10-K 1 syy-20120630x10k.htm 10-K 77594fe15845446

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

Form 10-K

 

 

(Mark One)

 

 

R

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended June 30, 2012

 

 

OR

 

 

£

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-6544

________________

Untitled.jpg

Sysco Corporation

(Exact name of registrant as specified in its charter)

Delaware

74-1648137

(State or other jurisdiction of

(IRS employer

incorporation or organization)

identification number)

1390 Enclave Parkway

77077-2099

Houston, Texas

(Zip Code)

(Address of principal executive offices)

 

Registrant’s Telephone Number, Including Area Code:

(281) 584-1390

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

Name of each exchange on

which registered

Common Stock, $1.00 par value

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes R    No £

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £    No R

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R    No £

 

Indicate by check mark whether the registrant  has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes R   No £

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large Accelerated Filer  R

Accelerated Filer  £

Non-accelerated Filer   £    (Do not check if a smaller reporting company)

Smaller Reporting Company   £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £     No R

 

The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $17,092,025,000 as of December 31, 2011 (based on the closing sales price on the New York Stock Exchange Composite Tape on December 30, 2011, as reported by The Wall Street Journal (Southwest Edition)). As of August 15, 2012, the registrant had issued and outstanding an aggregate of 586,604,951 shares of its common stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the company’s 2012 Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

Page No.

 

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

10 

Item 2.

Properties

11 

Item 3.

Legal Proceedings

12 

Item 4.

Mine Safety Disclosures

12 

 

PART II

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

12 

Item 6.

Selected Financial Data

15 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

40 

Item 8.

Financial Statements and Supplementary Data

43 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93 

Item 9A.

Controls and Procedures

93 

Item 9B.

Other Information

93 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

93 

Item 11.

Executive Compensation

93 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

93 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

93 

Item 14.

Principal Accounting Fees and Services

94 

 

PART IV

 

Item 15.

Exhibits

94 

Signatures

95 

 

 

 


 

PART I

 

Item 1.  Business

 

Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-K refer to Sysco Corporation together with its consolidated subsidiaries and divisions.    

 

Overview

 

Sysco Corporation, acting through its subsidiaries and divisions, is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. We provide products and related services to approximately 400,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers.

 

Founded in 1969, Sysco commenced operations as a public company in March 1970 when the stockholders of nine companies exchanged their stock for Sysco common stock. Since our formation, we have grown from $115.0 million to $42.4 billion in annual sales, both through internal expansion of existing operations and through acquisitions.

 

Sysco’s fiscal year ends on the Saturday nearest to June 30th.  This resulted in a 52-week year ending June 30, 2012 for fiscal 2012, a 52-week year ending July 2, 2011 for fiscal 2011 and a 53-week year ending July 3, 2010 for fiscal 2010.

 

Sysco Corporation is organized under the laws of Delaware. The address and telephone number of our executive offices are 1390 Enclave Parkway, Houston, Texas 77077-2099, (281) 584-1390. This annual report on Form 10-K, as well as all other reports filed or furnished by Sysco pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on Sysco’s website at www.sysco.com as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission.

 

Operating Segments

 

Sysco provides food and related products to the foodservice or food-away-from-home industry. Under the accounting provisions related to disclosures about segments of an enterprise, we have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined by accounting standards. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to their customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to chain restaurant customer locations. Our other segments include our specialty produce and lodging industry products segments, a company that distributes specialty imported products and a company that distributes to international customers. Specialty produce companies distribute fresh produce and, on a limited basis, other foodservice products. Our lodging industry products company distributes personal care guest amenities, equipment, housekeeping supplies, room accessories and textiles to the lodging industry. Selected financial data for each of our reportable segments as well as financial information concerning geographic areas can be found in Note 21, “Business Segment Information, in the Notes to Consolidated Financial Statements in Item 8.

 

Customers and Products

 

    Sysco’s customers in the foodservice industry include restaurants, hospitals, schools, hotels, industrial caterers and other similar venues where foodservice products are served. Services to our customers are supported by similar physical facilities, vehicles, material handling equipment and techniques, and administrative and operating staffs.

 

The products we distribute include:

 

·

a full line of frozen foods, such as meats, fully prepared entrees, fruits, vegetables and desserts;

·

a full line of canned and dry foods;

·

fresh meats;

·

dairy products;

·

beverage products;

·

imported specialties; and

·

fresh produce.

 

We also supply a wide variety of non-food items, including:

 

·

paper products such as disposable napkins, plates and cups;

·

tableware such as china and silverware;

·

cookware such as pots, pans and utensils;

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·

restaurant and kitchen equipment and supplies; and

·

cleaning supplies.

 

A comparison of the sales mix in the principal product categories during the last three years is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

Canned and dry products

19 

%

 

19 

%

 

19 

%

Fresh and frozen meats

19 

 

 

18 

 

 

17 

 

Frozen fruits, vegetables, bakery and other

14 

 

 

14 

 

 

14 

 

Dairy products

10 

 

 

11 

 

 

10 

 

Poultry

10 

 

 

10 

 

 

10 

 

Fresh produce

 

 

 

 

 

Paper and disposables

 

 

 

 

 

Seafood

 

 

 

 

 

Beverage products

 

 

 

 

 

Janitorial products

 

 

 

 

 

Equipment and smallwares

 

 

 

 

 

Medical supplies (1)

 -

 

 

 -

 

 

 -

 

 

100 

%

 

100 

%

 

100 

%

 

(1) Sales are less than 1% of total

 

Our distribution centers, which we refer to as operating companies, distribute nationally-branded merchandise, as well as products packaged under our private brands. Products packaged under our private brands have been manufactured for Sysco according to specifications that have been developed by our quality assurance team.  In addition, our quality assurance team certifies the manufacturing and processing plants where these products are packaged, enforces our quality control standards and identifies supply sources that satisfy our requirements.

 

We believe that prompt and accurate delivery of orders, competitive pricing, close contact with customers and the ability to provide a full array of products and services to assist customers in their foodservice operations are of primary importance in the marketing and distribution of foodservice products to our customers. Our operating companies offer daily delivery to certain customer locations and have the capability of delivering special orders on short notice. Through our approximately 13,600 sales and marketing representatives and support staff of Sysco and our operating companies, we stay informed of the needs of our customers and acquaint them with new products and services. Our operating companies also provide ancillary services relating to foodservice distribution, such as providing customers with product usage reports and other data, menu-planning advice, food safety training and assistance in inventory control, as well as access to various third party services designed to add value to our customers’ businesses.

 

No single customer accounted for 10% or more of Sysco’s total sales for the fiscal year ended June 30, 2012.

 

Based upon available information, we estimate that sales by type of customer during the past three fiscal years were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type of Customer

2012

 

2011

 

2010

Restaurants

63 

%

 

62 

%

 

62 

%

Hospitals and nursing homes

10 

 

 

11 

 

 

11 

 

Hotels and motels

 

 

 

 

 

Schools and colleges

 

 

 

 

 

Other

16 

 

 

16 

 

 

16 

 

Totals

100 

%

 

100 

%

 

100 

%

 

Sources of Supply

 

We purchase from thousands of suppliers,  both domestic and international, none of which individually accounts for more than 10% of our purchases. These suppliers consist generally of large corporations selling brand name and private label merchandise, as well as independent regional brand and private label processors and packers. Purchasing is generally carried out through both centrally developed purchasing programs and direct purchasing programs established by our various operating companies.

 

We administer a consolidated product procurement program designed to develop, obtain and ensure consistent quality food and non-food products. The program covers the purchasing and marketing of Sysco Brand merchandise as well as products from a number of national brand suppliers, encompassing substantially all product lines. Sysco’s operating companies purchase product from the

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suppliers participating in these consolidated programs and from other suppliers, although Sysco Brand products are only available to the operating companies through these consolidated programs.  We also focus on increasing profitability by lowering operating costs and by lowering aggregate inventory levels, which reduces future facility expansion needs at our broadline operating companies, while providing greater value to our suppliers and customers.  This includes the construction and operation of regional distribution centers (RDCs), which aggregate inventory demand to optimize the supply chain activities for certain products for all Sysco broadline operating companies in the region.  Currently, we have two RDCs in operation, one in Virginia and one in Florida.

 

Working Capital Practices

 

Our growth is funded through a combination of cash flow from operations, commercial paper issuances and long-term borrowings. See the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” at Item 7 regarding our liquidity, financial position and sources and uses of funds.

 

Credit terms we extend to our customers can vary from cash on delivery to 30 days or more based on our assessment of each customer’s credit worthiness. We monitor each customer’s account and will suspend shipments if necessary.

 

A majority of our sales orders are filled within 24 hours of when customer orders are placed. We generally maintain inventory on hand to be able to meet customer demand. The level of inventory on hand will vary by product depending on shelf-life, supplier order fulfillment lead times and customer demand. We also make purchases of additional volumes of certain products based on supply or pricing opportunities.

 

We take advantage of suppliers’ cash discounts where appropriate and otherwise generally receive payment terms from our suppliers ranging from weekly to 30 days or more.

 

Corporate Headquarters And Shared Services Center

 

Our corporate staff makes available a number of services to our operating companies. Members of the corporate staff possess experience and expertise in, among other areas, accounting and finance, treasury, legal, cash management, information technology, employee benefits, engineering, real estate and construction, risk management and insurance, sales and marketing, distribution, payroll, human resources, training and development, strategy, and tax compliance services. The corporate office also makes available warehousing and distribution services, which provide assistance in operational best practices including space utilization, energy conservation, fleet management and work flow.

 

Our shared services center performs support services for employees, suppliers and customers, payroll administration, human resources, customer and vendor contract administration, financial services such as vendor payments, invoicing, cash application, certain credit services, accounting and sales and use tax administration, procurement and maintenance support and sales support for some of our operating companies.    

 

Capital Improvements

 

To maximize productivity and customer service, we continue to modernize, expand and construct new distribution facilities. During fiscal 2012, 2011 and 2010, approximately $784.5 million, $636.4 million and $594.6 million, respectively, were invested in technology, facilities, delivery fleet and other capital asset enhancements. We estimate our capital expenditures in fiscal 2013 should be in the range of $600 million to $650 million. During the three years ended June 30, 2012, capital expenditures were financed primarily by internally generated funds, our commercial paper program and bank and other borrowings. We expect to finance our fiscal 2013 capital expenditures from the same sources.

