Sysco Corporation (NYSE: SYY) — Form 10-K summary
Reporting period: Fiscal year ended June 29, 2013 (52 weeks), filed August 26, 2013. Although the request metadata says “2012 Q4,” this is Sysco’s fiscal 2013 annual report; it also reports the quarter ended June 29, 2013.
Business context
Sysco is a North American foodservice distributor serving approximately 425,000 customers through 193 distribution facilities. Broadline and SYGMA are its reportable segments. No customer accounted for 10% or more of consolidated sales, although Wendy’s represented approximately 25% of SYGMA sales.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Sales | $44.41 billion | $42.38 billion | +4.8% |
| Gross profit | $7.87 billion | $7.68 billion | +2.5% |
| Operating income | $1.66 billion | $1.89 billion | -12.3% |
| Net earnings | $992.4 million | $1.12 billion | -11.5% |
| Diluted EPS | $1.67 | $1.90 | -12.1% |
| Operating cash flow | $1.51 billion | $1.40 billion | +7.6% |
| Capital expenditures | $511.9 million | $784.5 million | -34.8% |
| Free cash flow (non-GAAP) | $1.02 billion | $627.9 million | +61.7% |
- Gross margin fell to 17.72% from 18.11%; operating margin declined to 3.7% from 4.5%, and net margin to 2.2% from 2.6%.
- Adjusted operating income (non-GAAP) was $2.08 billion, down 1.7%; adjusted net earnings were $1.27 billion, up 0.1%; adjusted diluted EPS was $2.14, down 0.5%. These measures exclude specified project, pension, severance, restructuring, acquisition and facility charges; see the filing’s reconciliations.
- Case volume in Broadline and SYGMA, excluding acquisitions made in the preceding 12 months, increased 1.3%. Product cost inflation was estimated at 2.2%; acquisitions contributed 1.5% to sales growth.
- Fiscal 2013 fourth-quarter sales were $11.60 billion and net earnings were $283.0 million; diluted EPS was $0.47. Versus the prior-year fourth quarter, sales rose 5%, while operating income fell 11%, net earnings 8% and diluted EPS 11%.
Cash, debt and liquidity
- Cash and cash equivalents were $412.3 million at year-end, down from $688.9 million. Current assets were $6.21 billion and current liabilities $3.75 billion.
- Total debt was $2.89 billion, including $207.3 million of current maturities and $41.6 million of notes payable. Approximately 88% of debt was fixed rate; the debt-to-capitalization ratio was 35.4%, versus 39.2% a year earlier. Sysco reported compliance with its debt covenants.
- Available funding included a $1.3 billion commercial paper program supported by a $1.0 billion revolving credit facility. Commercial paper outstanding was $95.5 million. Management said operating cash flow and available borrowing and capital-market access should meet anticipated cash needs for the next 12 months.
- Cash from operations rose despite lower earnings, supported in part by the prior-year $212 million IRS settlement payment not recurring, higher depreciation and amortization, and pension-related cash-flow comparisons. Dividends paid were $648.3 million; treasury stock purchases were $721.6 million.
Material changes, outlook and key risks
- Management attributed weaker operating results primarily to higher operating expenses, including Business Transformation Project costs, pay-related costs, multiemployer pension withdrawal charges, depreciation and fuel. Competitive pressure and faster growth among lower-margin large customers also weighed on gross margin.
- Sysco acquired 14 businesses during the year; acquisitions represented annualized sales exceeding $1 billion. Cash paid for acquisitions and related contingent consideration was $397.4 million.
- The multi-year Business Transformation Project includes ERP deployment, cost transformation and category management. Management targets $550–$650 million in annual benefits by fiscal 2015, but expects project expenses to remain similar to fiscal 2013 and exceed benefits in fiscal 2014. ERP rollout was paused at additional locations while the company addressed system improvements; another deployment was planned around year-end 2013, with further rollout potentially resuming in early 2014.
- Management no longer expects to meet its earlier fiscal 2015 diluted EPS target of $2.50–$2.75. It expects gross-margin pressure to persist in fiscal 2014, while targeting sales-case growth and lower costs per case. Fiscal 2014 capital expenditures were forecast at $550–$600 million; retirement-related expenses were expected to decline by $75–$85 million, and Broadline cost per case by approximately $0.05.
- Fuel costs, food-cost volatility, weak consumer spending, competitive pricing, customer mix and execution of cost-saving and ERP initiatives remain material risks. Forward diesel commitments totaled approximately $204 million through August 2014, covering an estimated 60%–65% of fuel needs for the contracted periods.
- Multiemployer pension plans are underfunded. Sysco reported $65.7 million of contributions in fiscal 2013, including withdrawal payments, and estimated potential withdrawal liability of up to $220 million across participating plans. Separately, it estimated up to $80 million of reasonably possible additional exposure for certain plans, excluding liabilities already recorded; the estimates rely on dated plan information and could differ materially.
- The company-sponsored pension plans had a $3.09 billion benefit obligation and $2.52 billion in plan assets at year-end, a $571 million funded deficit. Sysco froze future accruals for U.S. salaried and non-union hourly employees and froze the SERP during fiscal 2013.
- California authorities alleged violations involving temporary “drop sites.” Sysco discontinued their use and said it was cooperating; fines or penalties remain possible. The filing also describes other legal proceedings but says management does not expect their resolution to materially affect consolidated results or financial position.
Important facts for investors to verify
- Whether the planned ERP fixes, rollout schedule and Business Transformation Project savings are being achieved, and how actual costs compare with projected benefits.
- Whether sales growth and case volumes can offset persistent margin pressure, particularly as customer mix shifts toward large, lower-margin accounts.
- Actual fiscal 2014 operating cash flow, capital spending, debt levels, fuel costs and progress toward the stated cost-per-case and retirement-expense targets.
- Updated valuations and funding requirements for company-sponsored and multiemployer pension plans, including any changes in withdrawal-liability exposure.
- Developments in the California drop-site matter, other legal contingencies and the company’s ability to retain SYGMA’s major customer relationships.