Performance Food Group Co - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 26, 2015

For the transition period from                      to                     

Commission File Number 001-37578 

Performance Food Group Company

(Exact name of registrant as specified in its charter)

(804) 484-7700

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

102,583,161 shares of common stock were outstanding as of October 27, 2015.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (this “Form 10-Q”) may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Risk Factors” in the Company’s prospectus dated October 1, 2015 (the “Prospectus”), filed with the Securities and Exchange Commission (the “SEC”) on October 2, 2015 pursuant to Rule 424(b)(4) under the Securities Act, and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

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We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All foward-looking statements in this report apply only as of the date of this report or as the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” or “PFG” as used in this Form 10-Q refer to Performance Food Group Company and its consolidated subsidiaries.

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Part I – FINANCIAL INFORMATION

PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

See accompanying notes, which are an integral part of these unaudited consolidated financial statements

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PERFORMANCE FOOD GROUP COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Supplemental disclosures of cash flow information:

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

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PERFORMANCE FOOD GROUP COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Business Overview

Performance Food Group Company, through its subsidiaries, markets and distributes national and company-branded food and food-related products to customer locations across the United States. The Company serves both of the major customer types in the restaurant industry: (i) independent, or “Street” customers, and (ii) multi-unit, or “Chain” customers, which include regional and national family and casual dining restaurants chains, fast casual chains, and quick-service restaurants. The Company also serves schools, healthcare facilities, business and industry locations, and other institutional customers.

Reverse stock split

On August 28, 2015, the Company effected a 0.485 for one reverse stock split of its Class A and Class B common stock and a reclassification of its Class A common stock and its Class B common stock into a single class. The Company retained the par value of $0.01 per share for all shares of common stock. All references to numbers of common shares and per-share data in the accompanying financial statements have been adjusted to reflect the stock split on a retroactive basis. Shareholders’ equity reflects the stock split by reclassifying from Common stock to Additional paid-in capital an amount equal to the par value of the reduction in shares arising from the reverse stock split.

Initial public offering

On October 6, 2015, the Company completed an initial public offering (“IPO”) in which it sold 12,777,325 newly issued shares of common stock and selling stockholders of the Company sold 3,897,675 shares of existing common stock at a public offering price of $19.00 per share. The Company’s common stock began trading publicly on the New York Stock Exchange (NYSE), under the ticker symbol “PFGC”, on October 1, 2015. See Note 15, Subsequent Events, for further discussion.

The consolidated financial statements have been prepared by the Company, without audit, with the exception of the June 27, 2015 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the Company’s Registration Statement on Form S-1 (File No. 333-198654), as amended (the “Registration Statement”). The financial statements include consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity, and consolidated statements of cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income, shareholders’ equity, and cash flows for all periods presented have been made.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates used by management are related to the accounting for the allowance for doubtful accounts, reserve for inventories, impairment testing of goodwill and other intangible assets, acquisition accounting, reserves for claims and recoveries under insurance programs, vendor rebates and other promotional incentives, bonus accruals, depreciation, amortization, determination of useful lives of tangible and intangible assets, and income taxes. Actual results could differ from these estimates.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included the Registration Statement. Certain footnote disclosures included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

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In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. 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. Companies may use either a full retrospective or modified retrospective approach for adoption of this Update. This Update, as amended with Accounting Standards Update (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. The Company has not yet evaluated which transition approach to use or the impact this Update will have on its future financial statements.

In July 2015, the FASB issued Accounting Standards Update (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. 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 within those fiscal years. The Company has not yet evaluated the impact this Update will have on its future financial statements.

In August 2015, the FASB issued Accounting Standards Update (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. The Company has not fully evaluated the impact this update will have on its future financial statements.

During the first quarter of fiscal 2016, the Company paid cash of $8.9 million for an acquisition which increased goodwill by $4.3 million. This acquisition was immaterial to the consolidated financial statements.

The Company is a holding company and conducts its operations through its subsidiaries, which have incurred or guaranteed indebtedness as described below.

Debt consisted of the following:

ABL Facility

PFGC, Inc. (“PFGC”), a wholly-owned subsidiary of the Company, entered into an Asset Based Revolving Loan Credit Agreement (the “ABL Facility”) on May 23, 2008 that was amended and restated on May 8, 2012 and further amended on May 6, 2013 and February 18, 2015. 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.

