Business context and reporting period
Sysco Corporation distributes food and related products to foodservice customers, primarily in the United States, Canada and Ireland. This Form 10-Q covers the fiscal third quarter ended March 30, 2013 (13 weeks) and the first 39 weeks of fiscal 2013. Although the request metadata says “2012 Q3,” the filing reports fiscal 2013 Q3.
Financial performance
Amounts below are in millions of dollars except per-share data; comparisons are with the corresponding fiscal 2012 period.
| Metric | Q3 FY2013 | Q3 FY2012 | 39 weeks FY2013 | 39 weeks FY2012 |
|---|---|---|---|---|
| Sales | $10,926 | $10,505 | $32,810 | $31,336 |
| Gross profit | $1,910 | $1,872 | $5,831 | $5,665 |
| Operating income | $337 | $439 | $1,199 | $1,375 |
| Net earnings | $201 | $260 | $709 | $812 |
| Diluted EPS | $0.34 | $0.44 | $1.20 | $1.38 |
| Operating cash flow | Not presented for the 13-week period | $759 | $908 |
- Q3 sales rose 4.0%, but operating income fell 23.2% and net earnings fell 22.4%. For the 39-week period, sales increased 4.7%, while operating income declined 12.8% and net earnings declined 12.7%.
- Gross margin was 17.48% in Q3 versus 17.82% a year earlier; operating margin was 3.1% versus 4.2%. For the 39 weeks, gross margin was 17.77% versus 18.08%, and operating margin was 3.7% versus 4.4%.
- Management’s adjusted, non-GAAP results exclude specified transformation, pension, severance, facility-closure and executive-retirement charges. Adjusted Q3 operating income was $471 million, down 4.4%; adjusted net earnings were $289 million, down 1.4%; adjusted diluted EPS was $0.49 versus $0.50. For 39 weeks, adjusted operating income was $1,519 million, up 0.5%, and adjusted diluted EPS was $1.55 versus $1.52.
- Cash from operations was $759 million, capital expenditures were $373 million, and company-defined free cash flow was $386 million for the first 39 weeks, versus $908 million, $633 million and $275 million, respectively, a year earlier.
Balance sheet, liquidity and capital allocation
- At March 30, 2013, cash and cash equivalents were $332 million; current assets were $6,376 million and current liabilities $3,657 million.
- Total debt carrying value was approximately $2,798 million, including $209 million of current maturities and $2,557 million of long-term debt. About 92% of debt was at fixed interest rates, including the effect of the remaining swap. The company repaid $250 million of 4.2% notes at maturity in February 2013.
- The $1.0 billion revolving facility supporting U.S. and Canadian commercial paper had no commercial paper outstanding at March 30; $925 million of the facility was extended to December 2017. Subsequent to quarter-end, commercial paper outstanding was $95 million at April 27. A separate €75 million Irish facility had €25 million drawn.
- During the first 39 weeks, Sysco paid $482 million in dividends and repurchased 10 million shares for $321 million. Cash declined $357 million from fiscal-year opening to $332 million, reflecting operating, investing and financing cash flows.
Material changes, outlook and risks
- Management attributed weaker results to a challenging foodservice environment, consumer spending hesitation, competitive pricing, lower gross margin, higher operating expenses and inconsistent execution of its business plan in Q3. Sales growth reflected inflation and acquisitions as well as volumes; acquisitions contributed 1.8% to Q3 sales growth, while case volumes excluding recent acquisitions declined about 0.2% in Q3 and improved 1.5% year to date.
- Q3 operating expenses included a $40.7 million multiemployer pension withdrawal charge and $83.2 million of Business Transformation Project costs. Transformation costs for the 39 weeks were $242.3 million, including $51.2 million of software amortization. Management cited increased pay, depreciation and fuel costs as additional expense drivers.
- The ERP deployment has been paused for additional work on pricing complexity and inventory management. Sysco said it would not deploy the complete system to additional locations during the fiscal year, expected deployment to resume around the end of calendar 2013, and planned to reassess the fiscal 2014 schedule. ERP-related assets were approximately $400 million; management reported no current impairment indicators, while noting it would review the assets as improvements proceed.
- Management expected fiscal 2013 capital expenditures of $550–$575 million and projected $550–$650 million of annualized transformation benefits by fiscal 2015; it aimed to achieve 25% of those benefits in fiscal 2013. Project expenses were expected to exceed benefits in fiscal 2013. These are management expectations, not assurances.
- Other outlook items included expected fiscal 2013 fuel-cost increases of approximately $10–$20 million, assuming fuel prices did not rise significantly, and additional Q4 executive-retirement restructuring charges of about $3.4 million. SYGMA sales were expected to remain under pressure and could decline in Q4 at a rate similar to Q3.
- Multiemployer pension plans are underfunded; recorded withdrawal liabilities were $54.8 million, and additional reasonably possible exposure was estimated at up to $80 million, based on older plan data and subject to material change. Management also expects plan contributions could rise.
- Other exposures include $227.8 million of fixed-price diesel commitments through June 2014, $1,346.9 million of minimum product-purchase commitments, legal proceedings, uncertain tax positions and execution, cost and benefit risks associated with the transformation project. The filing says liquidity needs over the next 12 months and beyond are expected to be met through operating cash flow and access to credit and capital markets.
- The EPA matter involving Sysco’s Detroit subsidiary was settled in February 2013 for a $119,000 penalty, and the alleged violations were remedied. Management stated other legal matters were not expected to materially affect consolidated financial position or results, while acknowledging outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether the ERP pause, revised deployment timing and planned fixes affect projected costs, the approximately $400 million of related assets, or expected transformation benefits.
- Whether core volume, customer mix and gross-margin trends improve, particularly given Q3’s decline in case volumes excluding acquisitions and pressure from large regional and national customers.
- The scale and timing of multiemployer pension contributions, recorded withdrawal-liability payments and the estimated additional exposure of up to $80 million.
- Whether operating cash flow recovers from its 16.4% year-over-year decline and whether capital spending, dividends, repurchases and debt maturities remain supported by liquidity.
- How fuel prices, product inflation, labor availability, customer traffic and competitive pricing compare with management’s assumptions and forecasts.
- Adjusted results alongside GAAP results: the company’s non-GAAP measures exclude substantial and rising charges, including transformation and pension-related costs.