Sysco Corporation (SYY) — Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2020 (52 weeks), with quarterly information including the quarter ended June 27, 2020. This is a fiscal 2020 annual report, not a standalone “2019 Q4” filing. Sysco distributes food and related products to foodservice customers across North America and Europe, serving more than 625,000 customer locations.
Financial results and position
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Sales | $52.9 billion | $60.1 billion |
| Gross profit / margin | $9.90 billion / 18.7% | $11.41 billion / 19.0% |
| Operating income / margin | $749.5 million / 1.4% | $2.33 billion / 3.9% |
| Net earnings | $215.5 million | $1.67 billion |
| Diluted EPS | $0.42 | $3.20 |
| Cash from operations | $1.62 billion | $2.41 billion |
| Free cash flow (non-GAAP) | $927.0 million | $1.74 billion |
| Cash and cash equivalents at year-end | $6.06 billion | $513.5 million |
| Total debt at carrying value | $14.45 billion | $8.16 billion |
| Shareholders’ equity | $1.16 billion | $2.50 billion |
Sales fell 12.0%; GAAP operating income fell 67.8%, net earnings fell 87.1%, and diluted EPS fell 86.9%. Adjusted operating income was $1.71 billion, down 37.4%; adjusted net earnings were $1.03 billion, down 44.4%; adjusted diluted EPS was $2.01, down 43.4%. These are company-defined non-GAAP measures and exclude selected “Certain Items,” not the full effects of the pandemic.
Operating cash flow declined 32.9% and free cash flow declined 46.7%. Net capital expenditures were $691.7 million. Year-end current assets were $12.35 billion and current liabilities $6.72 billion; liquidity increased substantially following debt issuance and borrowings. The company reported approximately $8.0 billion in cash and available liquidity as of August 7, 2020.
Material changes and unusual items
- COVID-19 sharply reduced foodservice demand beginning late in the third fiscal quarter. Fiscal fourth-quarter sales were $8.87 billion and Sysco reported a $531.6 million operating loss and a $618.4 million net loss for the quarter.
- Fiscal 2020 included $323.4 million of estimated pandemic-related excess bad-debt expense (within total provision for receivable losses of $404.2 million), $203.2 million of goodwill impairment and $70.3 million of severance expense. Sysco also recorded a $55.9 million write-down of assets held for sale.
- International Foodservice Operations reported a $371.4 million operating loss, versus $125.4 million operating income in fiscal 2019. U.S. Foodservice operating income declined 33.0% to $2.00 billion. SYGMA operating income increased to $36.9 million despite lower sales.
- Debt rose materially, including a $4.0 billion senior-note offering in April 2020 and $700 million outstanding under the revolving credit facility at year-end. A separate U.K. commercial-paper program had £600 million outstanding. About 79% of debt was fixed-rate, including swaps.
- The revolving-credit amendment added liquidity and leverage-related covenants and restricts dividend increases and share repurchases until the earlier of September 2022 or achievement of a specified EBITDA-to-interest ratio. Share repurchases were suspended in March 2020. The regular quarterly dividend continued, but Sysco did not expect to increase it in fiscal 2021.
Outlook, management commentary and risks
- Sysco withdrew its three-year plan guidance because of pandemic uncertainty. Management said the fiscal-year-end sales exit rate was approximately 30% below the prior-year end. Recovery improved sequentially in the fourth quarter, flattened in July as cases rose in some locations, and improved weekly again in August 2020.
- Management expected fiscal 2021 sales to exceed the fiscal 2020 exit rate despite a choppy recovery, and expected gross margin to remain broadly stable, while acknowledging changing customer mix. It anticipated a fiscal 2021 effective tax rate of approximately 24%.
- Cost actions removed approximately $500 million of expenses in the fourth quarter; permanent measures were expected to provide about $350 million in annualized savings. The company also accelerated digital, sales-model and U.S. regionalization initiatives and expanded into retail and grocery supply relationships.
- Management cited continued uncertainty around customer reopenings, consumer demand, receivable collections and potential further bad-debt charges. Other material risks include customer bankruptcies, margin pressure and customer-mix shifts, supply-chain or labor disruption, international currency and Brexit exposure, debt-service and covenant requirements, pension funding, food safety and cybersecurity.
- Sysco estimated potential multiemployer-plan withdrawal liability of up to $160.8 million. Its U.S. pension obligation was approximately $5.0 billion; the plans’ reported funded status and future contribution needs are sensitive to market returns and discount rates.
- The company reported no material off-balance-sheet arrangements and stated that pending legal proceedings were not expected to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether sales recovery, customer reopening and case volumes continued after the August 2020 update, particularly among locally managed restaurant customers.
- Whether receivables were collected as expected and whether further bad-debt expense, customer failures or goodwill impairments followed.
- Whether the approximately $350 million annualized cost savings were realized without impairing service, sales growth or margins.
- Debt maturities, borrowing costs, available liquidity and compliance with amended credit-facility covenants; also the timing and funding of the $750 million debt maturity due within 12 months.
- The sustainability of dividends and the timing of any resumption of share repurchases under the credit restrictions.
- Performance of International Foodservice operations and progress integrating and restructuring European businesses, including France and the U.K.
- Assumptions behind adjusted results and goodwill valuations, and the impact of pandemic-related exclusions when comparing non-GAAP results with GAAP results.