 

Employees

 

As of June 30, 2012, we had approximately 47,800 full-time employees, approximately 17% of whom were represented by unions, primarily the International Brotherhood of Teamsters. Contract negotiations are handled by each individual operating company. Approximately 17% of our union employees are covered by collective bargaining agreements which have expired or will expire during fiscal 2013 and are subject to renegotiation. Since June 30, 2012,  one contract covering 48 of such employees has been renegotiated.  We consider our labor relations to be satisfactory.

 

Competition

 

Industry sources estimate that there are more than 15,000 companies engaged in foodservice distribution in the United States. Our customers may also choose to purchase products directly from retail outlets or negotiate prices directly with our suppliers. While we compete primarily with local and regional distributors, a few organizations compete with us on a national basis. We believe that the principal competitive factors in the foodservice industry are effective customer contacts, the ability to deliver a wide range of quality products and related services on a timely and dependable basis and competitive prices.  An additional competitive factor for our larger chain restaurant customers is the ability to provide a national distribution network.  We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 17.5% of this approximately $225 billion annual market.  We believe, based upon industry trade data, that our sales to the United States and Canada food-away-from-home industry

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were the highest of any foodservice distributor during fiscal 2012. While adequate industry statistics are not available, we believe that in most instances our local operations are among the leading distributors of food and related non-food products to foodservice customers in their respective trading areas.  We believe our competitive advantages include our more than 8,000 marketing associates, our diversified product base, which includes a differentiated group of high quality Sysco brand products, the diversity in the types of customers we serve, our economies of scale and our wide geographic presence in the United States and Canada, which mitigates some of the impact of regional economic declines that may occur over time and provides a national distribution network for larger chain restaurant customers. We believe our liquidity and access to capital provides us the ability to continuously invest in business improvements.  We are the only publicly-traded distributor in the food-away-from-home industry in the United States. While our public company status provides us with some advantages, including access to capital, we believe it also provides us with some disadvantages that our competitors do not have in terms of additional costs related to complying with regulatory requirements.

 

Government Regulation

 

As a marketer and distributor of food products, we are subject to the U.S. Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (FDA), as well as the Canadian Food and Drugs Act and the regulations thereunder.

 

The FDA regulates food safety through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point (HACCP) requirements for certain foods, and the food and color additive approval process.  The agency also specifies the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the U.S. Department of Agriculture (USDA) to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program.  The USDA reviews and approves the labeling of these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.

 

In Canada, the Canadian Food Inspection Agency administers and enforces the food safety and nutritional quality standards established by Health Canada under the Canadian Food and Drugs Act and under other related federal legislation, including the Canada Agricultural Products Act, the Meat Inspection Act, the Fish Inspection Act and the Consumer Packaging and Labelling Act (as it relates to food). These laws regulate the processing, storing, grading, packaging, marking, transporting and inspection of certain Sysco product lines as well as the packaging, labeling, sale, importation and advertising of pre-packaged and certain other products.

 

We and our products are also subject to state, provincial and local regulation through such measures as the licensing of our facilities; enforcement by state, provincial and local health agencies of state, provincial and local standards for our products; and regulation of our trade practices in connection with the sale of our products. Our facilities are subject to inspections and regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor, together with similar occupational health and safety laws in each Canadian province. These regulations require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents and to establish hazard communication programs to transmit information on the hazards of certain chemicals present in products we distribute.

 

We are also subject to regulation by numerous U.S. and Canadian federal, state, provincial and local regulatory agencies, including, but not limited to, the U.S. Department of Labor and each Canadian provincial ministry of labour, which set employment practice standards for workers, and the U.S. Department of Transportation and the Canadian Transportation Agency, which regulate transportation of perishable and hazardous materials and waste, and similar state, provincial and local agencies.

 

Most of our distribution facilities have ammonia-based refrigeration systems and tanks for the storage of diesel fuel and other petroleum products which are subject to laws regulating such systems and storage tanks. Although we are subject to other U.S. and Canadian federal, state, provincial and local provisions relating to the protection of the environment or the discharge of materials, these provisions do not materially impact the use or operation of our facilities.

 

Compliance with these laws has not had, and is not anticipated to have, a material effect on our capital expenditures, earnings or competitive position.

 

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General

 

We have numerous trademarks that are of significant importance, including the SYSCO® trademark and our privately-branded product trademarks that include the SYSCO® trademark.  These trademarks and the private brands on which they are used are widely recognized within the foodservice industry.  Approximately half of our privately-branded sales are from products labeled with our SYSCO® trademark without any other trademark.  We believe the loss of the SYSCO®  trademark would have a material adverse effect on our results of operations.  Our U.S. trademarks are effective for a ten-year period and the company generally renews its trademarks before their expiration dates unless a particular trademark is no longer in use. The company does not have any material patents or licenses.

 

We are not engaged in material research and development activities relating to the development of new products or the improvement of existing products.

 

Our sales do not generally fluctuate significantly on a seasonal basis; therefore, the business of the company is not deemed to be seasonal.

 

As of June 30, 2012, we operated 185 distribution facilities throughout the United States, Canada and Ireland.

 

Item 1A.  Risk Factors

 

The following discussion of “risk factors” identifies the most significant factors that may adversely affect our business, operations, financial position or future financial performance. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes contained in this report. The following discussion of risks is not all inclusive but is designed to highlight what we believe are the most significant factors to consider when evaluating our business. These factors could cause our future results to differ from our expectations expressed in the forward-looking statements identified on page 39 and from historical trends.

 

Industry and General Economic Risks

 

Periods of significant or prolonged inflation or deflation affect our product costs and may negatively impact our profitability

 

Volatile food costs have a direct impact on our industry. Periods of product cost inflation may have a negative impact on our profit margins and earnings to the extent that we are unable to pass on all or a portion of such product cost increases to our customers, which may have a negative impact on our business and our profitability. In addition, product cost inflation may negatively impact consumer spending decisions, which could adversely impact our sales. Conversely, our business may be adversely impacted by periods of product cost deflation because we make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of product cost deflation, even though our gross profit percentage may remain relatively constant. Our estimate for the inflation in Sysco’s cost of goods was 5.5% in fiscal 2012, compared to estimated inflation of 4.6% in fiscal 2011 and deflation of 1.5% in fiscal 2010.

 

Our results and financial condition are directly affected by the volatility in the global economic environment and local market conditions and low consumer confidence, which can adversely affect our sales, margins and net income

 

The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profit margins and is especially susceptible to trends in economic activity, such as the recent global recession.  The global economic environment has been characterized by weak economies, persistently high unemployment rates, inflationary pressures and extreme volatility in financial markets worldwide, which has been exacerbated by the significant uncertainty associated with the ongoing sovereign debt crisis in certain Eurozone countries. In addition, our results of operations are substantially affected by local operating and economic conditions, which can vary substantially by market.  The difficult economic conditions can affect us in the following ways:

 

·

Unfavorable conditions can depress sales in a given market.

·

Food cost and fuel cost inflation experienced by the consumer can lead to reductions in the frequency of dining out and the amount spent by consumers for food-away-from-home purchases which could be negatively impact our business by reduced demand for our products

·

Heightened uncertainty in the financial markets negatively affect consumer confidence and discretionary spending and can cause disruptions with our customers and suppliers from tighter credit markets, temporary interruptions in our ability to conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers and/or liquidity issues resulting from an inability to access credit markets to obtain cash to support operations.

 

This environment has adversely affected both business and consumer confidence and spending, and uncertainty about the long-term investment environment could further depress capital investment and economic activity.  

5


 

 

Competition in our industry may adversely impact our margins and our ability to retain customers and makes it difficult for us to maintain our market share, growth rate and profitability 

 

The foodservice distribution industry is highly competitive, with numerous regional and local competitors, and is a mature industry characterized by slowing revenue growth. Additionally, new competition could arise from non-traditional sources, group purchasing organizations or consolidation among competitors. New competitive sources may result in increased focus on pricing and on limiting price increases, or may require increased discounting. Such competition may result in margin erosion and/or make it difficult for us to attract and retain customers.

 

Increased competition within the industry and general economic conditions have served to further increase pressure on the industry’s profit margins, and continued margin pressure within the industry may have a material adverse impact on our operating results and profitability. Although our sales historically have grown faster than the market, in recent years we have experienced slowing revenue growth. These trends have placed pressure on our profit margins and made it more difficult to achieve growth and pass along cost increases.  We expect these trends to continue for the foreseeable future.  If we are unable to effectively differentiate ourselves from our competitors, our market share, sales and profitability, through increased expenditures or decreased prices, could be adversely impacted.

 

We may not be able to fully compensate for increases in fuel costs and forward purchase commitments intended to contain fuel costs could result in above market fuel costs

 

Volatile fuel prices have a direct impact on our industry. The cost of fuel affects the price paid by us for products as well as the costs incurred by us to deliver products to our customers. Although we have been able to pass along a portion of increased fuel costs to our customers in the past, there is no guarantee that we can do so again if another period of high fuel costs occurs. If fuel costs increase again in the future, we may experience difficulties in passing all or a portion of these costs along to our customers, which may have a negative impact on our business and our profitability. We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at prices equal to the then-current market price for diesel. If fuel prices decrease significantly, these forward purchases may prove ineffective and result in us paying higher than market costs for a portion of our diesel fuel. 

 

Business and Operational Risks

 

Our ability to meet our long-term strategic objectives to grow the profitability of our business depends largely on the success of the Business Transformation Project

 

 In fiscal 2009, we commenced our Business Transformation Project, which currently consists of three main components:

 

·

the design and deployment of an Enterprise Resource Planning (ERP) system to implement an integrated software system to support a majority of our business processes and further streamline our operations;

·

a cost transformation initiative to lower our cost structure by $300 million to $350 million annually by fiscal 2015.  These include initiatives to increase our productivity in the warehouse and delivery activities including fleet management and maintenance activities.  It also involves improving sales productivity and reducing general and administrative expenses, partially through aligning compensation and benefit plans; and

·

a product cost reduction initiative which is designed to lower our total product costs by $250 million to $300 million annually by fiscal 2015.  This initiative involves the use of market data and customer insights to make changes to product pricing and product assortment.  We believe there are opportunities to more effectively provide the products that our customers want, to benefit from our purchasing power and to create mutually beneficial partnerships with our suppliers.  We believe that procuring greater quantities with select vendors will result in reduced prices for our product purchases.

