to provide class members the opportunity to take rest breaks of 10 minutes every four hours and failed to pay premium wage for such missed rest breaks; (5) provided inaccurate wage statements to the class members by failing to account for all hours worked; (6) failed to pay all compensation within the period due at the time of termination of employment; and (7) engaged in unlawful, unfair, fraudulent and deceptive business practices by failing to itemize and keep accurate time records and by failing to pay the class members in a lawful manner. In July 2015, we filed a Motion to Dismiss or Strike the Complaint. The court transferred the case to the judge presiding in the Contreras litigation, terminated the motion to dismiss without prejudice and ruled that we will be able to refile the motion, if necessary, in the future. All deadlines in the case have been postponed pending a status conference set for May 2016.

We believe that the exposure created by this lawsuit, if any, is duplicative of the exposure, if any, created by the Contreras litigation described above, and that settlement of the Contreras litigation will compromise the claims of the members of the putative class in Vengris. We are currently assessing our options regarding defense of this case.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth the names, ages, and positions of our directors and the executive officers of Performance Food Group Company, as of March 26, 2016.

 

Name

   Age     

Position

George L. Holm

     60       President and Chief Executive Officer; Director

David Flitman

     51       Executive Vice President of the Company and President and Chief Executive Officer of Performance Foodservice

James Hope

     56       Executive Vice President, Operations

Patrick T. Hagerty

     57       Senior Vice President of the Company and President and Chief Executive Officer of Vistar

Robert D. Evans

     56       Senior Vice President and Chief Financial Officer

Craig H. Hoskins

     55       Senior Vice President of the Company and President and Chief Executive Officer of PFG Customized

A. Brent King

     47       Senior Vice President, General Counsel, and Secretary

Carol A. O’Connell

     55       Senior Vice President and Chief Human Resources Officer

Terry A. West

     59       Senior Vice President and Chief Information Officer

Douglas M. Steenland

     64       Chairman of the Board of Directors

William F. Dawson Jr.

     50       Director

Bruce McEvoy

     38       Director

Prakash A. Melwani

     57       Director

Jeffrey Overly

     57       Director

Arthur B. Winkleblack

     58       Director

John J. Zillmer

     60       Director

George L. Holm has served as our President and Chief Executive Officer since September 2002, when he founded the Company and subsequently led the Company through its expansion into the broadline foodservice distribution industry with the PFG acquisition in May 2008. Mr. Holm has also served as a Director since 2002. Prior to joining the Company, he held various senior executive positions with Sysco, Alliant Foodservice, and US Foods.

David Flitman has served as our Executive Vice President and President and Chief Executive Officer of Performance Foodservice since January 2015. Prior to joining the Company, he was Chief Operating Officer and President USA & Mexico of Univar, a global chemical distributor, since January 2014. He joined Univar in December 2012 as President USA with additional responsibility for Univar’s Global Supply Chain & Export Services teams. From November 2011 to September 2012, he served as Executive Vice President and President Water and Process Services at Ecolab, the global leader in water, hygiene and energy technologies and services. From August 2008 to November 2011, Mr. Flitman served as Senior Executive Vice President of Nalco until it was acquired by Ecolab. He also served as President of Allegheny Power from February 2005 to July 2008. In his early career, Mr. Flitman spent nearly 20 years in operational, commercial, and global business leadership positions at DuPont.

James Hope has served as our Executive Vice President, Operations since July 2014. Prior to joining the Company, he was with Sysco for approximately 30 years. His last positions at Sysco were Executive Vice President, Business Transformation from January 2010 to June 2013, Senior Vice President, Business Transformation from January 2009 to December 2009, and Senior Vice President, Sales and Marketing from July 2007 to December 2008.

 

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Patrick T. Hagerty has served as our Senior Vice President and President and Chief Executive Officer of Vistar since September 2008. From May 2006 to September 2008, he was Vice President and Chief Operating Officer of Vistar. From November 1994 to May 2006, he was Vice President, Merchandising with the Company and its predecessor.

