Business Context and Reporting Period
Company: SYSCO CORPORATION
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 26-week period ended December 26, 1998 (Fiscal 1999)
Business Overview: Sysco is a foodservice distribution company. The financial statements are unaudited but have been reviewed by Arthur Andersen LLP. Share data reflects a 2-for-1 stock split on March 20, 1998.
Key Financial Metrics
| Metric | 26 Weeks Ended Dec 26, 1998 | 26 Weeks Ended Dec 27, 1997 |
|---|---|---|
| Sales | $8,439,305,000 | $7,614,340,000 |
| Net Earnings | $172,819,000 | $135,676,000 |
| Basic EPS | $0.52 | $0.40 |
| Diluted EPS | $0.51 | $0.39 |
| Operating Cash Flow | $169,884,000 | $83,783,000 |
| Total Assets | $4,031,129,000 | $3,630,523,000 |
| Total Debt (Current + Long-term) | $1,101,695,000 | $844,441,000 |
| Cash and Equivalents | $109,246,000 | $99,824,000 |
Note: Debt figures include current maturities of long-term debt and long-term debt. Interest expense for the 26-week period was $35,328,000.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 10.8% year-over-year. Real sales growth (adjusted for acquisitions and inflation) was approximately 7.4%, driven primarily by volume growth.
- Profitability: Net earnings increased 27.4% to $172.8 million. Pretax earnings increased 5.6% before accounting changes. Earnings per share increased 30% (Basic) and 31% (Diluted) compared to the prior year.
- Cost Structure: Cost of sales increased 11.0%, aligning with sales growth. Operating expenses remained stable as a percentage of sales. Interest expense rose due to increased borrowings.
- Balance Sheet: Total assets grew by approximately $400 million. Total debt increased significantly, with long-term debt rising from $829 million to $975 million and current maturities increasing from $15 million to $115 million.
- Cash Flow: Net cash provided by operating activities more than doubled to $169.9 million. However, investing activities consumed $137 million, primarily for plant and equipment additions.
Guidance, Outlook, and Risks
- Share Repurchases: The company continued its common stock repurchase program, buying 72 million shares in Fiscal 1992 through Q1 Fiscal 1999. An additional authorization for 8 million shares was approved in September 1998, with 2.6 million purchased by January 22, 1999.
- Accounting Change: The prior year (1997) included a one-time, after-tax, non-cash charge of $28 million related to EITF Issue No. 97-13, requiring the expensing of reengineering costs for computer system development. This charge is not present in the current period.
- Year 2000 Compliance: Sysco is undergoing a company-wide program to ensure information systems are Year 2000 compliant. Management expects costs will not have a material adverse impact, though risks of disruption from third-party non-compliance remain.
- Market Risks: The company holds no derivative financial instruments. Exposure to interest rate changes is limited primarily to long-term obligations, most of which are at fixed rates. Commercial paper outstanding was $183.9 million as of December 26, 1998.
Investor Verification Checklist
- Debt Levels: Verify the sustainability of the increased debt load (up ~$257 million year-over-year) and the impact of rising interest expenses on future margins.
- Real Growth Drivers: Confirm the sustainability of the 7.4% real sales growth and the specific contribution of volume versus price increases.
- Year 2000 Costs: Monitor actual costs incurred for Year 2000 compliance against management's estimate of "no material adverse impact."
- Share Count: Track the reduction in average shares outstanding due to the aggressive repurchase program and its effect on EPS.
- Working Capital: Review the significant increase in accounts receivable ($107 million increase in cash flow usage) and inventories ($97 million increase) to ensure collection and turnover rates remain healthy.