Business context and reporting period
Sysco Corporation is a North American foodservice distributor serving approximately 400,000 customers through 180 facilities. This is its Form 10-K for the fiscal year ended July 3, 2010—not a standalone 2009 fourth-quarter filing. Fiscal 2010 included 53 weeks; fiscal 2009 included 52 weeks, limiting direct comparisons.
The fourth quarter of fiscal 2010 was 14 weeks. Quarterly sales were $10.35 billion and net earnings were $337.8 million; diluted EPS was $0.57. The extra week affects comparison with the prior-year quarter.
Financial performance and position
| Metric | FY2010 | FY2009 |
|---|---|---|
| Sales | $37.24 billion | $36.85 billion |
| Gross margin | $7.11 billion; 19.1% | $7.04 billion; 19.1% |
| Operating income | $1.98 billion; 5.3% | $1.87 billion; 5.1% |
| Net earnings | $1.18 billion; 3.2% | $1.06 billion; 2.9% |
| Diluted EPS | $1.99 | $1.77 |
| Cash from operations | $885 million | $1.58 billion |
| Capital expenditures | $595 million | $465 million |
- Cash and cash equivalents were $585 million at year-end, down from $1.02 billion. Current assets were $5.08 billion and current liabilities $3.01 billion.
- Total debt was $2.48 billion, approximately 81% fixed-rate; long-term debt to capitalization was 39.3%, compared with 41.8% in FY2009. No commercial paper was outstanding at year-end, and Sysco reported compliance with debt covenants.
- Cash from operations fell by $691 million, principally reflecting $528 million paid under the IRS settlement and $140 million of pension contributions made early for FY2011. Cash from operations less capital expenditures was approximately $291 million.
- Dividends declared were $0.99 per share. Sysco repurchased 6.0 million shares for $179 million during the year.
Changes versus the prior comparable period
- Reported sales rose 1.1%, but excluding the estimated contribution of the 53rd week, sales declined 0.9%. Management cited improving case volumes in the second half, partly offset by product-cost deflation, weak economic conditions, and a shift toward lower-priced contract customers.
- Reported operating income increased 5.5%; adjusted for the extra week, it increased 3.3%. Operating expenses declined 0.6%, aided by lower fuel costs and a lower provision for receivable losses.
- Reported net earnings increased 11.7%; excluding the extra week, they increased 9.5%. Adjusted diluted EPS was $1.95, up 10.2% from $1.77.
- Product costs were estimated to have deflated 1.5%, versus 4.7% inflation in FY2009. Operating margin improved, while gross margin as a percentage of sales was broadly unchanged.
- The effective tax rate declined to 36.20% from 40.37%, benefiting from a one-time approximately $29 million tax benefit related to the IRS settlement and non-taxable gains on corporate-owned life insurance (COLI) policies. Those items, together, added approximately $0.09 per share in FY2010.
Outlook, commentary, risks and unusual items
- Management said sales trends improved in the second half, but consumer disposable income and foodservice demand remained under pressure; improvement might not persist or restore prior dining habits.
- FY2011 capital expenditures were estimated at $700–$750 million. The Business Transformation Project was expected to require approximately $260–$300 million of FY2011 cash outlay, with implementation starting in FY2011 and extending across most Broadline and SYGMA operations through FY2013. Total project cash outlay was estimated at approximately $900 million; early implementation costs were expected to exceed benefits.
- Management expected FY2011 pension costs to increase approximately $60 million and Business Transformation Project expense to rise approximately $25–$45 million. Fuel costs, before fuel-surcharge recoveries, were expected to increase approximately $10–$20 million versus FY2010, subject to market prices.
- The IRS settlement requires additional payments of $212 million in each of FY2011 and FY2012. The company said operating cash flow, cash resources and capital-market access should fund anticipated needs.
- Risks include economic weakness and reduced restaurant demand; food-cost inflation or deflation; fuel-price changes and supply interruptions; ERP cost, timing or execution problems; pension obligations; labor negotiations; technology disruption; and food safety or product-liability events. Sysco estimated potential multi-employer pension withdrawal liability of up to $183 million, based on plan data with valuation dates largely in 2008; the estimate could change.
- Sysco reported no off-balance-sheet arrangements. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Separate underlying sales, operating-income and EPS trends from the extra fiscal week and the one-time tax and COLI effects.
- Track customer case volumes, restaurant demand, product-cost trends and the extent to which Sysco can protect margins amid deflation or inflation.
- Monitor cash generation and liquidity after IRS installment payments, pension funding, dividends, repurchases and planned capital spending.
- Assess ERP implementation milestones, total project spending, capitalization and evidence of realized savings.
- Review pension assumptions and funding status, including the uncertain multi-employer withdrawal exposure and expected FY2011 pension-cost increase.
- Consider SYGMA customer concentration: Wendy’s/Arby’s represented approximately 33% of SYGMA sales, although management did not expect its loss alone to materially affect Sysco overall.