Sysco Corporation (SYY) — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 28, 2020, and the first 39 weeks of fiscal 2020. Although the request metadata says “2019 Q3,” this is Sysco’s fiscal third-quarter 2020 filing.
Business context and financial results
Sysco distributes food and related products through U.S. Foodservice Operations, International Foodservice Operations, SYGMA and other businesses. Results were sharply affected late in the quarter by COVID-19 restrictions that closed or curtailed many restaurant, hospitality and education customers.
| Metric | Q3 FY2020 | Q3 FY2019 | 39 weeks FY2020 | 39 weeks FY2019 |
|---|---|---|---|---|
| Sales | $13.70B | $14.66B | $44.03B | $44.64B |
| Gross profit | $2.56B | $2.75B | $8.34B | $8.43B |
| Operating income | $60.3M | $529.6M | $1.28B | $1.61B |
| Net earnings (loss) | $(3.3)M | $440.1M | $833.9M | $1.14B |
| Diluted EPS | $(0.01) | $0.85 | $1.62 | $2.17 |
| Gross margin | 18.7% | 18.8% | 18.9% | 18.9% |
| Operating margin | 0.4% | 3.6% | 2.9% | 3.6% |
Q3 sales decreased 6.5%; operating income fell 88.6%, and Sysco reported a net loss. Management’s non-GAAP adjusted diluted EPS was $0.45 for Q3, down 43.0%, and $2.29 year to date, down 6.5%. These adjusted figures exclude specified items and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- Operating cash flow for the first 39 weeks was $1.08B, versus $1.37B a year earlier. Net capital expenditures were $590.6M; reported free cash flow was $487.8M, versus $998.7M.
- Cash and cash equivalents were $2.24B at March 28, 2020. Total debt was approximately $10.9B, compared with $8.2B at June 29, 2019. The filing reports $1.7B drawn under the revolving facility and $153M in commercial paper at quarter-end.
- Sysco issued $1.0B of notes in February 2020. After quarter-end, it issued $4.0B of senior notes to strengthen liquidity, with proceeds expected to repay commercial paper and redeem $750M of notes due October 2020. As of May 5, management reported approximately $6.0B of cash and available liquidity.
- Year-to-date dividends paid were $628.1M; treasury-stock purchases were $844.7M. Repurchases were suspended in March. Management said it intended to continue dividends, subject to quarterly review.
Material changes and unusual items
- Q3 sales were down across major segments: U.S. Foodservice 5.1%, International 9.0% and SYGMA 11.3%. In the final two weeks of the quarter, total sales were down approximately 60% year over year; management reported approximate declines of 60% in U.S. Foodservice, 70% internationally and 50% in SYGMA.
- Receivables-loss provision was $213.8M for the first 39 weeks, including $175.4M in Q3. Management estimated approximately $153.5M was attributable to COVID-19 effects and warned further charges could be required as customer failures and bankruptcies increase.
- Sysco recorded $68.7M of goodwill impairment: $34.5M for Pacific Star and $34.2M for Cake, exhausting goodwill in those reporting units. Three European reporting units had $511.7M of goodwill and were considered sensitive to further valuation declines.
- Other operating pressures included restructuring and transformation costs, severance, reduced customer volumes, inventory spoilage risk, and ongoing challenges integrating and restructuring European operations. Foreign currency translation reduced reported international sales.
Outlook, management commentary and risks
Sysco withdrew guidance for the remainder of its three-year plan and provided no updated outlook, citing the uncertain duration and effects of the pandemic. Management expected an operating loss in fiscal Q4 2020; it said any losses in fiscal 2021 were not expected to be of the same magnitude, based on trends and reopening activity at the time. The filing states that future pandemic impacts could not be reasonably estimated.
Management described more than $500M of expense reductions for Q4, including staffing reductions of approximately 33%, route changes and operating efficiencies. Permanent changes were expected to produce approximately $300M in annualized benefits. Management cautioned that Q4 cost savings would be more than offset by lower sales. Capital spending was curtailed to business-critical projects. The company also pursued retail, logistics, healthcare, meal-kit and direct-to-consumer opportunities, but said these would not fully offset foodservice declines.
Key risks include prolonged customer closures or slow recovery, additional bad debts, inventory write-downs and spoilage, further goodwill or other asset impairments, liquidity and covenant pressure, and potential changes to tax assets and effective tax rates. Sysco reported compliance with debt covenants at March 28 and said it was working to amend its EBITDA-to-interest covenant. Management reported no significant supply-chain or facility disruptions to date. Legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Subsequent quarterly sales, case volumes and recovery trends by segment, especially versus the reported approximately 60% late-quarter sales decline.
- Receivables collections, customer bankruptcies and any additional bad-debt or inventory charges.
- Cash flow, available liquidity, debt maturities, covenant amendments and borrowing costs after the $4.0B notes issuance.
- Whether planned cost reductions and the projected $300M annualized benefit are achieved without impairing service or growth.
- Results of the fiscal Q4 goodwill impairment test and any further impairment or tax-valuation allowance charges.