SYSCO CORP 10-Q Summary: Period Ended Dec 29, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended December 29, 2007 (the second quarter of fiscal 2008), and the 26-week period ended on that date. SYSCO Corporation is a leading foodservice distributor operating in the United States and Canada, serving restaurants, healthcare, educational facilities, and lodging establishments. The company operates primarily through two reportable segments: Broadline and SYGMA (chain restaurant distribution).
Key Financial Metrics
| Metric | 26-Week Period Ended Dec 29, 2007 | 13-Week Period Ended Dec 29, 2007 |
|---|---|---|
| Sales | $18,645,349,000 | $9,239,505,000 |
| Gross Margin | $3,558,922,000 (19.1% of sales) | $1,767,780,000 (19.1% of sales) |
| Operating Income | $903,645,000 (4.9% of sales) | $449,012,000 (4.8% of sales) |
| Net Earnings | $531,137,000 | $264,148,000 |
| Diluted EPS | $0.86 | $0.43 |
| Cash from Operating Activities | $400,904,000 (26-week) | N/A |
| Total Assets | $9,952,827,000 | N/A |
| Total Debt (Current + Long-Term) | $2,143,103,000 | N/A |
| Cash and Equivalents | $168,786,000 | N/A |
Material Changes vs. Prior Period
- Sales Growth: Sales increased 8.1% for the 26-week period and 7.8% for the quarter compared to the prior year, driven primarily by inflation (estimated product cost increases of 5.9%) and organic growth.
- Profitability: Operating income rose 10.9% (26-week) and 6.3% (quarter). Net earnings increased 11.4% (26-week) and 7.1% (quarter).
- Margins: Gross margin percentage decreased slightly by 0.2 percentage points to 19.1% due to high product cost inflation. Operating expense ratio improved slightly to 14.2% (26-week) and 14.3% (quarter).
- Share Count: Diluted shares outstanding decreased by 1.7% (26-week) and 2.2% (quarter) due to aggressive share repurchases.
- Cash Flow: Operating cash flow decreased to $400.9 million (26-week) from $540.2 million in the prior year, negatively impacted by increases in receivables and inventory, and a decrease in accrued expenses.
Guidance, Outlook, and Risks
- Inflation Outlook: Management expects fuel costs to be $30 million to $40 million higher in the second half of fiscal 2008 compared to the prior year. While some fuel surcharges exist, full recovery of increased costs is uncertain.
- Capital Allocation: The company repurchased 10.7 million shares for $352.8 million in the first 26 weeks. As of January 26, 2008, approximately 10 million shares remained authorized for repurchase. Dividends were increased to $0.22 per share for the third quarter.
- Multi-Employer Pension Risk: SYSCO recorded a $9.5 million liability related to minimum funding requirements and excise taxes for an underfunded multi-employer plan. Potential withdrawal liability could reach $135 million if the company were to voluntarily withdraw from all plans.
- Tax Contingency (BSCC): The IRS is auditing the taxability of the Baugh Supply Chain Cooperative (BSCC) structure. If challenged successfully, SYSCO could face accelerated tax payments and interest ranging from $240 million to $265 million. Management believes it will prevail but has accrued for a portion of the interest exposure under FIN 48.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) effective July 1, 2007, resulting in a $91.6 million decrease to beginning retained earnings.
Investor Verification Checklist
- Verify Inflation Pass-Through: Confirm the extent to which SYSCO can pass the estimated 5.9% product cost inflation and rising fuel costs to customers without impacting volume.
- Monitor Pension Obligations: Track the funding status of multi-employer pension plans and any potential increases in required contributions or withdrawal liabilities.
- Assess Tax Exposure: Review the status of the IRS audit regarding the BSCC cooperative structure and the potential impact of the $240-$265 million interest exposure.
- Review Working Capital Trends: Analyze the continued growth in accounts receivable and inventory balances, which have pressured operating cash flow.
- Check Share Repurchase Pace: Monitor the remaining authorization for share buybacks and the company's ability to sustain dividends amidst capital expenditures and debt service.