Sysco Corporation — FY2018 Form 10-K
Period note: The filing covers the 52-week fiscal year ended June 30, 2018, not fiscal 2017 Q4. Fiscal 2017 was also 52 weeks. Sysco distributes food and related products to more than 600,000 customer locations through 332 facilities, primarily in North America and Europe.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Sales | $58.73 billion | $55.37 billion | +6.1% |
| Gross profit / margin | $11.09 billion / 18.9% | $10.56 billion / 19.1% | Profit +5.0%; margin -20 bps |
| Operating income / margin | $2.33 billion / 4.0% | $2.05 billion / 3.7% | +13.4% |
| Net earnings | $1.43 billion | $1.14 billion | +25.2% |
| Diluted EPS | $2.70 | $2.08 | +29.8% |
| Adjusted operating income (non-GAAP) | $2.55 billion | $2.35 billion | +8.4% |
| Adjusted net earnings / diluted EPS (non-GAAP) | $1.66 billion / $3.14 | $1.36 billion / $2.48 | Net earnings +22.1%; EPS +26.6% |
Sales growth reflected U.S. case-volume gains, product inflation, acquisitions and favorable currency translation. U.S. Foodservice sales rose 5.4%; International Foodservice sales rose 8.5%; SYGMA sales rose 6.1%. U.S. locally managed customer case growth was 3.6%, including acquisitions; organic local case growth was 2.8%. U.S. Broadline product inflation was estimated at 2.6%. Sysco attributed earnings growth to local-customer growth, gross-profit gains, lower corporate depreciation and tax effects, partly offset by higher supply-chain and interest costs. The reported gross margin nevertheless declined from 19.1% to 18.9%.
Cash flow, debt and liquidity
- Operating cash flow was $2.16 billion, down 3.6%; free cash flow, a non-GAAP measure, was $1.49 billion, down 5.3%.
- Capital expenditures were $687.8 million gross and $665.6 million net of asset-sale proceeds. Fiscal 2019 net capital expenditures were estimated at 1.2%–1.3% of sales.
- Year-end cash and equivalents were $552.3 million; an additional $163.5 million was restricted cash, primarily held by the captive insurer. About 68% of cash and equivalents was held by international subsidiaries.
- Total debt was $8.33 billion, versus $8.19 billion a year earlier; debt was 76.9% of capitalization. Current maturities of long-term debt were $782.3 million. No commercial paper was outstanding at year-end; the company had a $2.0 billion revolving facility supporting its commercial paper program.
- Sysco paid $722.2 million in dividends and repurchased $978.9 million of shares during FY2018. It declared dividends of $1.41 per share for the year.
Material changes and unusual items
- FY2018 net earnings and EPS include effects of the U.S. Tax Cuts and Jobs Act, including a provisional $80 million transition-tax charge, tax-rate remeasurement benefits and other tax-related effects. The FY2018 effective tax rate was 26.85%; it was 35.31% in FY2017.
- Sysco issued $1.0 billion of senior notes in March 2018 and tendered $230.5 million of older notes and debentures. The tender resulted in a $53.1 million debt-extinguishment loss included in interest expense. Reported interest expense increased 30.6% to $395.5 million.
- The company contributed $380 million voluntarily to its U.S. Retirement Plan; total company-sponsored pension contributions were $415 million. The U.S. plan’s funded deficit improved to $376.6 million from $882.6 million, while the filing identifies pension market and interest-rate sensitivity as risks.
- FY2018 acquisitions cost $248.1 million, substantially below FY2017’s $2.9 billion Brakes acquisition. FY2018 acquisitions included HFM, Doerle, Kent Frozen Foods, Eko Fågel, Fisk & Mittemellan and the remaining interest in the Costa Rica joint venture.
- International Foodservice operating income fell 20.5% to $193.2 million, primarily because of European supply-chain transformation and other higher operating costs. Adjusted International operating income fell 7.7%.
Outlook, commentary and risks
For FY2020, management set three-year targets versus FY2017: $650–$700 million of adjusted operating-income growth, EPS growth faster than operating-income growth, and 16% adjusted return on invested capital improvement for existing businesses. It also cited FY2020 sales growth of 4%–4.5%, adjusted operating-income growth of 9%, and adjusted diluted EPS of $3.85–$3.95. These are forward-looking, non-GAAP targets and depend on execution and market conditions.
Management expected an approximately 25% effective tax rate in FY2019, operating expenses to rise mainly with case volume, and higher transportation costs from fuel prices and a tight labor market. It expected inflation to continue through calendar 2018 and noted mid-to-high-single-digit product inflation in the U.K. Management described U.S. economic conditions as positive, while noting modest foodservice-market growth and continued pricing pressure.
Key risks include the industry’s low margins and intense competition; food-cost inflation or deflation and fuel-price volatility; customer retention and mix; supplier, weather and food-safety disruptions; labor shortages and union negotiations; Brexit and foreign-exchange exposure; cybersecurity and privacy; pension funding and multiemployer-plan liabilities; leverage and refinancing; tax-law uncertainty; and execution of acquisitions and European supply-chain changes. Sysco estimated potential multiemployer-plan withdrawal liability of up to $131 million. Contractual cash obligations totaled $17.0 billion, including $8.33 billion principal debt, $3.72 billion interest, $3.51 billion purchase obligations and $665 million operating leases. Management stated it did not expect pending legal matters, individually or collectively, to materially adversely affect financial position or results.
Investor verification priorities
- Reconcile GAAP results with adjusted results, including the material exclusions and provisional Tax Act accounting.
- Assess whether local-customer case growth and margin performance can offset inflation, pricing pressure and higher delivery and labor costs.
- Review debt maturities, leverage, interest expense and the company’s capacity to fund dividends, repurchases, acquisitions and pension needs.
- Track U.K. supply-chain transformation, International Foodservice profitability and the assumptions behind FY2020 targets.
- Monitor pension and multiemployer exposure, transition-tax estimates, purchase commitments and other contingencies. The filing reports an unqualified audit opinion and effective internal controls.