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The amendment in May 2012 increased the size of the ABL Facility from $1.1 billion to $1.4 billion, lowered the interest rate grid for the LIBOR-based pricing option discussed below, and extended the maturity from May 2014 to May 2017. 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%.

As of September 26, 2015, aggregate borrowings outstanding were $723.2 million. There were also $97.9 million in letters of credit outstanding under the facility, and excess availability was $578.9 million, net of $23.4 million of lenders’ reserves and subject to compliance with customary borrowing conditions. The average interest rate for the ABL facility was 1.86% at September 26, 2015. As of June 27, 2015, aggregate borrowings outstanding were $665.7 million. There were also $102.5 million in letters of credit outstanding under the facility, and excess availability was $631.8 million, net of $19.7 million of lenders’ reserves and subject to compliance with customary borrowing conditions.

The ABL Facility contains covenants requiring the maintenance of a minimum consolidated fixed charge coverage ratio if excess availability falls below (a) 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 or (b) 7.5% of the revolving credit facility amount at any time. 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 a term loan facility (the “Term Facility”) on May 14, 2013. Performance Food Group, Inc. borrowed an aggregate principal amount of $750.0 million under the Term 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 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 Facility and the ABL Facility amendment discussed above; and to pay a $220 million dividend to the Company’s stockholders. A portion of the Term Facility was considered a modification of such senior notes.

The Term 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 Facility may be reduced subject to attaining a certain total net leverage ratio. The applicable margin for borrowings will be 5.25% for loans based on a LIBOR rate and 4.25% for loans based on the Base Rate, as of September 26, 2015. If the Total Net Leverage ratio is lower than 4.25x, the applicable margin for the Term Facility will decrease by 0.25%. 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 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 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

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of $750 million on the last business day of each calendar quarter, beginning September 30, 2013. The Term Facility is prepayable at par. As of September 26, 2015, aggregate borrowings outstanding were $735.0 million with unamortized original issue discount of $2.4 million. Original issue discount is being amortized as additional interest expense on a straight-line basis over the life of the Term Facility, which approximates the effective yield method. For the first quarter of fiscal 2016 and 2015, interest expense included $0.1 million related to the amortization of original issue discount.

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 Facility. See Note 15, Subsequent Events, for further discussion of the IPO.

The ABL Facility and the Term 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 $115.0 million of restricted payment capacity available under such debt agreements, as of September 26, 2015.

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 quarter of fiscal 2016 and 2015, interest expense included $0.1 million related to this amortization. As of September 26, 2015, the carrying value of the promissory note was $5.2 million.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates and diesel fuel costs. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and payments related to the Company’s investments, borrowings, and diesel fuel purchases.

The effective portion of changes in the fair value of derivatives that are both designated and qualify as cash flow hedges is recorded in other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction occurs. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. Since the Company has a substantial portion of its debt in variable-rate instruments, it accomplishes this objective with interest rate swaps. These swaps are designated as cash flow hedges and involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. All of the Company’s interest rate swaps are designated and qualify as cash flow hedges.

Amounts reported in other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the twelve months ending October 1, 2016, the Company estimates that an additional $6.4 million will be reclassified to earnings as an increase to interest expense.

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As of September 26, 2015, Performance Food Group, Inc. had five interest rate swaps with a combined $750 million notional amount that were designated as cash flow hedges of interest rate risk. The following table summarizes the outstanding Swap Agreements as of September 26, 2015 (in millions):

Hedges of Forecasted Diesel Fuel Purchases

From time to time, Performance Food Group, Inc. enters into costless collar arrangements to hedge its exposure to variability in cash flows expected to be paid for its forecasted purchases of diesel fuel. As of September 26, 2015, Performance Food Group, Inc. was a party to five such arrangements, with an aggregate 13.2 million gallon original notional amount in total and an aggregate 7.8 million gallon notional amount remaining. The remaining 7.8 million gallon forecasted purchases of diesel fuel are expected to be made between October 1, 2015 and December 31, 2016.