Robert D. Evans has served as our Senior Vice President and Chief Financial Officer since May 2009. Prior to joining the Company, he was President of Black Diamond Holdings, a start-up manufacturer and retailer of eco-friendly cleaning services from July 2005 to February 2009. From December 2000 to December 2004, he was Chief Financial Officer and Executive Vice President, Finance and Development of Giant Foods, a retail supermarket chain in the Baltimore/Washington, D.C. area. He has served as Vice President of Strategy and Corporate Development, Senior Vice President and General Manager of U.S. Ready to Eat Cereal, and Chief Financial Officer and Senior Vice President of Kellogg North America and held a series of finance positions at the Frito-Lay division of PepsiCo.

On May 3, 2016, Robert D. Evans notified the Company of his intent to retire from his position as Senior Vice President and Chief Financial Officer of the Company. Mr. Evans’s retirement will be effective on the date that the Company appoints a new Chief Financial Officer. The Company is working with an executive search firm to assist in the search for Mr. Evans’s successor. Following Mr. Evans’s retirement, Mr. Evans will remain available to provide transition and advisory services and consulting services to the Company for a specified period pursuant to a transition agreement with the Company.

Craig H. Hoskins has served as our Senior Vice President and Chief Executive Officer and President of PFG Customized since January 2012. He served as Senior Vice President and President and Chief Operating Officer of PFG Customized from July 2011 to December 2011. Prior to that, he served as PFG’s Senior Vice President, Sales from October 2007 to July 2011 and at its predecessor. Prior to that, he served in various operating and customer facing leadership roles with our predecessor since joining in August 1990 as Marketing Manager.

A. Brent King has served as our Senior Vice President, General Counsel and Secretary since March 17, 2016. Prior to joining the Company, he was Vice President, General Counsel and Secretary of Tredegar Corporation from October 2008 to March 2016. From October 2005 until October 2008, he served as General Counsel at Hilb Rogal & Hobbs Company. Mr. King was Vice President and Assistant Secretary for Hilb Rogal & Hobbs Company from October 2001 to October 2008. He served as Associate General Counsel for Hilb Rogal & Hobbs Company from October 2001 to October 2005.

Carol A. O’Connell has served as our Senior Vice President and Chief Human Resources Officer since October 2011. Prior to joining the Company, she was Senior Vice President of Global Talent Management for Aramark from February 2008 to October 2011 and Vice President of Human Resources for Aramark’s Business and Industry Group from April 2007 to February 2008. Prior to that, she held various HR leadership roles at General Electric Company from March 1989 to April 2007.

Terry A. West has served as our Senior Vice President and Chief Information Officer since February 2011. Prior to joining the Company, he was with ConAgra Foods, Inc. from May 2000 to February 2011, serving as a Vice President, Information Technology from July 2006 to February 2011. Prior to that, Mr. West served in the United States Army for over 20 years.

Douglas M. Steenland has served as a Director and as Chairman of the Board of Directors since 2010. Mr. Steenland served as President and Chief Executive Officer of Northwest Airlines from 2004 until its merger with Delta on October 29, 2008. Prior to this, Mr. Steenland served in a number of executive positions after joining Northwest Airlines in 1991, including President from 2001 to 2004 and Executive Vice President and Chief Corporate Officer from 1999 to 2001. Mr. Steenland is a director of American International Group, Travelport Limited and Hilton Worldwide Holdings. Mr. Steenland received a B.A. from Calvin College and is a graduate from The George Washington University Law School.

 

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William F. Dawson, Jr., has served as a Director since 2002. Mr. Dawson is the Chief Executive Officer of Wellspring. He has served as the chair of Wellspring’s investment committee since 2004. Mr. Dawson has led or co-sponsored several of Wellspring’s most successful investments in distribution, consumer services, business services, healthcare, energy services and industrial companies. Mr. Dawson currently serves on the board of directors of ProAmpac, Tradesmen International, API Heat Transfer, United Sporting Companies, Swift Worldwide Resources, National Seating & Mobility, Qualitor, Inc., Great Lakes Caring, and Crosman Corporation. Prior to joining Wellspring, Mr. Dawson was a partner at Whitney & Co., where he was head of the middle-market buyout group. Prior to that, Mr. Dawson spent 14 years at Donaldson, Lufkin & Jenrette Securities Corporation where he was most recently a managing director at DLJ Merchant Banking. He has served on the boards of more than twenty public and private companies during his career. Mr. Dawson received a Bachelor of Science degree from St. Francis College and an MBA from Harvard Business School.

