Sysco Corporation — Form 10-Q Summary
Business context and reporting period: Sysco distributes food and related products to restaurants and other foodservice customers. This filing covers the 13 weeks and 26 weeks ended December 26, 2015 (fiscal 2016 second quarter and first half), compared with the corresponding periods ended December 27, 2014. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Key financial results
| Metric | Quarter | First 26 weeks |
|---|---|---|
| Sales | $12,153.6 million; up 0.6% | $24,716.2 million; up 0.8% |
| Gross profit / margin | $2,156.8 million / 17.75%, versus 17.25% | $4,394.8 million / 17.78%, versus 17.42% |
| Operating income | $432.6 million; up 37.1% | $926.1 million; up 18.6% |
| Adjusted operating income (non-GAAP) | $436.9 million; up 10.2% | $943.3 million; up 4.2% |
| Net earnings | $272.4 million; up 72.4% | $516.8 million; up 18.3% |
| Diluted EPS | $0.48, versus $0.27 | $0.88, versus $0.73 |
| Adjusted diluted EPS (non-GAAP) | $0.48; up 17.1% | $1.00; up 7.5% |
| Operating cash flow / free cash flow | Not separately reported for the quarter | $468.9 million / $231.5 million, versus $452.4 million / $156.5 million |
Quarterly GAAP operating income and net earnings benefited from lower prior-year US Foods merger-planning costs; adjusted measures provide a more modest comparison. Fiscal 2016 first-half interest expense was $174.1 million, including an $86.5 million loss on extinguishment of debt and related financing costs. Second-quarter interest expense was $47.2 million, down from $77.0 million a year earlier.
Balance sheet, debt and liquidity
- At December 26, 2015, cash and cash equivalents were $595.6 million; total assets were $13.1 billion.
- Long-term debt was $4.27 billion, with $7.1 million in current maturities and $83.0 million in notes payable. Management reported total debt of approximately $4.4 billion; no commercial paper was outstanding at quarter-end.
- Cash fell from $5.13 billion at June 27, 2015, largely reflecting the $5.05 billion redemption of merger-related senior notes and the $1.5 billion accelerated share repurchase. Sysco also issued $2.0 billion of new senior notes in September 2015.
- First-half capital expenditures were $248.2 million; acquisitions used $98.2 million. Dividends paid were $348.4 million. Free cash flow is a company-defined non-GAAP measure.
- Management said cash from operations, borrowing facilities and access to capital markets should meet anticipated cash needs for the next 12 months. Approximately 49% of cash was held by international subsidiaries; repatriation could result in additional taxes.
Changes versus prior period and operating trends
- Sales growth was modest despite strong volume: U.S. Broadline case volumes, including recent acquisitions, rose 3.9% in the quarter and 3.6% year to date. Locally managed customer case growth was 3.0% and 2.5%, respectively.
- Product-cost deflation was 1.2% for the quarter and 0.7% year to date, compared with inflation of 6.0% and 5.4% in the prior-year periods. Lower selling prices and foreign-currency translation restrained sales; currency reduced reported sales by 1.7% in the quarter and 1.8% year to date.
- Gross margin improved, supported by volume and customer mix, category management, Sysco-branded products and management of deflation. Adjusted operating expenses increased 1.8% in the quarter and 2.5% year to date, reflecting volume-related pay, technology investment and incentive accruals.
- Broadline operating income rose 8.7% for the quarter and 7.2% year to date. SYGMA sales declined 3.4% and 4.8%, respectively, due to lost or strategically resigned business and lower fuel surcharges. “Other” segment first-half operating income declined, partly due to early-stage operations.
- The $20.8 million favorable resolution of a tax contingency helped lower the second-quarter effective tax rate to 30.71%, from 33.12%. The first-half rates were 33.31% and 35.10%. Share repurchases reduced average diluted shares by 4.1% for the quarter and 1.4% year to date.
Outlook, commentary and risks
- Management’s three-year plan targets at least $400 million of operating-income growth by the end of fiscal 2018 and improved adjusted return on invested capital. It targeted 20%–30% of the operating-income improvement goal in fiscal 2016 and said it was on track for the first-year goals.
- The plan includes improving working capital by four days, moderate dividend growth, acquisitions and reducing diluted shares through a $3.0 billion share-repurchase authorization over two years. The $1.5 billion accelerated repurchase was underway; final share delivery remained subject to adjustment. Management estimated an approximately $0.03–$0.04 fiscal 2016 EPS benefit, partly offset by interest on new debt.
- Sysco expected deflation to persist at least through fiscal 2016 and expected a normalized tax rate of 36%–37% for the second half. Fiscal 2016 capital expenditures, net of asset-sale proceeds, were forecast at the lower end of $550–$600 million.
- Management cited cautious consumer spending, modestly declining restaurant traffic, competitive pricing, foreign-exchange pressure and deflation as risks. Other disclosed risks include fuel and product-cost volatility, customer retention, labor, pension obligations, debt and capital-market access, tax matters, acquisitions, and technology or cybersecurity disruptions.
- Legal proceedings were ongoing; management did not expect their resolution to materially adversely affect consolidated financial position or results, while noting outcomes are uncertain. The filing also disclosed $32.1 million of unrecognized tax benefits and $19.4 million of related accrued interest; the potential change in unrecognized benefits could not be estimated.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile GAAP and adjusted results, especially the impact and timing of merger-related charges, debt-redemption costs and the favorable tax-contingency resolution.
- Track whether deflation, competitive pricing and foreign-exchange movements continue to pressure reported sales and earnings, and whether margin gains persist.
- Monitor debt, interest expense, share-repurchase settlement and remaining repurchase activity, including the effect on leverage and per-share results.
- Assess cash conversion and working-capital seasonality; first-half operating cash flow benefited from lower tax payments, while accrued-expense movements were unfavorable.
- Follow SYGMA’s lost-business trend, early-stage “Other” operations, the strategic-plan targets and the stated fiscal 2016 tax-rate and capital-spending expectations.