Sysco Corporation — Form 10-Q Summary
Business context and reporting period
Sysco distributes food and related products to foodservice customers through U.S. Foodservice Operations, International Foodservice Operations, SYGMA and other businesses. This report covers the 13 weeks and 26 weeks ended December 30, 2017, the second quarter and first half of fiscal 2018; comparisons are with the periods ended December 31, 2016.
Financial performance and position
| Metric | Second quarter | First 26 weeks |
|---|---|---|
| Sales | $14.41 billion, up 7.1% | $29.06 billion, up 6.0% |
| Gross profit / margin | $2.70 billion; 18.7% versus 19.1% | $5.49 billion; 18.9% versus 19.2% |
| Operating income / margin | $532.3 million, up 8.1%; 3.7% versus 3.7% | $1.16 billion, up 9.1%; 4.0% versus 3.9% |
| Net earnings | $284.1 million, up 3.3% | $651.8 million, up 8.8% |
| Diluted EPS | $0.54 versus $0.50 | $1.23 versus $1.08 |
Adjusted diluted EPS, excluding the company’s defined Certain Items, was $0.78 for the quarter and $1.52 for the half-year. After also excluding the estimated one-time benefit from the U.S. statutory tax-rate change, adjusted EPS was $0.66 and $1.40, respectively. These are non-GAAP measures.
- For the first half, operating cash flow was $933.2 million versus $639.4 million; capital expenditures were $258.6 million; and free cash flow, a non-GAAP measure, was $678.5 million versus $365.3 million.
- Cash and cash equivalents on the balance sheet were $961.1 million; the cash-flow statement total of $1.114 billion also includes $152.9 million of restricted cash. Current assets were $8.27 billion and current liabilities $5.98 billion.
- Total debt carrying value was approximately $8.9 billion, up from $8.2 billion at July 1, 2017. At quarter-end, $750 million of commercial paper was outstanding; $500 million of 5.25% senior notes were due February 2018. Approximately 66% of debt was at fixed rates, including swaps.
- Sysco declared dividends of $0.36 per common share for the quarter. First-half dividends paid were $346.9 million; share repurchases were $750.5 million.
Material changes and operating drivers
- U.S. Foodservice sales rose 6.6% in the quarter, reflecting 3.0% case-volume growth, 3.3% inflation and acquisitions. Segment operating income grew 3.7%; gross margin declined to 19.8% from 20.1%.
- International sales rose 9.3%, including favorable currency translation and inflation, but segment operating income fell 38.2% to $52.4 million. Management cited weaker European gross margins, U.K. competition and higher transformation and transportation costs. U.K. food-cost inflation was approximately 6% in the quarter.
- Consolidated gross margin declined year over year even as gross-profit dollars increased. Management cited inbound freight pressure, lower-margin new customers and inflation. Driver shortages increased carrier rates and use of spot transportation.
- Interest expense increased 19% in the quarter and 14.4% for the first half, primarily because of higher debt levels. Average diluted shares fell 4.2% in the quarter, supporting per-share growth.
- First-half acquisitions cost $147.6 million, including HFM Foodservice and the remaining 50% interest in a Costa Rican joint venture. Management said the acquisitions did not materially affect reported results.
Outlook, commentary and risks
- Management said second-quarter results reflected continued local case growth alongside gross-profit and expense pressures, and expressed confidence in meeting fiscal 2018 financial targets. It expects second-half EPS to benefit by $0.09–$0.13 from ongoing tax-reform effects.
- The newly outlined fiscal 2020 plan targets $650–$700 million of adjusted operating-income growth versus fiscal 2017, 16% adjusted return on invested capital, sales growth of 4%–4.5%, and adjusted diluted EPS of $3.40–$3.50. These are management targets, not guarantees, and may change as tax effects are assessed.
- Sysco estimated annual tax savings of $200–$300 million from the Tax Act. Its tax accounting remained incomplete: it recorded a provisional $115 million transition-tax expense and tax benefits from the lower blended statutory rate and balance-sheet remeasurement. Final tax effects may differ; certain elements, including GILTI, were not yet reasonably estimable.
- First-half cash generation benefited from deferred tax payments related to Hurricane Harvey; management said payments would likely resume in the third quarter. The company cautioned that cash flow is seasonal and expects full-year operating cash flow and free cash flow generally consistent with fiscal 2017.
- Other material risks include fuel and product-cost volatility, freight and labor availability, competition and margin pressure, execution and integration of strategic initiatives, international operations and Brexit, technology disruption and cybersecurity, and substantial indebtedness. Legal proceedings were described as not expected to materially adversely affect the company, though outcomes are uncertain.
Most important facts for investors to verify
- Whether sales and local case growth persist and gross-margin pressure from freight, inflation and customer mix eases.
- Whether International Foodservice Operations recover operating profitability, particularly in the U.K. and Europe.
- How final Tax Act accounting, transition-tax payments and realized tax savings compare with provisional estimates and management expectations.
- Whether cash flow remains strong after Harvey-related tax-payment deferrals, and how debt maturities, commercial paper and buybacks affect liquidity and leverage.
- Progress toward fiscal 2020 non-GAAP targets, including the assumptions and adjustments underlying those targets.