SYY

SYSCO CORP 10-Q Summary: Quarter Ended March 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the 13-week period ended March 30, 2002 (Q3 Fiscal 2002) and the 39-week period ended March 30, 2002. SYSCO Corporation operates as a foodservice distributor through 124 operating companies, aggregated into five segments, with Broadline and SYGMA being the primary reportable segments. The company serves the "food-prepared-away-from-home" industry across the United States and Canada.

Key Financial Metrics

Note: All figures in thousands except per share data and percentages.

Material Changes vs. Prior Period

• Sales Growth: Sales increased 5.2% in the quarter and 6.5% for the 39-week period. Real sales growth (adjusted for acquisitions and food price increases) was 2.7% for the quarter and 1.7% for the 39-week period, down from prior year real growth of 5.0% and 6.9% respectively, attributed to economic softness.
• Profitability: Net earnings rose 8.6% in the quarter and 12.1% for the 39-week period. Diluted EPS increased 9.5% and 12.9% respectively.
• Operating Expenses: Operating expenses as a percentage of sales increased slightly to 15.15% in the quarter (from 14.97% prior year) due to start-up costs for new "fold-out" facilities in Sacramento, Columbia, and Las Vegas.
• Interest Expense: Decreased 22.6% in the quarter and 13.4% for the 39-week period due to lower interest rates on short-term and commercial paper borrowings.
• Acquisitions: The company acquired SERCA Foodservice operations of Sobeys Inc. effective March 30, 2002, for approximately $210.5 million. This acquisition is not reflected in the current period's operating results but was funded via commercial paper.

Guidance, Outlook, and Risks

• Capital Expenditures: Total fiscal 2002 capital expenditures are expected to range between $400 million and $425 million. Fiscal 2003 expenditures are expected to increase due to the fold-out program and supply chain initiatives.
• Debt Strategy: Management intends to replace commercial paper borrowings (used to fund the SERCA acquisition) with long-term notes. In April 2002, the company issued $200 million in 4.75% Notes due 2005 to retire commercial paper.
• Tax Deferrals: A reorganization of the supply chain resulted in a deferral of approximately $150 million in federal and state income tax payments for the 39-week period. Payments related to this deferral are anticipated to begin in fiscal 2004.
• Share Repurchases: The company repurchased 2.2 million shares for $64.2 million in the quarter. Approximately 12.4 million shares remain available for repurchase under current authorization.
• Risks: Key risks include sensitivity to general economic conditions, low industry profit margins, leverage and debt risks, and the outcome of ongoing legal proceedings (though management does not expect a material adverse effect).
• Accounting Changes: The company is assessing the impact of adopting SFAS No. 142 (Goodwill and Other Intangible Assets), effective July 1, 2002, which will discontinue goodwill amortization.

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of the SERCA acquisition, which was funded via short-term debt and will appear in future periods.
• Debt Refinancing: Monitor the execution of the plan to replace commercial paper with long-term debt to stabilize interest rate exposure.
• Real Sales Growth: Track "real" sales growth (excluding price increases and acquisitions) to gauge underlying demand given the reported slowdown to 1.7% for the 39-week period.
• Capital Expenditure Returns: Assess the profitability timeline for the new fold-out facilities in Sacramento, Columbia, and Las Vegas, which currently are increasing operating expense ratios.
• Tax Liability: Confirm the timing and amount of the deferred tax payments expected to commence in fiscal 2004.