Sysco 2008 Annual Report Download - page 40

Net company-sponsored pension costs in fiscal 2008 were $8,754,000 less than fiscal 2007, due primarily to the funding status and
the projected asset performance of the qualified pension plan. Net company-sponsored pension costs decreased $56,001,000 in fiscal
2007 over the prior year, due primarily to the increase in the discount rate used to determine fiscal 2007 pension costs.
Also affecting the comparison of fiscal 2007 and fiscal 2006 were increased management incentive bonus accruals and investments in
strategic business initiatives. Due primarily to improved operating results, the non-stock portion of management incentive bonus accruals
increased $64,770,000 in fiscal 2007 compared to fiscal 2006 when our performance did not satisfy the criteria for paying bonuses to our
corporate officers. Investments in strategic business initiatives increased $22,410,000 in fiscal 2007 over the prior year.
In addition, SYSCO’s fuel costs increased by $34,023,000 in fiscal 2008 over fiscal 2007 primarily due to increased diesel prices. Our
fuel costs increased by $21,225,000 in fiscal 2007 over fiscal 2006 due to increased diesel prices and increased volume usage. SYSCO’s
costs per gallon have increased 18.7% in fiscal 2008 over fiscal 2007 and 7.1% in fiscal 2007 over fiscal 2006. During fiscal 2008, 2007 and
2006, fuel costs, excluding any amounts recovered through fuel surcharges, represented approximately 0.6%, 0.6% and 0.5% of sales,
respectively. SYSCO’s activities to manage increased fuel costs include reducing miles driven by our trucks through improved routing
techniques, improving fleet utilization by adjusting idling time and maximum speeds, entering into forward fuel purchase commitments and
the use of fuel surcharges.
We periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements. In fiscal
2008, the forward purchase commitments resulted in an estimated $21,000,000 of avoided fuel costs as the fixed price contracts were
lower than market prices for the contracted volumes. In fiscal 2007, the forward purchase commitments resulted in prices that were
comparable to market prices. In fiscal 2006, the forward purchase commitments resulted in an estimated $9,000,000 of avoided fuel costs
as the fixed price contracts were lower than market prices for the contracted volumes. In July and August 2008, we entered into forward
diesel fuel purchase commitments totaling approximately $195,000,000 through July 2009, which will lock in the price on approximately
50% of our fuel purchases through the first 26 weeks of fiscal 2009 and approximately 70% of our fuel purchases needs for the last
26 weeks of fiscal 2009.
In fiscal 2008, due to sustained, increased diesel prices, SYSCO increased its use of fuel surcharges. Fuel surcharges were
approximately $27,000,000 higher in fiscal 2008 than in fiscal 2007. The change in fuel surcharges in fiscal 2007 over fiscal 2006
was not significant. Fuel surcharges are reflected within sales and gross margins.
If fuel prices continue at current levels, fuel costs in the first 26 weeks of fiscal 2009, exclusive of any amounts recovered through fuel
surcharges, are expected to increase by approximately $55,000,000 to $65,000,000 as compared to the first 26 weeks of fiscal 2008. Our
estimate is based upon the prevailing market prices for diesel in mid-August 2008, the cost committed to in our forward fuel purchase
agreements currently in place and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these
assumptions change, in particular if future fuel prices vary significantly from our current estimates. We continue to evaluate all opportunities
to offset this increase in fuel expense in fiscal 2009, including the continued use of fuel surcharges and overall expense management. If fuel
surcharges continue in fiscal 2009 at the same levels as the end of fiscal 2008, we estimate that we can recover about half of the anticipated
increase in fuel costs noted above through increased fuel surcharges, which is less than the approximate 75% we were able to recover in
fiscal 2008.
Customer accounts written off, net of recoveries, were $32,367,000, or 0.09% of sales, $26,010,000 or 0.07% of sales, and
$21,128,000 or 0.06% of sales, for fiscal 2008, 2007 and 2006, respectively. We continue to monitor our customer account balances and
believe continued strong credit practices will be necessary to avoid significant increases in write-offs in fiscal 2009. However, if the
challenging economic environment persists, we could experience increased levels of write-offs and a higher provision for losses on
receivables in fiscal 2009.
Net company-sponsored pension costs in fiscal 2009 are expected to increase by approximately $20,000,000 due primarily to lower
returns on assets of the qualified pension plan during fiscal 2008, partially offset by a decrease in expense due to amendments to our
Supplemental Executive Retirement Plan. Share-based compensation expense in fiscal 2009 is expected to decrease $20,000,000 to
$25,000,000. The expected decrease is due primarily to two factors. First, option grants in prior years were at greater levels than recent
years, resulting in reduced compensation expense being recognized. Secondly, the Management Incentive Plan annual bonus awards have
been modified beginning with fiscal 2009, to exclude the previous stock award component. As a result, the share-based compensation
expense related to the stock award component of the incentive bonuses recorded in previous years will not be incurred in fiscal 2009, and as
a result fiscal 2009 will reflect reduced overall share-based based compensation expenses. Beginning in fiscal 2010, we expect to replace
the stock award component of the incentive bonuses with annual discretionary restricted stock grants subject to time-based vesting which
may result in increased share-based compensation expense in fiscal 2010.
Net Earnings
Net earnings increased 10.5% in fiscal 2008 over fiscal 2007. Net earnings increased 17.0% in fiscal 2007 over fiscal 2006. The
changes in net earnings for these periods were due primarily to the factors discussed above, as well as the impact of changes in interest
expense, other income and income taxes discussed below. Additionally, fiscal 2007 over fiscal 2006 was impacted by a fiscal 2006
accounting change. In the first quarter of fiscal 2006, SYSCO recorded a cumulative effect of a change in accounting due to a change in the
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