Sysco Corporation (SYY) — Form 10-Q Summary
Reporting period: 13 weeks ended September 26, 2020 (Sysco fiscal 2021 first quarter; not calendar 2020 Q1). Comparisons are with the 13 weeks ended September 28, 2019. Results remained substantially affected by COVID-19 and reduced food-away-from-home demand.
Financial performance
| Metric | Q1 FY2021 | Prior year | Change |
|---|---|---|---|
| Sales | $11.78 billion | $15.30 billion | Down 23.0% |
| Gross profit / margin | $2.22 billion / 18.8% | $2.94 billion / 19.2% | Gross profit down 24.6%; margin down 39 bps |
| Operating income / margin | $419.6 million / 3.5% | $668.3 million / 4.3% | Down 37.2% |
| Net earnings | $216.9 million | $453.8 million | Down 52.2% |
| Diluted EPS | $0.42 | $0.87 | Down 51.7% |
| Operating cash flow | $930.9 million | $171.6 million | Up $759.3 million |
| Free cash flow (non-GAAP) | $862.4 million | $0.8 million | Up $861.7 million |
Adjusted operating income was $364.7 million, down 50.8%; adjusted net earnings were $173.5 million, down 66.0%; and adjusted diluted EPS was $0.34 versus $0.98. These are non-GAAP measures and exclude specified “Certain Items,” including restructuring and transformation costs, acquisition-related costs, and the pre-pandemic bad-debt reserve adjustment.
Operating cash flow benefited from a $903.8 million year-over-year improvement in working-capital comparisons, including faster collection of pre-pandemic receivables, higher accounts payable associated partly with extended supplier terms, and other timing effects. The cash-flow improvement should not be assumed to represent recurring earnings or cash generation.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $6.0 billion at September 26, 2020, compared with $6.1 billion at June 27, 2020. Total debt carrying value was $13.7 billion, down from $14.4 billion; estimated fair value of debt was $15.8 billion.
- Sysco reported $700 million drawn under its $2.0 billion revolving credit facility and £600 million outstanding under its U.K. commercial paper program; no U.S. commercial paper was outstanding. The U.K. notes mature in May 2021. Sysco redeemed $750 million of 2.60% senior notes in September 2020.
- Management reported approximately $7.5 billion of cash and available liquidity as of November 3, 2020, and said available sources were expected to cover cash requirements for more than 12 months. Approximately 20% of quarter-end cash was held by international subsidiaries and could incur tax or withholding costs if transferred or repatriated.
- About 83% of debt was at fixed interest rates, including swaps. Share repurchases were suspended; the credit-facility amendment also bars share repurchases and dividend increases through fiscal 2021. The quarterly dividend was $0.45 per share, and management expected to continue quarterly payments but not increase the dividend during FY2021.
Material changes and operating trends
- U.S. Foodservice sales fell 25.7%, principally from a 25.6% decline in case volume; International Foodservice sales fell 25.7% (27.1% on a constant-currency basis). SYGMA sales increased 5.3%, supported by quick-service restaurant business and new business. Hospitality-related “Other” sales declined 41.0%.
- COVID-related restrictions, closures and reduced customer activity drove the overall decline. Management described weekly sales improvement early in the quarter, followed by a leveling of improvement toward quarter-end. Consolidated gross margin declined 39 basis points, although management reported an improved exit rate; U.S. Foodservice gross margin increased 7 basis points.
- Operating expenses decreased 20.9%, reflecting lower activity and costs, permanent headcount reductions, cost-out actions and a benefit from reduced receivable reserves. Interest expense rose 76.1% to $146.7 million, primarily due to higher fixed-debt volume, partly offset by lower floating rates.
- Sysco sold its interest in Cake Corporation and recorded a $12.0 million loss on sale. The sale generated a $7.6 million tax benefit.
Outlook, risks and unusual items
- Management said second-quarter sales volume was approximately 20% below the comparable prior-year period at the time of filing and warned that additional COVID-related restrictions could worsen results, particularly in Europe. It characterized recovery as potentially non-linear and dependent largely on restrictions and customer activity.
- Sysco expected to remove approximately $350 million of structural costs in FY2021, with most savings flowing to the bottom line and some reinvested in growth. It also cited continued transformation work, including U.S. Broadline regionalization, digital ordering and pricing tools, and sales-model changes.
- Management expected operating cash flow and free cash flow to decline initially over the next two quarters due to seasonality, inventory rebuilding and investment needs. It expected full-year free cash flow to end flat to slightly positive compared with the prior year, and operating cash flow to end flat to slightly positive compared with the first-quarter level.
- Collections on pre-pandemic receivables improved, producing a $98.6 million reserve-reduction benefit. Sysco also recorded $20.8 million of additional reserves for post-pandemic receivables, for a net $77.8 million benefit in the provision for receivable losses. Management cautioned that actual losses could differ and further reserve increases or reductions were possible.
- Other risks include prolonged pandemic effects, customer credit losses, lower demand, margin and inflation volatility, cost-saving execution, access to capital, and possible tax effects from jurisdictional losses. Management said it had not experienced significant supply-chain disruption or material facility closures. It did not expect pending legal proceedings, individually or collectively, to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether customer volumes and sales recover, especially under changing restrictions, and whether management’s second-quarter volume and full-year cash-flow expectations are met.
- Whether the $98.6 million pre-pandemic reserve benefit is non-recurring and how receivable collections and new post-pandemic credit losses evolve.
- Whether the $350 million FY2021 structural cost-removal target is achieved without impairing service, growth or margins.
- Liquidity and refinancing needs for the £600 million U.K. commercial paper and $500 million of long-term debt due within the next 12 months, as well as compliance with credit-facility terms.
- The sustainability of dividends and cash generation given the restriction on dividend increases and suspended share repurchases.