The fuel collar instruments do not qualify for hedge accounting. Accordingly, the derivative instruments are recorded as an asset or liability on the balance sheet at fair value and any changes in fair value are recorded in the period of change as unrealized gains or losses on fuel hedging instruments and included in Other, net in the accompanying consolidated statement of operations. The Company recorded $1.2 million in unrealized losses and $1.0 million in expense for cash settlements related to these fuel collars for the three-month period ended September 26, 2015, compared to $0.2 million in unrealized losses and no cash settlements related to these fuel collars for the three-month period ended September 27, 2014.

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The Company does not currently have a payable or receivable related to cash collateral for its derivatives, and therefore it has not established an accounting policy for offsetting the fair value of its derivatives against such balances. The table below presents the fair value of the derivative financial instruments as well as their classification on the balance sheet as of September 26, 2015 and June 27, 2015:

All of the Company’s derivative contracts are subject to a master netting arrangement with the respective counterparties that provide for the net settlement of all derivative contracts in the event of default or upon the occurrence of certain termination events. Upon exercise of termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and the positive value or “in the money” transactions are netted against the negative value or “out of the money” transactions, and (iii) the only remaining payment obligation is of one of the parties to pay the netted termination amount.

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The Company has elected to present the derivative assets and derivative liabilities on the balance sheet on a gross basis for periods ended September 26, 2015 and June 27, 2015. The tables below present the derivative assets and liability balance by type of financial instrument, before and after the effects of offsetting, as of September 26, 2015 and June 27, 2015:

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The tables below present the effect of the derivative financial instruments designated in hedging relationships on the consolidated statement of operations for the three-month periods ended September 26, 2015 and September 27, 2014:

The derivative instruments are the only assets or liabilities that are recorded at fair value on a recurring basis. The fuel collars are exchange-traded commodities and their fair value is derived from valuation models based on certain assumptions regarding market conditions, some of which may be unobservable. Based on the lack of significance of these unobservable inputs, the Company has concluded that these instruments represent Level 2 on the hierarchy. The fair values of the Company’s interest rate swap agreements are determined using a valuation model with several inputs and assumptions, some of which may be unobservable. A specific unobservable input used by the Company in determining the fair value of its interest rate swaps is an estimation of both the unsecured borrowing spread to LIBOR for the Company as well as that of the derivative counterparties. Based on the lack of significance of this estimated spread component to the overall value of the Company’s interest rate swaps, the Company has concluded that these swaps represent Level 2 on the hierarchy.

There have been no transfers between levels in the hierarchy from June 27, 2015 to September 26, 2015.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that provide that if the Company either defaults or is capable of being declared in default on any of its indebtedness, the Company can also be declared in default on its derivative obligations.

As of September 26, 2015, and June 27, 2015, the aggregate fair value amount of derivative instruments that contain contingent features was $12.0 million and $8.9 million, respectively. As of September 26, 2015, the Company has not been required to post any collateral related to these agreements. If the Company breached any of these provisions, it would be required to settle its obligations under the agreements at their termination value of $12.0 million.

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Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

The carrying values of cash, accounts receivable, outstanding checks in excess of deposits, trade accounts payable, and accrued expenses approximate their fair values because of the relatively short maturities of those instruments. The derivative liabilities are recorded at fair value on the balance sheet. The fair value of long-term debt, which has a carrying value of $1,461.0 million and $1,405.2 million, is $1,462.7 million and $1,406.0 million at September 26, 2015 and June 27, 2015, respectively, and is determined by reviewing current market pricing related to comparable debt issued at the time of the balance sheet date, and is considered a Level 2 measurement.

The Company is required by its insurers to collateralize a part of the deductibles for its workers’ compensation and liability claims. The Company has chosen to satisfy these collateral requirements by depositing funds in insurance trusts or by issuing letters of credit. All amounts in restricted cash at September 26, 2015 and June 27, 2015 represent funds deposited in insurance trusts, and $10.2 million and $10.2 million, respectively, represent Level 1 fair value measurements.

The determination of the Company’s overall effective tax rate requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The effective tax rate reflects the income earned and taxed in various United States federal and state jurisdictions. Tax law changes, increases and decreases in temporary and permanent differences between book and tax items, tax credits, and the Company’s change in income in each jurisdiction all affect the overall effective tax rate.