 

Although we expect the investment in the Business Transformation Project to provide meaningful benefits to the company over the long-term, the costs exceeded the benefits during the testing stages of implementation of ERP, including in fiscal 2012.  We believe the costs will exceed the benefits in fiscal 2013.  Successfully managing deployment is critical to our business success.  While we expect all three components of the Business Transformation Project to enhance our value proposition to customers and suppliers and improve our long-term profitability, there can be no assurance that we will realize our expectations within the time frame we have established, if at all.

 

The actual cost of the ERP system may be greater or less than currently expected and delays in the execution of deployment may adversely affect our business and results of operations

 

ERP implementations are complex and time-consuming projects that involve substantial investments in system software and implementation activities over a multi-year timeframe. Our cost estimates related to our ERP system are based on assumptions which are subject to wide variability, require a great deal of judgment, and are inherently uncertain.  Thus, the actual costs of the project in

6


 

fiscal 2013 (and beyond) may be greater or less than currently expected.  For example, as we continue implementation of the project, we have encountered, and we may continue to encounter, the need for changes in design or revisions of the project calendar and budget, including incurring expenses at an earlier or later time than currently anticipated.  In addition, implementation of the systems require significant management attention and resources over an extended period of time and any significant design errors or delay in the implementation of the systems could materially and adversely affect our operating results and impact our ability to manage our business. Delays in deployment, additional operating problems discovered in the underlying information technology systems’ processes, cost overages or limitations on the extent of the business transformation during the ERP implementation process adversely affect our business and results of operations. In addition, because the implementation is expected to continue to involve a significant capital commitment, our business, results of operations and liquidity may also be adversely affected if the ERP system, and the associated process changes, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. There can be no guarantee that we will be able to realize the intended results of the system software and implementation activities. We expect costs to continue to outweigh benefits for fiscal 2013 as we commence deployment.

 

We may not realize anticipated benefits from our cost reduction efforts 

 

We have implemented a number of cost reduction initiatives that we believe are necessary to position our business for future success and growth. Our future success and earnings growth depend upon our ability to achieve a lower cost structure and operate efficiently in the highly competitive food and beverage industry, particularly in an environment of increased competitive activity and reduced profitability. If we are unable to realize the anticipated benefits from our cost cutting efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease.

 

We may not realize anticipated benefits from our product cost reduction initiative

 

Our product cost reduction initiative will be deployed to use market data and customer insights to make changes to product pricing and product assortment issues.  This initiative aims to improve our offerings to customers, strengthen strategic relationships with suppliers, and improve our sales and profit margins.  The implementation of changes may not result in the cost savings and other benefits at the levels that we anticipate, or at all.

 

Conditions beyond our control can interrupt our supplies and increase our product costs 

 

We obtain substantially all of our foodservice and related products from third-party suppliers. For the most part, we do not have long-term contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide benefits when dealing with suppliers, suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices requested. We are also subject to delays caused by interruption in production and increases in product costs based on conditions outside of our control. These conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather conditions or more prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions, unavailability of fuel or increases in fuel costs, competitive demands and natural disasters or other catastrophic events (including, but not limited to food-borne illnesses). Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. In the summer months of 2012, certain agricultural areas of the United States have experienced severe drought.  The impact of this drought is uncertain and could result in volatile input costs.  Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period.  Our inability to obtain adequate supplies of foodservice and related products as a result of any of the foregoing factors or otherwise could mean that we could not fulfill our obligations to customers, and customers may turn to other distributors.

 

Adverse publicity about us or lack of confidence in our products could negatively impact our reputation and reduce earnings

 

Maintaining a good reputation and public confidence in the safety of the products we distribute is critical to our business, particularly to selling Sysco Brand products. Anything that damages that reputation or the public’s confidence in our products, whether or not justified, including adverse publicity about the quality, safety or integrity of our products, could quickly affect our revenues and profits. Reports, whether true or not, of food-borne illnesses, such as e-coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella, and injuries caused by food tampering could also severely injure our reputation or negatively impact the public’s confidence in our products. If patrons of our restaurant customers become ill from food-borne illnesses, our customers could be forced to temporarily close restaurant locations and our sales and profitability would be correspondingly decreased. In addition, instances of food-borne illnesses or food tampering or other health concerns, such as flu epidemics or other pandemics, even those unrelated to the use of Sysco products, or public concern regarding the safety of our products, can result in negative publicity about the food service distribution industry and cause our sales and profitability to decrease dramatically.

 

7


 

Expanding into international markets and complementary lines of business presents unique challenges, and our expansion efforts with respect to international operations and complementary lines of business may not be successful

 

In addition to our domestic activities, an element of our strategy includes the possibility of further expansion of operations into international markets. Our ability to successfully operate in international markets may be adversely affected by local laws and customs, legal and regulatory constraints, including compliance with the Foreign Corrupt Practices Act, political and economic conditions and currency regulations of the countries or regions in which we currently operate or intend to operate in the future. Risks inherent in our existing and future international operations also include, among others, the costs and difficulties of managing international operations, difficulties in identifying and gaining access to local suppliers, suffering possible adverse tax consequences, maintaining product quality and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations may have an impact on our future costs or on future sales and cash flows from our international operations.

 

Another element of our strategy includes the possibility of expansion into businesses that are closely related or complementary to, but not currently part of, our core foodservice distribution business. Our ability to successfully operate in these complementary business markets may be adversely affected by legal and regulatory constraints, including compliance with regulatory programs to which we become subject. Risks inherent in branching out into such complementary markets also include the costs and difficulties of managing operations outside of our core business, which may require additional skills and competencies, as well as difficulties in identifying and gaining access to suppliers or customers in new markets.

 

If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business

 

We are subject to governmental regulation at the federal, state, international, national, provincial and local levels in many areas of our business, such as food safety and sanitation, minimum wage, overtime, wage payment, wage and hour and employment discrimination, immigration, human health and safety, including regulations of the FDA, USDA, U.S. Occupational Safety and Health Administration, federal motor carrier safety, data privacy, environmental protection, the import and export of goods and customs regulations, the False Claims Act, the Foreign Corrupt Practices Act and the services we provide in connection with governmentally funded entitlement programs. From time to time, both federal and state governmental agencies have conducted audits of our billing practices as part of investigations of providers of services under governmental contracts, or otherwise. We also receive requests for information from governmental agencies in connection with these audits. While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations. If we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, prohibitions on exporting, seizures or debarments from contracting with the government. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations.

 

Product liability claims could materially impact our business

 

We, like any other seller of food, face the risk of exposure to product liability claims in the event that the use of products sold by Sysco causes injury or illness. With respect to product liability claims, we believe we have sufficient primary or excess umbrella liability insurance. However, this insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying our products, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If Sysco does not have adequate insurance or contractual indemnification available, product liability relating to defective products could materially reduce our net earnings and earnings per share.

 

We must finance and integrate acquired businesses effectively

 

Historically, a portion of our growth has come through acquisitions. If we are unable to integrate acquired businesses successfully or realize anticipated economic, operational and other benefits and synergies in a timely manner, our earnings per share may decrease. Integration of an acquired business may be more difficult when we acquire a business in a market in which we have limited expertise, or with a culture different from Sysco’s. A significant expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and operational resources. Significant acquisitions may also require the issuance of material additional amounts of debt or equity, which could materially alter our debt to equity ratio, increase our interest expense and decrease earnings per share, and make it difficult for us to obtain favorable financing for other acquisitions or capital investments.

 

8


 

We need access to borrowed funds in order to grow and any default by us under our indebtedness could have a material adverse impact

 

A substantial part of our growth historically has been the result of acquisitions and capital expansion. We anticipate additional acquisitions and capital expansion in the future. As a result, our inability to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to expand. Moreover, any default under the documents governing our indebtedness could have a significant adverse effect on our cash flows, as well as the market value of our common stock.

 

Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position

 

 As of June 30, 2012, we had approximately $3 billion of total indebtedness. We have a Board-approved commercial paper program allowing us to issue short-term unsecured notes in an aggregate amount not to exceed $1.3 billion; a revolving credit facility supporting our U.S. and Canadian commercial paper programs in the amount of $1.0 billion set to expire on December 29, 2016; and certain uncommitted bank lines of credit providing for unsecured borrowings for working capital of up to $95.0 million. In June 2012, we issued $750 million in senior notes, which contributed to an increase in our total indebtedness.  Our indebtedness may further increase from time to time for various reasons, including fluctuations in operating results, working capital needs, capital expenditures and potential acquisitions or joint ventures. Our increased level of indebtedness and the ultimate cost of such indebtedness could have a negative impact on our liquidity, cost of capital and financial results.

 

Technology dependence could have a material negative impact on our business

 

 Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the reliability of our technology network. We use software and other technology systems, among other things, to generate and select orders, to load and route trucks and to monitor and manage our business on a day-to-day basis.  Any disruption to these computer systems could adversely impact our customer service, decrease the volume of our business and result in increased costs. Furthermore, process changes will be required as we continue to use our existing warehousing, delivery, and payroll systems to support operations as we implement the ERP system. While Sysco has invested and continues to invest in technology security initiatives and disaster recovery plans, these measures cannot fully insulate us from technology disruption that could result in adverse effects on operations and profits.

 

We may be required to pay material amounts under multiemployer defined benefit pension plans

 

We contribute to several multiemployer defined benefit pension plans based on obligations arising under collective bargaining agreements covering union-represented employees. Approximately 10% of our current employees are participants in such multiemployer plans. In fiscal 2012, our total contributions to these plans were approximately $68 million, which included payments for withdrawal liabilities of $34 million. The costs of providing benefits through such plans have increased in recent years. The amount of any increase or decrease in our required contributions to these multiemployer plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability if we choose to exit.  Based upon the information available to us from plan administrators, we believe that several of these multiemployer plans are underfunded. The unfunded liabilities of these plans may result in increased future payments by us and the other participating employers. Underfunded multiemployer pension plans may impose a surcharge requiring additional pension contributions. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. Based on the latest information available from plan administrators, we estimate our share of the aggregate withdrawal liability on the multiemployer plans in which we participate could have been as much as $205 million as of June 30, 2012.  A significant increase to funding requirements could adversely affect the Company’s financial condition, results of operations or cash flows.

