Sysco Corp. Reports 9.1 Percent Third Quarter Sales Increase

Sysco Corp. announced financial results for its 13-week third quarter ended April 2, 2011.

Third quarter sales were $9.8 billion, an increase of 9.1 percent from $8.9 billion in the third quarter of fiscal 2010.

Operating income was $427 million, including a $36 million charge related to the withdrawal of an operating company from a multi-employer pension plan (MEPP). This result was $5 million, or 1.1 percent, lower than last year's third quarter.

Diluted earnings per share (EPS) were $0.44, including a $0.04 negative impact related to the MEPP withdrawal discussed above, and a $0.02 tax benefit related to the recognition of deferred tax assets. This result was 4.8 percent higher compared to $0.42 in last year's third quarter.

Sales were $28.9 billion, an increase of 7.4 percent, from $26.9 billion in the prior year period.

Operating income was $1.4 billion, a decrease of $21 million, or 1.5 percent, compared to the prior year period.

Diluted EPS was $1.39, including a $0.05 benefit from corporate owned life insurance (COLI), and a net $0.02 negative impact from the MEPP charge and tax benefit discussed above. This result was 2.1 percent lower than diluted EPS of $1.42 in the prior year period, which included a $0.05 tax benefit related to the company's IRS settlement and a $0.05 benefit from COLI.

"We are pleased with our improved performance in the third quarter as both sales and earnings grew over the prior year. Particularly encouraging is our case volume growth in the midst of ongoing product inflation and a sluggish economic recovery," said Bill DeLaney, Sysco's president and chief executive officer in a prepared statement. "Our leadership team remains highly focused on supporting our customers and improving productivity in all aspects of our business."

Net earnings for the third quarter were $258 million, an increase of $11 million, or 4.4 percent compared to the prior year. Diluted EPS was $0.44, including a $0.04 negative impact related to the withdrawal from the MEPP mentioned above and a $0.02 tax benefit also discussed above. Diluted EPS in the prior year period was $0.42.

Sales for the third quarter were $9.8 billion, an increase of $817 million, or 9.1 percent compared to the same period last year due primarily to higher prices and case volume growth. Food cost inflation, as measured by the estimated change in Sysco's product costs, was 5.1 percent driven mainly by high levels of inflation in the meat, seafood and canned/dry categories. This compares to deflation of 0.8 percent in the prior year period. Sales for the first 39 weeks of fiscal 2011 were $28.9 billion, an increase of 7.4 percent compared to the same period last year driven mainly by higher prices and case volume growth.

Food cost inflation, as measured by the estimated change in Sysco's product costs, was 4.2 percent driven mainly by high levels of inflation in the meat, seafood, and dairy categories. Sales from acquisitions (within the last 12 months) increased sales by 0.6 percent. The impact of changes in foreign exchange rates for the first three quarters of the year increased sales by 0.5 percent.

Gross margin for the first 39 weeks was $5.4 billion, an increase of $259 million, or 5.0 percent, compared to the prior year. Gross margin as a percentage of sales declined 43 basis points year over year to 18.6 percent. Pressure from high inflation and strategic pricing initiatives were the main factors impacting gross margin as a percent of sales.

Operating expense increased 7.5 percent, or $280 million, for the first 39 weeks mainly from 1) a $95 million increase in salaries and related expense due to increases in sales compensation and other payroll costs; 2) a $45 million increase in costs related to the Company's corporate-sponsored pension plan; 3) a $36 million charge related to the withdrawal of an operating company from an MEPP; and 4) a $20 million increase in fuel expense. As a result, operating income was $1.4 billion, a decrease of $21 million, or 1.5 percent, during the first 39 weeks of fiscal 2011.

Net earnings for the first 39 weeks of fiscal 2011 were $816 million, a decrease of $26 million, or 3.1 percent. Diluted EPS was $1.39, including a $0.05 favorable impact from COLI, and a net $0.02 negative impact from the MEPP charge and tax benefit discussed above. Diluted EPS in the prior year period was $1.42, including a $0.05 tax benefit related to the company's IRS settlement and a $0.05 favorable impact from COLI.

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