Sysco Corporation (NYSE: SYY) — FY2019 Form 10-K
Reporting period: Fiscal year ended June 29, 2019 (52 weeks). The filing also provides fourth-quarter results; this is an annual report, not a standalone quarterly filing. Sysco distributes food and related products to more than 650,000 foodservice customers through operations in North America and Europe.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $60.114 billion | $58.727 billion | +2.4% |
| Gross profit / margin | $11.409 billion / 19.0% | $11.085 billion / 18.9% | +2.9% |
| Operating income / margin | $2.330 billion / 3.9% | $2.314 billion / 3.9% | +0.7% |
| Net earnings | $1.674 billion | $1.431 billion | +17.0% |
| Diluted EPS | $3.20 | $2.70 | +18.3% |
| Adjusted operating income (non-GAAP) | $2.733 billion | $2.533 billion | +7.9% |
| Adjusted net earnings / diluted EPS (non-GAAP) | $1.857 billion / $3.55 | $1.660 billion / $3.14 | +11.9% / +13.1% |
Results are for the full fiscal year. Fourth-quarter sales were $15.475 billion versus $15.316 billion; net earnings were $535.8 million versus $448.9 million, and diluted EPS was $1.03 versus $0.85. Fourth-quarter FY2019 earnings included a $66.3 million gain on the sale of Iowa Premium.
- Cash flow: Operating cash flow was $2.411 billion, up 11.9%. Capital expenditures were $692.4 million; free cash flow, a company-defined non-GAAP measure, was $1.740 billion versus $1.490 billion.
- Liquidity: Cash and cash equivalents were $513.5 million at year-end, compared with $552.3 million a year earlier. Current assets were $8.142 billion and current liabilities $6.103 billion. Management said operating cash flow, commercial paper capacity and capital-market access should cover anticipated requirements for the next 12 months.
- Debt: Total debt was $8.163 billion, versus $8.327 billion in FY2018; long-term debt was $8.122 billion. Approximately 70% of debt was at fixed rates, including swaps. Sysco had $132.1 million of commercial paper outstanding and a $2.0 billion revolving credit facility with no borrowings at year-end.
- Shareholder returns: Fiscal-year dividends paid were $775.4 million; share repurchases totaled approximately $1.0 billion. Dividends declared per share rose to $1.53 from $1.41.
Changes and operating drivers
- U.S. Foodservice sales rose 4.2% and operating income rose 4.4%. U.S. Broadline case volume increased 2.7%, including 3.1% growth in locally managed customer cases; inflation also supported sales.
- International sales declined 0.2% and GAAP operating income fell 35.3%. Currency translation reduced international sales, while France integration challenges, restructuring and strategic investments weighed on reported results. Adjusted international operating income increased 10.7%.
- SYGMA sales fell 4.8%, while operating income increased 14.2%, reflecting improved margins and expense management.
- Overall gross margin edged up to 19.0%; operating margin remained 3.9%. Sales growth was partly offset by higher labor, transportation, warehouse and technology costs. Foreign exchange reduced consolidated sales by 0.8%.
Outlook, commentary and risks
- Sysco lowered its FY2018–FY2020 adjusted operating-income growth target, measured against FY2017, from $650–$700 million to approximately $600 million, citing lower-than-anticipated volume growth, higher expenses and the Iowa Premium sale. Other plan objectives included EPS growth faster than operating income and 16% adjusted ROIC improvement for existing businesses; these are non-GAAP targets.
- For FY2020, management expected an effective tax rate of approximately 24% and net capital expenditures of about 1.3% of sales. It also expected to increase share repurchases to more than $1 billion and continue dividend growth, subject to business needs and Board decisions.
- Management described U.S. economic conditions as relatively positive but noted flat recent restaurant same-store sales and negative traffic. It cited low U.K. consumer confidence amid Brexit uncertainty, France integration challenges, competitive pricing pressure, and tight labor markets.
- Key risks include thin industry margins and food-cost inflation or deflation; strong competition and customer price sensitivity; fuel, labor and supply-chain costs; food safety, recalls and reputational harm; customer concentration or churn; Brexit, currency and other international risks; acquisition integration; cybersecurity and technology disruption; and debt, pension funding and union-contract obligations.
- Sysco disclosed approximately $48.5 million of FY2019 multiemployer pension contributions and estimated potential aggregate withdrawal liability of up to $128 million. The company-sponsored U.S. pension benefit obligation was $4.5 billion; market and discount-rate changes can affect funded status and future funding needs.
- Other notable items: the FY2019 effective tax rate was 16.53%, helped by $95.1 million of foreign tax credits and other tax effects; transformation, restructuring and acquisition-related charges affected comparability. The filing reports no off-balance-sheet arrangements and says pending legal proceedings are not expected to have a material adverse effect. Adoption of lease accounting in FY2020 was expected to add $500–$600 million of operating-lease right-of-use assets and liabilities.
Investor verification priorities
- Assess the quality and sustainability of EPS growth: the FY2019 tax rate and $66.3 million Iowa Premium gain materially affected GAAP results; compare with adjusted measures and their exclusions.
- Track organic local-customer case growth, volume versus inflation, and whether gross-profit gains can outpace labor, distribution and technology costs.
- Monitor integration and restructuring progress in France and the U.K., including whether international adjusted improvement converts into GAAP operating income and sales growth.
- Review debt maturities, borrowing costs, liquidity and capital returns alongside the $8.2 billion debt balance and planned buybacks.
- Follow pension funding exposure, multiemployer plan status and union negotiations, as well as the impact of new lease liabilities.
- Confirm execution against revised FY2020 targets and guidance. The filing’s forward-looking targets are subject to significant uncertainty.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that disclosure controls were effective.