The Company’s effective tax rate was 41.3% for the three months ended September 26, 2015 and 41.4% for the three months ended September 27, 2014. The effective tax rate varied from the 35% statutory rate primarily due to state taxes, federal credits, and non-deductible expenses.

As of September 26, 2015 and June 27, 2015, the Company had net deferred tax assets of $37.7 million and $36.8 million, respectively, and deferred tax liabilities of $118.0 million and $119.6 million, respectively. The Company believes that it is more likely than not that the remaining deferred tax assets will be realized.

The Company records a liability for Uncertain Tax Positions in accordance with FASB ASC 740-10-25, Income Taxes—General—Recognition. As of September 26, 2015 and September 27, 2014, the Company had approximately $0.9 million and $0.7 million of unrecognized tax benefits, respectively. It is reasonably possible that a decrease of approximately $0.3 million in the balance of unrecognized tax benefits may occur within the next twelve months because of statute of limitations expirations, that, if recognized, would affect the effective tax rate.

It is the Company’s practice to recognize interest and penalties related to uncertain tax positions in income tax expense. Less than $0.1 million (less than $0.1 million net of federal tax benefit) was accrued for interest related to uncertain tax positions as of September 26, 2015 and September 27, 2014, respectively. Net interest expense of less than $0.1 million (less than $0.1 million net of federal tax benefit) was recognized in tax expense for the quarters ended September 26, 2015 and September 27, 2014.

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Purchase Obligations

The Company had outstanding contracts and purchase orders for capital projects totaling $13.7 million at September 26, 2015. Amounts due under these contracts were not included on the Company’s consolidated balance sheet as of September 26, 2015.

Withdrawn Multiemployer Pension Plans

Until May 2013, Performance Food Group, Inc. participated in the Central States Southeast and Southwest Areas Pension Fund (“Central States Pension Fund”), a multiemployer pension plan administered by the Teamsters Union, pursuant to which Performance Food Group, Inc. was required to make contributions on behalf of certain union employees. The Central States Pension Fund is underfunded and is in critical status. In connection with the recent renegotiation of the collective bargaining agreement that had previously required the Company’s participation in the Central States Pension Fund, the Company negotiated the termination of its participation in the Central States Pension Fund and the Company has withdrawn. The withdrawal liability was increased by $2.8 million during the second quarter of fiscal 2015 to the Company’s total estimated withdrawal liability of $6.9 million. The Company has made total payments for voluntary withdrawal of this plan in the amount of $0.8 million. As of September 26, 2015, the estimated outstanding withdrawal liability totaled $6.1 million.

Guarantees

Subsidiaries of the Company have entered into numerous operating leases, including leases of buildings, equipment, tractors, and trailers. Certain of the leases for tractors, trailers, and other vehicles and equipment provide for residual value guarantees to the lessors. Circumstances that would require the subsidiary to perform under the guarantees include either (1) default on the leases with the leased assets being sold for less than the specified residual values in the lease agreements, or (2) decisions not to purchase the assets at the end of the lease terms combined with the sale of the assets, with sales proceeds less than the residual value of the leased assets specified in the lease agreements. Residual value guarantees under these operating lease agreements typically range between 5% and 25% of the value of the leased assets at inception of the lease. These leases have original terms ranging from 5 to 7 years and expiration dates ranging from 2015 to 2022. As of September 26, 2015, the undiscounted maximum amount of potential future payments for lease guarantees totaled $21.2 million, which would be mitigated by the fair value of the leased assets at lease expiration. The assessment as to whether it is probable that subsidiaries of the Company will be required to make payments under the terms of the guarantees is based upon their actual and expected loss experience. Consistent with the requirements of FASB ASC 460-10-50, Guarantees-Overall-Disclosure, the Company has recorded $0.2 million of the potential future guarantee payments on its consolidated balance sheet as of September 26, 2015.

In addition, the Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to: (i) certain real estate leases under which subsidiaries of the Company may be required to indemnify property owners for environmental and other liabilities and other claims arising from their use of the applicable premises; (ii) certain agreements with the Company’s officers, directors, and employees under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship; and (iii) customer agreements under which the Company may be required to indemnify customers for certain claims brought against them with respect to the supplied products.

