Sysco Corporation — Q1 Fiscal 2013 Form 10-Q
Business context and reporting period
Sysco distributes food and related products to foodservice customers in the United States, Canada, Ireland and other markets. This unaudited report covers the 13 weeks ended September 29, 2012; comparisons are with the 13 weeks ended October 1, 2011. Management said economic pressure on consumers was weighing on foodservice demand, while Sysco believed it continued to gain market share.
Financial performance and liquidity
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $11.087 billion | $10.586 billion | +4.7% |
| Gross profit / margin | $2.004 billion / 18.07% | $1.948 billion / 18.40% | Profit +2.9%; margin down 33 bps |
| Operating income / margin | $478.8 million / 4.32% | $509.3 million / 4.81% | -6.0% |
| Net earnings / margin | $286.6 million / 2.59% | $302.7 million / 2.86% | -5.3% |
| Diluted EPS | $0.49 | $0.51 | -3.9% |
| Operating cash flow | $213.2 million | $255.3 million | Down $42.1 million |
| Capital expenditures | $155.7 million | $226.5 million | Down $70.9 million |
Adjusted non-GAAP operating income was $562.9 million, up 2.0%; adjusted net earnings were $340.1 million, up 3.2%; and adjusted diluted EPS was $0.58 versus $0.56. These measures exclude specified transformation-project, severance, facility-closure and multiemployer pension withdrawal costs; they are not substitutes for GAAP results.
Cash and cash equivalents were $548.4 million at quarter-end, down $140.5 million from June 30, 2012. Current assets were $6.334 billion and current liabilities $3.603 billion. Total debt carrying value was approximately $3.019 billion, including $254.3 million of current maturities; about 84% of debt was fixed-rate, including swaps. No commercial paper or short-term bank borrowings were outstanding. Sysco had a $1.0 billion revolving facility and $95 million of uncommitted bank lines, both undrawn at quarter-end. The company intended to repay $250 million of 4.2% notes maturing in February 2013 using cash, operating cash flow, commercial paper, debt issuance, or a combination.
Material changes versus the prior comparable period
- Sales growth reflected approximately 2.9% case-volume growth, 2.2% product-cost inflation and acquisitions; foreign exchange reduced sales growth by 0.3%.
- Gross margin declined amid inflation in certain categories and competition in a slow-growth market. Poultry and meat inflation was 6%–11%, while dairy prices deflated 8%.
- Operating expenses rose 6.0%, exceeding gross-profit growth. Business Transformation Project expenses rose to $77.7 million from $37.0 million, including $11.0 million of software amortization after deployment began in August 2012.
- Broadline sales rose 4.6% and operating income 3.0%. SYGMA sales rose 2.6%, but operating income fell 23.0%; Other-segment sales rose 12.2%, while operating income fell 8.7%.
- Operating cash flow fell partly because tax payments were higher. Capital spending and treasury-stock purchases were lower year over year; dividends paid were $158.2 million versus $153.8 million.
Outlook, management commentary, risks and unusual items
- Management expected $550 million–$650 million of annualized Business Transformation Project benefits by fiscal 2015 and believed it could achieve 25% of total expected benefits in fiscal 2013. It targeted conversion of 5–15 U.S. Broadline operating companies during FY2013. Project costs were expected to exceed benefits in FY2013, with expenses higher than FY2012.
- Management estimated FY2013 fuel costs, excluding fuel-surcharge recoveries, could increase $10 million–$20 million versus FY2012 if fuel prices did not rise significantly; forward fuel commitments covered approximately 35%–45% of expected needs for the remaining fiscal year.
- Sysco cited inflation and drought-related input-cost uncertainty, subdued consumer confidence, competition, labor availability and costs, fuel-price volatility, and execution and cost risks in the transformation project. It said operating cash flow should improve in FY2013 and beyond, citing transformation benefits and working-capital initiatives; this is a forward-looking expectation.
- Management could not quantify Hurricane Sandy’s financial impact; facilities sustained no substantial damage, but customers in affected regions were impacted.
- Potential multiemployer pension withdrawal liability for certain plans was estimated at up to $115 million, based on administrator data with valuation dates from 2009–2011; management warned the current amount could differ materially. Recorded withdrawal liabilities were $30.7 million.
- Unrecognized tax benefits were $63.4 million, with $35.1 million of related accrued interest; the company could not estimate the range of possible near-term changes. A proposed EPA matter involving a Detroit subsidiary was expected to settle for approximately $125,000, subject to final approval.
Important facts for investors to verify
- Whether case-volume growth, market share gains and gross-margin trends persist as inflation and competition evolve.
- Whether transformation costs, deployment timing and projected benefits track management’s targets, and how adjusted results reconcile with GAAP performance.
- Whether working-capital requirements, tax payments and operating cash flow improve as management expects.
- Fuel-price exposure, the effectiveness and cost of forward commitments, and whether expected fuel-cost increases materialize.
- Potential pension-plan contributions or withdrawal liabilities, tax-position developments, and the effect of the February 2013 debt maturity on liquidity.