Sysco Corporation (10-K) — Fiscal 2017 Summary
Reporting period: Fiscal year ended July 1, 2017 (52 weeks). This filing is an annual report, not a standalone 2016 Q4 filing. Fiscal 2016 had 53 weeks, so reported year-over-year comparisons are not fully comparable; Sysco provides adjusted 52-week comparisons. Sysco distributes food and related products to more than 500,000 foodservice locations. On July 5, 2016, it acquired European distributor Brakes Group.
Key financial results
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Sales | $55.37 billion | $50.37 billion | Up 9.9%; excluding Brakes and adjusting for the extra week, up 1.6%. |
| Gross profit / margin | $10.56 billion / 19.1% | $9.04 billion / 17.9% | Gross profit up 16.8%; margin up 112 basis points. Excluding Brakes and adjusting for the extra week, margin rose 43 basis points. |
| Operating income / margin | $2.05 billion / 3.7% | $1.85 billion / 3.7% | Operating income up 11.0%. Adjusted income was $2.35 billion, up 17.1%. |
| Net earnings | $1.14 billion | $949.6 million | Up 20.3%; adjusted net earnings were $1.36 billion, up 11.9%. |
| Diluted EPS | $2.08 | $1.64 | Up 26.8%; adjusted diluted EPS was $2.48, up 18.1% (20.4% on a 52-week-comparable basis). |
| Operating cash flow / free cash flow | $2.18 billion / $1.51 billion | $1.93 billion / $1.43 billion | Operating cash flow up 12.6%; free cash flow up 5.9%. Free cash flow is a non-GAAP measure. |
| Cash and total debt | $869.5 million / $8.19 billion | $3.92 billion / $7.44 billion | Debt increased following the Brakes acquisition; about 71% of debt was fixed-rate, including swaps. |
| Capital spending | $686.4 million | $527.3 million | Net capital expenditures were $662.7 million. |
Performance, capital and liquidity
- Brakes contributed $5.2 billion of sales and $47.0 million of net earnings from acquisition through year-end. The acquisition drove most of International Foodservice Operations’ reported sales increase; excluding Brakes and the extra week, international comparable sales rose 2.1%.
- Sysco reported 0.6% product-cost deflation for the year. Management cited stronger local-customer growth, improved gross profit dollars and expense management; U.S. broadline case growth was 0.9% on a comparable 52-week basis.
- Operating cash flow benefited from improved working-capital management, including accounts payable. Investing cash outflow included $2.92 billion for acquisitions. The company paid $698.6 million in dividends and repurchased $1.9 billion of shares.
- Year-end current assets were $8.03 billion and current liabilities $6.10 billion. Cash was down substantially from the prior year, partly reflecting the acquisition and capital returns. About 79% of cash was held by international subsidiaries; Sysco said it did not anticipate needing to repatriate it.
- Management said operating cash flow, commercial paper and credit facilities, and access to capital markets should meet anticipated cash needs for the next 12 months. The $2.0 billion revolving facility supporting U.S. commercial paper was undrawn as of August 11, 2017; commercial paper outstanding then was $551 million.
- Shareholders’ equity declined to $2.38 billion from $3.48 billion. Debt represented 77.5% of debt-plus-equity capitalization, versus 67.9% in fiscal 2016.
Outlook, unusual items and risks
- For fiscal 2018, Sysco estimated net capital expenditures of 1.3%–1.4% of sales, expected operating expenses and transportation costs to rise with case volumes and fuel prices, and anticipated inflation for the balance of calendar 2017. Management expected multi-unit case growth trends to improve and planned greater sales-team investment.
- The three-year plan, measured through fiscal 2018, targets $600–$650 million of adjusted operating-income improvement from fiscal 2015, adjusted EPS growth faster than operating income, and a 15% improvement in adjusted return on invested capital for existing businesses. Management expected to achieve the high end of the operating-income target. Brakes was excluded from the original targets.
- FY2017 “Certain Items” included $111.3 million of accelerated technology-system depreciation, acquisition and restructuring costs, and a $35.6 million multiemployer-pension withdrawal charge. Adjusted measures exclude specified items and should be considered alongside GAAP results.
- Sysco’s Albany subsidiary withdrew from a multiemployer pension plan and accrued a $35.6 million liability. Sysco estimated its share of aggregate withdrawal liabilities across participating plans could reach $147.9 million; several plans were considered underfunded. The company also reported a $4.2 billion U.S. pension obligation.
- Key risks include intense competition and low industry margins, food-cost deflation or inflation, fuel prices, supply interruptions and food-safety events, customer concentration or loss, foreign exchange and Brexit-related uncertainty, acquisition integration, cybersecurity, pension funding and substantial debt. Goodwill impairment risk warrants attention: $1.7 billion of goodwill in certain reporting units could require further impairment analysis if estimated fair values fell by 5%–28%; no impairment was recorded in FY2017.
- Legal proceedings were not expected by management to materially affect consolidated results, though outcomes remain uncertain. The filing’s Item 3 reports none; the financial-statement note discusses ongoing proceedings and contingencies.
- Management and the auditor reported effective internal control over financial reporting, but the assessment excluded Brakes, which represented 25.2% of year-end assets and 9.3% of annual sales. The filing also notes corrections to cash-flow classifications and balance-sheet acquisition allocations previously presented in the August 14, 2017 earnings-release filing.
Investor verification priorities
- Reconcile reported growth with the Brakes acquisition and the extra week in fiscal 2016; compare GAAP results with Sysco’s adjusted 52-week, ex-Brakes measures.
- Review debt maturities, interest costs, cash availability by jurisdiction and the pace of debt reduction after the acquisition.
- Assess whether local-customer growth, gross-margin gains and productivity improvements can offset competitive pricing, fuel and labor cost pressures.
- Track Brakes integration and performance, including the execution of its U.K. supply-chain transformation and the sensitivity of acquired goodwill valuations.
- Monitor pension funding and potential multiemployer withdrawal liabilities, as well as the fiscal 2018 capital-spending and strategic-plan targets.