Generally, a maximum obligation under these contracts is not explicitly stated. Because the obligated amounts associated with these types of agreements are not explicitly stated, the overall maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make payments under these obligations and, therefore, no liabilities have been recorded for these obligations in the Company’s consolidated balance sheets.

Litigation

The Company is engaged in various legal proceedings that have arisen, but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable and reasonably estimable, the losses have been accrued. Based on estimates of the range of potential losses associated with these matters, management does not believe that the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the Company. However, the final results of legal proceedings cannot be predicted with certainty and, if the Company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the Company’s current estimates of the range of potential losses, the Company’s consolidated financial position or results of operations could be materially adversely affected in future periods.

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Sales Tax Liabilities

The Company’s sales and use tax filings are subject to customary audits by authorities in the jurisdictions where it conducts business in the United States, which may result in assessments of additional taxes.

Transaction and Advisory Fee Agreement

The Company is a party to an advisory fee agreement pursuant to which affiliates of The Blackstone Group and Wellspring Capital Management provide certain strategic and structuring advice to the Company and certain monitoring, advising, and consulting services. The advisory fee agreement generally provides for the payment by the Company of certain fees, and the reimbursement of out of pocket expenses. The annual advisory fee is the greater of $2.5 million or 1.5% of the Company’s consolidated EBITDA (as defined in the advisory fee agreement) for the immediately preceding fiscal year. For the three-month periods ended September 26, 2015 and September 27, 2014, the annual payment and reimbursements to affiliates of Blackstone and Wellspring totaled $5.0 million and $4.4 million, respectively.

Subsequent to September 26, 2015, the agreement was amended to provide that the advisory agreement will terminate no later than the second anniversary of the initial closing date of the IPO.

Other

The Company leases a distribution facility from an entity owned by an officer of the Company. The lease generally provides that the Company will bear the cost of property taxes. Total rent and taxes paid to the officer’s company totaled $0.1 million for the three-month period ended September 26, 2015, compared to $0.1 million for the three-month period ended September 27, 2014.

The Company does business with certain other affiliates of The Blackstone Group. In the three-month period ended September 26, 2015, the Company recorded sales of $6.7 million to certain of these affiliate companies. In the three-month period ended September 26, 2015, the Company recorded no purchases from affiliate companies. In the three-month period ended September 27, 2014, the Company recorded sales of $7.2 million to certain of these affiliate companies. In the three-month period ended September 27, 2014, the Company recorded purchases of $0.7 million from certain of these affiliate companies. The Company does not conduct a material amount of business with affiliates of Wellspring Capital Management.

As of September 26, 2015, an affiliate of The Blackstone Group held $18.1 million of the outstanding $735.0 million Term Facility. The Company paid approximately $0.3 million in interest related to the three-month period ended September 26, 2015, to this affiliate pursuant to the terms of the Term Facility. The Company paid approximately $0.5 million in interest related to the three-month period ended September 27, 2014, to this affiliate pursuant to the terms of the Term Facility. See Note 5, Debt, for a discussion of the Term Facility.

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Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased with the proceeds from the exercise of stock options under the treasury stock method.

For the three months ended September 27, 2014, the Company’s calculation of weighted-average number of common shares includes Class A and Class B common stock. All shares of Class A and Class B common stock entitle the holders thereof to the same rights, preferences, and privileges in respect of dividends.

A reconciliation of the numerators and denominators for the basic and diluted EPS computations is as follows:

Performance Food Group Company provides compensation benefits to employees and non-employee directors under several share based payment arrangements.

The Performance Food Group Company 2007 Management Option Plan (the “2007 Option Plan”)

The 2007 Option Plan allows for the granting of awards to current and future employees, officers, directors, consultants, and advisors of the Company or its affiliates in the form of nonqualified options. The 2007 Option Plan is designed to promote the long-term growth and profitability of the Company by providing employees and consultants who are or will be involved in the Company’s growth with an opportunity to acquire an ownership interest in the Company, thereby encouraging them to contribute to and participate in the success of the Company. The terms and conditions of awards granted under the 2007 Option Plan are determined by the Board of Directors. There are 6,445,982 shares of common stock reserved for issuances under the 2007 Option Plan. All current awards have a contractual term of ten years.

