Sysco Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 27, 2010, and year-to-date results for the 39 weeks ended that date (fiscal 2010 third quarter). The request metadata says “2009 Q3,” but the filing itself identifies the period as fiscal 2010 Q3.
Business context and financial results
Sysco distributes food and related products to foodservice customers, primarily in the United States and Canada. The interim financial statements are unaudited; management states they include normal recurring adjustments, and the independent auditors performed a review.
| Metric | 13 weeks ended Mar. 27, 2010 | Change vs. prior year | 39 weeks ended Mar. 27, 2010 | Change vs. prior year |
|---|---|---|---|---|
| Sales | $8.945 billion | +2.4% | $26.895 billion | -3.1% |
| Gross margin | $1.683 billion; 18.8% | +2.8% dollars | $5.126 billion; 19.1% | -2.8% dollars |
| Operating income | $432.1 million; 4.8% of sales | +6.6% | $1.392 billion; 5.2% of sales | +4.5% |
| Net earnings | $247.6 million | +9.5% | $842.2 million | +13.7% |
| Diluted EPS | $0.42 | +10.5% | $1.42 | +14.5% |
| Operating cash flow | Not presented for the quarter alone | Not stated | $465.9 million | Down from $984.7 million |
Cash, debt and liquidity: At March 27, 2010, cash and cash equivalents were $652.8 million, total current assets were $5.132 billion and current liabilities were $2.917 billion (current ratio approximately 1.76). Long-term debt was $2.469 billion and current maturities were $7.8 million. Total debt carrying value was $2.476 billion; approximately 81% of long-term debt was fixed-rate, including swaps. Cash declined $434.3 million from fiscal year-end. Sysco reported no commercial paper outstanding and no borrowings under its $88 million uncommitted bank lines; a $1 billion revolving facility supports its commercial paper programs.
Cash uses: Year-to-date capital expenditures were $438.1 million; dividends paid were $431.9 million, or $0.73 per share; and share repurchases were $41.0 million. Additions to plant and equipment exceeded operating cash flow, before dividends and other financing uses.
Material changes versus the prior comparable period
- After year-to-date sales fell 3.1%, third-quarter sales returned to growth, rising 2.4%. Management attributed the quarterly improvement mainly to better case volumes and favorable foreign exchange; product-cost deflation partly offset the increase.
- Estimated product-cost deflation was 2.7% for the 39-week period and 0.8% in the quarter, versus inflation of 6.2% and 3.3%, respectively, in the prior-year comparisons.
- Year-to-date operating expenses fell 5.3%, supporting operating-income growth despite lower gross-margin dollars. In the quarter, gross-margin dollars increased 2.8%; operating expenses rose 1.6%, partly due to higher incentive compensation and foreign exchange.
- Year-to-date net earnings benefited from a lower effective tax rate and other favorable items. Sysco reported a $29 million tax benefit from reversing previously accrued interest following an IRS settlement and $31.8 million of gains on corporate-owned life insurance (COLI) policies. Management said these items together added about $0.10 to year-to-date EPS. The comparable prior-year period included COLI losses that reduced EPS by about $0.11.
- Operating cash flow was $518.8 million lower year over year, primarily because of $475 million of IRS-settlement payments, alongside working-capital and other changes. Cash taxes paid were $973.4 million versus $510.1 million.
- Broadline third-quarter sales increased 3.1% and operating income increased 7.7%; SYGMA sales increased 0.3% and operating income increased 42.9% from a lower base.
Outlook, commentary and risks
- Management reported signs of economic improvement and better third-quarter volumes, but said consumer disposable income would remain under pressure and could continue to constrain foodservice demand. It warned that prolonged product-cost deflation could pressure profit dollars because pricing is often based on product cost plus a percentage markup.
- Fiscal 2010 capital expenditures were expected to total $575 million to $625 million. The multiyear business transformation/ERP project was expected to require approximately $900 million of total cash outlay; $260 million to $275 million was expected in fiscal 2010, with implementation across most Broadline and SYGMA operations expected from fiscal 2011 through fiscal 2013. Management expected costs to exceed benefits in the early implementation period.
- The IRS settlement requires payments of $528 million in fiscal 2010, $212 million in fiscal 2011 and $212 million in fiscal 2012. Of the fiscal 2010 amount, $475 million had been paid by the end of the reported period. Management said available cash, operating cash flow and capital access should be sufficient to meet the payments.
- Sysco estimated potential withdrawal liability of up to $173 million for underfunded multi-employer pension plans, based on available plan valuations and a voluntary withdrawal scenario. About $16 million was already recorded for plans from which Sysco had withdrawn. Management expects multi-employer plan contributions could increase; company-sponsored pension contributions were expected to total $140 million in fiscal 2010.
- COLI policy values may fluctuate with financial markets and affect operating income and EPS. Other stated risks include fuel-price changes, interest rates, labor and union matters, supply interruptions, customer credit, technology reliability and successful implementation of the ERP project. Forward diesel commitments totaled approximately $71 million through March 2011, covering an estimated 30%–35% of fuel needs for contracted periods.
- Management stated it expected operating cash flows and access to capital to cover anticipated needs for at least the next 12 months. It provided no specific sales or EPS guidance. Legal proceedings were not expected by management to have a material adverse effect; disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of earnings and EPS growth persists after excluding the IRS interest reversal and COLI gains, and how COLI market movements affect subsequent periods.
- Whether the return to quarterly sales growth continues as deflation, customer volumes and consumer spending evolve.
- Whether operating cash flow recovers after the IRS-related payments and working-capital movements, and how the remaining settlement installments are funded.
- Whether the ERP project stays within its estimated cost and schedule, and when its expected operating benefits begin to exceed implementation costs.
- The updated funding status and potential contribution or withdrawal obligations of multi-employer pension plans.
- Progress against fiscal 2010 capital-spending expectations, debt and liquidity capacity, and exposure to variable rates under the interest-rate swaps.