Business Context and Reporting Period
Company: SYSCO CORPORATION
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13-week period ended October 2, 1999
Business Overview: SYSCO is a food service distributor. The period includes results from recent acquisitions: Newport Meat Co. Inc. (July 1999), Doughtie's Foods, Inc. (August 1999), and Buckhead Beef Company, Inc. (August 1999).
Key Financial Metrics
| Metric | Oct 2, 1999 | Sept 26, 1998 |
|---|---|---|
| Sales | $4,657,034,000 | $4,192,630,000 |
| Cost of Sales | $3,793,200,000 | $3,426,045,000 |
| Gross Profit | $863,834,000 | $766,585,000 |
| Operating Expenses | $674,244,000 | $607,812,000 |
| Net Earnings | $97,638,000 | $86,420,000 |
| Diluted EPS (Net) | $0.29 | $0.26 |
| Cash from Operations | $95,835,000 | $121,860,000 |
| Total Assets | $4,398,990,000 | $3,961,066,000 |
| Total Debt (Current + Long-term) | $1,213,968,000 | $1,002,239,000 |
| Cash and Equivalents | $143,831,000 | $108,264,000 |
Margins: Gross margin was approximately 18.6% for the current period. Operating expenses remained approximately the same as a percent of sales compared to the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 11.1% year-over-year. Real sales growth exceeded 10%, driven primarily by volume growth. Acquisitions contributed 1.1% to the increase.
- Profitability: Pretax earnings increased 21.3% and net earnings before accounting changes increased 22.3%. This was driven by volume growth, a shift to higher-margin territorial street customers, and a 0.2% deflation in food costs (poultry, dairy, canned products).
- Accounting Change: A one-time, after-tax, non-cash charge of $8.0 million was recorded to comply with SOP 98-5 regarding start-up activities. This reduced net earnings and EPS by $0.02 per share.
- Debt and Liquidity: Long-term debt to capitalization ratio rose to 42% (target 35-40%) due to share repurchases for acquisitions. Interest expense increased due to higher borrowings.
- Cash Flow: Net cash provided by operating activities decreased to $95.8 million from $121.9 million, largely due to increases in receivables and inventories. Net cash used for investing activities increased significantly to $114.3 million due to business acquisitions ($60.4 million) and capital expenditures.
Guidance, Outlook, and Risks
- Share Repurchases: The Board authorized an additional 8,000,000 shares in July 1999. 3,425,400 shares were purchased through October 2, 1999, primarily for acquisitions. The program continues into the first quarter of Fiscal 2000.
- Dividends: On November 4, 1999, the Board increased the quarterly cash dividend to $0.12 per share from $0.10 per share.
- Year 2000 Compliance: SYSCO is implementing the SYSCO Uniform System (SUS) and has completed testing of mission-critical IT systems. Remaining upgrades are planned for completion by December 1999. Management believes costs will not materially impact financial statements, though risks remain regarding supplier and customer compliance.
- Market Risks: The company holds no derivative financial instruments. Interest rate risk is limited as most long-term debt is fixed-rate, though $274.6 million in commercial paper is outstanding.
Investor Verification Checklist
- Verify the impact of the $8.0 million non-cash accounting charge (SOP 98-5) on net earnings and EPS.
- Confirm the sustainability of the 10%+ real sales growth and the contribution of recent acquisitions (Newport, Doughtie's, Buckhead).
- Monitor the long-term debt to capitalization ratio, which is currently 42% (above the 35-40% target).
- Review the status of Year 2000 compliance for significant suppliers and customers, as failure could materially affect operations.
- Track the execution of the share repurchase program and its effect on diluted shares outstanding.