Each of the employee awards under the 2007 Option Plan is divided into three equal portions. Tranche I options are subject to time vesting. Tranche II and Tranche III options are subject to both time and performance vesting, including performance criteria based on the internal rate of return and sponsor cash inflows as outlined in the 2007 Option Plan. Prior to the amendment discussed below, the Company’s assessment of the performance criteria indicated that satisfaction of the performance criteria was not probable and therefore, no compensation expense had been recognized to date on Tranche II and Tranche III options.

The Tranche I compensation cost that has been charged against income for the Company’s 2007 Option Plan was $0.3 million for the quarter ended September 26, 2015 and $0.2 million for the quarter ended September 27, 2014 and is included within operating expenses in the consolidated statement of operations. These costs relate to the service

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condition component of the awards and are being recognized on a straight-line basis. The Company recorded no tax benefit nor incurred an impact on its cash flows related to compensation cost on share-based payment arrangements for the period. The total remaining unrecognized compensation cost for Tranche I was $4.6 million as of September 26, 2015.

The 2007 Option Plan has repurchase rights that generally allow the Company to repurchase shares, at the current fair value following a participant’s retirement or a participant’s termination of employment by the Company other than for “cause” and at the lower of the original exercise price or current fair value following any termination of employment by the Company for “cause,” resignation of the participant, or in the event a participant resigns due to retirement and subsequently breaches the non-competition or non-solicitation covenant within one year of such participant’s termination. Because of the existence of the repurchase rights, the weighted average service period has exceeded the contractual term of the options. However, the repurchase option feature of this plan terminated upon the date of an Initial Public Offering. As a result, the Company’s management determined that the requisite service period should be reduced from 10.7 to the 5 year service vesting period and estimates compensation costs of $3.8 million will be recorded in the second quarter.

On July 30, 2015, the Company approved amendments to the 2007 Option Plan to modify the vesting terms of all of the Tranche II and Tranche III options granted pursuant to the 2007 Option Plan. These time and performance vesting options will continue to vest based on a combination of time and performance vesting conditions. The time-based vesting condition did not change and will continue to be satisfied with respect to 20% of the shares underlying these options annually, based on the participant’s continued employment with the Company. The performance-based vesting condition was reduced to reflect changes in the food industry environment since the plan was adopted.

In addition, as part of the amendments to the 2007 Option Plan, the Company further evaluated its outstanding options and in light of the fact that certain grants of options (Tranche II and III options) have performance targets that may not be met before the expiration of such options, individuals holding these unvested time and performance-vesting options were allowed the right to exercise such options into restricted shares of the Company’s common stock and to receive a new grant of time and performance-vesting options to purchase shares of our common stock. On September 30, 2015, 3.73 million options were exchanged for 2.27 million restricted shares and 1.46 million new options. There were no new awards during the quarter. Subsequent to the quarter, the Company issued approximately 120,000 new option awards under the 2007 Option Plan. These awards are comprised of three equal portions exercisable for one-third of the grant with vesting consistent with past grants.

Based on management’s assessment of probability associated with the underlying conditions of the amended Tranche II and II awards, the Company believes that, following the amendments, there is a reasonable possibility that the performance targets could be met. Therefore, the Company engaged an unrelated specialist to assist in the process of determining the fair value based measure of the modified award. Based on management’s initial evaluation, the preliminary estimate of the possible future compensation expense is approximately $40 million. The expense will be recognized in the next four years when the Company concludes that it is probable that the performance metrics will be met.

The Performance Food Group Company 2015 Omnibus Incentive Plan (“the 2015 Incentive Plan”)

In July 2015, the Company approved the 2015 Incentive Plan. The 2015 Incentive Plan allows for the granting of awards to current employees, officers, directors, consultants, and advisors of the Company. Similar to the 2007 Option Plan, the 2015 Incentive Plan is designed to promote the long-term growth and profitability of the Company by providing employees and consultants who are or will be involved in the Company’s growth with an opportunity to acquire an ownership interest in the Company, thereby encouraging them to contribute to and participate in the success of the Company. The terms and conditions of awards granted under the 2015 Option Plan are determined by the Board of Directors.

