Sysco Corporation — Form 10-Q Summary
Business context and reporting period
Sysco distributes food and related products to foodservice customers, primarily through U.S. and international foodservice operations and SYGMA. This filing covers the 13 weeks ended September 29, 2018 (first quarter of fiscal 2019), compared with the 13 weeks ended September 30, 2017. The interim statements are unaudited.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Sales | $15.215 billion | $14.650 billion | +3.9% |
| Gross profit / margin | $2.904 billion / 19.1% | $2.794 billion / 19.1% | +3.9% gross profit |
| Operating income / margin | $628.1 million / 4.1% | $619.4 million / 4.2% | +1.4% |
| Adjusted operating income (non-GAAP) | $691.7 million | $658.2 million | +5.1% |
| Net earnings | $431.0 million | $367.6 million | +17.2% |
| Diluted EPS | $0.81 | $0.69 | +17.4% |
| Adjusted diluted EPS (non-GAAP) | $0.91 | $0.74 | +22.4% |
| Operating cash flow | $271.1 million | $82.8 million | +$188.4 million |
| Free cash flow (non-GAAP) | $170.7 million | -$51.8 million | +$222.4 million |
Gross margin was flat year over year, while operating margin declined about 0.1 percentage point. Net margin rose to 2.8% from 2.5%. The effective tax rate fell to 19.88% from 32.72%, reflecting lower rates under the Tax Act, equity-compensation tax benefits and the release of certain tax contingencies.
At September 29, 2018, cash and cash equivalents were $790.3 million; cash, cash equivalents and restricted cash totaled $953.4 million, including restricted cash held primarily for captive-insurance obligations. Total debt carrying value was approximately $8.7 billion, comprising $783.0 million of current maturities and $7.9 billion of long-term debt. Approximately 75% of debt was at fixed interest rates, including swaps. Current liabilities were $6.64 billion and current assets were $8.64 billion.
Changes versus the prior comparable period
- Sales growth was driven principally by U.S. Foodservice Operations, where sales rose 5.6%; international sales grew 0.6%, while SYGMA sales declined 1.2%.
- U.S. case-volume growth was strong, but product-cost inflation was modest. U.S. gross margin declined 7 basis points to 20.10%.
- Operating expenses rose 4.7%, faster than sales, reflecting warehouse and transportation costs, overtime and hiring costs, higher fuel costs, and increased bad-debt expense. Pay-related costs in U.S. operations rose $48.4 million.
- Reported operating income increased only 1.4%; excluding restructuring, transformation and Brakes-related acquisition costs, adjusted operating income increased 5.1%. These excluded costs totaled $63.5 million, versus $38.8 million a year earlier.
- Interest expense rose 10.1%, primarily because of higher floating rates. Pre-tax earnings declined 1.5%, but net earnings increased as the effective tax rate fell.
- Operating cash flow improved substantially, primarily because of a favorable year-over-year working-capital comparison, including receivables and payables. Net capital expenditures were $100.5 million, versus $134.5 million a year earlier.
Outlook, management commentary and risks
- Management expected modest operating-income growth in fiscal Q2 and improved performance in the second half of fiscal 2019, while noting that results may not improve evenly by quarter.
- The fiscal 2020 three-year-plan targets, measured against fiscal 2017, include $650–$700 million of adjusted operating-income growth, 16% adjusted return on invested capital for existing businesses, 4%–4.5% sales growth, 9% adjusted operating-income growth and adjusted diluted EPS of $3.85–$3.95. These are forward-looking, non-GAAP objectives, not guaranteed results.
- Management anticipated some moderation in volume and gross-profit-dollar growth due to acquisition and customer annualizations, customer mix and Hurricane Michael. Hurricane Florence had already affected the quarter.
- Cost pressures include tight labor markets, supply-chain inefficiencies, fuel, and international transformation and integration spending. Management cited finance transformation, spending controls and Canadian regionalization initiatives as planned cost and service improvements.
- International risks include Brexit uncertainty and a challenging U.K. restaurant market; Sysco also cited foreign-exchange exposure, fuel-price volatility, inflation or deflation, competition, labor availability, technology and cybersecurity risks, and its leverage and access to capital markets.
- Sysco issued CDN $500 million (USD $384.6 million) of senior notes at a 3.65% coupon in September 2018, using proceeds for internal debt repayment, commercial-paper repayment and general corporate purposes. $750 million of notes mature in March and April 2019; management expected to fund repayment through cash, operating cash flow, borrowing or a combination.
- Legal proceedings were described as ranging from remote to probable; management did not expect their resolution, individually or in aggregate, to materially adversely affect financial position or results. No new acquisitions occurred in the quarter. Revenue-standard adoption had no material impact. Management said it had not completed all Tax Act accounting and expected to finalize it in fiscal Q2.
Most important facts for investors to verify
- Whether operating-cost initiatives deliver the expected improvement, especially in U.S. warehouse and transportation operations and international businesses.
- How much earnings growth reflects sustainable operations versus the lower tax rate, tax-contingency releases and the exclusion of “Certain Items” in non-GAAP results.
- Whether the strong operating-cash-flow comparison persists, given its reliance on working-capital movements and Sysco’s seasonal cash-flow pattern.
- Progress against the fiscal 2020 targets, including the assumptions behind adjusted operating income, adjusted EPS and adjusted return on invested capital.
- Debt maturities, borrowing costs and liquidity, along with the effects of fuel prices, foreign exchange, Brexit and labor constraints.