Sysco Corporation — Form 10-Q Summary
Reporting period: 13 weeks ended October 1, 2016, the first quarter of fiscal 2017. Comparisons are with the 13 weeks ended September 26, 2015, unless noted. Amounts are in U.S. dollars.
Business context and material changes
Sysco distributes food and related products to foodservice customers in the U.S. and internationally. On July 5, 2016, it acquired Brakes Group, a European foodservice distributor, for total consideration of approximately $2.91 billion, including repayment of Brakes debt. Brakes contributed about $1.28 billion of quarterly sales and $18.9 million of net earnings; the reported Brakes earnings exclude interest on debt Sysco incurred to fund the acquisition. The acquisition materially changed Sysco’s international operations, assets, debt and segment reporting.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $13.97 billion | $12.56 billion | +11.2% |
| Gross profit | $2.69 billion | $2.24 billion | +20.3% |
| Gross margin | 19.3% | 17.8% | +1.5 percentage points |
| Operating income | $566.8 million | $493.5 million | +14.9% |
| Operating margin | 4.1% | 3.9% | +0.2 percentage points |
| Net earnings | $323.9 million | $244.4 million | +32.5% |
| Diluted EPS | $0.58 | $0.41 | +41.5% |
| Dividends declared per share | $0.31 | $0.30 | +$0.01 |
Management also reported non-GAAP adjusted diluted EPS of $0.67, up 28.8%; excluding Brakes and specified items, adjusted diluted EPS was $0.63, up 21.2%. These measures exclude selected restructuring, acquisition and other costs and are not GAAP results. Sysco attributed earnings growth to gross-profit growth, cost management, Brakes and fewer shares outstanding after repurchases. Average diluted shares fell 6.6% year over year.
Cash flow, debt and liquidity
- Cash from operations was $248.7 million, versus cash used of $261.5 million a year earlier. Capital expenditures were $142.3 million; reported free cash flow, a non-GAAP measure, was $110.7 million versus negative $381.2 million.
- Investing activities used $3.05 billion, primarily reflecting $2.91 billion of acquisition payments. Financing activities used $389.7 million, including $600.1 million of treasury-stock purchases and $173.3 million of dividends.
- Cash and cash equivalents were $759.9 million at October 1, down from $3.92 billion at July 2, 2016. About 71% of quarter-end cash was held by international subsidiaries; Sysco said it did not currently anticipate needing to repatriate it.
- Total debt carrying value was approximately $7.85 billion, up from $3.04 billion at September 26, 2015, largely in connection with the acquisition. Approximately 65% of debt was at fixed rates, including swaps. Quarter-end commercial paper outstanding was $442.8 million.
- Sysco said operating cash flow, commercial paper and credit facilities, and access to capital markets were expected to meet anticipated cash requirements for the next 12 months. A new $2.0 billion revolving credit facility was established November 2, 2016, after quarter-end.
- Current assets were $8.14 billion and current liabilities were $5.37 billion at October 1, 2016. The filing provides these balances but does not state a current ratio.
Management commentary, outlook and risks
- Management described execution as solid despite softening restaurant demand. It cited declining year-over-year restaurant traffic and decelerating restaurant spending.
- Sysco reported 2.2% year-over-year deflation, primarily in center-of-the-plate proteins and dairy, and expected deflation to continue into calendar 2017. Lower fuel costs helped results, but management expected fuel costs to become comparable with the prior year in Q2 FY2017.
- Brakes contributed approximately $0.04 to quarterly consolidated EPS. Management expected the acquisition to be modestly accretive through fiscal 2017 by low- to mid-single-digit cents per share on a GAAP basis, and high-single-digit cents excluding applicable Certain Items; it expected accretion to accelerate in fiscal 2018 and beyond. These are forward-looking expectations, not guarantees.
- Unusual items included $28.2 million of accelerated depreciation and conversion costs tied to the revised business technology strategy, along with other restructuring and acquisition costs. Prior-year results included an $86.5 million loss on redemption of debt issued for the proposed US Foods merger, which was terminated.
- Key risks identified include economic and restaurant-market weakness; inflation or deflation and fuel-price exposure; competition and margin pressure; execution and integration of Brakes; Brexit-related effects; indebtedness and capital-market access; technology disruption and cybersecurity; labor and pension obligations; and product, regulatory and legal risks. Management said pending legal proceedings were not expected to have a material adverse effect based on current estimates, while noting outcomes remain uncertain.
Important facts for investors to verify
- How Brakes performs after integration, including realized synergies, financing costs and actual EPS accretion versus management’s forecast.
- Whether underlying volume, gross-profit growth and margins remain resilient as restaurant demand softens and deflation continues.
- Debt reduction, interest expense, liquidity and the amount and location of cash following the acquisition.
- The sustainability of operating cash flow and free cash flow, considering seasonal working-capital needs and acquisition-related spending.
- The effect of excluded costs and other adjustments when comparing non-GAAP results with GAAP earnings.