There are 4,850,000 shares of common stock reserved for issuance under the 2015 Incentive Plan including non-qualified stock options and incentive stock options, stock appreciation rights, restricted shares, and other equity based or cash-based awards. In connection with the IPO, the Company granted approximately 144,000 options, 525,000 shares of time-vesting restricted stock, and 144,000 performance-vesting restricted stock to employees. In addition, the Company granted restricted stock units to certain directors. The compensation cost that has been charged against income for the Company’s 2015 Incentive Plan was $0.8 million for the quarter ended September 26, 2015 and is included within operating expenses in the consolidated statement of operations. Total unrecognized compensation cost for time vesting awards is estimated to be $14.3 million as of September 26, 2015.

Management is in the process of valuing and assessing the probability associated with the underlying conditions of the performance stock awards and in the process of determining the fair value based measure of the award. Depending on the terms of the awards, the expense will either be recognized over the respective service periods or be based on the timing of when the Company concludes that it is probable that the performance metrics will be met.

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Other, net on the consolidated statement of operations primarily includes the change in fair value gains or loss and cash settlements pertaining to our derivatives on forecasted diesel fuel purchases along with other non-operating income or expense items. Other, net consisted of the following:

The Company has three reportable segments, as defined by ASC 280 Segment Reporting, related to disclosures about segments of an enterprise. The Performance Foodservice segment markets and distributes food and food-related products to Street restaurants, Chain restaurants, and other institutional “food-away-from-home” locations. The PFG Customized segment principally serves the family and casual dining channel but also serves fine dining, fast casual, and quick serve restaurant chains. The Vistar segment distributes candy, snack, beverage, and other products to customers in the vending, office coffee services, theater, retail, and other channels. Intersegment sales represent sales between the segments and are eliminated in consolidation. Management evaluates the performance of each operating segment based on various operating and financial metrics, including total sales and EBITDA. For PFG Customized, EBITDA includes certain allocated corporate charges that are included in operating expenses. The allocated corporate charges are determined based on a percentage of total sales. This percentage is reviewed on a periodic basis to ensure that the segment is allocated a reasonable rate of corporate expenses based on its use of corporate services.

Corporate & All Other is comprised of corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of the Company’s internal logistics unit responsible for managing and allocating inbound logistics revenue and expense.

Total assets by reportable segment, excluding intercompany receivables between segments, are as follows:

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On October 6, 2015, the Company completed its IPO of 16,675,000 shares of common stock for cash consideration of $19.00 per share ($17.955 per share net of underwriting discounts), including the exercise in full by the underwriters of their option to purchase additional shares. The Company sold an aggregate of 12,777,325 shares of such common stock for an aggregate offering price of the amount sold of $242.8 million, and certain selling stockholders sold 3,897,675 shares. In connection with the offering the Company paid the underwriters a discount of $1.045 per share, for a total underwriting discount of approximately $13.4 million. In addition, the Company incurred other expenses estimated at $5.7 million in connection with the offering. This offering generated aggregate net proceeds to the Company of approximately $223.7 million, net of underwriting discounts and commissions and direct offering expenses. Using the net proceeds from the IPO, the Company repaid $223.0 million aggregate principal amount of indebtedness under the Term Facility.

Management has evaluated subsequent events through November 4, 2015, the date that the financial statements were available to be issued. Any items noted have been properly reflected or disclosed in the consolidated financial statements and accompanying notes above.

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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 in the Prospectus and the unaudited financial statements and Notes thereto included elsewhere in this Form 10-Q. 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 the Prospectus. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Form 10-Q.”

Our Company

We market and distribute approximately 150,000 food and food-related products to customers across the United States from 68 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 to 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 grew in each quarter over the comparable prior fiscal year, 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 quarter of fiscal 2016 given that we have grown our sales more rapidly than forecast by Technomic, a research and consulting firm servicing the food and food related industry. Our Adjusted EBITDA grew 14.1% from the first quarter of fiscal 2015 to the first quarter of fiscal 2016, driven by case growth of 5.1% and improved profit per case. Gross margin dollars rose 7.1% versus the comparable prior year period, 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 quarter of fiscal 2015 rose 4.9%, slower than case growth, as a result of initiatives undertaken to reduce operating expenses and lower fuel prices.

