Sysco Corp. Reports 5.8 Percent Second Quarter Sales Gain

Sysco Corp. announced financial results for its 13-week second quarter ended Jan. 1, 2011.

Second quarter sales were $9.4 billion, an increase of 5.8 percent from $8.9 billion in the second quarter of fiscal 2010. Operating income was $437 million, a decrease of 5.5 percent compared to $462 million in last year's second quarter. Diluted earnings per share (EPS) were $0.44, including a $0.02 benefit from corporate owned life insurance. This result was 2.2 percent lower than last year's second quarter EPS of $0.45, which included a $0.01 benefit from corporate owned life insurance.

First half 2011 sales were $19.1 billion, an increase of 6.6 percent from $17.9 billion in the first half of fiscal 2010. Operating income was $943 million, a decrease of 1.7 percent compared to $960 million in last year's first half.

Diluted EPS was $0.95, including a $0.04 benefit from COLI. This result was 5.0 percent lower than last year's first half EPS of $1.00, which included a $0.05 tax benefit related to the company's IRS settlement, and a $0.04 benefit from corporate owned life insurance.

"Our financial results for the second quarter reflect the unfavorable impact of certain market conditions and operational challenges that we were unable to fully overcome in the near term. Specifically, accelerating and significant food cost inflation negatively impacted our customers' purchasing budgets, contributed to increased gross margin pressure and meaningfully increased our selling expense. In addition, higher year over year pension and fuel costs also adversely impacted our ability to grow operating earnings over the prior year," said Bill DeLaney, Sysco's president and chief executive officer in a prepared statement. "Looking forward, we are highly focused on improving the execution of our business plan in the second half of our fiscal year and effectively implementing our strategic priorities over the long term."

Second quarter fiscal 2011 sales were $9.4 billion, an increase of $516 million, or 5.8 percent compared to the same period last year due primarily to the impact of food cost inflation. Food cost inflation, as measured by the estimated change in Sysco's product costs, was 4.5 percent, driven by continued double-digit levels of inflation in the meat, dairy and seafood categories. This compares to deflation of 3.5 percent in the prior year period. In addition, sales from acquisitions (within the last 12 months) increased sales by 0.6 percent, and the impact of changes in foreign exchange rates for the second quarter increased sales by 0.4 percent.

Operating income decreased $25 million, or 5.5 percent, to $437 million during the second quarter. Operating expense increased $72 million, or 5.9 percent, for the second quarter while gross margin increased only $47 million, or 2.8 percent.

Gross margin as a percentage of sales declined 55 basis points year over year to 18.6 percent. Pressure from high inflation, strategic pricing initiatives and changes in segment mix continued to be the main factors impacting gross margin performance.

Operating expense increased 5.9 percent, or $72 million, for the second quarter mainly from a $15 million increase in pension costs; a $13 million increase in salaries and related expense due to increases in sales compensation and other payroll costs; and a $10 million increase in fuel costs.

Net earnings for the second quarter were $258 million, a decrease of $10 million, or 3.8 percent. Diluted EPS was $0.44, including a $0.02 positive impact from company owned life insurance. Diluted EPS in the prior year period was $0.45, which included a $0.01 positive impact from company owned life insurance.

First Half Fiscal 2011 Summary
Sales for the first half of fiscal 2011 were $19.1 billion, an increase of 6.6 percent compared to the same period last year. Food cost inflation, as measured by the estimated change in Sysco's cost of goods, was 3.9 percent for the first half of the year. 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 half of the year increased sales by 0.5 percent.

Operating income decreased $16 million, or 1.7 percent, to $943 million during the first half of fiscal 2011. Operating expense increased $148 million, or 5.9 percent, for the first half of the fiscal year, while gross margin increased $131 million, or 3.8 percent.

Gross margin as a percentage of sales declined 50 basis points year over year to 18.7 percent. Pressure from high inflation, strategic pricing initiatives and changes in segment mix were the main factors impacting gross margin performance.

Operating expense increased 5.9 percent, or $148 million, for the first half mainly from a $59 million increase in salaries and related expense due to increases in sales compensation and other payroll costs; and a $30 million increase in pension expense.

Net earnings for the first half of fiscal 2011 were $557 million, a decrease of $37 million, or 6.3 percent. Diluted EPS was $0.95, aided by a $0.04 favorable impact from company owned life insurance. Diluted EPS in the prior year period was $1.00, aided by a $0.05 tax benefit related to the company's IRS settlement and a $0.04 favorable impact from Company owned life insurance.

Cash flow from operations was $283 million for the first half of fiscal 2011. Capital expenditures totaled $174 million for the second quarter, and $317 million in the first half of the fiscal year. The primary areas for investment included facility replacements and expansions, replacements to Sysco's fleet, and technology.

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