Bruce McEvoy has served as a Director since 2007. Mr. McEvoy is a Senior Managing Director at Blackstone. Before joining Blackstone in 2006, Mr. McEvoy worked as an Associate at General Atlantic from 2002 to 2004, and was a consultant at McKinsey & Company from 1999 to 2002. Mr. McEvoy graduated from Princeton University and received an MBA from Harvard Business School. Mr. McEvoy currently serves on the boards of directors of GCA Services, Catalent, RGIS Inventory Specialists, Vivint, Vivint Solar, and MB Aerospace.

Prakash A. Melwani has served as a Director since 2007. Mr. Melwani is a Senior Managing Director at Blackstone and is based in New York. He is the Chief Investment Officer of the Private Equity Group and chairs each of its Investment Committees. Since joining Blackstone in 2003, Mr. Melwani has led Blackstone’s investments in Kosmos Energy, Foundation Coal, Texas Genco, Ariel Re, Pinnacle Foods, RGIS Inventory Specialists, and Crocs. Before joining Blackstone, Mr. Melwani was a founding partner of Vestar Capital Partners and served as its Chief Investment Officer. Prior to that, he was with the management buyout group at The First Boston Corporation and with N.M. Rothschild & Sons in Hong Kong and London. Mr. Melwani received a First Class Honors degree in Economics from Cambridge University, England, and an MBA with High Distinction from the Harvard Business School, where he graduated as a Baker Scholar and a Loeb Rhodes Fellow. Mr. Melwani serves on the boards of directors of Crocs, Kosmos Energy, RGIS Inventory Specialists, and Blackstone strategic partner, Patria.

Jeffrey Overly has served as our Director since 2013. Mr. Overly is an Operating Partner at The Blackstone Group. Before joining Blackstone in 2008, Mr. Overly was Vice President of Global Fixture Operations at Kohler Company. Prior to that, he served 25 years at General Motors Corporation and Delphi Corporation in numerous operations and engineering positions. Mr. Overly has a BS in Industrial Management from the University of Cincinnati and a Masters in Business from Central Michigan University. Mr. Overly current serves on the board of directors of RGIS, LLC.

Arthur B. Winkleblack has served as a Director since 2015. Mr. Winkleblack retired in June 2013 as Executive Vice President and Chief Financial Officer of the HJ Heinz Company, a global packaged food manufacturer, where he had been employed as Executive Vice President and Chief Financial Officer since January 2002. From 1999 through 2001, Mr. Winkleblack was Acting Chief Operating Officer of Perform.com and Chief Executive Officer of Freeride.com at Indigo Capital. Earlier in his career, Mr. Winkleblack held senior management and finance positions at the C. Dean Metropoulos Group, Six Flags Entertainment Corporation, AlliedSignal, Inc. and PepsiCo, Inc. Mr. Winkleblack also provides financial and capital markets consulting services to Ritchie Brothers Auctioneers, an industrial auctioneer, where he serves as the Senior Advisor to the CEO. Mr. Winkleblack currently serves on the board of directors of Church & Dwight Co., Inc.

John J. Zillmer has served as a Director since 2015. Mr. Zillmer joined Univar Inc. in 2009 as President and Chief Executive Officer. In 2012, he stepped down as President and CEO and became Executive Chairman until December 2012 when he retired from Univar. Prior to joining Univar, Mr. Zillmer served as Chairman and Chief Executive Officer of Allied Waste Industries, a solid waste management business, from 2005 until the merger of Allied Waste with Republic Services, Inc. in December 2008. Before Allied Waste, Mr. Zillmer spent 30 years in

 

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the managed services industry, most recently as Executive Vice President of ARAMARK Corporation, a provider of food, uniform and support services. During his eighteen-year career with ARAMARK, Mr. Zillmer served as President of ARAMARK’s Business Services division, the International division and the Food and Support Services group. Prior to joining ARAMARK, Mr. Zillmer was employed by Szabo Food Services until Szabo was acquired by ARAMARK in 1986. Mr. Zillmer currently serves on the boards of directors of Ecolab Inc., Reynolds American Inc., and Veritiv Corp.

