Sysco Corporation — Form 10-K Summary
Reporting period: The filing covers fiscal 2011, the 52 weeks ended July 2, 2011, and was filed August 30, 2011. This is not a standalone fiscal 2010 Q4 filing. Fiscal 2010 had 53 weeks, so reported year-over-year comparisons include an extra week in the prior-year period; management also provides adjusted 52-week comparisons.
Business context
Sysco is a North American foodservice distributor serving approximately 400,000 customers through 177 distribution facilities. Broadline distribution is the core business; SYGMA serves chain restaurants. Restaurants accounted for about 62% of sales, and no single customer represented 10% or more of consolidated sales. Wendy’s represented approximately 31% of SYGMA sales.
Financial performance and position
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Sales | $39.323 billion | $37.243 billion |
| Gross profit / margin | $7.321 billion / 18.62% | $7.107 billion / 19.08% |
| Operating income / margin | $1.932 billion / 4.9% | $1.976 billion / 5.3% |
| Net earnings / net margin | $1.152 billion / 2.9% | $1.180 billion / 3.2% |
| Diluted EPS | $1.96 | $1.99 |
| Cash provided by operations | $1.092 billion | $885 million |
| Capital expenditures | $636 million | $595 million |
On management’s adjusted 52-week comparison, sales increased 7.7%, operating income declined 0.1%, net earnings declined 0.3%, and diluted EPS increased 0.5%. Reported changes were +5.6%, -2.2%, -2.4%, and -1.5%, respectively. Fiscal 2011 gross profit dollars grew more slowly than sales, while operating expenses rose 5.0%.
Fourth-quarter fiscal 2011 sales were $10.426 billion, operating income $561 million, net earnings $336 million, and diluted EPS $0.57. The comparable fiscal 2010 fourth quarter included 14 weeks, versus 13 weeks in fiscal 2011, limiting direct comparison.
At year-end, cash and cash equivalents were $640 million, current assets $5.733 billion, and current liabilities $3.575 billion. Total debt was $2.669 billion; shareholders’ equity was $4.705 billion. About 75% of debt was fixed-rate, at a weighted average rate of 5.9%; the remainder was floating-rate, averaging 2.1%. Sysco reported compliance with debt covenants. A $182 million Canadian short-term borrowing outstanding at year-end was repaid July 4, 2011. The $1 billion revolving credit facility was due to expire November 4, 2012, subject to extension.
Material changes and unusual items
- Product-cost inflation was estimated at 4.6%, compared with 1.5% deflation in fiscal 2010. Dairy, meat, and seafood costs rose about 10%–12%; Sysco said it could not fully pass through those increases without affecting customers.
- Gross margin fell 47 basis points, reflecting inflation and strategic pricing initiatives intended to support volume and market share.
- Fiscal 2011 included $41.5 million of provisions for multi-employer pension withdrawals, including a $36.1 million charge. The company had $42.4 million of recorded withdrawal liabilities and estimated potential additional withdrawal exposure of up to $200 million, based on older plan information and subject to substantial uncertainty.
- Business Transformation Project gross expenses were $102 million in fiscal 2011. Testing delayed broader deployment by approximately six to twelve months; the deployment timeline remained undetermined. Management estimated fiscal 2012 project expenses of $280 million–$300 million and project capital expenditures of $100 million–$120 million.
- Fiscal 2011 net earnings included favorable effects from $28.2 million of gains on corporate-owned life insurance policies and a $17 million tax benefit from reversing state tax valuation allowances; the pension withdrawal charge was an offsetting unfavorable item. Fiscal 2010 included a one-time $29 million tax benefit tied to the IRS settlement.
Outlook, liquidity, and risks
Management expected fiscal 2012 capital expenditures of $750 million–$800 million, including the ERP project, facilities, fleet, and equipment. It anticipated fuel costs, before surcharges, would rise approximately $35 million–$45 million versus fiscal 2011, with fuel surcharges expected to offset most of the increase if prices stayed near then-current assumptions. Company-sponsored pension costs were expected to decline by about $27 million, while the filing noted sensitivity to discount rates and investment returns.
Sysco expected operating cash flow, commercial paper capacity, bank facilities, and capital-market access to cover anticipated cash needs. A further $212 million payment under the IRS settlement was due in fiscal 2012. Key risks include weak consumer demand, food and fuel price volatility, margin pressure, supplier disruption, food safety and product-liability exposure, competition, labor negotiations and pension obligations, and ERP implementation delays or cost overruns. Management said routine legal proceedings were not expected to materially affect results; the filing provides no specific quantified aggregate exposure for those matters.
Most important facts for investors to verify
- Use the 52-week-adjusted comparison when assessing fiscal 2011 growth against fiscal 2010’s 53-week results.
- Track whether case-volume gains and pricing initiatives offset lower gross margin and operating-cost inflation.
- Check actual ERP deployment timing, total spending, and realized productivity savings against management’s estimates.
- Assess the recorded and potential multi-employer pension liabilities, including the age and uncertainty of underlying plan data.
- Confirm completion and funding of the fiscal 2012 IRS payment, the June 2012 debt maturity, and renewal or extension of the revolving facility.
- Compare subsequent fuel costs and surcharge recovery with the forecast, and monitor pension assumptions and funding needs.