Sysco Corporation — Form 10-Q Summary
Business context and period. Sysco distributes food and related products to foodservice customers, principally in the U.S. and Canada. This unaudited filing covers the 13 weeks ended October 1, 2011 (first quarter fiscal 2012), compared with the 13 weeks ended October 2, 2010. Management reported that the statements include normal recurring adjustments and were reviewed by Ernst & Young LLP.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change / context |
|---|---|---|---|
| Sales | $10.586 billion | $9.751 billion | +8.6%; mainly inflation-driven |
| Gross profit | $1.948 billion | $1.846 billion | +5.5% |
| Gross margin | 18.4% | 18.9% | Down 53 basis points |
| Operating income | $509.3 million | $506.2 million | +0.6%; operating margin 4.8% vs. 5.2% |
| Net earnings | $302.7 million | $299.1 million | +1.2%; net margin 2.8% vs. 3.1% |
| Diluted EPS | $0.51 | $0.51 | Unchanged; adjusted diluted EPS was $0.55 vs. $0.51 |
| Operating cash flow | $255.3 million | $226.8 million | Increase included a $444.9 million rise in accrued income taxes, partly offset by deferred-tax movements |
| Capital expenditures | $226.5 million | $142.9 million | Higher investment in facilities, fleet and technology |
Sysco estimated product-cost inflation at 7.3%, versus 3.3% a year earlier. Case volumes rose approximately 2.0% including acquisitions, or 1.0% excluding them. Acquisitions and foreign exchange each contributed about 0.7% to sales growth. Higher inflation, particularly in dairy, meat, and canned and dry products, limited the company’s ability to maintain gross margin while passing costs through to customers.
Broadline sales grew 8.9% and operating income 5.3%; SYGMA sales grew 4.9% and operating income 4.7%. Segment comparisons were revised to reflect a changed allocation of centrally incurred costs; the filing also moved custom-cut meat operations into Broadline reporting.
Balance sheet, debt and capital allocation
- At October 1, 2011, cash and cash equivalents were $284.1 million; current assets were $5.696 billion and current liabilities $3.579 billion. Total assets were $11.447 billion.
- Debt carrying value was approximately $2.597 billion, including $206.3 million of current maturities; fair value was estimated at $3.016 billion. Approximately 77% of debt was at fixed rates, including swaps.
- Commercial paper outstanding was $108 million at quarter-end and $351 million as of October 29. A $1.0 billion revolving facility supports the U.S. and Canadian commercial paper programs and expires November 2012, subject to extension. Uncommitted working-capital lines totaled $95 million, of which $5.4 million was drawn at quarter-end.
- Cash declined by $355.7 million during the quarter. Investing cash outflow was $273.8 million and financing cash outflow was $325.7 million, including $133.4 million of share repurchases and $153.8 million of dividends paid.
- The declared dividend was $0.26 per share, up from $0.25 a year earlier. Sysco repurchased 4.92 million shares under its program during the quarter.
Outlook, commentary and risks
- Management described a challenging environment marked by uncertain economic conditions, pressure on consumer spending, rising product-cost inflation and softening sentiment. It said the foodservice market was recovering slowly, while Sysco believed it continued to gain share.
- Fiscal 2012 capital expenditures were expected to be $700–$750 million. The estimate was reduced partly due to delayed timing for a third regional distribution center; construction timing remained under review.
- Business Transformation Project expenses were expected to total approximately $250–$275 million in fiscal 2012 and exceed project benefits during the year. The deployment timeline remained under determination after additional pilot-system improvements; software readiness in the second half of fiscal 2012 was conditional on improvements in the first half.
- Assuming diesel prices did not rise significantly from recent levels, management expected fiscal 2012 fuel costs, before fuel-surcharge recovery, to increase approximately $25–$35 million versus fiscal 2011. Forward fuel commitments covered approximately 30%–35% of expected needs for contracted periods.
- Sysco expected sufficient operating cash flow and access to capital to meet cash requirements. A $200 million note due in June 2012 was expected to be refinanced with commercial paper, senior notes, or a combination.
- Sysco expected to pay $212 million in fiscal 2012 under its IRS settlement related to the BSCC cooperative; no such payment was made in this quarter. Management stated it believed available cash, operating cash flow and capital access would be sufficient.
- Several multiemployer pension plans were believed to be underfunded. Estimated potential withdrawal liability on most plans was as much as $210 million, based largely on older plan valuations and subject to material change; $46.9 million was already recorded for plans from which Sysco had withdrawn. Management expected contributions to these plans to rise over time.
- Legal proceedings were not expected by management to have a material adverse effect, though outcomes could not be predicted. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales growth and volume trends can persist if inflation moderates, and whether Sysco can restore gross margin after the 53-basis-point decline.
- Business Transformation Project spending, implementation progress, timing and realized savings relative to the $250–$275 million fiscal-year cost estimate.
- Underlying cash generation apart from substantial accrued-tax movements, and the timing and funding of the $212 million IRS settlement payment.
- Fuel-price exposure, surcharge recovery and the assumptions behind expected fiscal 2012 fuel-cost increases.
- Debt refinancing and liquidity around the June 2012 note maturity, as well as the potentially changing exposure to underfunded multiemployer pension plans.