SYSCO CORP 10-Q Summary: Period Ended December 30, 2006
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for SYSCO CORPORATION, a leading foodservice distributor operating in the United States and Canada. The report covers the 26-week period ended December 30, 2006 (Fiscal Year 2007), and the 13-week period ended December 30, 2006 (Second Quarter). The company serves restaurants, healthcare, educational facilities, and lodging establishments.
Key Financial Metrics
| Metric (in thousands) | 26-Week Period Ended Dec 30, 2006 | 26-Week Period Ended Dec 31, 2005 | 13-Week Period Ended Dec 30, 2006 | 13-Week Period Ended Dec 31, 2005 |
|---|---|---|---|---|
| Sales | $17,240,820 | $15,981,545 | $8,568,748 | $7,971,061 |
| Net Earnings | $425,704 | $412,677 | $236,686 | $204,182 |
| Diluted EPS (Net Earnings) | $0.68 | $0.65 | $0.38 | $0.33 |
| Operating Cash Flow | $540,180 | $311,551 | Not provided for 13-week | Not provided for 13-week |
| Total Assets | $9,266,398 | $8,810,187 | N/A | N/A |
| Total Debt (Current + Long-Term) | $1,861,059 | $2,036,833 | N/A | N/A |
| Shareholders' Equity | $3,185,665 | $2,711,257 | N/A | N/A |
Note: Total Debt includes Notes Payable, Current Maturities of Long-Term Debt, and Long-Term Debt.
Material Changes vs. Prior Period
- Sales Growth: Sales increased 7.9% for the 26-week period and 7.5% for the 13-week period compared to the prior year. This growth was partially offset by the adoption of EITF 04-13, which reduced reported sales by $177 million (26-week) and $85.5 million (13-week) due to netting inventory transactions with the same counterparty.
- Earnings Growth: Earnings before the cumulative effect of accounting change increased 15.4% (26-week) and 15.9% (13-week). Net earnings increased 3.2% (26-week) and 15.9% (13-week).
- Accounting Changes: A cumulative charge of $39.7 million was recorded in the first quarter of fiscal 2007 due to the adoption of FSP FTB 85-4-1 regarding life settlement contracts. This reduced net earnings for the 26-week period.
- Costs and Margins: Gross margins remained stable at 19.3% of sales. Operating expenses as a percentage of sales decreased slightly to 14.6% (26-week) and 14.5% (13-week), driven by lower share-based compensation and pension costs, partially offset by increased management incentive accruals and strategy initiative investments.
- Segment Performance: The Broadline segment contributed the majority of sales and earnings. The SYGMA segment returned to profitability, reporting earnings before taxes of $5.8 million (26-week) compared to a loss of $3.3 million in the prior year.
Guidance, Outlook, and Risks
- Strategy Initiatives: Management is executing a strategic planning process focusing on sourcing, integrated delivery, demand management, organizational capabilities, and new growth. Investments in these initiatives totaled $21 million for the 26-week period.
- Supply Chain Project: The National Supply Chain project aims to lower inventory and operating costs. The Northeast Regional Distribution Center (RDC) is operational, with a second RDC in Florida expected to be operational in fiscal 2008.
- Capital Allocation: The company continues its share repurchase program, having repurchased 6.6 million shares for $225 million in the first 26 weeks. Dividends were increased to $0.19 per share for the third quarter.
- Key Risks:
- Multi-Employer Pension Plans: Potential withdrawal liability is estimated at up to $130 million if underfunded plans terminate or employers withdraw.
- Tax Contingencies: A deferred tax liability of $680 million related to the Baugh Supply Chain Cooperative (BSCC) structure exists. If challenged by tax authorities, the company could face accelerated payments and interest up to $185 million.
- Fuel Costs: Increased fuel costs impact operating expenses and consumer spending. The company has hedged approximately $89 million of diesel fuel requirements through calendar year 2007.
- IRS Audit: 2003 and 2004 federal tax returns are under audit, with a recorded liability of $13 million for challenged positions.
Investor Verification Checklist
- Verify the impact of the $39.7 million accounting change charge on net earnings and the sustainability of earnings growth excluding this one-time item.
- Monitor the status of the IRS audit regarding the BSCC cooperative structure and the potential $680 million deferred tax liability.
- Assess the progress and cost savings of the National Supply Chain project and the new Regional Distribution Centers.
- Review the funding status of multi-employer pension plans and the potential for increased contributions or withdrawal liabilities.
- Track the execution of the share repurchase program and dividend policy relative to cash flow generation.