 

Our funding requirements for our company-sponsored qualified pension plan may increase and our earnings may decrease should financial markets experience future declines

 

Our company-sponsored qualified pension plan (Retirement Plan) holds investments in both equity and fixed income securities. The amount of our annual contribution to the plan is dependent upon, among other things, the returns on the plan’s assets and discount rates used to calculate the plan’s liability. Our expense is also impacted by these items. Fluctuations in asset values can cause the amount of our anticipated future contributions to the plan to increase and pension expense to increase and can result in a reduction to shareholders’ equity on our balance sheet at fiscal year-end, which is when this plan’s funded status is measured. Also, the projected liability of the plan will be impacted by the fluctuations of interest rates on high quality bonds in the public markets as these are inputs in determining our discount rate at fiscal year-end. Specifically, decreases in these interest rates may have an adverse impact on our results of operations. To the extent financial markets experience future declines similar to those experienced in fiscal 2008 through the beginning of fiscal 2010, and/or interest rates on high quality bonds in the public markets decline, our required contributions and pension expense may increase for future years as our funded status decreases, which could have an adverse impact on our liquidity and results of operations. 

9


 

 

At the end of fiscal 2012, we decided to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees.  Effective January 1, 2013, these employees will be eligible for additional contributions under an enhanced, defined contribution plan.  While these actions will serve to limit future growth in our pension liabilities, we had a sizable pension obligation of $2.7 billion as of June 30, 2012 which could continue to impact our funding requirements and our earnings.  Additionally, although recent pension funding relief legislation has served to defer some required funding, additional contributions may be required if our plan is not fully funded when the provisions that provided the relief are phased out.  See Note 13, “Company-Sponsored Employee Benefit Plans” to the Consolidated Financial Statements in Item 8 for a discussion of the funded status of the Retirement Plan.

 

Failure to successfully renegotiate union contracts could result in work stoppages

 

As of June 30, 2012, approximately 8,200 employees at 50 operating companies were members of 53 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. In fiscal 2013, 15 agreements covering approximately 1,400 employees have expired or will expire. Since June 30, 2012, one contract covering 48 of the approximately 1,400 employees has been renegotiated. Failure of our operating companies to effectively renegotiate these contracts could result in work stoppages. Although our operating subsidiaries have not experienced any significant labor disputes or work stoppages to date, and we believe they have satisfactory relationships with their unions, a work stoppage due to failure of multiple operating subsidiaries to renegotiate union contracts could have a material adverse effect on us.

 

A shortage of qualified labor could negatively impact our business and materially reduce earnings

 

Our operations rely heavily on our employees, particularly drivers, and any shortage of qualified labor could significantly affect our business. Our recruiting and retention efforts and efforts to increase productivity gains may not be successful and there may be a shortage of qualified drivers in future periods. Any such shortage would decrease Sysco’s ability to effectively serve our customers. Such a shortage would also likely lead to higher wages for employees and a corresponding reduction in our net earnings.

 

Our authorized preferred stock provides anti-takeover benefits that may not be viewed as beneficial to stockholders

 

Under our Restated Certificate of Incorporation, Sysco’s Board of Directors is authorized to issue up to 1,500,000 shares of preferred stock without stockholder approval. Issuance of these shares could make it more difficult for anyone to acquire Sysco without approval of the Board of Directors, depending on the rights and preferences of the stock issued. In addition, if anyone attempts to acquire Sysco without approval of the Board of Directors of Sysco, the existence of this undesignated preferred stock could allow the Board of Directors to adopt a shareholder rights plan without obtaining stockholder approval, which could result in substantial dilution to a potential acquirer. As a result, hostile takeover attempts that might result in an acquisition of Sysco, that could otherwise have been financially beneficial to our stockholders, could be deterred.

 

Item 1B.  Unresolved Staff Comments

 

None. 

10


 

Item 2.  Properties

 

The table below shows the number of distribution facilities occupied by Sysco in each state, province or country and the aggregate square footage devoted to cold and dry storage as of June 30, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

Number of Facilities

 

Cold Storage

(Square Feet in thousands)

 

Dry Storage

(Square Feet in thousands)

 

Segment Served*

Alabama

 

184 

 

228 

 

BL

Alaska

 

43 

 

26 

 

BL

Arizona

 

138 

 

120 

 

BL, O

Arkansas

 

131 

 

88 

 

BL, O

California

17 

 

1,088 

 

1,144 

 

BL, S, O

Colorado

 

283 

 

227 

 

BL, S, O

Connecticut

 

160 

 

109 

 

BL, O

District of Columbia

 

 

 

BL

Florida

15 

 

1,269 

 

911 

 

BL, S, O

Georgia

 

324 

 

454 

 

BL, S, O

Idaho

 

84 

 

88 

 

BL

Illinois

 

402 

 

535 

 

BL, S, O

Indiana

 

100 

 

109 

 

BL

Iowa

 

93 

 

95 

 

BL

Kansas

 

177 

 

171 

 

BL

Kentucky

 

92 

 

106 

 

BL

Louisiana

 

134 

 

113 

 

BL

Maine

 

59 

 

50 

 

BL

Maryland

 

291 

 

252 

 

BL

Massachusetts

 

397 

 

395 

 

BL, S

Michigan

 

320 

 

363 

 

BL, S

Minnesota

 

150 

 

135 

 

BL

Mississippi

 

95 

 

69 

 

BL

Missouri

 

107 

 

95 

 

BL, S

Montana

 

120 

 

121 

 

BL

Nebraska

 

217 

 

232 

 

BL

Nevada

 

193 

 

109 

 

BL, O

New Jersey

 

140 

 

453 

 

BL, O

New Mexico

 

120 

 

108 

 

BL

New York

 

417 

 

317 

 

BL

North Carolina

 

334 

 

300 

 

BL, S, O

North Dakota

 

46 

 

59 

 

BL

Ohio

 

419 

 

400 

 

BL, S, O

Oklahoma

 

189 

 

157 

 

BL, S, O

Oregon

 

177 

 

160 

 

BL, S

Pennsylvania

 

460 

 

405 

 

BL, S

Rhode Island

 

 

 -

 

BL

South Carolina

 

151 

 

98 

 

BL

Tennessee

 

412 

 

424 

 

BL, O

Texas

17 

 

1,127 

 

1,057 

 

BL, S, O

Utah

 

161 

 

107 

 

BL

Virginia

 

564 

 

410 

 

BL

Washington

 

134 

 

92 

 

BL

Wisconsin

 

287 

 

242 

 

BL

Alberta, Canada

 

218 

 

216 

 

BL

British Columbia, Canada

 

279 

 

254 

 

BL, O

Manitoba, Canada

 

76 

 

105 

 

BL

New Brunswick, Canada

 

48 

 

48 

 

BL

Newfoundland, Canada

 

40 

 

25 

 

BL

Nova Scotia, Canada

 

31 

 

42 

 

BL

Ontario, Canada

11 

 

478 

 

430 

 

BL, O

Quebec, Canada

 

50 

 

101 

 

BL

Saskatchewan, Canada

 

46 

 

63 

 

BL

Ireland

 

44 

 

40 

 

BL

Total

185 

 

13,109 

 

12,465 

 

 

 

*  Segments served include Broadline (BL), SYGMA (S) and Other (O).

11


 

We own approximately 21,279,000 square feet of our distribution facilities (or 83.2% of the total square feet), and the remainder is occupied under leases expiring at various dates from fiscal 2013 to fiscal 2032, exclusive of renewal options. Certain of the facilities owned by the company are subject to industrial revenue bond financing arrangements totaling $13.6 million as of June 30, 2012. Such industrial revenue bond financing arrangements mature at various dates through fiscal 2026.    

 

We own our approximately 625,000 square foot headquarters office complex in Houston, Texas.  In addition, we own our approximately 669,000 square foot shared services complex in Cypress, Texas.

 

We are currently constructing a fold-out facility in southern California.  

 

As of June 30, 2012, our fleet of approximately 9,100 delivery vehicles consisted of tractor and trailer combinations, vans and panel trucks, most of which are either wholly or partially refrigerated for the transportation of frozen or perishable foods. We own approximately 92% of these vehicles and lease the remainder.

 

 

Item 3.  Legal Proceedings

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

 

The principal market for Sysco’s common stock (SYY) is the New York Stock Exchange. The table below sets forth the high and low sales prices per share for our common stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared for the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

Common Stock Prices

 

Declared

 

High

 

Low

 

Per Share

Fiscal 2011:

 

 

 

 

 

 

 

 

First Quarter

$

31.55 

 

$

27.13 

 

$

0.25 

Second Quarter

 

30.18 

 

 

28.22 

 

 

0.26 

Third Quarter

 

30.54 

 

 

27.31 

 

 

0.26 

Fourth Quarter

 

32.76 

 

 

27.81 

 

 

0.26 

Fiscal 2012:

 

 

 

 

 

 

 

 

First Quarter

$

31.73 

 

$

25.48 

 

$

0.26 

Second Quarter

 

29.62 

 

 

25.09 

 

 

0.27 

Third Quarter

 

31.18 

 

 

28.70 

 

 

0.27 

Fourth Quarter

 

30.20 

 

 

27.05 

 

 

0.27 

 

The number of record owners of Sysco’s common stock as of August 15, 2012 was 13,529.

 

12


 

As indicated in the table below, we did not make any share repurchases during the fourth quarter of fiscal 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a) Total Number of Shares Purchased

 

(b) Average Price Paid per Share

 

(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

Month #1

 

 

 

 

 

 

 

 

April 1 – April 28

 -

 

$

 -

 

 -

 

23,386,600 

Month #2

 

 

 

 

 

 

 

 

April 29 – May 26

 -

 

 

 -

 

 -

 

23,386,600 

Month #3

 

 

 

 

 

 

 

 

May 27 – June 30

 -

 

 

 -

 

 -

 

23,386,600 

Total

 -

 

$

 -

 

 -

 

23,386,600 

 

On August 27, 2010, the Board of Directors approved the repurchase of 20,000,000 shares.    On November 16, 2011, the Board of Directors approved the repurchase of an additional 20,000,000 shares. Pursuant to the repurchase program, shares may be acquired in the open market or in privately negotiated transactions at the company’s discretion, subject to market conditions and other factors

 

In July 2004, the Board of Directors authorized us to enter into agreements from time to time to extend our ongoing repurchase program to include repurchases during company announced “blackout periods” of such securities in compliance with Rule 10b5-1 promulgated under the Exchange Act.

