Sysco Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 31, 2012 (13 weeks), with year-to-date results for the 39 weeks ended March 31, 2012. Comparisons are with the periods ended April 2, 2011. The filing period is fiscal 2012 Q3, notwithstanding the request metadata’s “2011 Q3.” Figures below are in U.S. dollars.
Business context and financial results
Sysco distributes food and related products to foodservice customers, principally in the United States and Canada. Management estimated its share of that market at approximately 17.5%. Sales growth reflected higher product costs and selling prices, as well as modest case-volume growth.
| Metric | Q3 FY2012 | Q3 FY2011 | 39 weeks FY2012 | 39 weeks FY2011 |
|---|---|---|---|---|
| Sales | $10.505 billion | $9.762 billion | $31.336 billion | $28.898 billion |
| Gross profit | $1.872 billion | $1.833 billion | $5.665 billion | $5.440 billion |
| Operating income | $438.8 million | $427.5 million | $1.375 billion | $1.371 billion |
| Net earnings | $259.6 million | $258.5 million | $812.3 million | $815.7 million |
| Diluted EPS | $0.44 | $0.44 | $1.38 | $1.39 |
| Gross margin | 17.82% | 18.77% | 18.08% | 18.83% |
| Operating margin | 4.2% | 4.4% | 4.4% | 4.7% |
Cash flow and capital: For the 39 weeks, operating cash flow was $908.3 million, versus $665.8 million; capital expenditures were $633.2 million, versus $454.1 million. Operating cash flow less capital expenditures was approximately $275.1 million (derived). Cash and equivalents at March 31 were $350.5 million. Total debt carrying value was approximately $2.872 billion, including $456.0 million of current maturities; fair value of debt was estimated at $3.264 billion. Current assets of $5.925 billion and current liabilities of $3.704 billion imply a current ratio of approximately 1.60 (derived).
During the 39 weeks, Sysco paid $464.8 million in dividends and repurchased $272.3 million of treasury shares. The declared quarterly dividend was $0.27 per share. The $1.0 billion revolving credit facility supporting U.S. and Canadian commercial paper programs runs to December 2016, subject to extension. Commercial paper outstanding at March 31 was $390 million.
Material changes versus comparable periods
- Q3 sales rose 7.6% and year-to-date sales rose 8.4%; case volumes including recent acquisitions increased approximately 2.9% and 2.7%, respectively. Estimated product-cost inflation was 5.5% for Q3 and 6.3% year to date.
- Gross margin declined 95 basis points in Q3 and 75 basis points year to date, as inflation and competitive pricing limited the ability to pass through costs without affecting customers.
- GAAP operating income increased 2.7% in Q3 but only 0.3% year to date. Net earnings increased 0.4% in Q3 and declined 0.4% year to date; year-to-date diluted EPS fell 0.7%.
- Management’s adjusted non-GAAP diluted EPS was $0.49 in Q3, up 2.1%, and $1.50 year to date, up 4.2%. These adjustments exclude specified transformation costs, pension withdrawal charges, COLI effects and tax benefits; they are not substitutes for GAAP results.
- Broadline sales grew, but segment operating income comparisons benefited from a $36.1 million multiemployer-pension withdrawal charge in the prior-year quarter. SYGMA operating income declined 1.8% in Q3, while “Other” segment operating income fell 32.5%.
Outlook, risks and unusual items
- Business Transformation Project: The second pilot began in Q3 after additional system work. Sysco did not expect broader deployment during the remainder of FY2012 and anticipated deployment activities beginning in early FY2013. FY2012 project expense guidance was approximately $175–$195 million; project capital expenditures were estimated at $145–$165 million. Total FY2012 capital expenditures were estimated at $775–$800 million. Management said the multiyear project would cost significantly more than originally estimated and carries implementation, cost and benefit risks.
- Inflation and fuel: Management cited a slow foodservice-market recovery, pressure on consumer disposable income, high product inflation and competitive pressure. Forward diesel commitments totaled approximately $83.4 million through February 2013, covering about 30%–35% of fuel needs for contracted periods. Assuming fuel prices did not rise significantly, FY2012 fuel costs excluding surcharge recovery were expected to increase $35–$45 million year over year; surcharges were expected to offset most of the increase.
- Pensions and taxes: Management estimated potential multiemployer-plan withdrawal liability of up to $220 million, based on dated plan information, and said actual exposure could differ materially. Approximately $47.7 million was already recorded for plans from which Sysco had withdrawn. The company expected multiemployer contributions could rise. It had $53 million remaining in FY2012 payments under an IRS settlement; $159 million had been paid during the first 39 weeks.
- Other items: Q3 effective tax rate was 37.12%. The prior-year comparison included tax benefits and COLI gains, as well as the pension withdrawal charge; Sysco had shifted COLI assets toward lower-risk investments and reported a one-time redemption of approximately $75 million during the current year-to-date period. Legal proceedings were described as not expected to have a material adverse effect, though outcomes remain uncertain.
- Management said existing operating cash flow, commercial-paper and bank facilities, and capital-market access should meet anticipated cash requirements. This outlook is subject to economic, inflation, fuel, technology-project, competition, labor, pension, interest-rate and financing risks.
Key facts for investors to verify
- Whether case-volume gains and market-share growth persist if inflation moderates, and whether gross margins recover from the reported declines.
- Actual Business Transformation Project costs, deployment timing, capitalized spending and realized savings versus management’s estimates.
- Whether fuel surcharges offset fuel-cost increases as projected, and the effect of diesel prices on margins.
- Updated multiemployer pension funding and withdrawal exposure, including the timing and amount of recorded or future payments.
- Cash generation after capital expenditures, debt maturities and financing plans, including repayment of $200 million of 2012 notes and $250 million of 2013 notes.
- How normalized GAAP earnings compare with management’s adjusted non-GAAP measures, particularly given prior-period pension, COLI and tax items.