Sysco Corporation (SYY) — Form 10-Q Summary
Reporting period: 13 weeks ended September 28, 2019, the first quarter of Sysco’s fiscal 2020 (filed November 4, 2019). Comparative period: 13 weeks ended September 29, 2018. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $15.303 billion | $15.215 billion | Up 0.6% |
| Gross profit / margin | $2.943 billion / 19.2% | $2.904 billion / 19.1% | Profit up 1.4% |
| Operating income / margin | $668.3 million / 4.3% | $628.1 million / 4.1% | Up 6.4% |
| Net earnings | $453.8 million | $431.0 million | Up 5.3% |
| Diluted EPS | $0.87 | $0.81 | Up 7.4% |
| Operating cash flow | $171.6 million | $271.1 million | Down $99.6 million |
| Free cash flow (non-GAAP) | $0.8 million | $170.7 million | Down $169.9 million |
- Adjusted operating income was $741.9 million, up 7.3%; adjusted net earnings were $510.3 million, up 6.5%; adjusted diluted EPS was $0.98, up 8.6%. These are non-GAAP measures that exclude specified “Certain Items.”
- Cash and cash equivalents were $455.5 million at quarter-end; restricted cash was an additional $58.9 million. Current assets were $8.484 billion and current liabilities $6.101 billion.
- Total debt carrying value was $8.7 billion, compared with $8.2 billion at June 29, 2019. Commercial paper outstanding was $665.4 million. About 65% of debt was at fixed interest rates, including swaps.
- Capital expenditures were $175.7 million, partly offset by $4.9 million of asset-sale proceeds. The company paid $74.8 million, net of cash acquired, for acquisitions.
Changes and business drivers
- U.S. Foodservice sales increased 2.5% and operating income rose 5.6%. Local case growth, inflation and branded-product penetration supported results; U.S. Broadline product-cost inflation was 2.9%.
- International sales declined 0.3% in reported dollars, including a 3.3% adverse currency impact. International operating income fell 17.9% as reported; adjusted operating income rose 3.8%, or 6.2% on a constant-currency basis.
- SYGMA sales declined 10.8%, primarily from customer exits, while operating income increased from $2.4 million to $7.6 million following improved margins, cost management and a distribution-location closure.
- Sales growth reflected local customer gains, partly offset by national-customer transitions, the Iowa Premium divestiture and foreign exchange. Sysco said sales growth accelerated late in the quarter and expected that trend to continue into Q2.
- Operating expenses were essentially flat overall. Higher labor, operating and bad-debt costs were offset in part by transformation savings. France faced operational and supply-chain integration challenges that management expected to continue weighing on results for the rest of the fiscal year.
Outlook, risks and unusual items
- Management’s three-year plan, through fiscal 2020, targets approximately $600 million of adjusted operating-income growth versus fiscal 2017, EPS growth faster than operating-income growth, and 16% adjusted ROIC for existing businesses. These are targets, not a specific quarterly or full-year earnings forecast; reconciliation to GAAP future results was not provided.
- Management cited modestly favorable U.S. foodservice conditions, but mixed industry traffic; U.K. and Ireland activity remained soft amid Brexit uncertainty. The company also identified customer transitions, inflation/deflation, competition, labor availability, fuel costs, supply disruptions, integration execution and foreign exchange as risks.
- Cash flow was pressured by working-capital comparisons, particularly receivables and payables, and higher capital spending. Sysco noted seasonal cash use early in its fiscal year. Tax payments of approximately $200–$250 million were deferred from Q2 to Q3 FY2020 following relief related to Tropical Storm Imelda.
- Sysco adopted lease accounting (Topic 842) at the start of fiscal 2020, recognizing operating lease right-of-use assets and liabilities. At September 28, operating lease liabilities were $648.1 million; adoption was reported to have no other significant financial-statement impact.
- Restructuring and transformation costs were $56.7 million, and Brakes acquisition-related costs were $16.9 million in the quarter. A $126.2 million foreign-currency translation loss contributed to a $75.7 million total other comprehensive loss.
- The board authorized a separate $2.5 billion share-repurchase program through fiscal 2021. Sysco repurchased 4.6 million shares for $349.3 million during the quarter; remaining authorization across programs was approximately $2.6 billion as of October 18, 2019.
- Management said pending legal matters were not expected to have a material adverse effect; no material legal proceedings were listed in Part II. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether reported sales and case growth continue despite national-customer transitions, SYGMA customer exits and the Iowa Premium divestiture.
- Whether local-case growth, inflation and product mix sustain gross-margin improvement, and whether labor, fuel and other operating costs remain contained.
- Progress in France and other transformation/integration initiatives, including the duration and cost of operational challenges and restructuring.
- Working-capital recovery, capital-spending levels and the timing of deferred tax payments, given the sharp year-over-year decline in operating and free cash flow.
- Debt, commercial-paper usage, interest-rate exposure and the pace of repurchases relative to cash generation and investment needs.
- Execution against fiscal 2020 strategic targets; the filing does not provide a clear numerical reconciliation of those forward-looking non-GAAP targets to GAAP results.
- Potential effects of Brexit, currency movements, food-cost volatility, labor constraints and other disclosed operating risks.