Our Corporate Governance

We have structured our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance include:

 

    Our Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as possible, and with the directors serving three-year terms;

 

    We have independent director representation on our Audit, Compensation, and Nominating and Corporate Governance Committees immediately at the time of the offering, and our independent directors meet regularly in executive sessions without the presence of our corporate officers or non-independent directors;

 

    One of our directors qualifies as an “audit committee financial expert” as defined by the SEC; and

 

    We have implemented a range of other corporate governance best practices, including placing limits on the number of directorships held by our directors to prevent “overboarding,” and implementing a robust director education program.

Composition of the Board of Directors

Our business and affairs are managed under the direction of our Board of Directors. Our amended and restated certificate of incorporation provides for a classified Board of Directors, with three directors in Class I (Messrs. Holm, Winkleblack, and Zillmer), three directors in Class II (Messrs. Overly, and Steenland) and three directors in Class III (Messrs. Dawson, McEvoy, and Melwani). See “Description of Capital Stock—Anti-Takeover Effects of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and Certain Provisions of Delaware Law—Classified Board of Directors.” In addition, we are party to a stockholders agreement entered into with certain affiliates of our Sponsors in connection with the IPO. This agreement grants our Sponsors the right to designate nominees to our Board of Directors subject to the maintenance of certain ownership requirements in us. We anticipate that, pursuant to such stockholders agreement, Blackstone will designate an additional nominee. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

Background and Experience of Directors

When considering whether directors and nominees have the experience, qualifications, attributes, or skills, taken as a whole, to enable our Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure, the Board of Directors focused primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. Once appointed, directors serve until they resign or are terminated by the stockholders. In particular, the members of our Board of Directors considered the following important characteristics, among others:

 

    Douglas M. Steenland—we considered Mr. Steenland’s experience in managing large, complex, institutions.

 

    George L. Holm—we considered Mr. Holm’s experience as an executive in the U.S. foodservice distribution industry. Furthermore, we also considered how his additional role as our Chief Executive Officer and President would bring management perspective to board deliberations and provide valuable information about the status of our day-to-day operations.

 

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    William F. Dawson Jr.—we considered Mr. Dawson’s significant financial, investment, and operational experience from his involvement in Wellspring’s investments in numerous portfolio companies, as well as his twelve years of experience as a director of the Company and its predecessor.

 

    Bruce McEvoy—we considered Mr. McEvoy’s knowledge and expertise based on his experiences at Blackstone coupled with his experience as a director of several companies, as well as his management consulting experience.

 

    Prakash A. Melwani—we considered Mr. Melwani’s significant financial, investment and operational experience from his involvement in Blackstone’s investments in numerous portfolio companies and he has played active roles in overseeing those businesses.

 

    Jeffrey Overly—we considered Mr. Overly’s significant financial, investment and operational experience from his involvement in Blackstone’s investments in numerous portfolio companies and he has played active roles in overseeing those businesses.

 

    Arthur B. Winkleblack—we considered Mr. Winkleblack’s substantial executive experience across a broad range of industries. In addition, his nearly twelve years of experience as the Chief Financial Officer of a large, publicly-traded consumer goods company enables him to bring important perspectives to our Board of Directors on performance management, business analytics, compliance, risk management, public reporting, and investor relations.

 

    John J. Zillmer—we considered Mr. Zillmer’s extensive experience leading both public and private companies in various industries.

Role of Board in Risk Oversight

The Board of Directors has extensive involvement in the oversight of risk management related to us and our business and accomplishes this oversight through the regular reporting to the Board of Directors by the Audit Committee. The Audit Committee represents the Board of Directors by periodically reviewing our accounting, reporting and financial practices, including the integrity of our financial statements, the surveillance of administrative and financial controls, and our compliance with legal and regulatory requirements. Through its regular meetings with management, including the finance, legal, internal audit, and information technology functions, the Audit Committee reviews and discusses all significant areas of our business and summarizes for the Board of Directors all areas of risk and the appropriate mitigating factors. In addition, our Board of Directors receives periodic detailed operating performance reviews from management.

