Sysco Corporation — Form 10-Q summary
Business context and period: Sysco distributes food and related products to foodservice customers, primarily in the United States, Canada and Ireland. This unaudited report covers the 13 weeks ended December 29, 2012 (second quarter of fiscal 2013) and the first 26 weeks of fiscal 2013. Comparisons below are with the corresponding periods ended December 31, 2011.
Financial performance and position
Amounts are in U.S. dollars; financial statement amounts are shown in millions unless noted.
| Metric | Second quarter FY13 | Second quarter FY12 | 26 weeks FY13 | 26 weeks FY12 |
|---|---|---|---|---|
| Sales | $10,796.9 | $10,244.4 | $21,883.8 | $20,830.8 |
| Gross profit | $1,917.6 | $1,845.7 | $3,921.1 | $3,793.3 |
| Operating income | $382.7 | $427.0 | $861.4 | $936.3 |
| Net earnings | $221.4 | $250.1 | $508.0 | $552.8 |
| Diluted EPS | $0.38 | $0.43 | $0.86 | $0.94 |
| Gross margin | 17.76% | 18.02% | 17.92% | 18.21% |
| Operating margin | 3.54% | 4.17% | 3.94% | 4.50% |
- Growth and earnings: Sales rose 5.4% in the quarter and 5.1% year to date, supported by case growth, acquisitions and product-cost inflation. Case volume excluding recent acquisitions grew approximately 1.8% and 2.4%, respectively. GAAP operating income declined 10.4% in the quarter and 8.0% year to date; net earnings fell 11.5% and 8.1%.
- Adjusted results: Excluding management-defined charges—including Business Transformation Project (BTP), retirement-plan restructuring, pension withdrawal, severance and facility-closure costs—adjusted operating income increased 4.6% in the quarter and 3.1% year to date. Adjusted net earnings increased 4.7% and 3.8%; adjusted diluted EPS was $0.49 and $1.06, respectively. These are non-GAAP measures and should be considered with GAAP results.
- Cash flow: For the first 26 weeks, operating cash flow was $386.8 million, down from $538.5 million. Capital expenditures were $261.6 million versus $433.9 million; reported free cash flow, defined as operating cash flow less capital expenditures, was $125.2 million versus $104.7 million. Acquisitions used $194.2 million. Dividends paid were $315.9 million and treasury-stock purchases were $143.5 million.
- Liquidity and debt: At December 29, 2012, cash and cash equivalents were $320.8 million; current assets were $6.16 billion and current liabilities $3.49 billion. Total debt carrying value was approximately $3.11 billion, including $253.2 million of current maturities and $42.8 million of notes payable. The company had a $1.0 billion revolving facility supporting commercial paper; $45 million of commercial paper was outstanding at quarter-end and none was outstanding January 26, 2013. Sysco stated it expected cash from operations and borrowing-market access to meet cash needs. A $250 million, 4.2% note was due in February 2013.
- Dividends: Dividends declared were $0.28 per share in the quarter and $0.55 per share year to date, compared with $0.27 and $0.53 in the prior-year periods.
Material changes and management commentary
- Operating expenses rose 8.2% in the quarter and 7.1% year to date, faster than sales. Management attributed the increase principally to BTP costs, pay-related expenses, depreciation and amortization, and fuel. BTP expense was $81.4 million for the quarter and $159.0 million year to date; software amortization began after the system was placed in service in August 2012.
- Gross margin declined amid competitive pricing pressure and a greater sales mix from large regional and national customers, which generally carry lower margins. Management estimated product-cost inflation of 2.5% in the quarter and 2.3% year to date; it said margin pressure had eased with more moderate inflation.
- Broadline sales increased 5.5% in the quarter and 5.0% year to date. SYGMA sales increased 0.6% and 1.6%; its year-to-date operating income declined 11.9%, with case-volume weakness and higher delivery costs cited. Consolidated operating income was also affected by higher corporate expenses, which include BTP and share-based compensation.
- Cash from operations was pressured by working-capital changes, including higher receivables and inventory, and the absence of prior-year proceeds from redeeming corporate-owned life insurance policies. Management expected operating cash flow and free cash flow to improve in fiscal 2013 versus fiscal 2012, citing the nonrecurrence of prior-year IRS settlement payments, lower capital spending and anticipated transformation benefits.
Outlook, risks and unusual items
- BTP: Management targeted $550–$650 million of annualized benefits by fiscal 2015 and believed it could achieve 25% of total expected benefits in fiscal 2013. It expected fiscal 2013 project costs to exceed benefits and be higher than fiscal 2012. Further system deployments were being reassessed while the company addressed identified improvements; the filing warns that delays, cost overruns or failure to realize benefits could adversely affect results and liquidity.
- Fuel and food costs: Sysco expected fiscal 2013 fuel costs, before fuel-surcharge recoveries, to increase approximately $10–$20 million versus fiscal 2012, subject to fuel prices and usage. Forward diesel commitments totaled about $110 million through November 2013. Drought-related input-cost volatility, prolonged inflation and competitive pressures could affect margins and customer demand.
- Retirement plans: The company froze future accruals for U.S. salaried and non-union hourly employees under its qualified pension plan effective December 31, 2012, with additional 401(k) contributions beginning January 1, 2013. Executive retirement-plan restructuring generated about $12 million of second-quarter charges, with approximately $12 million more expected in the second half of fiscal 2013. Management projected retirement-related expenses to increase $35–$45 million net in fiscal 2013 versus fiscal 2012.
- Multiemployer pensions: A January 2013 agreement triggered withdrawal from a union pension plan; Sysco expected to record a $40.7 million provision in the third quarter. The company estimated possible withdrawal liability for other plans at up to $115 million as of December 29, 2012, revised to up to $80 million as of January 26, 2013. Recorded liabilities related to prior withdrawals were approximately $54.7 million as of January 26, 2013. Estimates rely on dated plan information and could differ materially.
- Other contingencies and commitments: Sysco disclosed approximately $1.53 billion of minimum product-purchase commitments, $454.8 million of remaining committed IT-service costs, and legal proceedings that management did not expect to have a material adverse effect, while noting outcomes are uncertain. A proposed EPA settlement involving a Detroit subsidiary carried an approximately $125,000 penalty and remediation obligation; Sysco did not expect a material impact.
- Hurricane Sandy: Management estimated a negative second-quarter impact of $0.01 per share, despite limited damage to Sysco facilities, because customers in affected areas were harmed.
- Market and operating risks: Management cited weak consumer confidence and disposable-income pressure, slow foodservice-market growth, competition, labor shortages, fuel and product-cost volatility, and acquisition and technology execution risks. Approximately 35% of quarter-end cash was held by international subsidiaries; Sysco said it did not anticipate needing to relocate it.
Important facts for investors to verify
- Whether BTP deployment proceeds on schedule, whether costs remain above benefits in fiscal 2013, and whether the stated fiscal 2015 savings target is achieved.
- Whether underlying case growth and adjusted earnings improvement translate into stronger GAAP operating income, margins and cash generation.
- The timing and cash impact of the $40.7 million pension withdrawal charge, the remaining potential multiemployer liability, and future plan contributions.
- Actual fuel and food-cost trends versus management estimates, including the effect of price competition and customer mix on gross margin.
- Cash-flow conversion and working-capital trends, debt refinancing or repayment of the February 2013 notes, and continued access to commercial-paper and capital markets.
- Any material changes in contingent liabilities, legal matters, purchase commitments or other risks disclosed in the filing.