Sysco Corporation — Form 10-Q Summary
Reporting-period note: The request identifies 2017 Q3, but the supplied filing is for the 13-week quarter ended March 31, 2018 (Sysco fiscal 2018 Q3), and the 39 weeks ended that date. Comparisons below are with the periods ended April 1, 2017.
Business context and results
Sysco distributes food and related products through U.S. Foodservice Operations, International Foodservice Operations, SYGMA and other businesses. Management described the quarter as solid, citing gross-profit growth and operating-income improvement despite adverse weather, ongoing investments and operational challenges.
| Metric | 13 weeks ended Mar. 31, 2018 | Change year over year | 39 weeks ended Mar. 31, 2018 | Change year over year |
|---|---|---|---|---|
| Sales | $14.35 billion | +6.1% | $43.41 billion | +6.0% |
| Gross profit | $2.68 billion | +5.6% | $8.17 billion | +4.8% |
| Operating income | $485.9 million | +11.5% | $1.64 billion | +9.8% |
| Net earnings | $330.1 million | +38.5% | $981.8 million | +17.3% |
| Diluted EPS | $0.63 | +43.2% | $1.85 | +21.7% |
Quarterly gross, operating and net margins were 18.6%, 3.3% and 2.3%, respectively, versus 18.7%, 3.2% and 1.7% a year earlier. For the 39-week periods, those margins were 18.8%, 3.8% and 2.3%, versus 19.0%, 3.6% and 2.0%. Adjusted diluted EPS, a non-GAAP measure, was $0.67 for the quarter and $2.19 year to date.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $1.12 billion, compared with $1.08 billion; capital expenditures were $372.6 million, down from $413.8 million. Free cash flow, a non-GAAP measure, was $768.5 million versus $687.7 million.
- Cash and cash equivalents were $901.6 million at March 31; the cash-flow statement also included $145.6 million of restricted cash, primarily for the company’s captive insurer and acquisition escrows.
- Total debt was approximately $9.1 billion, up from $8.2 billion at July 1, 2017. About 73% was fixed-rate, including swaps. Commercial paper outstanding was $758 million at quarter-end; Sysco reported no borrowings under the supporting U.S. credit facility.
- Financing included $1.0 billion of new senior notes, a $500 million senior-note repayment at maturity, and a tender offer for $230.5 million principal of older notes and debentures. The tender resulted in a $53.1 million extinguishment loss.
- Sysco paid $534.7 million in dividends and repurchased $911.0 million of shares during the 39 weeks. It contributed $330 million to its U.S. pension plan.
Material changes and management commentary
- U.S. Foodservice sales rose 5.1% for the quarter, driven by case growth, 2.6% product-cost inflation and acquisitions. U.S. Broadline gross margin declined 19 basis points to 19.7%, reflecting inflation, lower-margin new customers and inbound freight pressure. Operating income increased only 0.9% as expenses grew faster than gross profit.
- International sales increased 10.7% for the quarter, substantially reflecting favorable currency translation and inflation. International operating income increased 20.2% in the quarter but fell 17.7% over the 39 weeks; management cited European and Canadian winter storms, fewer shipping days, acute inflation and higher expenses.
- Management cited generally favorable U.S. market conditions, local-customer growth and improved foodservice-sector conditions. It also noted continued investments in selling, technology and supply-chain capabilities, along with weather, freight, labor and transportation cost pressures.
- Sysco reported three fiscal-2018 acquisitions, including Doerle and HFM, and acquired the remaining 50% of its Costa Rica joint venture. Acquisition cash paid in the 39 weeks was $203.6 million.
Outlook, unusual items and risks
- Targets: The new plan through fiscal 2020 targets $650–$700 million of adjusted operating-income growth versus fiscal 2017, 16% adjusted ROIC for existing businesses, and fiscal-2020 adjusted diluted EPS of $3.40–$3.50. Management cautioned that results may not progress evenly and that targets may change as tax-reform impacts are assessed.
- Taxes: The Tax Act produced a provisional $115 million transition-tax expense, offset in part by tax-rate remeasurement benefits and a pension-contribution tax benefit. The reported quarterly effective tax rate was 9.54%; management expects a 25%–26% effective rate in fiscal 2019 and beyond, subject to ongoing tax accounting and estimates. Some Tax Act effects remained unresolved.
- Cash outlook: Management expected fiscal-2018 operating cash flow to be generally consistent with fiscal 2017 and free cash flow to grow over the remainder of the year. Capital spending, net of asset-sale proceeds, was expected to be below the prior plan. Sysco estimated annual tax savings of $200–$300 million and said it expected available cash flows and capital-market access to meet near-term needs.
- Key risks and contingencies: Risks include food and fuel inflation, inability to pass through costs, competition and margin pressure, labor availability, supply disruptions, acquisition integration, indebtedness and capital-market access, pension obligations, technology and cybersecurity disruptions, and Brexit-related effects. Legal proceedings were described as not expected to have a material adverse effect, though outcomes are uncertain. No goodwill impairment was recorded in the quarter.
- Other items: The quarter included restructuring, Brakes-related acquisition costs, business-technology transformation costs, a multiemployer-pension withdrawal charge and the debt-extinguishment loss. Adjusted results exclude specified “Certain Items”; they are non-GAAP and should be considered alongside GAAP results.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2018 Q3, not fiscal 2017 Q3.
- Assess whether U.S. margin pressure and international operating-income weakness persist as inflation, freight costs and weather effects change.
- Reconcile GAAP and adjusted earnings, particularly the effects of the Tax Act, pension funding, acquisition and restructuring costs, and the debt-extinguishment charge.
- Track debt, commercial-paper usage, interest expense and cash deployment across dividends, buybacks, acquisitions and investment.
- Monitor completion of tax accounting and the assumptions underlying fiscal-2020 targets and the stated tax-rate outlook.