SYY

SYSCO CORP 10-Q Summary: Period Ended Dec 29, 2001

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for SYSCO CORPORATION, a leading foodservice distributor operating in the contiguous United States, Alaska, Hawaii, D.C., and portions of Canada. The report covers the 26-week period ended December 29, 2001 (Fiscal 2002), and the 13-week period ended on the same date. The financial statements are unaudited but have been reviewed by Arthur Andersen LLP.

Key Financial Metrics

Margins: The filing does not explicitly state gross or operating margin percentages, though it notes operating expenses remained approximately the same as a percent of sales for the 26-week period. Pretax earnings increased 13.8% for the 26-week period.

Material Changes vs. Prior Period

• Sales Growth: Sales increased 7.2% for the 26-week period and 5.7% for the 13-week period compared to the prior year. Internal sales growth was 4.0% (26-weeks) and 2.7% (13-weeks) after adjusting for acquisitions.
• Profitability: Net earnings increased 13.8% (26-weeks) and 13.7% (13-weeks). Diluted EPS rose 14.3% for both periods.
• Costs: Cost of sales increased 6.9% (26-weeks) and 5.4% (13-weeks). Inflation in food costs was 2.7% (26-weeks) and 2.0% (13-weeks), driven by medical and dairy products.
• Interest Expense: Decreased 8.6% (26-weeks) and 8.4% (13-weeks) due to lower interest rates on short-term and commercial paper borrowings.
• Segment Performance:
  • Broadline: Sales up 5.0% (26-weeks); Pretax earnings up 12.0%.
  • SYGMA: Sales up 9.3% (26-weeks); Pretax earnings up 72.4% due to operating efficiencies.
  • Other: Sales up 44.6% (26-weeks) primarily due to acquisition timing; Pretax earnings up 14.5%.

Guidance, Outlook, and Risks

• Capital Expenditures: Expected to range between $400 million and $425 million for fiscal 2002. Current 26-week spending was $215.2 million, a 35% increase year-over-year, driven by new facilities in Sacramento, Las Vegas, and Columbia.
• Acquisitions:
  • Pending: Agreed to acquire SERCA Foodservice operations in Canada for approximately $278 million (CAD $440 million). Closing anticipated in Spring 2002, subject to regulatory approval. Note: Pacific Division operations of SERCA are being sold separately.
  • Completed: Several acquisitions in fiscal 2001 (e.g., Guest Supply, Fulton Provision) contributed to sales growth.
• Share Repurchases: Repurchased 8.9 million shares for $218.7 million during the 26-week period. 14.6 million shares remain available under current authorization.
• Liquidity: Long-term debt to capitalization ratio is 32.6%, below the 35-40% target. The company maintains $267.8 million in uncommitted bank lines and a $500 million debt shelf registration with $275 million available.
• Risks:
  • Economic downturn affecting foodservice demand.
  • Low profit margins inherent to the industry.
  • Regulatory approval risks for the SERCA acquisition.
  • Impact of new accounting standards (SFAS No. 142) on goodwill amortization, effective June 30, 2002.

Investor Verification Checklist

• Verify the closing status and regulatory approval of the SERCA Foodservice acquisition in Canada.
• Monitor the impact of SFAS No. 142 adoption on future earnings due to the cessation of goodwill amortization.
• Assess the sustainability of internal sales growth (4.0% for 26-weeks) amidst the noted economic softness.
• Review the progress of capital expenditure projects (Sacramento, Las Vegas, Columbia) against the $400-$425 million fiscal guidance.
• Track the company's leverage ratio as share repurchases continue, ensuring it remains within the 35-40% target range.