Sysco Q2 Adj. Earnings Meet View, But Sales Top; To Divest 11 Facilities

(RTTNews) - Food-distribution giant Sysco Corp. (SYY) reported Monday a profit for the second quarter that declined 25 percent from last year, despite sales growth, hurt by higher charges related to the US Foods merger and higher food costs. Adjusted earnings per share matched analysts' expectations, while quarterly sales topped their estimates.

Separately, Sysco agreed to divest eleven of its US Foods facilities to Performance Food Group as part of its pending merger with US Foods. The facilities being divested generated $4.6 billion in annual revenue. The sale will help Sysco achieve estimated net annual synergies of at least $600 million in four years, in addition to the synergies it identified during its integration planning efforts.

The divestiture package is contingent on consummation of the proposed merger between Sysco and US Foods announced in December 2013. The move to divest the facilities is expected to allay concerns raised by the Federal Trade Commission related to the merger. It will now seek FTC approval for the merger.

"Our second quarter financial results were generally in-line with our expectations, as we made consistent progress on our business transformation initiatives and did a good job of remaining focused on the needs of our customers," President and CEO Bill DeLaney said.

The Houston, Texas-based company reported net earnings of $157.98 million or $0.27 per share for the second quarter, lower than $210.84 million or $0.36 per share in the prior-year quarter.

Excluding items, adjusted earnings for the quarter was $0.41 per share, compared to $0.39 per share last year. On average, ten analysts polled by Thomson Reuters expected the company to report earnings of $0.41 per share for the quarter. Analysts' estimates typically exclude special items.

Sales for the quarter grew 7.6 percent to $12.09 billion from $11.24 billion in the same quarter last year, and topped seven Wall Street analysts' consensus estimate of $11.93 billion.

Contributions from acquisitions in the last 12 months increased sales by 0.8 percent, while sales were decreased by 0.9 percent due to changes in foreign exchange rates.

Food cost inflation, as measured by the estimated change in Sysco's product costs, was 6 percent for the quarter, due to inflation in the meat and dairy categories.

Broadline sales for the quarter totaled $9.83 billion, higher than last year's sales of $9.08 billion, and sales at SYGMA grew to $1.56 billion from $1.54 billion in the year-ago quarter. Other segment sales totaled $785.61 million, up from $695.62 million in the prior-year quarter.

Case volume for the company's Broadline and SYGMA operations combined grew 3.6 percent during the quarter, including acquisitions, and increased about 3.3 percent, excluding acquisitions.

Operating income for the quarter decreased 10.3 percent to $315.45 million, while adjusted operating income increased 3.1 percent to $396.26 million from the year-ago quarter. Gross profit grew 6.1 percent to $2.09 billion, while gross margin declined 23 basis points to 17.25 percent from last year.

Total operating expenses increased 9.7 percent to $1.77 billion from $1.61 billion in the year-ago quarter, primarily due to higher merger and integration planning costs. Interest expense soared to $77.04 million from $29.78 million, due to incurring US Foods financing costs.

"We continue to have opportunities to improve our management of operating expenses and have multiple initiatives underway to address this area of our business," DeLaney added.

SYY closed Friday's regular trading session at $39.17, down $0.49 on a volume of 5.10 million shares. In the past 52-week period, the stock has been trading in a range of $34.07 to $41.45.