SYSCO CORP 10-K Summary: Fiscal Year Ended June 29, 2002
Business Context and Reporting Period
Company: SYSCO Corporation (SYSCO)
Reporting Period: Fiscal Year Ended June 29, 2002 (53 weeks)
Business Overview: SYSCO is the largest North American distributor of food and food-related products to the foodservice industry ("food-prepared-away-from-home"). It serves approximately 415,000 customers, including restaurants, healthcare facilities, schools, and lodging establishments, through 158 facilities in the U.S. and Canada.
Segments: Operations are aggregated into five segments, with Broadline and SYGMA being the primary reportable segments. "Other" segments include specialty produce, meat, and lodging industry products.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2002 | Fiscal 2001 | Fiscal 2000 |
|---|---|---|---|
| Sales | $23,350,504 | $21,784,497 | $19,303,268 |
| Net Earnings | $679,787 | $596,909 | $445,588 |
| Earnings Per Share (Diluted) | $1.01 | $0.88 | $0.67 |
| Operating Cash Flow | $1,084,980 | $955,224 | $708,726 |
| Capital Expenditures | $416,393 | $341,138 | $266,413 |
| Long-Term Debt | $1,176,307 | $961,421 | $1,023,642 |
| Total Assets | $5,989,753 | $5,352,987 | $4,730,145 |
| Shareholders' Equity | $2,132,519 | $2,100,535 | $1,721,584 |
Margins & Ratios:
- Operating expenses were 14.8% of sales in 2002 (14.8% in 2001, 14.7% in 2000).
- Effective tax rate was 38.25%.
- Return on average shareholders' equity was approximately 31%.
- Long-term debt to total capitalization ratio was 35.6% (target range 35-40%).
Material Changes vs. Prior Period
- Sales Growth: Sales increased 7.2% to $23.35 billion. Real sales growth (adjusted for acquisitions and food cost inflation) was approximately 2.7%. Acquisitions contributed 3.4% to sales growth, while food cost inflation was 1.1%.
- Profitability: Net earnings rose 13.9% to $679.8 million. Earnings before income taxes increased 13.9% to $1.1 billion, driven by operating efficiencies and higher sales of higher-margin SYSCO Brand products.
- Segment Performance:
- Broadline: Sales up 5.8%; Earnings before tax up 12.4%.
- SYGMA: Sales up 10.6%; Earnings before tax up 41.2% due to operating efficiencies and improved labor costs.
- Other: Sales up 23.9% primarily due to the timing of acquisitions (specialty meat, lodging, produce).
- Acquisitions: Fiscal 2002 acquisitions totaled $234.6 million, including a Canadian broadline operation (SERCA), a lodging supplier (Franklin Supply), and specialty meat operations.
- Capital Structure: Long-term debt increased by $214.9 million. The company issued $200 million in 4.75% notes (2005 maturity) and $200 million in 6.10% notes (2012 maturity) to repay commercial paper and fund acquisitions.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditure Outlook: Management expects fiscal 2003 capital expenditures to range between $450 million and $500 million, funded by internal cash flow, commercial paper, and bank borrowings.
- Dividends: Quarterly dividend increased to $0.09 per share in January 2002 (from $0.07). Total dividends paid in 2002 were $213.3 million.
- Share Repurchases: The company repurchased 18 million shares for $473.6 million in fiscal 2002. An additional authorization of 20 million shares was approved in July 2002.
- Unusual Items / Accounting Changes:
- Tax Deferral: A supply chain reorganization resulted in a deferral of $266.7 million in federal and state income taxes, significantly boosting operating cash flow in 2002. This benefit is expected to continue in 2003 but diminish in 2004.
- Pension Liability: Due to stock market declines, a minimum pension liability of $65.4 million (net of tax) was recorded as a non-cash charge to shareholders' equity (comprehensive loss), not net income.
- Goodwill Accounting: SYSCO will adopt SFAS No. 142 in fiscal 2003, discontinuing goodwill amortization. Management preliminarily assesses no impairment.
- Risk Factors:
- Low Margins: The industry is characterized by low profit margins and high sensitivity to food price deflation and economic conditions.
- Supply Interruption: Reliance on third-party suppliers without long-term contracts creates risk of supply shortages due to weather, strikes, or natural disasters.
- Labor Relations: Approximately 21% of employees are unionized; 14 agreements covering 2,130 employees expire in fiscal 2003.
- Product Liability: Exposure to claims regarding food safety and product quality.
Key Facts for Investor Verification
- Cash Flow Sustainability: Verify the sustainability of the $266.7 million tax deferral benefit in future periods, as it significantly inflated 2002 operating cash flow.
- Real Sales Growth: Confirm the 2.7% real sales growth rate against industry benchmarks, given the slowdown from 5.8% in the prior year.
- Debt Servicing: Monitor the debt-to-capitalization ratio (currently 35.6%) against the 35-40% target, especially with $402.5 million in debt maturities due in fiscal 2006.
- Acquisition Integration: Assess the integration progress of the SERCA (Canada) and Franklin Supply acquisitions to ensure anticipated synergies are realized.
- Pension Funding: Review the funded status of pension plans, which showed a significant unfunded status increase due to market performance, potentially impacting future cash contributions.