 

Stock Performance Graph

 

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that Sysco specifically incorporates such information by reference into such filing.

 

 

The following stock performance graph compares the performance of Sysco’s Common Stock to the S&P 500 Index and to the S&P 500 Food/Staple Retail Index for Sysco’s last five fiscal years.

 

 The graph assumes that the value of the investment in our Common Stock, the S&P 500 Index, and the S&P 500 Food/Staple Index was $100 on the last trading day of fiscal 2007, and that all dividends were reinvested. Performance data for Sysco, the S&P 500 Index and the S&P 500 Food/Staple Retail Index is provided as of the last trading day of each of our last five fiscal years.

 

 

 

 

13


 

Untitled2.jpg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6/30/07

6/28/08

6/27/09

7/3/10

7/2/11

6/30/12

Sysco Corporation

$100

$88

$75

$95

$109

$107

S&P 500

100

87

64

73

97

101

S&P 500 Food/Staple Retail Index

100

104

86

87

113

130

 

14


 

Item 6.  Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

2012

 

2011

 

2010
(53 Weeks)

 

2009

 

2008

 

(In thousands except for per share data)

Sales

$

42,380,939 

 

 

$

39,323,489 

 

 

$

37,243,495 

 

 

$

36,853,330 

 

 

$

37,522,111 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

1,890,632 

 

 

 

1,931,502 

 

 

 

1,975,868 

 

 

 

1,872,211 

 

 

 

1,879,949 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

1,784,002 

 

 

 

1,827,454 

 

 

 

1,849,589 

 

 

 

1,770,834 

 

 

 

1,791,338 

 

Income taxes

 

662,417 

 

 

 

675,424 

 

 

 

669,606 

 

 

 

714,886 

 

 

 

685,187 

 

Net earnings

$

1,121,585 

 

 

$

1,152,030 

 

 

$

1,179,983 

 

 

$

1,055,948 

 

 

$

1,106,151 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

1.91 

 

 

$

1.96 

 

 

$

1.99 

 

 

$

1.77 

 

 

$

1.83 

 

Diluted earnings per share

 

1.90 

 

 

 

1.96 

 

 

 

1.99 

 

 

 

1.77 

 

 

 

1.81 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

$

1.07 

 

 

$

1.03 

 

 

$

0.99 

 

 

$

0.94 

 

 

$

0.85 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

12,094,972 

 

 

$

11,385,555 

 

 

$

10,313,701 

 

 

$

10,148,486 

 

 

$

10,010,615 

 

Capital expenditures

 

784,501 

 

 

 

636,442 

 

 

 

594,604 

 

 

 

464,561 

 

 

 

515,963 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$

254,650 

 

 

$

207,031 

 

 

$

7,970 

 

 

$

9,163 

 

 

$

4,896 

 

Long-term debt

 

2,763,688 

 

 

 

2,279,517 

 

 

 

2,472,662 

 

 

 

2,467,486 

 

 

 

1,975,435 

 

Total long-term debt

 

3,018,338 

 

 

 

2,486,548 

 

 

 

2,480,632 

 

 

 

2,476,649 

 

 

 

1,980,331 

 

Shareholders’ equity

 

4,685,040 

 

 

 

4,705,242 

 

 

 

3,827,526 

 

 

 

3,449,702 

 

 

 

3,408,986 

 

Total capitalization

$

7,703,378 

 

 

$

7,191,790 

 

 

$

6,308,158 

 

 

$

5,926,351 

 

 

$

5,389,317 

 

Ratio of long-term debt to capitalization

 

39.2 

%

 

 

34.6 

%

 

 

39.3 

%

 

 

41.8 

%

 

 

36.7 

%

 

 

15


 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends.  Any non-GAAP financial measure will be denoted as an adjusted measure and excludes expenses from our Business Transformation Project, from withdrawals from multiemployer pension plans, restructuring charges, corporate-owned life insurance policies (COLI) policies, recognized tax benefits and the impact of the 53rd week in fiscal 2010.  More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.”

 

Overview

 

Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our operations are primarily located throughout the United States, Canada and Ireland and include broadline companies (which include our custom-cut meat operations), SYGMA (our chain restaurant distribution subsidiary), specialty produce companies, hotel supply operations, a company that distributes specialty imported products and a company that distributes to international customers.

 

We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 17.5% of this approximately $225 billion annual market.  According to industry sources, the foodservice, or food-away-from-home, market represents approximately 46% of the total dollars spent on food purchases made at the consumer level in the United States.

 

Industry sources estimate the total foodservice market in the United States experienced a real sales decline of approximately 0.4% in calendar year 2011 and 2.5% in calendar year 2010.  Real sales declines do not include the impact of inflation or deflation.

 

General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, have contributed to a decline in the foodservice market.  Historically, we have grown at a faster rate than the overall industry and believe we have continued to grow our market share in this fragmented industry. 

 

Highlights

 

High levels of product costs and an uneven economic recovery contributed to a challenging business environment in fiscal 2012.  Our case volume growth has shown modest improvement in a low growth market environment.  However, our earnings declined due to high levels of inflation and rising operating expenses, driven in part by our expenses related to our Business Transformation Project.

 

     Comparison of results from fiscal 2012 to fiscal 2011:

 

·

Sales increased 7.8% to $42.4 billion primarily due to increased prices due to inflation and secondarily from case volume growth.

·

Operating income decreased 2.1%, or $40.9 million, to $1.9 billion, primarily driven by lower gross margins and increased operating expenses partially from increased expenses from payroll and our Business Transformation Project.  These expense increases were partially offset by increases in gross profit dollars.  Adjusted operating income increased 3.0%, or $60.9 million.

·

Net earnings decreased 2.6% to $1.1 billion primarily due to the decline in operating income.  Adjusted net earnings increased 4.7%, or $56.4 million.

·

Basic and diluted earnings per share in fiscal 2012 were $1.91 and $1.90, respectively.  This represents a 2.6% decrease from the comparable prior year period amount for basic earnings per share of $1.96 per share and a 3.1% decrease from the comparable prior year period amount for diluted earnings per share of $1.96.  Adjusted diluted earnings per share were $2.13 in fiscal 2012 and $2.04 in fiscal 2011, an increase of 4.4%.

 

See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.

 

Trends and Strategy

 

Trends

 

General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, have contributed to a slow rate of recovery in the foodservice market.  According to industry sources, real sales for the total foodservice market in the United States are not expected to grow significantly over the next year.

 

16


 

We experienced prolonged levels of high product cost inflation during most of fiscal 2012 as compared to fiscal 2011.  Our product cost inflation reached a high of 7.3% in the first quarter of fiscal 2012 and a low of 3.3% in the fourth quarter of fiscal 2012.  While we are generally able to pass on modest levels of inflation to our customers, we were unable to fully pass through these higher levels of product cost inflation with the same gross margin percentage without negatively impacting our customers’ business and therefore our business.  In the summer months of 2012, certain agricultural areas of the United States have experienced severe drought.  The impact of this drought is uncertain and could result in volatile input costs.  Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period.  While we cannot predict whether inflation will continue at current levels, periods of high inflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit, operating income and earnings.

 

We have experienced higher operating costs this fiscal year.  Some of the increase has resulted from increased pay-related expenses.  Sales compensation includes commissions which are driven by gross profit dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumes.  Since these drivers are variable in nature, increased gross profit dollars and case volumes have increased sales and delivery compensation.  We believe pay-related expense could continue to increase if gross profit dollars and case volumes increase; however, the impact of our productivity related initiatives could favorably impact the magnitude of this trend.  Fuel costs are expected to stabilize provided that fuel prices do not significantly change from their current levels.  Our Business Transformation Project is a key part of our strategy to control costs and grow our market share over the long-term.   This project includes an integrated software system that went into deployment in August 2012.  We believe expenses related to the project will increase in fiscal 2013 as compared to fiscal 2012 due to amortization of the software asset and increased deployment costs. 

 

Net company-sponsored pension costs for our Retirement Plan have experienced volatility over the past five years primarily due to changes in interest rates which are used to determine the discount rates for our pension obligations and our pension asset performance.  For most of these periods, we have experienced significantly increased pension expense.  At the end of fiscal 2012, Sysco decided to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees.  Effective January 1, 2013, these employees will be eligible for additional contributions under an enhanced, defined contribution plan.  Pension costs will decrease in fiscal 2013 primarily due to this plan freeze.  Our expenses related to our defined contribution plan will increase in fiscal 2013 and will more than offset our reduced pension costs; however, over the long-term, we believe the changes to both plans will result in reduced volatility of retirement related expenses and a reduction in total retirement related expenses.

 

Strategy

 

We are focused on optimizing our core broadline business in the U.S. and Canada, while continuing to explore appropriate opportunities to profitably grow our market share and create shareholder value by expanding beyond our core business.  Day-to-day, our business decisions are driven by our mission to market and deliver great products to our customers with exceptional service, with the aspirational vision of becoming each of our customers’ most valued and trusted business partner.  We have identified five strategies to help us achieve our mission and vision:

 

·

Profoundly enrich the experience of doing business with Sysco:  Our primary focus is to help our customers succeed. We believe that by building on our current competitive advantages, we will be able to further differentiate our offering to customers.  Our competitive advantages include our sales force of over 8,000 marketing associates; our diversified product base, which includes quality-assured Sysco brand products; the suite of services we provide to our customers such as business reviews and menu analysis; and our wide geographic presence in the United States and Canada.  In addition, we have a portfolio of businesses spanning broadline, specialty meat, chain restaurant distribution, specialty produce, hotel amenities, specialty import and export which serves our customers’ needs across a wide array of business segments.  We believe this strategy of enriching the experience of doing business with Sysco will increase customer retention and profitably accelerate sales growth with both existing and new customers.