Controlled Company Exception

After the completion of this offering, affiliates of Blackstone will beneficially own approximately 47.1% of our common stock and voting power, or 45.4% if the underwriters exercise in full their option to purchase additional shares. As a result, we will no longer be a “controlled company” within the meaning of the NYSE corporate governance standards. The NYSE rules require that we appoint a majority of independent directors to our Board of Directors within one year of the date we no longer qualify as a “controlled company.” The NYSE rules also require that we have at least one independent director on each of our Compensation Committee and Nominating and Corporate Governance Committee on the date we no longer qualify as a “controlled company,” at least a majority of independent directors within 90 days of such date and a fully independent Compensation Committee and Nominating and Governance Committee within one year of such date.

Pending such determination, you may not have the same protections afforded to stockholders of companies that are subject to all of these corporate governance requirements. In the event that we cease to be a “controlled company” and our shares continue to be listed on the NYSE, we will be required to comply with these standards and, depending on the board’s independence determination with respect to our then-current directors, we may be required to add additional directors to our board in order to achieve such compliance within the applicable transition periods.

 

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Board Committees

The standing committees of our Board of Directors consist of an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee.

Our president and chief executive officer and other executive officers regularly report to the non-executive directors and the Audit, the Compensation, and the Nominating and Corporate Governance Committees to ensure effective and efficient oversight of our activities and to assist in proper risk management and the ongoing evaluation of management controls. The director of internal audit report functionally and administratively to our chief financial officer and directly to the Audit Committee. We believe that the leadership structure of our Board of Directors provides appropriate risk oversight of our activities given the controlling interests held by Blackstone.

Audit Committee

Our Audit Committee consists of Mr. Winkleblack, who serves as the Chair, and Messrs. Steenland and Zillmer. Each of Messrs. Winkleblack, Steenland, and Zillmer qualifies as an independent director under the NYSE corporate governance standards and the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our Board of Directors has determined that Mr. Winkleblack qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K.

The purpose of the Audit Committee is to prepare the audit committee report required by the SEC to be included in our proxy statement and to assist our Board of Directors in overseeing and monitoring (1) the quality and integrity of our financial statements, (2) our compliance with legal and regulatory requirements, (3) our independent registered public accounting firm’s qualifications and independence, (4) the performance of our internal audit function, and (5) the performance of our independent registered public accounting firm.

Our Board of Directors has adopted a written charter for the Audit Committee, which is available on our website.

Compensation Committee

Our Compensation Committee consists of Mr. Melwani, who serves as the Chair, and Messrs. McEvoy, Steenland, and Zillmer. Each of Mr. Steenland and Mr. Zillmer qualifies as an independent director under the NYSE corporate governance standards. Under the NYSE rules, we are required to have at least a majority of independent members on the Compensation Committee within 90 days from date that we cease to be a “controlled company” and a Compensation Committee that is comprised entirely of independent members within one year from such date.

The purpose of the Compensation Committee is to assist our Board of Directors in discharging its responsibilities relating to (1) setting our compensation program and compensation of our executive officers and directors, (2) monitoring our incentive and equity-based compensation plans, and (3) preparing the compensation committee report required to be included in our proxy statement under the rules and regulations of the SEC.

Our Board of Directors has adopted a written charter for the Compensation Committee, which is available on our website.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee consists of Mr. Dawson, who serves as the Chair, and Messrs. Overly and Winkleblack. Mr. Winkleblack qualifies as an independent director under the NYSE corporate governance standards. Under the NYSE rules, we are required to have at least a majority of independent members on the Nominating and Corporate Governance Committee within 90 days from date that we cease to be a “controlled company” and a Nominating and Corporate Governance Committee that is comprised entirely of independent members within one year from such date.

 

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The purpose of our Nominating and Corporate Governance Committee is to assist our Board of Directors in discharging its responsibilities relating to (1) identifying individuals qualified to become new Board of Directors members, consistent with criteria approved by the Board of Directors, subject to the stockholders agreement with our Sponsors; (2) reviewing the qualifications of incumbent directors to determine whether to recommend them for reelection and selecting, or recommending that the Board of Directors select, the director nominees for the next annual meeting of stockholders; (3) identifying Board of Directors members qualified to fill vacancies on any Board of Directors committee and recommending that the Board of Directors appoint the identified member or members to the applicable committee, subject to the stockholders agreement with our Sponsors; (4) reviewing and recommending to the Board of Directors corporate governance principles applicable to us; (5) overseeing the evaluation of the Board of Directors and management; and (6) handling such other matters that are specifically delegated to the committee by the Board of Directors from time to time.

