Sysco Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first 26 weeks of fiscal 2010, ended December 26, 2009; comparisons are with the periods ended December 27, 2008. Sysco distributes food and related products to foodservice customers, primarily in the United States and Canada. Financial amounts below are in U.S. dollars; dollar figures are in millions unless otherwise noted.
Financial performance
| Metric | 13 weeks | 26 weeks |
|---|---|---|
| Sales | $8,868.5, down 3.1% | $17,949.9, down 5.7% |
| Gross margin | $1,694.9; 19.1% of sales | $3,442.2; 19.2% of sales |
| Operating income | $462.4, up 9.6%; 5.2% margin | $959.7, up 3.6%; 5.3% margin |
| Net earnings | $268.3, up 12.9% | $594.6, up 15.6% |
| Diluted EPS | $0.45, up 12.5% | $1.00, up 16.3% |
| Operating cash flow | Not provided separately | $144.0, versus $561.7 |
For the 26-week period, gross margin was 19.2% versus 19.1% a year earlier, operating margin was 5.3% versus 4.9%, and net margin was 3.2% versus 2.7%. Lower operating expenses more than offset lower gross margin dollars: expenses declined 8.4% year over year for 26 weeks and 7.2% for the quarter. Management cited lower payroll and incentive compensation, reduced headcount, lower fuel costs, and a more favorable comparison of corporate-owned life insurance (COLI) valuation changes.
Balance sheet, debt and liquidity
- At December 26, 2009, cash and cash equivalents were $647.6 million and short-term investments were $61.9 million; current assets were $5,089.5 million and current liabilities $2,783.7 million.
- Total debt carrying value was $2,477.1 million, including $8.4 million of current maturities and $2,468.7 million of long-term debt. Long-term debt was $1,972.6 million at December 27, 2008. Approximately 81% of debt was at fixed rates, including swaps.
- Sysco had no commercial paper outstanding and no borrowings on its $1.0 billion revolving credit facility. It reported access to additional bank lines and capital markets and said resources should meet anticipated cash needs for at least 12 months.
- Cash declined by $439.5 million during the first half of fiscal 2010. Investing used $349.3 million, including $247.6 million in capital expenditures; financing used $247.4 million, including $283.8 million of dividends. No shares were repurchased under the public program during the period.
Changes versus the prior comparable period
- Sales declined amid weak economic conditions and product-cost deflation: estimated deflation was 3.4% for the first half and 3.5% for the second quarter, compared with inflation of 7.6% and 7.0%, respectively, in the prior-year periods. Management said the sales decline moderated from the first quarter, with case volumes improving late in the second quarter and deflation pressures appearing to moderate.
- Operating income rose despite lower sales, reflecting expense reductions. Broadline sales fell 4.5% year to date while operating income increased 1.5%; SYGMA sales fell 6.2% while operating income increased 24.5%. Other-segment sales and operating income declined 13.4% and 7.7%, respectively.
- Net earnings benefited from a lower effective tax rate and unusual items. The first-half effective tax rate was 33.75%, versus 41.53% a year earlier; EPS included a favorable $0.09 impact from IRS-settlement interest reversal and COLI gains, compared with a $0.09 unfavorable COLI impact in the prior year.
- Operating cash flow was substantially lower, principally reflecting $422 million of IRS-settlement tax payments in the first half of fiscal 2010 and, for comparison, Hurricane Ike-related deferral of federal estimated tax payments in the prior-year period. Cash taxes paid were $759.7 million versus $73.8 million.
Outlook, management commentary and risks
- Management said continued deflation and a weak economic environment would make sales growth challenging in fiscal 2010. It expects fuel-cost declines in the second half to be smaller than in the first half, assuming fuel prices do not rise substantially.
- The business transformation project is expected to require approximately $900 million of total cash outlay. Fiscal 2010 outlay is estimated at $250–$275 million, with $160–$175 million expected to be capitalized. Implementation across most Broadline and SYGMA operations is expected to begin in fiscal 2011 and conclude in fiscal 2013. Management expects a fiscal 2010 operating-income reduction of $40–$50 million, or about $0.05 per share.
- Fiscal 2010 capital expenditures are estimated at $600–$650 million. Sysco anticipates $140 million of fiscal 2010 contributions to its qualified pension plan, plus estimated contributions of $19.4 million to the SERP and $0.4 million to other postretirement plans.
- An IRS settlement resolved the BSCC deferred-tax matter for the audited 2003–2006 periods and subsequent periods, including 2007 and 2008. Scheduled payments are $528 million in fiscal 2010, $212 million in fiscal 2011, and $212 million in fiscal 2012; $422 million of the fiscal 2010 amount had been paid by December 26, 2009.
- Management estimated potential withdrawal liability of up to $174 million for underfunded multi-employer pension plans, based on available plan information; approximately $17 million was already recorded for plans from which Sysco had withdrawn. Required future contributions may rise.
- Other risks include persistent deflation and economic weakness, fuel-price changes, labor and pension obligations, interest-rate and market exposure, and successful implementation of the multi-year systems project. Management stated pending legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether sales and case-volume trends improve as deflation moderates, and whether operating-expense reductions can be sustained.
- The effect of the IRS payment schedule on cash flow, liquidity, and future tax expense; first-half operating cash flow was only $144.0 million.
- Actual cost, timing, capitalization, and operating benefits of the ERP transformation compared with the $900 million total estimate and projected fiscal 2010 earnings impact.
- Developments in multi-employer pension funding, contributions, and potential withdrawal liabilities.
- COLI valuation volatility and the distinction between underlying operating performance and reported earnings affected by tax and other unusual items.