Sysco Corporation (SYSCO) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the 13 weeks ended September 30, 2017; comparisons are with the 13 weeks ended October 1, 2016. Sysco distributes food and related products through U.S., international and SYGMA operations. The filing was signed November 9, 2017.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales | $14.650 billion | $13.969 billion | +4.9% |
| Gross profit | $2.794 billion | $2.692 billion | +3.8% |
| Operating income | $623.1 million | $566.8 million | +9.9% |
| Net earnings | $367.6 million | $323.9 million | +13.5% |
| Diluted EPS | $0.69 | $0.58 | +19.0% |
| Operating cash flow | $82.8 million | $253.9 million | Down $171.2 million |
| Capital expenditures | $136.3 million | $142.3 million | Down $6.0 million |
| Free cash flow (non-GAAP) | $(51.8) million | $115.9 million | Down $167.7 million |
- Gross margin was 19.1%, versus 19.3%; operating margin was 4.3%, versus 4.1%. The effective tax rate declined to 32.72% from 35.28%.
- Adjusted operating income was $661.9 million, up 5.6%; adjusted net earnings were $394.5 million, up 4.9%; adjusted diluted EPS was $0.74, up 10.4%. These are non-GAAP measures and exclude specified restructuring and Brakes acquisition-related items.
- Sales growth reflected inflation as well as volume and currency effects. U.S. Foodservice sales increased 3.9%, including 3.8% inflation; U.S. Broadline case volume increased 0.3%. International sales rose 6.4%, principally from inflation and favorable currency translation, while segment operating income fell 3.5%.
Balance sheet, debt and liquidity
- At September 30, 2017, cash and cash equivalents were $909.2 million; total assets were $18.419 billion; current liabilities were $6.140 billion.
- Total debt was approximately $9.0 billion, compared with $8.2 billion at July 1, 2017. Long-term debt was $8.426 billion and current maturities were $533.6 million. Fair value of total debt was estimated at $9.4 billion.
- Commercial paper outstanding was $864.8 million at quarter-end; $959.8 million was outstanding by October 13. The company reported no borrowings on the credit facility supporting its U.S. commercial paper program as of that date. Approximately 65% of debt was at fixed interest rates, including swaps.
- Operating cash flow was pressured by working-capital investment, particularly receivables and inventory, and lower accounts payable. Management cited seasonal cash use early in the fiscal year and said it expects fiscal 2018 operating cash flow to be generally consistent with fiscal 2017.
- Sysco repurchased 10.5 million shares for $550.1 million and paid $174.9 million in dividends during the quarter. The quarterly dividend declared was $0.33 per share. Management did not expect repurchases to continue at the first-quarter pace.
Material changes and management commentary
- U.S. Foodservice operating income increased 4.8%, while International Foodservice operating income declined 3.5%, mainly reflecting weaker European margins and higher expenses. Canada improved; SYGMA sales rose 9.0%, but operating income was slightly lower.
- Management estimated that Hurricanes Harvey, Irma and Maria reduced operating income by approximately $10 million and diluted EPS by about $0.01 through lost sales and lower productivity.
- A new share-based compensation accounting standard resulted in $16.0 million of excess tax benefits, or about $0.03 per share, in the quarter. The benefit is variable and difficult to predict. Excluding such benefits, Sysco expects an effective tax rate of 35%–36%.
- Reduced depreciation following full depreciation of the former ERP system is expected to provide an approximately $50 million net one-time benefit. Management also cited rising inflation, challenging inbound freight conditions and pay-related expense increases.
- After quarter-end, Sysco acquired HFM Foodservice, a Hawaii-based distributor with approximately $290 million in annual sales, and acquired the remaining 50% interest in its Costa Rica joint venture.
- The company reported no goodwill impairment after an interim test related to combining Ireland reporting units. It stated that legal matters were not expected to materially adversely affect consolidated results or financial position, while noting that outcomes remain uncertain.
Outlook, risks and contingencies
- Management expects softer European operations in Q2 FY2018 followed by a stronger second half, and expects multi-unit customer growth to begin in Q2 and continue in the second half. It described U.S. market conditions as modestly favorable, but European restaurant traffic and U.K. food-away-from-home activity as weak.
- Management stated an adjusted return on invested capital target of 15% and an adjusted operating income target expected by the end of fiscal 2018. These are non-GAAP targets; the filing does not provide a quantitative reconciliation to GAAP or a specific consolidated revenue or EPS forecast.
- Management expects fiscal 2018 free cash flow to be generally consistent with fiscal 2017 and anticipates improvement over the remainder of the year. It also expects cash flows, commercial paper and capital-market access to meet anticipated cash requirements for the next 12 months.
- Risks highlighted include inflation and fuel costs, competitive pressure on margins and customer retention, international economic conditions and Brexit, acquisition integration, debt and capital-market access, labor and pension obligations, and technology disruption or cybersecurity incidents.
- Sysco had $500 million of 5.25% senior notes due in February 2018 and intended to repay them using cash, operating cash flow, commercial paper, new notes or a combination. Tax payments were deferred by approximately $300 million to Q3 FY2018 following Hurricane Harvey relief.
Important facts for investors to verify
- Whether sales and profit growth reflect sustainable case-volume gains rather than primarily inflation, currency translation and temporary tax benefits.
- Whether working-capital use and negative first-quarter free cash flow reverse as management expects during the remainder of the fiscal year.
- Whether debt growth, interest costs and share repurchases remain consistent with liquidity and capital-allocation priorities.
- Whether European operating performance improves as forecast, given weak demand, U.K. inflation and margin pressure.
- Progress toward the adjusted operating income and 15% adjusted ROIC targets, including the effect of recurring restructuring, technology and acquisition costs.
- Integration and performance of HFM and the Costa Rica operation, and any material changes in legal, tax or other contingencies.