Our Board of Directors has adopted a written charter for the Nominating and Corporate Governance Committee, which is available on our website.

Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee has at any time been one of our executive officers or employees. None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee. We are parties to certain transactions with the Sponsors described in the “Certain Relationships and Related Party Transactions” section of this prospectus.

Code of Ethics

At the time of the IPO, we adopted a new Code of Business Conduct that applies to all of our directors, officers, and employees, including our principal executive officer, principal financial officer, and principal accounting officer, which is available on our website. Our Code of Business Conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. Please note that our Internet website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our Internet website.

Executive Compensation

Compensation Discussion and Analysis

This section contains a discussion of the material elements of compensation awarded to, earned by or paid to our President and Chief Executive Officer, our Chief Financial Officer, and each of our three other most highly compensated executive officers who served in such capacities at the end of our fiscal year on June 27, 2015, collectively known as the “Named Executive Officers” or “NEOs.”

Our Named Executive Officers for fiscal 2015 were:

 

    George L. Holm, our President and Chief Executive Officer;

 

    Robert D. Evans, our Senior Vice President and Chief Financial Officer;

 

    David Flitman, our Executive Vice President of the Company and President and Chief Executive Officer of Performance Foodservice;

 

    Patrick T. Hagerty, our Senior Vice President of the Company and President and Chief Executive Officer of Vistar; and

 

    James Hope, our Executive Vice President, Operations.

 

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Executive Compensation Program Objectives and Overview

Our current executive compensation program is intended to achieve two fundamental objectives: (1) attract, motivate, and retain high caliber talent; and (2) align executive compensation with achievement of our overall business goals, adherence to our core values, and stockholder interests. In structuring our current executive compensation program, we are guided by the following basic philosophies:

Competitive Compensation. Our executive compensation program should provide a fair and competitive compensation opportunity that enables us to attract and retain high caliber executive talent. Executives should be appropriately rewarded for their contributions to our successful performance.

Pay for Performance.” A significant portion of each executive’s compensation should be “at risk” and tied to overall company, business unit, and individual performance.

Alignment with Stockholder Interests. Executive compensation should be structured to include elements that link executives’ financial rewards to stockholder return.

As described in more detail below, the material elements of our executive compensation program for NEOs include base salary, cash bonus opportunities, a long-term equity incentive opportunity, and broad-based employee benefits. The NEOs may also receive severance payments and other benefits in connection with certain terminations of employment or a change in control of the Company. We believe that each element of our executive compensation program helps us to achieve one or more of our compensation objectives, as illustrated by the table below.

 

Compensation Element

  

Compensation Objectives Designed to be Achieved

Base Salary

   Recognize ongoing performance of job responsibilities.

Cash Bonus Opportunity

   Compensation “at risk” and tied to achievement of business goals.

Long-Term Equity Incentive Opportunity

   Align compensation with the creation of stockholder value, and achievement of business goals.

Benefits and Perquisites

   Attract and retain high caliber talent and to provide a basic level of protection from health, dental, life and disability risks.

Severance and other Benefits Potentially Payable Upon Certain Terminations of Employment or a Change in Control

   Encourage the continued attention and dedication of our executives and provide reasonable individual security to enable our executives to focus on our best interests, particularly when considering strategic alternatives.

These individual compensation elements are intended to create a total compensation package for each NEO that we believe achieves our compensation objectives and provides competitive compensation opportunities.

Compensation Determination Process

The Compensation Committee of our Board of Directors (the “Committee”) is responsible for establishing, maintaining, and administering our compensation and benefit policies. The Committee takes into account our President and Chief Executive Officer’s recommendations regarding the compensatory arrangements for our executive officers other than himself. For fiscal 2015, our President and Chief Executive Officer provided the final compensation recommendations for our Named Executive Officers to the Committee for review and approval. The other NEOs do not have any role in determining or recommending the form or amount of compensation paid to our NEOs. Our President and Chief Executive Officer is not a member of the Committee and does not participate in deliberations regarding his compensation.

 

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