 

·

Continuously improve productivity in all areas of our business:  Our multi-year Business Transformation Project is designed to improve productivity and reduce costs.  An integrated software system is included in this project and will support a majority of our business processes to further streamline our operations and reduce costs. These systems are commonly referred to as Enterprise Resource Planning (ERP) systems. We view the technology as an important enabler of this project; however the larger outcome of this project will be from transformed processes that standardize portions of our operations.  This includes a shared business service center to centrally manage certain back-office functions that are currently performed at a majority of our operating companies.  This project also includes removing costs from our operations through improved productivity without impacting our service to our customers.  We continue to optimize warehouse and delivery activities across the corporation to achieve a more efficient delivery of products to our customers and we seek to improve sales productivity and lower general and administrative costs.  We also have a product cost reduction initiative to provide the right products to our customers while leveraging our purchasing power. 

17


 

·

Expand our portfolio of products and services by initiating a customer-centric innovation program:  We continually explore opportunities to provide new and improved products, technologies and services to our customers.  

 

·

Explore, assess and pursue new businesses and markets: This strategy is focused on identifying opportunities to expand the core business through growth in new international markets and in adjacent areas that complement our core foodservice distribution business.   As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses.

 

·

Develop and effectively integrate a comprehensive, enterprise-wide talent management process:  Our ability to drive results and grow our business is directly linked to having the best talent in the industry.  We are committed to the continued enhancement of our talent management programs in terms of how we recruit, select, train and develop our associates throughout Sysco as well as succession planning.  Our ultimate objective is to provide our associates with outstanding opportunities for professional growth and career development.  

 

Business Transformation Project

 

In fiscal 2009, we commenced our Business Transformation Project, which currently consists of three main components:

 

·

the design and deployment of an ERP system to implement an integrated software system to support a majority of our business processes and further streamline our operations;

·

a cost transformation initiative to lower our cost structure; and

·

a product cost reduction initiative to use market data and customer insights to make changes to product pricing and product assortment issues.

 

In fiscal 2012, we continued to refine our ERP system after implementing it at two pilot operating companies.  The system has been deployed to three operating companies and we are targeting to convert 5 to 15 U.S. Broadline operating companies in fiscal 2013.  Our next five conversions will be in Texas and Louisiana.   We believe future conversions will be 15 to 25 U.S. Broadline operating companies per year from fiscal 2014 to fiscal 2016.  Although we expect the investment in the ERP system within our Business Transformation Project to provide meaningful benefits to the company over the long-term, the costs will exceed the benefits during fiscal 2013.   

 

Expenses related to the Business Transformation Project were $193.1 million in fiscal 2012 or $0.21 per share, $102.6 million in fiscal 2011 or $0.11 per share and $81.1 million in fiscal 2010 or $0.09 per share.  We anticipate that project expenses for fiscal 2013 will continue to significantly increase primarily due to the initiation of software amortization as the system was placed into service in August 2012.  Our costs will also increase from the ramp up of our shared services center, continuing costs for deployment of the software platform and information technology support costs.  Some of these increased costs will be partially offset by benefits obtained from the project, primarily in reduced headcount; however the costs will exceed the benefits in fiscal 2013.    

 

Our cost transformation initiative seeks to lower our cost structure by $300 million to $350 million annually by fiscal 2015.  These include initiatives to increase our productivity in the warehouse and delivery activities including fleet management and maintenance activities.  It also involves improving sales productivity and reducing general and administrative expenses, partially through aligning compensation and benefit plans. 

 

Our product cost reduction initiative is designed to lower our total product costs by $250 million to $300 million annually by fiscal 2015.  This initiative involves the use of market data and customer insights to make changes to product pricing and product assortment.  We believe there are opportunities to more effectively provide the products that our customers want, to benefit from our purchasing power and to create mutually beneficial partnerships with our suppliers.  We believe that procuring greater quantities with select vendors will result in reduced prices for our product purchases. 

 

We expect our expenses related to the Business Transformation Project for fiscal 2013 to be approximately $300 million to $350 million net of benefits obtained from our shared services center.  We expect our capital expenditures related to this project to be approximately $5 million to $20 million.  In fiscal 2013, we believe we can obtain approximately 25% of the total expected annualized benefits of $550 million to $650 million.   If we are successful in obtaining these benefits in fiscal 2013, some of the trends noted above could be favorably impacted.

 

18


 

Results of Operations

 

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2012

 

2011

 

(53 Weeks)

Sales

100.0 

%

 

100.0 

%

 

100.0 

%

Cost of sales

81.9 

 

 

81.2 

 

 

80.7 

 

Gross profit

18.1 

 

 

18.8 

 

 

19.3 

 

Operating expenses

13.6 

 

 

13.9 

 

 

14.0 

 

Operating income

4.5 

 

 

4.9 

 

 

5.3 

 

Interest expense

0.3 

 

 

0.3 

 

 

0.3 

 

Other expense (income), net

(0.0)

 

 

(0.0)

 

 

0.0 

 

Earnings before income taxes

4.2 

 

 

4.6 

 

 

5.0 

 

Income taxes

1.6 

 

 

1.7 

 

 

1.8 

 

Net earnings

2.6 

%

 

2.9 

%

 

3.2 

%

 

The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the prior year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

Sales

 

 

 

7.8 

%

 

5.6 

%

Cost of sales

 

 

 

8.7 

 

 

6.2 

 

Gross profit

 

 

 

3.8 

 

 

2.9 

 

Operating expenses

 

 

 

5.9 

 

 

4.8 

 

Operating income

 

 

 

(2.1)

 

 

(2.2)

 

Interest expense

 

 

 

(4.1)

 

 

(5.7)

 

Other expense (income), net

 

 

 

(52.4)

(1)

 

 

(1)

Earnings before income taxes

 

 

 

(2.4)

 

 

(1.2)

 

Income taxes

 

 

 

(1.9)

 

 

0.9 

 

Net earnings

 

 

 

(2.6)

%

 

(2.4)

%

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

(2.6)

%

 

(1.5)

%

Diluted earnings per share

 

 

 

(3.1)

 

 

(1.5)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

 

0.2 

 

 

(1.0)

 

Diluted shares outstanding

 

 

 

0.1 

 

 

(0.8)

 

 

 

(1)     Other expense (income), net was income of $6.8 million in fiscal 2012,  income of $14.2 million in fiscal 2011 and expense of $0.8 million in fiscal 2010.

 

Sales

 

Sales for fiscal 2012 were 7.8%  higher than fiscal 2011. Sales for fiscal 2012 increased as a result of product cost inflation, and the resulting increase in selling prices, along with improving case volumes.  Changes in product cost, an internal measure of inflation, were approximately 5.5% during fiscal 2012Case volumes including acquisitions within the last 12 months improved approximately 3.0% during fiscal 2012.  Case volumes excluding acquisitions within the last 12 months improved approximately 2.5% during fiscal 2012.  Our case volumes represent our results from our Broadline and SYGMA segments only.  Sales from acquisitions in the last 12 months favorably impacted sales by 0.7% for fiscal 2012. The changes in the exchange rates used to translate our foreign sales into U.S. dollars did not have a significant impact on sales when compared to fiscal 2011

 

Sales for fiscal 2011 were 5.6% higher than fiscal 2010.   After adjusting for the estimated impact of the 53rd week in fiscal 2010, the adjusted increase in sales in fiscal 2011 would have been 7.7%Sales for fiscal 2011 increased as a result of product cost inflation, and the resulting increase in selling prices, along with improving case volumes.  Estimated product cost increases, an internal measure of inflation, were approximately 4.6% during fiscal 2011.  Case volumes including acquisitions within the last 12 months improved approximately 4.1% during fiscal 2011.  Case volumes excluding acquisitions within the last 12 months improved approximately 3.4%

19


 

during fiscal 2011.  Sales from acquisitions in the last 12 months favorably impacted sales by 0.7% for fiscal 2011. The changes in the exchange rates used to translate our foreign sales into U.S. dollars positively impacted sales by 0.5% compared to fiscal 2010. 

   

Operating Income

 

Cost of sales primarily includes our product costs, net of vendor consideration, and includes in-bound freight.  Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities. Fuel surcharges are reflected within sales and gross profit; fuel costs are reflected within operating expenses.

 

Fiscal 2012 vs. Fiscal 2011

 

Operating income decreased 2.1% in fiscal 2012 over fiscal 2011 to $1.9 billion, and as a percentage of sales, decreased to 4.5% of sales.  This decrease was primarily driven by declines in gross margin and increased operating expenses partially from increased expenses from payroll and our Business Transformation Project.  These expense increases were partially offset by increases in gross profit dollars.  Gross profit dollars increased 3.8% in fiscal 2012 as compared to fiscal 2011, and operating expenses increased 5.9% in fiscal 2012 as compared to fiscal 2011Adjusted operating income increased 3.0%, or $60.9 million, during fiscal 2012.

 

Gross profit dollars increased in fiscal 2012 as compared to fiscal 2011 primarily due to increased sales.  Gross margin,  which is gross profit as a percentage of sales, was 18.11% in fiscal 2012, a decline of 69 basis points from the gross margin of 18.80% in fiscal 2011.  This decline in gross margin was primarily the result of product cost inflation.  Other factors contributing to our gross margin decline were competitive pressures on pricing, segment mix changes where certain of our lower margin segments grew faster than our Broadline segment and our own strategy to gain market share. 

 

Sysco’s product cost inflation was estimated as inflation of 5.5% during fiscal 2012.  Based on our product sales mix for fiscal 2012, we were most impacted by higher levels of inflation in the meat, canned and dry and frozen product categories in the range of 6% to 8%.  Our product cost inflation reached a high of 7.3% in the first quarter of fiscal 2012 and a low of 3.3% in the fourth quarter of fiscal 2012.  While we are generally able to pass through modest levels of inflation to our customers, we were unable to fully pass through these higher levels of product cost inflation with the same gross margin in these product categories without negatively impacting our customers’ business and therefore our business.  In the summer months of 2012, certain agricultural areas of the United States have experienced severe drought.  The impact of this drought is uncertain and could result in volatile input costs.  Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period.  While we cannot predict whether inflation will continue at these levels, prolonged periods of high inflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit and earnings.  Our product cost reduction initiative is designed to lower our total product costs by $250 million to $300 million annually by fiscal 2015; however we believe the impact on our product costs in fiscal 2013 will be modest.  

 

Gross profit dollars for fiscal 2012 also increased as a result of higher fuel surcharges.  Fuel surcharges were approximately $47.5 million higher in fiscal 2012 than in fiscal 2011 due to higher fuel prices incurred during fiscal 2012 and the application of fuel surcharges to a broader customer base for the entire fiscal periodAssuming that fuel prices do not greatly vary from recent levels, we expect the level of fuel surcharges in fiscal 2013 to remain consistent with those experienced in fiscal 2012.