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.

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Key Factors Affecting Our Business

We believe that our performance is principally affected by the following key factors:

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 the rounded numbers.

Net Sales

Net sales is equal to gross sales minus sales returns as well as any 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 prior to pricing of our products, and mix of products sold.

Gross Profit

Gross profit is equal to our net sales minus our cost of goods sold. Cost of goods sold primarily includes inventory costs (net of supplier consideration) and inbound freight. Cost of goods sold generally changes as we incur higher or lower costs from our suppliers and as our customer and product mix changes.

EBITDA and Adjusted EBITDA

Management measures operating performance based on our EBITDA, defined as net income (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 Form 10-Q, and such information is not meant to replace or supersede U.S. GAAP measures.

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In addition, 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.

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:

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:

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Results of Operations, EBITDA, and Adjusted EBITDA

The following table sets forth a summary of our results of operations, EBITDA, and Adjusted EBITDA for the periods indicated (dollars in millions, except per share data):

Share and per share amounts have been retroactively adjusted to reflect a reverse stock split of our common stock.

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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:

Consolidated Results of Operations

Three months ended September 26, 2015 compared to three months ended September 27, 2014

Net Sales

Net sales increased $231.3 million, or 6.3%, for the first three months of fiscal 2016 compared to the first three months of fiscal 2015. This increase is primarily the result of balanced growth between Street customers and Chain customers within Performance Foodservice and sales growth in Vistar’s theater, retail, and hospitality channels. We grew case volume by 5.1% in the first three months of fiscal 2016, which contributed to the increase in net sales. Inflation during the first three months of fiscal 2016 increased at an estimated annual rate of 0.1% compared to an estimated annual rate of 3.2% during the first three months of fiscal 2015. As we enter our second quarter, we are witnessing food deflation, especially in dairy, beef, and seafood. 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 $31.7 million, or 7.1%, for the first three months of fiscal 2016 compared to the first three months of fiscal 2015. This increase in gross profit was the result of growth in cases sold and a higher gross profit per case, which in turn was the result of selling an improved mix of channels and products. Within Performance Foodservice, case growth to 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 the other brands we sell, from the first three months of fiscal 2015 to the first three months of fiscal 2016. See “—Segment Results—Performance Foodservice” below for additional discussion.

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Operating Expenses

Operating expenses increased $20.4 million, or 4.9%, for the first three months of fiscal 2016 compared to the first three months of fiscal 2015. The increase in operating expenses was primarily caused by the increase in case volume, an increased investment in our Street sales force, an increase in bonus expense, and an increase in insurance expense related to workers compensation, auto, and general liability, as discussed in the segment results below. These increases were partially offset by leverage of our fixed costs, improved productivity in our warehouse and transportation operations, and a decrease in fuel expense and amortization. All of these factors resulted in a net increase in operating expenses for the first three months of fiscal 2016 compared to the first three months of fiscal 2015.

Depreciation and amortization of intangible assets decreased from $30.2 million in the first three months of fiscal 2015 to $28.2 million in the first three months of fiscal 2016, a decrease of 6.6%. Decrease in amortization of intangible assets, as 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 $12.2 million for the first three months of fiscal 2016 compared to a net income of $6.6 million for the first three months of fiscal 2015. This increase in net income was attributable to an $11.3 million increase in operating profit, partially offset by a $1.8 million increase in other expense and a $3.9 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 increase in other expense, net related primarily to $1.0 million increase in non-cash expense related to the change in fair value of our derivatives for the first three months of fiscal 2016 compared to the first three months of fiscal 2015 and to $1.0 million of expense during the first three months of fiscal 2016 related to settlements on our derivatives. These were partially offset by lower interest expense in the amount of $0.2 million for the first three months of fiscal 2016. The decrease in interest expense was primarily a result of lower average borrowings, partially offset by an increase in average interest rate during the first three months of fiscal 2016 compared to the first three months of fiscal 2015. The increase in income tax expense was primarily a result of the increase in income before taxes. Our effective tax rate in the first three months of fiscal 2016 was 41.3%, compared to 41.4% in the first three months of fiscal 2015.

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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.

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

EBITDA