01—Abstract
Summary
Summary of the 10-K filed August 28, 2012. Cited figures are marked; the original filing is the authoritative source.
Sysco Corporation (SYY) reported fiscal 2012 (52 weeks ended June 30, 2012) sales of $42.38 billiona, up 7.8% from $39.32 billion, driven primarily by product cost inflation and selling price increases, along with improving case volumes.
Operating income declined 2.1% to $1.89 billionb, and net earnings fell 2.6% to $1.12 billion. Diluted earnings per share were $1.90 versus $1.96 in fiscal 2011. Management attributes the earnings decline to lower gross margin (18.11% versus 18.80%) from product cost inflation and competitive pricing pressure, along with higher operating expenses including payroll and Business Transformation Project costs of $193.1 million.
On a non-GAAP basis, adjusted diluted EPS was $2.13c, up 4.4%. The company's Business Transformation Project, which includes an ERP system deployed in August 2012, is expected to cost more than it returns in fiscal 2013, with management targeting $550 million to $650 million in annualized benefits. Management also decided to freeze future benefit accruals under its Retirement Plan effective December 31, 2012, and expects net pension costs to decrease by about $26.5 million in fiscal 2013.
Cash flow from operations rose to $1.40 billiond from $1.09 billion, and total debt reached $3.0 billion after a June 2012 issuance of $750 million in senior notes. Sysco is the largest North American distributor of food to the foodservice industry, serving about 400,000 customers through 185 distribution facilities.
Management estimates it serves about 17.5% of a roughly $225 billion U.S. and Canadian market. Key risks disclosed include product cost inflation, fuel costs, competition, labor availability, union contract renegotiations, and multiemployer pension withdrawal liabilities estimated as much as $205 million.
02—Key points
Key Highlights
- Net sales rose 7.8% to $42.38 billion, driven mainly by product cost inflation and higher selling prices, with case volumes improving about 3.0%.
- Operating income fell 2.1% to $1.89 billion; operating margin declined to 4.5% of sales from 4.9%.
- Diluted EPS was $1.90, down 3.1% from $1.96; adjusted diluted EPS (non-GAAP) rose 4.4% to $2.13.
- Gross margin declined to 18.11% from 18.80% due to product cost inflation (5.5% estimated for fiscal 2012) and competitive pricing pressure.
- Business Transformation Project expenses reached $193.1 million in fiscal 2012, and costs are expected to exceed benefits in fiscal 2013.
- Operating cash flow increased to $1.40 billion from $1.09 billion; capital expenditures were $784.5 million.
- Total debt was $3.0 billion at June 30, 2012, after $750 million of senior notes were issued in June 2012; the company paid dividends of $1.06 per share.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Sysco kept $0.03.
- Revenue$42.38B100.0%
- Cost of revenue−$34.60B81.6%
- Gross profit$7.78B18.4%
- Operating costs−$5.89B13.9%
- Operating income$1.89B4.5%
- Interest, other & tax−$769.0M1.8%
- Net income$1.12B2.6%
Where FY2012 revenue went
$42.38B- Cost of revenue: $34.60B, 82% of revenue
- Operating costs: $5.89B, 14% of revenue
- Net income: $1.12B, 2.6% of revenue
- Interest, other & tax: $769.0M, 1.8% of revenue
Kept 2.6% as net incomeNet income $1.12B · 2.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed August 28, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $42.38B$39.32B | +7.8% |
| Gross Profit | $7.78B$7.39B | +5.2% |
| Operating Expenses | $5.89B$5.46B | +7.8% |
| Operating Income | $1.89B$1.93B | −2.1% |
| Interest Expense | $113.40M$118.27M | −4.1% |
| Net Income | $1.12B$1.15B | −2.6% |
| EPS (Basic) | $1.91$1.96 | −2.6% |
| EPS (Diluted) | $1.90$1.96 | −3.1% |
| Shares Outstanding (Basic) | 587.73M586.53M | +0.2% |
| Shares Outstanding (Diluted) | 588.99M588.69M | +0.1% |
05—Questions
Frequently Asked Questions
Why did Sysco's earnings decline in fiscal 2012 despite higher sales?
Sales grew 7.8%, but gross margin fell to 18.11% from 18.80% because product cost inflation could not be fully passed through to customers, and competitive pricing pressure increased. Operating expenses also rose 5.9%, driven by pay-related costs, fuel, and Business Transformation Project expenses, so operating income fell 2.1% and net earnings fell 2.6%.
What is the Business Transformation Project and when will it pay off?
The project began in fiscal 2009 and includes an ERP system, a cost transformation initiative targeting $300 million to $350 million in annual cost reductions by fiscal 2015, and a product cost reduction initiative targeting $250 million to $300 million annually by fiscal 2015. Management expects costs to exceed benefits in fiscal 2013 and targets about 25% of expected annualized benefits of $550 million to $650 million in that year.
What changes did Sysco make to its retirement plans?
At the end of fiscal 2012, Sysco decided to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for U.S.-based salaried and non-union hourly employees. Those employees will become eligible for an enhanced defined contribution plan starting January 1, 2013. Management expects net company-sponsored pension costs to decrease by about $26.5 million in fiscal 2013, while defined contribution expenses rise by about $45 million to $55 million.
What are the main risks to Sysco's business highlighted in the filing?
Key risks include volatile food and fuel costs, competition that pressures margins, the execution of the ERP implementation, labor shortages and union contract renegotiations (about 1,400 employees under agreements expiring in fiscal 2013), and multiemployer pension liabilities, with withdrawal liability estimated as much as $205 million. The filing also notes that the loss of the SYGMA segment's largest customer, The Wendy's Company, which represents about 29% of SYGMA sales, would have a material adverse effect on SYGMA, though not on Sysco as a whole.
How strong is Sysco's balance sheet and liquidity?
Sysco had $688.9 million in cash and cash equivalents at June 30, 2012, and shareholders' equity of $4.69 billion. Total debt was $3.0 billion, of which about 84% was at fixed rates with a weighted average rate of 4.7%. The company has a $1.3 billion commercial paper program supported by a $1.0 billion revolving credit facility expiring December 29, 2016, and it stated it was in compliance with all debt covenants.
06—Continue