Sysco Corporation — Form 10-Q Summary
Reporting period: Second quarter and first 26 weeks of fiscal 2020, ended December 28, 2019. The quarter comprised 13 weeks; the comparable prior-year periods ended December 29, 2018. Amounts are U.S. dollars unless noted. Sysco distributes food and related products through U.S. and international foodservice operations, SYGMA and other businesses.
Financial performance
| Metric | 13 weeks ended Dec. 28, 2019 | Change year over year | 26 weeks ended Dec. 28, 2019 | Change year over year |
|---|---|---|---|---|
| Sales | $15.03 billion | +1.8% | $30.33 billion | +1.2% |
| Gross profit | $2.83 billion | +2.0% | $5.77 billion | +1.7% |
| Operating income (GAAP) | $552.5 million | +22.3% | $1.22 billion | +13.0% |
| Net earnings (GAAP) | $383.4 million | +43.4% | $837.2 million | +19.9% |
| Diluted EPS (GAAP) | $0.74 | +45.9% | $1.62 | +22.1% |
| Adjusted diluted EPS (non-GAAP) | $0.85 | +13.2% | $1.83 | +10.7% |
Margins: Consolidated gross margin was 18.8% in the quarter, unchanged at the filing’s rounded precision, and 19.0% for the first 26 weeks versus 18.9% a year earlier. Operating margin was 3.7% for the quarter versus 3.1%; first-half operating margin was 4.0% versus 3.6%. U.S. Foodservice gross margin declined 17 basis points in the quarter to 19.68%, principally reflecting difficulty passing through inflation and lower fuel surcharges.
Cash flow and capital allocation: First-half operating cash flow was $754.5 million, down from $917.8 million. Capital expenditures were $393.4 million; free cash flow, a company-defined non-GAAP measure, was $371.4 million versus $700.9 million. Sysco paid $399.1 million in dividends and spent $630.4 million on share repurchases. It also paid $142.8 million for acquisitions.
Liquidity and debt: At December 28, cash and cash equivalents were $524.6 million, with another $46.9 million of restricted cash. Current assets were $8.66 billion and current liabilities $6.93 billion. Carrying value of total debt was $8.9 billion; estimated fair value was $9.6 billion. Commercial paper outstanding was $853.3 million, supported by a $2.0 billion program and revolving credit facility. Management said available cash flows and borrowing and capital-market access should meet anticipated needs for the next 12 months. About 59% of cash and equivalents was held by international subsidiaries and could incur taxes if transferred or repatriated.
Changes versus the prior comparable period
- Reported earnings growth substantially exceeded adjusted growth: quarterly GAAP operating income rose 22.3% versus 3.9% adjusted, and GAAP net earnings rose 43.4% versus 11.3% adjusted. Lower restructuring and transformation charges contributed to the reported comparisons.
- Quarterly sales growth reflected U.S. volume, inflation and acquisitions. U.S. Foodservice sales rose 3.2%; International sales were essentially flat; SYGMA sales fell 5.3%, mainly from exiting certain customers.
- For the first half, U.S. Foodservice sales rose 2.9%, while International sales declined 0.2% reported but increased 2.0% on a constant-currency basis. Foreign exchange reduced consolidated sales growth by 0.4 percentage points.
- Working capital was a significant cash-flow headwind. Management attributed the year-over-year decline in operating cash flow partly to changes in receivables, inventory and accounts payable.
- Operating lease right-of-use assets and liabilities were recognized following adoption of the new lease standard at the start of fiscal 2020; adoption initially recorded approximately $647 million of lease assets and $658 million of liabilities.
Outlook, commentary and risks
- Sysco lowered its fiscal 2018–2020 adjusted operating income growth target from $600 million to approximately $500–$525 million, and revised the expected growth rate from about 8% to about 7%. Management cited inflation, France integration challenges, higher discrete corporate expenses and investments intended to support future growth. The adjusted EPS growth objective and 16% adjusted return-on-invested-capital target remained part of the plan.
- Management reported strong local restaurant customer growth and continued Sysco-brand penetration, but noted dairy and beef inflation, lower produce pricing versus the prior-year period, reduced fuel surcharges and pressure on gross margin. A 12-day Denver strike added costs; labor retention and operating costs also remain considerations.
- France integration and operational challenges were expected to weigh on results through the remainder of fiscal 2020. International risks include soft U.K. and Ireland conditions, Brexit uncertainty, and economic and political developments in Europe.
- Other disclosed risks include fuel-price volatility, labor availability and disputes, customer and competitive pressures, execution and cost risks from transformation initiatives, acquisition integration, foreign exchange, and access to capital. Sysco said pending legal matters were not expected to have a material adverse effect; certain loss exposures remain contingent.
- Sysco acquired J. Kings Food Service Professionals and Hawaii distributors Armstrong Produce and Kula Produce during the first half; the acquisitions did not materially affect reported results. Management also disclosed a senior leadership change in January 2020.
Important facts for investors to verify
- Reconcile GAAP earnings growth with adjusted results and review the company’s non-GAAP definitions and adjustments.
- Track delivery of the revised adjusted operating income target, adjusted EPS growth objective and 16% adjusted ROIC target.
- Monitor operating cash conversion, receivables and inventory, capital spending, free cash flow, debt and share repurchases.
- Assess U.S. gross-margin recovery, inflation pass-through, local case growth, SYGMA customer exits and International performance, especially France.
- Review potential costs or disruption from Brexit, labor issues and disputes, fuel prices, contingent acquisition earnouts and legal or tax matters.