 

Operating expenses for fiscal 2012 increased 5.9% primarily due to increased pay-related expenses, increased expenses related to our Business Transformation Project, increased fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values as compared to the prior year period.  These increases were partially offset by decreases in net company-sponsored pension costs and lower provisions related to multiemployer pension plans.    Adjusted operating expenses increased 4.1%, or $221.0 million, in fiscal 2012 over fiscal 2011.

 

Pay-related expenses, excluding labor costs associated with our Business Transformation Project, increased by $153.7 million in fiscal 2012 over fiscal 2011.  The increase was primarily due to increased sales and delivery compensation and added costs from companies acquired within the last 12 months. Sales compensation includes commissions which are driven by gross profit dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumesSince these drivers are variable in nature, increased gross profit dollars and cases volumes will increase sales and delivery compensationHowever, the impact of our productivity related initiatives could favorably impact the magnitude of this trend.  Also contributing to the increase was a restructuring charge related to severance incurred in the fourth quarter of fiscal 2012 of $6.4 million.

 

Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $193.1 million in fiscal 2012 and $102.6 million in fiscal 2011, representing an increase of $90.5 million.   The increase in fiscal 2012 resulted from increased project spending, reduced capitalization of expenditures and expenses due to the ramp up of our shared services center. We anticipate that project expenses for fiscal 2013 will continue to increase primarily due to the initiation of software amortization as the system was placed into service in August 2012.  Additionally, the majority of the expenditures forecasted for fiscal 2013 will be expensed as the company is in the deployment phase of the project.  We believe the increase in project expenses, including all pay-related expenses,

20


 

related to the Business Transformation Project in fiscal 2013 as compared to fiscal 2012 will be approximately $105 million to $155 million. 

 

Fuel costs increased by $39.8 million in fiscal 2012 over fiscal 2011 primarily due to increased contracted and market diesel prices.  Our costs per gallon increased 13.0% in fiscal 2012 over fiscal 2011.   Our activities to mitigate fuel costs include reducing miles driven by our trucks through improved routing techniques, improving fleet utilization by adjusting idling time and maximum speeds and using fuel surcharges.  We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements with a goal of mitigating a portion of the volatility in fuel prices.

 

Our fuel commitments will result in either additional fuel costs or avoided fuel costs based on the comparison of the prices on the fixed price contracts and market prices for the respective periods.  In fiscal 2012, the forward purchase commitments resulted in an estimated $20.2 million of avoided fuel costs as the fixed price contracts were generally lower than market prices for the contracted volumes.    In fiscal 2011, the forward purchase commitments resulted in an estimated $16.4 million of avoided fuel costs as the fixed price contracts were generally lower than market prices for the contracted volumes.

 

As of June 30, 2012, we had forward diesel fuel commitments totaling approximately $96 million through April 2013.  Subsequent to June 30, 2012, we entered into forward diesel fuel commitments totaling approximately $20 million for May and June 2013.  These contracts will lock in the price of approximately 35% to 45% of our fuel purchase needs for the contracted periods at prices higher than the current market price for diesel.   Assuming that fuel prices do not rise significantly over recent levels during fiscal 2013, fuel costs exclusive of any amounts recovered through fuel surcharges, are not expected to fluctuate significantly as compared to fiscal 2012.  Our estimate is based upon current, published quarterly market price projections for diesel, the cost committed to in our forward fuel purchase agreements currently in place for fiscal 2013 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 potential increases in fuel expense, including the use of fuel surcharges and overall expense management.  

 

We adjust the carrying values of our COLI policies to their cash surrender values on an ongoing basis.  The cash surrender values of these policies are largely based on the values of underlying investments, which through fiscal 2011 included publicly traded securities.  As a result, the cash surrender values of these policies fluctuated with changes in the market value of such securities.  The changes in the financial markets resulted in gains for these policies of $28.2 million in fiscal 2011.  Near the end of fiscal 2011, we reallocated all of our policies into low-risk, fixed-income securities to reduce earnings volatility and therefore our adjustments for fiscal 2012 were not significant.   Beginning with fiscal 2013, there should be no significant year-over-year impact from COLI adjustments as compared to fiscal 2013.

 

Net company-sponsored pension costs in fiscal 2012 were $27.3 million lower than in fiscal 2011The decrease in fiscal 2012 was due primarily to higher returns on assets of Sysco’s Retirement Plan obtained in fiscal 2011.    At the end of fiscal 2012, Sysco decided to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees.  Effective January 1, 2013, these employees will be eligible for additional contributions under an enhanced, defined contribution plan.  Net company-sponsored pension costs in fiscal 2013 have been determined as of the fiscal 2012 year-end measurement date and will decrease by approximately $26.5 million in fiscal 2013.  Our expenses related to our defined contribution plan will increase approximately $45 million to $55 million in fiscal 2013.  The decline in pension cost will occur evenly over fiscal 2013; however, the increased defined contribution expenses will occur in the last half of fiscal 2013 when these enhancements go into effect.  Over the long-term, we believe the changes to both plans will result in reduced volatility of retirement related expenses and a reduction in total retirement related expenses.   Absent the Retirement Plan freeze discussed above, net company-sponsored pension costs in fiscal 2013 would have increased $106.9 million instead of decreasing $26.5 million.

 

From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our future exposure to these plans.  In the last two fiscal years, we voluntary withdrew from several multiemployer plans and recorded provisions of $21.9 million in fiscal 2012 and  $41.5 million in fiscal 2011

 

We also measure our expense performance on a cost per case basis, which we seek to align with the gross profit that we are able to generate.  For our Broadline companies, our cost per case increased $0.04 per case as compared to fiscal 2011.  These increases primarily related to increased payroll costs and fuel costs discussed above. 

 

Fiscal 2011 vs. Fiscal 2010

 

Operating income decreased 2.2% in fiscal 2011 over fiscal 2010 to $1.9 billion, and as a percentage of sales, declined to 4.9% of sales.  The decrease was driven by the absence of the 53rd week in fiscal 2011, gross profit dollars growing at a slower rate than sales and operating expenses increasing faster than gross profit partially due to charge of $41.5 million from withdrawals from multiemployer pension plans.  Gross profit dollars increased 2.9% in fiscal 2011 as compared to fiscal 2010, and operating expenses increased 4.8% in fiscal 2011.  Adjusted operating income increased 2.5%, or $50.8 million, in fiscal 2011 over fiscal 2010.

 

21


 

Gross profit dollars increased in fiscal 2011 as compared to fiscal 2010 primarily due to increased sales, partially offset by the negative comparison of the additional week included in fiscal 2010.  Gross margin was 18.80% in fiscal 2011, a decline of 50 basis points from the gross margin of 19.30% in fiscal 2010.  This decline in gross margin was primarily the result of the following factors described in the paragraphs below. 

 

First, Sysco’s product cost inflation was estimated as inflation of 4.6% during fiscal 2011.  Based on our product sales mix for fiscal 2011, we were most impacted by higher levels of inflation in the dairy, meat and seafood product categories in the range of 10% to 12%.  Our largest selling product category, canned and dry, experienced inflation of 4%. 

 

Second, ongoing strategic pricing initiatives in fiscal 2011 lowered our prices to our customers in certain product categories in order to increase sales volumes.  These initiatives are being phased in over time and resulted in short-term gross profit declines as a percentage of sales, but we believe will result in long-term gross profit dollar growth due to higher sales volumes and increased market share.  We have experienced meaningful year over year volume growth with those items included in the early phases of these programs in the geographies where this program has been implemented.  We believe the long-term benefits of these strategic initiatives will result in profitable market share growth.

 

Third, gross profit dollars for fiscal 2011 increased as a result of higher fuel surcharges.  Fuel surcharges were approximately $26.0 million higher in fiscal 2011 than in the comparable prior year period due to higher fuel prices incurred during fiscal 2011 and the application of fuel surcharges to a broader customer base for a small portion of the third quarter and the entire fourth quarter. 

 

Operating expenses for fiscal 2011 increased 4.8% primarily due to higher pay-related expense, an increase in net company-sponsored pension costs, provisions for withdrawal from multiemployer pension plans and higher fuel costs as compared to the prior year period.  The impact of these operating expense increases was partially offset by a decrease in operating expenses of approximately $101.4 million resulting from the absence of the 53rd week in fiscal 2010. Adjusted operating expense increased 5.9%, or $298.8 million, in fiscal 2011 over fiscal 2010.

 

Pay-related expenses, excluding labor costs associated with our Business Transformation Project, increased by $61.1 million in fiscal 2011 over fiscal 2010.  The increase was primarily due to increased sales and delivery compensation.  Pay-related expenses from acquired companies and changes in the exchange rates used to translate our foreign sales into U.S. dollars also contributed to the increase.  Partially offsetting these increases were lower provisions for current management incentive bonuses of $13.9 million. 

 

Net company-sponsored pension costs in fiscal 2011 were $60.3 million higher than in fiscal 2010.  The increase in fiscal 2011 was due primarily to a decrease in discount rates used to calculate our projected benefit obligation and related pension expense at the end of fiscal 2010, partially offset by reduced amortization of our net actuarial loss resulting from actuarial gains from higher returns on assets of Sysco’s Retirement Plan during fiscal 2010.

 

From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our future exposure to these plans.  In fiscal years 2011 and 2010, we voluntary withdrew from several multiemployer plans and recorded provisions of $41.5 million in fiscal 2011 and  $2.9 million in fiscal 2010

 

Fuel costs increased by $33.0 million in fiscal 2011 over fiscal 2010 primarily due to increased contracted and market diesel prices.  Our costs per gallon increased 14.3% in fiscal 2011 over fiscal 2010.   Our forward fuel commitments will result in either additional fuel costs or avoided fuel costs based on the comparison of the prices on the fixed price contracts and market prices for the respective periods.  In fiscal 2011, the forward purchase commitments resulted in an estimated $16.4 million of avoided fuel costs as the fixed price contracts were generally lower than market prices for the contracted volumes.    In fiscal 2010, the forward purchase commitments resulted in an estimated $1.5 million of additional fuel costs as the fixed price contracts were higher than market prices for the contracted volumes for a portion of the fiscal year.

