Sysco Corporation — Q1 FY2014 Form 10-Q
Business context and reporting period. Sysco distributes food and related products to foodservice customers in the U.S. and selected international markets. This unaudited quarterly report covers the 13 weeks ended September 28, 2013; comparisons are with the 13 weeks ended September 29, 2012 unless noted.
Financial performance and liquidity
| Metric | Q1 FY2014 | Prior period | Change |
|---|---|---|---|
| Sales | $11.714 billion | $11.087 billion | +5.7% |
| Gross profit / margin | $2.065 billion / 17.63% | $2.030 billion / 18.31% | Profit +1.8%; margin down 68 bps |
| Operating income / margin | $478.2 million / 4.1% | $478.8 million / 4.4% | Down 0.1% |
| Net earnings | $285.6 million | $286.6 million | Down 0.4% |
| Diluted EPS | $0.48 | $0.49 | Down 2.0% |
| Operating cash flow | $169.2 million | $213.2 million | Down 20.6% |
| Capital expenditures / free cash flow | $135.7 million / $44.1 million | $155.7 million / $58.9 million | Free cash flow down 25.2% |
Management’s non-GAAP adjusted operating income was $547.7 million, down 2.7%; adjusted net earnings were $329.5 million, down 3.1%; and adjusted diluted EPS was $0.56 versus $0.58. These measures exclude specified restructuring, severance, facility-closure and Business Transformation Project costs and should be considered alongside GAAP results.
At September 28, 2013, cash and cash equivalents were $359.5 million, versus $548.4 million a year earlier. Current assets were $6.534 billion and current liabilities $3.884 billion. Total debt carrying value was $3.130 billion, versus $3.019 billion a year earlier; its estimated fair value was $3.328 billion. The company reported $329 million of commercial paper outstanding at quarter-end and $631 million on October 26, 2013. The revolving facility supporting commercial paper totaled $1.925 billion across its two components.
Quarterly dividends declared were $0.28 per share, up from $0.27. Sysco repurchased 7.725 million shares for $250.6 million during the quarter.
Material changes and operating drivers
- Sales growth reflected acquisitions closed in the prior 12 months (2.3 percentage points of sales growth), estimated product-cost inflation of 2.1%, and case-volume growth. Case volumes rose about 4.1% including acquisitions and 1.8% excluding them.
- Gross margin contracted amid competitive pricing and a shift toward regional and national customers, whose margins are generally lower than locally managed customers. Management said the latter group contributes disproportionately to profitability.
- Operating expenses rose 2.3%, driven principally by acquired operations, depreciation and amortization, and fuel costs; lower transformation expenses and cost initiatives partly offset the increases. Business Transformation Project costs were $66.6 million, compared with $77.7 million.
- Broadline sales rose 5.4% and operating income 1.8%. SYGMA sales increased 7.2%, but operating income fell 31.0%, reflecting lower fuel surcharges, higher delivery costs, new-customer startup costs and facility-consolidation preparation.
- Operating cash flow was lower mainly because of working-capital movements; management cited a $62.3 million unfavorable year-over-year comparison from receivables, inventory and payables. Lower tax payments partly offset this pressure.
Outlook, risks and contingencies
- No specific revenue or EPS forecast is stated. Management described a challenging, slow-growth foodservice market and said consumer spending pressure and competitive pricing were weighing on customers and margins.
- Management targets annual operating-cost reductions of $300–$350 million and product-cost reductions of $250–$300 million by fiscal 2015. Fiscal 2014 Business Transformation Project expenses were expected to be $300–$350 million, similar to fiscal 2013; ERP rollout timing remained dependent on system performance and execution.
- Sysco expected fiscal 2014 retirement-related expenses to decline $75–$85 million from fiscal 2013, or $50–$60 million excluding fiscal 2013 restructuring charges. It expected Broadline cost per case to decline approximately $0.05 for fiscal 2014.
- Management believed cash from operations, borrowing facilities and access to capital markets would meet cash needs over the next 12 months. A $200 million note maturity was due in March 2014; repayment was expected to be funded with cash, operating cash flow, commercial paper, senior notes or a combination.
- Potential multiemployer pension withdrawal liability for certain plans was estimated at up to $90 million, excluding amounts already recorded; management cautioned the estimate could differ materially. Recorded liabilities for prior withdrawals were $40.3 million. Contributions may increase as underfunded plans improve funding.
- Sysco was cooperating with a California investigation into alleged violations involving delivery drop sites; potential fines or injunctive relief were possible and financial exposure could not be estimated. Legal proceedings overall were not expected by management to materially affect results, though outcomes were uncertain.
- Outstanding forward diesel commitments were approximately $187.4 million through November 2014. Contractual purchase obligations totaled $4.637 billion; the filing also described approximately $3.032 billion of minimum product-purchase commitments. These commitments and fuel-price exposure may affect future costs.
- Other identified risks included weak consumer confidence, customer and pricing pressures, fuel and interest-rate volatility, execution and cost risks in the transformation program, technology disruption, acquisitions, and pension funding obligations.
Important facts for investors to verify
- Whether sales growth and case-volume trends persist after separating acquisition contributions, inflation and customer mix.
- Whether gross-margin pressure continues, particularly if locally managed customer growth remains weaker than regional and national customer growth.
- Whether cash conversion improves and how working-capital needs, share repurchases and dividends affect liquidity and debt.
- Progress, spending and realized savings from the Business Transformation Project and category-management initiative, including ERP deployment execution.
- Developments in the California investigation and multiemployer pension exposure, including updated estimates and required contributions.
- Management’s assumptions and reconciliation for non-GAAP adjusted results; interim statements are unaudited, and the filing reports that disclosure controls were effective at the reasonable-assurance level.