Business Context and Reporting Period
Company: SYSCO CORPORATION
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 1998 (13-week period)
Business Overview: Sysco is a foodservice distribution company. The financial statements are unaudited, except for the June 27, 1998 balance sheet, and have been reviewed by Arthur Andersen LLP. Share data reflects a 2-for-1 stock split on March 20, 1998.
Key Financial Metrics
| Metric | Q1 1999 (Ended Sept 26, 1998) | Q1 1998 (Ended Sept 27, 1997) |
|---|---|---|
| Sales | $4,192,630,000 | $3,828,244,000 |
| Net Earnings | $86,420,000 | $80,100,000 |
| Diluted EPS | $0.26 | $0.23 |
| Operating Cash Flow | $121,860,000 | $31,805,000 |
| Total Assets | $3,959,261,000 | $3,635,477,000 |
| Total Debt (Current + Long-term) | $1,003,241,000 | $778,835,000 |
| Cash and Equivalents | $108,264,000 | $88,509,000 |
Note: Debt figures include current maturities of long-term debt and long-term debt. Interest expense for the quarter was $16,931,000.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 9.5% year-over-year. Real sales growth exceeded 6%, driven by volume growth, a 1.5% increase from acquisitions, and approximately 2% food cost inflation (primarily dairy).
- Profitability: Net earnings rose 8% to $86.4 million. Earnings per share (EPS) increased 13% due to higher earnings and a reduction in average shares outstanding from the share repurchase program.
- Cost Structure: Cost of sales increased 9.4%. Operating expenses remained stable as a percentage of sales. Interest expense increased due to higher borrowings.
- Cash Flow: Net cash provided by operating activities surged to $121.9 million from $31.8 million in the prior year, largely due to a significant increase in accounts payable ($154.7 million increase vs. $80.8 million previously).
- Balance Sheet: Total assets grew by approximately $324 million. Total shareholders' equity increased to $1.39 billion.
Outlook, Risks, and Management Commentary
- Share Repurchases: The company has repurchased 72 million shares since 1992. In September 1998, the Board authorized an additional 8 million shares; 418,700 shares were purchased under this new authorization by period end.
- Year 2000 Compliance: Sysco is undergoing a company-wide program to ensure information systems are Year 2000 compliant. Management expects costs will not have a material adverse impact, though disruptions from non-compliant third-party systems remain a risk.
- Market Risks: The company holds no derivative instruments for trading. Interest rate risk is limited as most long-term debt is fixed-rate. Commercial paper outstanding was approximately $79.9 million.
- Forward-Looking Statements: Management notes that share repurchases, capital expenditures, and Year 2000 costs are subject to market conditions and management discretion.
Investor Verification Checklist
- Debt Levels: Verify the sustainability of the increased debt load (Total debt rose significantly from ~$779M to ~$1.0B) and the impact of higher interest expenses on future margins.
- Working Capital: Confirm the drivers behind the $154.7 million increase in accounts payable and whether this trend is sustainable or indicative of extended payment terms.
- Year 2000 Costs: Monitor actual expenditures for Year 2000 compliance against the preliminary estimate that costs would not be material.
- Share Count: Track the execution of the new 8 million share repurchase authorization and its impact on future EPS.
- Inflation Impact: Assess the ability to pass through the cited 2% food cost inflation (dairy products) to customers without eroding volume growth.