Sysco Corporation (SYY) — Form 10-K Summary
Reporting period: Fiscal year ended July 2, 2016, a 53-week year; prior fiscal year ended June 27, 2015 and had 52 weeks. The request metadata says “2015 Q4,” but the filing is the fiscal 2016 annual report. Results below are annual unless noted.
Business context and material events
Sysco distributes food and related products to foodservice customers, principally in North America. The filing’s fiscal 2016 results largely reflect the legacy Sysco business. On July 5, 2016, after year-end, Sysco completed its acquisition of the Brakes Group, a European foodservice distributor, for approximately £2.3 billion (about $3.1 billion), including repayment of about $2.3 billion of Brakes debt. Brakes’ results are not included in fiscal 2016 results.
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $50.37 billion | $48.68 billion |
| Gross profit / margin | $9.04 billion / 17.95% | $8.55 billion / 17.57% |
| Operating income / GAAP margin | $1.85 billion / 3.67% | $1.23 billion / 2.53% |
| Net earnings | $949.6 million | $686.8 million |
| Diluted EPS | $1.64 | $1.15 |
| Adjusted diluted EPS (non-GAAP) | $2.06 on a comparable 52-week basis | $1.84 |
| Cash from operations / free cash flow (non-GAAP) | $1.93 billion / $1.43 billion | $1.56 billion / $1.04 billion |
| Capital expenditures | $527.3 million | $542.8 million |
Sales rose 3.5% as reported, but 1.5% on management’s comparable 52-week basis; the extra week contributed an estimated 2.0% to reported sales growth. Adjusted operating income increased 9.6% on a comparable 52-week basis, and adjusted diluted EPS increased 12.0%. These are non-GAAP measures; management’s adjustments exclude specified restructuring, acquisition and financing items.
Cash and cash equivalents were $3.92 billion at year-end. Total debt was approximately $7.44 billion, versus $7.32 billion a year earlier; shareholders’ equity fell to $3.48 billion from $5.26 billion, partly reflecting share repurchases and pension-related comprehensive losses. Current assets were $10.05 billion and current liabilities $4.43 billion. Sysco reported no commercial paper outstanding at year-end and said cash flow, borrowing facilities and market access should meet anticipated cash needs for the next 12 months.
Changes, unusual items and management commentary
- GAAP operating income and net earnings improved substantially, but year-over-year comparisons are affected by the extra week and by large nonrecurring items. FY2015 included $554.7 million of US Foods merger-related costs; FY2016 included $158.7 million of specified “Certain Items,” as well as $111.3 million of other expense, principally foreign-currency losses related to Brakes.
- FY2016 included an $86.5 million loss on redemption of US Foods-related notes. Sysco also reported a $101.2 million loss on remeasurement of foreign cash and a $45.7 million realized loss on currency options related to the Brakes purchase.
- Product-cost deflation was 0.7% in FY2016, versus 3.7% inflation in FY2015. Management expected deflation to continue at least through calendar 2016. It cited uneven restaurant demand and anticipated modest case-volume growth in the first half of FY2017.
- Management set FY2018 targets: at least $500 million improvement in operating income, EPS growth faster than operating income, and 15% improvement in return on invested capital for existing businesses. It expected FY2017 to deliver 50%–60% of its cumulative adjusted operating-income improvement target. These targets are not guarantees.
- Sysco expected the Brakes acquisition to be immediately accretive in FY2017, contributing low- to mid-single-digit percentage EPS growth. It also expected a normalized FY2017 tax rate of 35%–36%, net capital expenditures of approximately 1% of sales, and about $130 million of FY2017 technology-strategy charges. The company planned to complete the remaining $1.5 billion of its $3 billion share-repurchase program in FY2017.
Risks, contingencies and other disclosures
Principal risks include intense competition and low industry margins; food-cost deflation or inflation and fuel volatility; uneven restaurant demand; supply interruptions and food-safety or product-liability events; labor availability and union negotiations; cybersecurity and technology execution; and the integration, financing, foreign-exchange and European economic risks associated with Brakes and the U.K.’s vote to leave the EU. The filing estimates potential multiemployer-plan withdrawal liability of up to $86 million for plans where triggering events were considered reasonably possible; a broader risk-factor discussion cites an estimate as high as $225 million across participating plans, based on available plan information. The company-sponsored pension benefit obligation was $4.28 billion, with a $1.17 billion funded deficit at year-end. Management did not expect the resolution of disclosed legal proceedings, individually or collectively, to materially adversely affect results, while noting outcomes remain uncertain.
Sysco reported no off-balance-sheet arrangements. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Investor verification priorities
- Track post-acquisition Brakes contribution, integration costs, synergies, financing, leverage and currency exposure in subsequent filings.
- Reconcile GAAP performance with adjusted measures, including the effects of the 53rd week, US Foods-related costs, Brakes currency losses and tax-contingency benefits.
- Monitor debt service, cash deployment, share repurchases, dividends and liquidity following the acquisition and planned FY2017 buybacks.
- Assess whether case growth, gross-margin improvement and cost savings persist amid deflation, competitive pricing pressure and softer restaurant traffic.
- Review pension funding assumptions and multiemployer plan exposure, along with technology transition costs, labor negotiations and food-safety or regulatory developments.