Sysco Corporation — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2019, the 13 weeks ended December 29, 2018; year-to-date figures cover 26 weeks. Comparisons are with the corresponding fiscal 2018 periods. Amounts below are in U.S. dollars.
Business context and financial performance
Sysco distributes food and related products through U.S. Foodservice Operations, International Foodservice Operations, SYGMA and other businesses. The company attributed growth mainly to U.S. Broadline case-volume growth and product inflation, while noting higher operating costs and weaker conditions in some international markets.
| Metric | Q2 FY2019 | Q2 FY2018 | 26 weeks FY2019 | 26 weeks FY2018 |
|---|---|---|---|---|
| Sales | $14.766 billion | $14.411 billion | $29.981 billion | $29.062 billion |
| Gross profit | $2.772 billion | $2.699 billion | $5.675 billion | $5.493 billion |
| Gross margin | 18.8% | 18.7% | 18.9% | 18.9% |
| Operating income | $451.9 million | $528.6 million | $1.080 billion | $1.148 billion |
| Operating margin | 3.1% | 3.6% | 3.6% | 3.9% |
| Net earnings | $267.4 million | $284.1 million | $698.4 million | $651.8 million |
| Diluted EPS | $0.51 | $0.54 | $1.33 | $1.23 |
| Interest expense | $87.1 million | $86.0 million | $176.1 million | $166.9 million |
For the 26 weeks, operating cash flow was $917.8 million, versus $933.2 million; capital expenditures, net of equipment-sale proceeds, were $216.9 million; and free cash flow, a non-GAAP measure, was $700.9 million, versus $678.5 million. Cash and cash equivalents were $744.8 million at December 29, 2018, with another $152.2 million of restricted cash, primarily held by the captive insurer.
Total debt was approximately $8.8 billion, including $786.0 million of current maturities; long-term debt was $8.0 billion. Current assets were $8.44 billion and current liabilities $6.75 billion. Shareholders’ equity was $2.17 billion.
Changes versus comparable periods
- Q2 sales rose 2.5%, but GAAP operating income fell 14.5%, net earnings fell 5.9%, and diluted EPS fell 5.6%. Management said lower GAAP earnings primarily reflected the prior-year quarter’s larger retroactive tax benefit following U.S. tax-law changes, alongside operating-cost pressures.
- Excluding “Certain Items,” Q2 adjusted operating income increased 4.8% to $603.3 million, while adjusted net earnings declined 4.5% to $393.5 million and adjusted diluted EPS declined 4.0% to $0.75. These are company-defined non-GAAP measures.
- For the first 26 weeks, sales increased 3.2%, GAAP operating income decreased 5.9%, and net earnings increased 7.2%. Adjusted operating income increased 5.0% to $1.295 billion; adjusted net earnings rose 8.2% to $872.7 million and adjusted diluted EPS rose 9.0% to $1.66.
- Segment results diverged: Q2 U.S. Foodservice sales grew 4.2% and operating income 4.2%; International sales grew 0.8% but reported an operating loss of $14.9 million; SYGMA sales declined 5.9%. International GAAP results were affected by substantial restructuring and acquisition-related costs.
Outlook, management commentary and risks
- Management expects improved operating-income performance in the second half of fiscal 2019 and said it remains confident in achieving its three-year plan. Targets through fiscal 2020, compared with fiscal 2017, include $650–$700 million of adjusted operating-income growth, 16% adjusted ROIC for existing businesses, and adjusted diluted EPS of $3.85–$3.95. These are forward-looking, non-GAAP targets, not guarantees.
- Planned transformation and cost initiatives include finance modernization, indirect-spend controls, Canadian regionalization and administrative-cost reductions; management expected benefits to begin in the second half of fiscal 2019. In February 2019, Sysco announced organizational changes reducing corporate support salaried positions by 10%.
- Cost pressures included transportation and warehouse expenses, labor tightness, overtime, fuel and technology spending. France integration restructuring charges were $56.2 million for the first half, including $54.9 million in Q2. Certain Items also include transformation, severance, facility-closure and Brakes acquisition-related costs.
- International sales and results faced foreign-exchange headwinds, Brexit uncertainty affecting the U.K., and yellow-vest protests affecting France. Sysco also identified risks from competition, inflation or deflation, labor availability, fuel prices, technology disruption and cybersecurity, execution of transformation plans, and debt and capital-market access.
- Operating cash flow was lower year over year, partly reflecting higher tax payments; the prior-year period benefited from Hurricane Harvey-related tax-payment relief. Sysco said seasonal patterns typically use more cash earlier in the fiscal year. Management believed available operating cash flow and borrowing-market access would meet anticipated needs for the next 12 months.
- Sysco issued CDN $500 million of senior notes at a 3.65% coupon. Notes of $250 million due March 2019 and $500 million due April 2019 were included in current maturities. Approximately 67% of debt was at fixed rates, including swaps.
- Legal proceedings were ongoing; management did not expect their resolution, individually or in aggregate, to materially adversely affect financial position or results. The filing reported effective disclosure controls, while implementation of a financial system had materially modified internal controls over financial reporting at corporate and shared-services locations.
Key facts for investors to verify
- Whether second-half operating-income improvement and fiscal 2020 adjusted targets remain achievable, and how GAAP results compare with the company’s adjusted measures.
- Whether U.S. customer and case-volume growth can offset cost inflation, labor and supply-chain pressures, and margin challenges.
- International segment recovery, France integration costs, and the effects of Brexit, currency movements and operating conditions in Europe.
- Cash conversion and working-capital trends, upcoming debt maturities, refinancing plans, and the balance between dividends, repurchases and investment.
- The magnitude and duration of restructuring and transformation expenses, and whether projected savings materialize; review the non-GAAP reconciliations and assumptions.