Business Context and Reporting Period
Company: SYSCO CORP
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 39-week period ended March 29, 2003 (Fiscal Year 2003)
Business Overview: SYSCO provides marketing and distribution services to foodservice customers and suppliers in the United States and Canada. The company operates through reportable segments including Broadline and SYGMA, focusing on profitable sales growth, acquisitions, and supply chain optimization.
Key Financial Metrics
| Metric (in thousands) | 39-Weeks Ended Mar 29, 2003 | 39-Weeks Ended Mar 30, 2002 | 13-Weeks Ended Mar 29, 2003 | 13-Weeks Ended Mar 30, 2002 |
|---|---|---|---|---|
| Sales | $19,168,497 | $17,039,968 | $6,395,278 | $5,620,324 |
| Net Earnings | $535,552 | $473,869 | $168,411 | $151,384 |
| Diluted EPS | $0.81 | $0.70 | $0.26 | $0.23 |
| Operating Cash Flow | $884,495 | $744,316 | N/A | N/A |
| Cost of Sales Margin | 80.3% | 80.3% | 80.4% | 80.2% |
| Operating Expense Margin | 14.9% | 15.0% | 15.0% | 15.2% |
| Total Debt (Current + Long-term) | $1,385,833 | $1,167,096 | N/A | N/A |
| Cash and Equivalents | $186,956 | $346,083 | N/A | N/A |
Note: Total Debt includes Notes Payable ($81,492), Current Maturities of Long-term Debt ($24,684), and Long-term Debt ($1,279,657) as of March 29, 2003.
Material Changes vs. Prior Period
- Sales Growth: Sales increased 12.5% for the 39-week period and 13.8% for the quarter. Real sales growth (adjusted for acquisitions and deflation) was approximately 6.8% for the 39-week period.
- Profitability: Net earnings increased 13.0% for the 39-week period. Diluted EPS increased 15.7% due to earnings growth and share repurchases.
- Acquisitions: Acquisitions contributed 6.5% to sales growth in the 39-week period. Notable acquisitions included Abbott Foods, Pronamics, Asian Foods, and assets of Marriott Distribution Services.
- Working Capital: Operating cash flow was negatively impacted by a $175.3 million increase in accounts receivable and a $116.6 million increase in inventory, partially offset by a $152.6 million increase in accounts payable.
- Debt Levels: Total debt increased significantly, driven by commercial paper borrowings ($181.4 million outstanding) and long-term debt obligations.
Guidance, Outlook, and Risks
- Capital Expenditures: Total capital expenditures for fiscal 2003 are projected to be between $425 million and $450 million. This includes the "National Supply Chain project," with the Northeast Redistribution Center expected to be operational in summer 2004.
- Share Repurchases: The company repurchased 12.96 million shares for $372.8 million during the period. Approximately 12.6 million shares remain available for repurchase under the current authorization.
- Dividends: Dividends declared were $0.11 per share for the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004.
- Accounting Changes: SYSCO adopted SFAS No. 142, discontinuing goodwill amortization. Management assessed no impairment to goodwill. The elimination of amortization expense was offset by corporate expenses related to the supply chain project and life insurance asset adjustments.
- Risks: Key risks include low profit margins in the foodservice industry, sensitivity to economic conditions, leverage and debt risks, and the successful execution of the National Supply Chain project.
Investor Verification Checklist
- Real Sales Growth: Verify the 6.8% real sales growth figure against the 12.5% reported sales increase to understand the impact of acquisitions and deflation.
- Working Capital Trends: Monitor the $175 million increase in receivables and $116 million increase in inventory to ensure these are not indicative of collection issues or overstocking.
- Supply Chain Project Costs: Track the $59.6 million spent to date on the National Supply Chain project against the projected $275-$325 million total cost for the Northeast phase.
- Debt Maturity and Rates: Review the $181.4 million in commercial paper and the interest rate swap agreement ($200 million notional) to assess exposure to floating rate fluctuations.
- Segment Performance: Analyze the Broadline segment's 13.1% sales increase versus the "Other" segment's earnings decline to understand margin pressures in specialty operations.