SYSCO CORP annual report, FY2017

Sysco Corporation (10-K) — Fiscal 2017 Summary

Reporting period: Fiscal year ended July 1, 2017 (52 weeks). This filing is an annual report, not a standalone 2016 Q4 filing. Fiscal 2016 had 53 weeks, so reported year-over-year comparisons are not fully comparable; Sysco provides adjusted 52-week comparisons. Sysco distributes food and related products to more than 500,000 foodservice locations. On July 5, 2016, it acquired European distributor Brakes Group.

Key financial results

MetricFY2017FY2016Change / context
Sales$55.37 billion$50.37 billionUp 9.9%; excluding Brakes and adjusting for the extra week, up 1.6%.
Gross profit / margin$10.56 billion / 19.1%$9.04 billion / 17.9%Gross profit up 16.8%; margin up 112 basis points. Excluding Brakes and adjusting for the extra week, margin rose 43 basis points.
Operating income / margin$2.05 billion / 3.7%$1.85 billion / 3.7%Operating income up 11.0%. Adjusted income was $2.35 billion, up 17.1%.
Net earnings$1.14 billion$949.6 millionUp 20.3%; adjusted net earnings were $1.36 billion, up 11.9%.
Diluted EPS$2.08$1.64Up 26.8%; adjusted diluted EPS was $2.48, up 18.1% (20.4% on a 52-week-comparable basis).
Operating cash flow / free cash flow$2.18 billion / $1.51 billion$1.93 billion / $1.43 billionOperating cash flow up 12.6%; free cash flow up 5.9%. Free cash flow is a non-GAAP measure.
Cash and total debt$869.5 million / $8.19 billion$3.92 billion / $7.44 billionDebt increased following the Brakes acquisition; about 71% of debt was fixed-rate, including swaps.
Capital spending$686.4 million$527.3 millionNet capital expenditures were $662.7 million.

Performance, capital and liquidity

  • Brakes contributed $5.2 billion of sales and $47.0 million of net earnings from acquisition through year-end. The acquisition drove most of International Foodservice Operations’ reported sales increase; excluding Brakes and the extra week, international comparable sales rose 2.1%.
  • Sysco reported 0.6% product-cost deflation for the year. Management cited stronger local-customer growth, improved gross profit dollars and expense management; U.S. broadline case growth was 0.9% on a comparable 52-week basis.
  • Operating cash flow benefited from improved working-capital management, including accounts payable. Investing cash outflow included $2.92 billion for acquisitions. The company paid $698.6 million in dividends and repurchased $1.9 billion of shares.
  • Year-end current assets were $8.03 billion and current liabilities $6.10 billion. Cash was down substantially from the prior year, partly reflecting the acquisition and capital returns. About 79% of cash was held by international subsidiaries; Sysco said it did not anticipate needing to repatriate it.
  • Management said operating cash flow, commercial paper and credit facilities, and access to capital markets should meet anticipated cash needs for the next 12 months. The $2.0 billion revolving facility supporting U.S. commercial paper was undrawn as of August 11, 2017; commercial paper outstanding then was $551 million.
  • Shareholders’ equity declined to $2.38 billion from $3.48 billion. Debt represented 77.5% of debt-plus-equity capitalization, versus 67.9% in fiscal 2016.

Outlook, unusual items and risks

  • For fiscal 2018, Sysco estimated net capital expenditures of 1.3%–1.4% of sales, expected operating expenses and transportation costs to rise with case volumes and fuel prices, and anticipated inflation for the balance of calendar 2017. Management expected multi-unit case growth trends to improve and planned greater sales-team investment.
  • The three-year plan, measured through fiscal 2018, targets $600–$650 million of adjusted operating-income improvement from fiscal 2015, adjusted EPS growth faster than operating income, and a 15% improvement in adjusted return on invested capital for existing businesses. Management expected to achieve the high end of the operating-income target. Brakes was excluded from the original targets.
  • FY2017 “Certain Items” included $111.3 million of accelerated technology-system depreciation, acquisition and restructuring costs, and a $35.6 million multiemployer-pension withdrawal charge. Adjusted measures exclude specified items and should be considered alongside GAAP results.
  • Sysco’s Albany subsidiary withdrew from a multiemployer pension plan and accrued a $35.6 million liability. Sysco estimated its share of aggregate withdrawal liabilities across participating plans could reach $147.9 million; several plans were considered underfunded. The company also reported a $4.2 billion U.S. pension obligation.
  • Key risks include intense competition and low industry margins, food-cost deflation or inflation, fuel prices, supply interruptions and food-safety events, customer concentration or loss, foreign exchange and Brexit-related uncertainty, acquisition integration, cybersecurity, pension funding and substantial debt. Goodwill impairment risk warrants attention: $1.7 billion of goodwill in certain reporting units could require further impairment analysis if estimated fair values fell by 5%–28%; no impairment was recorded in FY2017.
  • Legal proceedings were not expected by management to materially affect consolidated results, though outcomes remain uncertain. The filing’s Item 3 reports none; the financial-statement note discusses ongoing proceedings and contingencies.
  • Management and the auditor reported effective internal control over financial reporting, but the assessment excluded Brakes, which represented 25.2% of year-end assets and 9.3% of annual sales. The filing also notes corrections to cash-flow classifications and balance-sheet acquisition allocations previously presented in the August 14, 2017 earnings-release filing.

Investor verification priorities

  1. Reconcile reported growth with the Brakes acquisition and the extra week in fiscal 2016; compare GAAP results with Sysco’s adjusted 52-week, ex-Brakes measures.
  2. Review debt maturities, interest costs, cash availability by jurisdiction and the pace of debt reduction after the acquisition.
  3. Assess whether local-customer growth, gross-margin gains and productivity improvements can offset competitive pricing, fuel and labor cost pressures.
  4. Track Brakes integration and performance, including the execution of its U.K. supply-chain transformation and the sensitivity of acquired goodwill valuations.
  5. Monitor pension funding and potential multiemployer withdrawal liabilities, as well as the fiscal 2018 capital-spending and strategic-plan targets.