Sysco Corporation — Form 10-Q Summary
Business context and reporting period
Sysco distributes food and related products to foodservice customers, primarily in the United States and Canada. This unaudited filing covers the 13 weeks ended September 26, 2009, the first quarter of fiscal 2010; comparisons are with the 13 weeks ended September 27, 2008 unless noted. Management attributed the difficult trading environment to weak economic conditions, reduced consumer confidence and product-cost deflation.
Financial performance and liquidity
| Metric | Quarter ended September 26, 2009 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $9.081 billion | $9.877 billion | Down 8.1% |
| Gross margin | $1.747 billion; 19.2% of sales | $1.887 billion; 19.1% of sales | Down 7.4% |
| Operating income | $497.3 million; 5.5% of sales | $504.8 million; 5.1% of sales | Down 1.5% |
| Income before taxes | $465.5 million | $481.2 million | Down 3.2% |
| Net earnings | $326.2 million | $276.8 million | Up 17.8% |
| Diluted EPS | $0.55 | $0.46 | Up 19.6% |
| Operating cash flow | $46.5 million | $63.4 million | Down $16.9 million |
- Net earnings and EPS benefited from an approximately $29 million tax benefit from the IRS settlement, non-taxable gains of $21.2 million on corporate-owned life insurance, and a roughly $5 million state tax benefit. Management said the settlement reversal and insurance gains together added $0.09 per share. The effective tax rate was 29.93%, versus 42.47%.
- Cash and cash equivalents were $851.0 million at quarter-end, down from $1.087 billion at June 27, 2009. Current assets were $5.362 billion and current liabilities $3.082 billion.
- Long-term debt was $2.469 billion, with $8.7 million of current maturities; total debt carrying value was about $2.478 billion. Approximately 91% of long-term debt was fixed-rate. No commercial paper or bank-line borrowings were outstanding. Sysco reported $88 million of uncommitted U.S. bank lines and a €20 million Irish facility.
- Capital expenditures were $109.4 million; dividends paid were $141.7 million, or $0.24 per share. There were no repurchases under the public program in the quarter.
Material changes versus the prior-year quarter
- Sales declined amid estimated product-cost deflation of 3.4%, compared with 8.3% inflation in the prior-year quarter. Lower sales prices, weak demand and reduced fuel surcharges also weighed on revenue.
- Operating expenses fell 9.5%, reflecting lower payroll and incentive compensation, operating efficiencies, lower fuel costs and the life-insurance gains. Pay-related expense declined $70.0 million. These savings limited the drop in operating income despite lower sales.
- Interest expense rose 28.0% to $33.8 million. Company-sponsored pension cost increased $10.4 million year over year, to $31.5 million.
- Broadline sales declined 7.2% and operating income 2.7%; SYGMA sales declined 6.3%, while operating income rose 26.3%. Other-segment sales fell 17.1% and operating income fell 10.3%.
Outlook, management commentary, risks and unusual items
- Management said weak economic conditions and continued deflation would make sales growth challenging in fiscal 2010. It reported that Broadline’s sales-volume decline had slowed early in the second quarter and said sales trends could improve if economic conditions improve. These statements are forward-looking, not guidance with quantified targets.
- Fuel surcharge revenue was about $29 million lower year over year in the quarter; management expected it to be up to $25 million lower in the second quarter, with second-half fuel costs and surcharges potentially closer to prior-year levels if fuel prices did not rise materially.
- The IRS settlement ends deferred federal tax treatment related to BSCC and requires payments reported as $528 million in fiscal 2010, $212 million in fiscal 2011 and $212 million in fiscal 2012. Sysco paid $316 million in the first quarter; remaining fiscal 2010 payments were scheduled in quarterly installments. Management said available cash, operating cash flow and capital access would be sufficient. The filing also describes a $41 million one-time payment as part of the settlement.
- Management estimated potential multi-employer pension withdrawal liability of up to $107 million based on available plan information, and cautioned the actual amount could be greater. About $17 million of recorded liabilities for plans from which Sysco had withdrawn were expected to be paid in fiscal 2010. Underfunding could also increase future contributions or expose the company to excise taxes.
- Sysco anticipated $140 million of fiscal 2010 contributions to its qualified pension plan, in addition to estimated contributions for executive and other postretirement benefits. Forward diesel commitments totaled about $42 million through June 2010, covering an estimated 30%–35% of remaining fiscal-year fuel needs.
- The ERP system design was largely complete, but implementation timing and decisions were still being assessed. Management expected to provide more specific information on fiscal 2010 earnings and liquidity effects after decisions planned by December 2009; costs could exceed benefits in early implementation.
- Sysco entered a $200 million interest-rate swap during the quarter, converting fixed-rate debt due in fiscal 2014 to floating rate. In October 2009, after quarter-end, it entered a further $250 million swap on debt due in fiscal 2013. Other stated risks include economic sensitivity, product deflation, fuel and interest-rate volatility, pension funding, labor issues, supply interruptions and ERP execution.
Important facts for investors to verify
- How much of the 17.8% earnings increase reflects recurring operations versus the $0.09-per-share benefit from tax and life-insurance items.
- The timing and cash-flow effect of the IRS settlement payments, and the relationship between the payment schedule and the separate $41 million one-time payment.
- Whether sales-volume trends improved after quarter-end, particularly in Broadline, and how deflation and lower fuel surcharges affected margins.
- The actual and potential exposure from multi-employer pension plans, including future contribution requirements and withdrawal liabilities.
- Final ERP scope, implementation timing, and quantified effects on earnings, cash flow and liquidity; also monitor debt and interest-rate exposure after the swaps.