 

For our Broadline companies, our cost per case increased $0.11 per case as compared to fiscal 2010.  These increases primarily related to increased payroll costs, increased fuel costs and charges created by withdrawing from multiemployer plans, all of which are discussed above. 

 

Net Earnings

 

Net earnings for fiscal 2012 decreased 2.6% over the comparable prior year period.  This decrease was primarily due to changes in operating income discussed above.  Adjusted net earnings increased 4.7% during fiscal 2012. 

 

Net earnings for fiscal 2011 decreased 2.4% over the comparable prior year period.  This decrease was primarily due to the absence of the 53rd week in fiscal 2011, the factors discussed above and an increase in the effective tax rate.  The effective tax rate for fiscal 2011 was 36.96%, compared to an effective tax rate of 36.20% for fiscal 2010.  The difference between the tax rates for the two periods resulted largely from the one-time reversal of interest accruals for tax contingencies related to our settlement with the Internal Revenue Service (IRS) in the first quarter of fiscal 2010.  Adjusted net earnings increased 3.6% during fiscal 2011.

22


 

 

The effective tax rate for fiscal 2012 was 37.13%.    Indefinitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate.

 

The effective tax rate of 36.96% for fiscal 2011 was favorably impacted primarily by two items.  First, we recorded a tax benefit of approximately $17.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.  Second, we adjust the carrying values of our COLI policies to their cash surrender values.  The gain of $28.2 million recorded in fiscal 2011 was primarily non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.1 million.   Partially offsetting these favorable impacts was the recording of $9.3 million in tax and interest related to various federal, foreign and state uncertain tax positions.

 

The effective tax rate of 36.20% for fiscal 2010 was favorably impacted primarily by two items.  First, we recorded an income tax benefit of approximately $29.0 million resulting from the one-time reversal of a previously accrued liability related to the settlement with the IRS (See Note 18, “Income Taxes” for additional discussion).  Second, the gain of $21.6 million recorded to adjust the carrying value of COLI policies to their cash surrender values in fiscal 2010 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $8.3 million.

 

 Earnings Per Share

 

Basic and diluted earnings per share in fiscal 2012 were $1.91 and $1.90, respectively.  This represents a 2.6% decrease from the comparable prior year period amount for basic earnings per share of $1.96 per share and a 3.1% decrease from the comparable prior year period amount for diluted earnings per share of $1.96.  This decrease was primarily the result of the factors discussed above.    Adjusted diluted earnings per share was $2.13 in fiscal 2012 and $2.04 in fiscal 2011, or an increase of 4.4%.  

 

Basic and diluted earnings per share decreased 1.5% in fiscal 2011 from the prior year.  This decrease was primarily the result of the absence of the 53rd week in fiscal 2011 and the factors discussed above, as well as a net reduction in shares outstanding.  The net reduction in both average and diluted shares outstanding was primarily due to share repurchases which occurred during the first 26 weeks of fiscal 2011.  Adjusted diluted earnings per share were $2.04 in fiscal 2011 and $1.95 in fiscal 2010, or an increase of 4.6%. 

 

Non-GAAP Reconciliations

 

Sysco’s results of operations are impacted by costs from our multi-year Business Transformation Project (BTP), significant charges from the withdrawal from a multiemployer pension plan (MEPP), restructuring charges and recognized tax benefits.  Additionally, near the end of fiscal 2011, we reallocated all of our investments in our COLI policies into low-risk, fixed-income securities and therefore we do not expect significant volatility in operating expenses, operating income, net earnings and diluted earnings per share in future periods related to these policies.  We experienced significant gains in these policies during fiscal 2011.  Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove the impact of the Business Transformation Project expenses, multiemployer pension plan charges, restructuring charges, COLI gains and tax benefits provides an important perspective with respect to underlying business trends and results and provides meaningful supplemental information to both management and investors that is indicative of the performance of the company’s underlying operations and facilitates comparison on a year-over year basis.    

 

In addition, Sysco’s fiscal year ends on the Saturday nearest to June 30th.  This resulted in a 52-week year ending June 30, 2012 for fiscal 2012, a 52-week year ending July 2, 2011 for fiscal 2011 and a 53-week year ending July 3, 2010 for fiscal 2010.  Because the fourth quarter of fiscal 2010 contained an additional week as compared to fiscal 2011, our results of operations for fiscal 2010 are not directly comparable to fiscal 2011.  Management believes that adjusting the fiscal 2010 results of operations for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis.  As a result, in the non-GAAP reconciliation below for fiscal 2011 compared to fiscal 2010, in addition to the specific line item impacts noted above, operating items have been adjusted by one-fourteenth of the total metric for the fourth quarter of fiscal 2010.  Failure to make these adjustments would cause the year-over-year changes in certain metrics such as sales, operating income, net earnings and diluted earnings per share to be overstated, whereas in certain cases, a metric may actually have increased rather than declined or declined rather than increased on a more comparable year-over-year basis. 

 

The company uses these non-GAAP measures when evaluating its financial results as well as for internal planning and forecasting purposes.  These financial measures should not be used as a substitute in assessing the company’s results of operations for periods presented.  An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.  As a result, in the tables below, each period presented is adjusted to remove expenses related to the Business Transformation Project, significant charges incurred from the withdrawal from a multiemployer pension plan, restructuring charges, gains recorded on the adjustments to the carrying value of COLI policies and to remove the impact of tax benefits in fiscal 2011.  In addition, fiscal 2010 results are adjusted to remove the estimate impact of the 53rd week. 

23


 

Set forth below is a reconciliation of actual operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for fiscal 2012 and fiscal 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Change in Dollars

 

% Change

 

 

(In thousands, except for share and per share data)

Operating expenses (GAAP)

$

5,785,945 

 

$

5,463,210 

 

$

322,735 

 

5.9 

%

Impact of BTP costs

 

(193,126)

 

 

(102,623)

 

 

(90,503)

 

88.2 

 

Impact of MEPP charge

 

(21,899)

 

 

(41,544)

 

 

19,645 

 

(47.3)

 

Impact of restructuring charge

 

(6,415)

 

 

 -

 

 

(6,415)

 

 

 

Impact of COLI

 

3,721 

 

 

28,197 

 

 

(24,476)

 

(86.8)

 

Adjusted operating expenses (Non-GAAP)

$

5,568,226 

 

$

5,347,240 

 

$

220,986 

 

4.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (GAAP)

$

1,890,632 

 

$

1,931,502 

 

$

(40,870)

 

(2.1)

%

Impact of BTP costs

 

193,126 

 

 

102,623 

 

 

90,503 

 

88.2 

 

Impact of MEPP charge

 

21,899 

 

 

41,544 

 

 

(19,645)

 

(47.3)

 

Impact of restructuring charge

 

6,415 

 

 

 -

 

 

6,415 

 

 

 

Impact of COLI

 

(3,721)

 

 

(28,197)

 

 

24,476 

 

(86.8)

 

Adjusted operating income (Non-GAAP)

$

2,108,351 

 

$

2,047,472 

 

$

60,879 

 

3.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (GAAP)

$

1,121,585 

 

$

1,152,030 

 

$

(30,445)

 

(2.6)

%

Impact of BTP costs (net of tax) (1)

 

121,416 

 

 

64,694 

 

 

56,722 

 

87.7 

 

Impact of MEPP charge (net of tax) (1)

 

13,768 

 

 

26,189 

 

 

(12,421)

 

(47.4)

 

Impact of restructuring charge (net of tax) (1)

 

4,033 

 

 

 -

 

 

4,033 

 

 

 

Impact of COLI

 

(3,721)

 

 

(28,197)

 

 

24,476 

 

(86.8)

 

Impact of tax benefits

 

 -

 

 

(14,032)

 

 

14,032 

 

0.0 

 

Adjusted net earnings (Non-GAAP)

$

1,257,081 

 

$

1,200,684 

 

$

56,397 

 

4.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share (GAAP)

$

1.90 

 

$

1.96 

 

$

(0.06)

 

(3.1)

%

Impact of BTP costs (2)

 

0.21 

 

 

0.11 

 

 

0.10 

 

90.9 

 

Impact of MEPP charge (2)

 

0.02 

 

 

0.04 

 

 

(0.02)

 

(50.0)

 

Impact of restructuring charge (2)

 

0.01 

 

 

 -

 

 

0.01 

 

 

 

Impact of COLI (2)

 

(0.00)

 

 

(0.05)

 

 

0.05 

 

 

 

Impact of tax benefits (2)

 

 -

 

 

(0.02)

 

 

0.02 

 

 

 

Adjusted diluted earnings per share (Non-GAAP)

$

2.13 

 

$

2.04 

 

$

0.09 

 

4.4 

%

 

 

 

 

 

 

 

 

 

 

 

 

Diluted shares outstanding

 

588,991,441 

 

 

588,691,546 

 

 

 

 

 

 

 

 

(1)     Tax impact of adjustments for Business Transformation Project, multiemployer pension plan expenses, restructuring charges was $82.2 million and $53.3 million for fiscal 2012 and 2011, respectively.

 

 

(2    Individual components of diluted earnings per share may not sum to the total adjusted diluted earnings due to rounding.

 

24


 

Set forth below is a reconciliation of actual sales, operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for fiscal 2011 and fiscal 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

(53 Weeks)

 

Change in Dollars

 

% Change

 

 

(In thousands, except for share and per share data)

Sales (GAAP)

$

39,323,489 

 

$

37,243,495 

 

$

2,079,994 

 

5.6 

%

Impact of 53rd week

 

 -

 

 

739,177 

 

 

(739,177)

 

 

 

Adjusted sales (Non-GAAP)

$

39,323,489 

 

$

36,504,318 

 

$

2,819,171 

 

7.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (GAAP)

$

5,463,210 

 

$

5,212,439 

 

$

250,771 

 

4.8 

%

Impact of 53rd week

 

 -

 

 

(101,442)

 

 

101,442 

 

 

 

Impact of BTP costs

 

(102,623)

 

 

(81,140)

 

 

(21,483)

 

26.5 

 

Impact of MEPP charge

 

(41,544)

 

 

(2,944)

 

 

(38,600)

 

 

 

Impact of COLI

 

28,197 

 

 

21,554 

 

 

6,643 

 

30.9 

 

Adjusted operating expenses (Non-GAAP)

$

5,347,240 

 

$

5,048,467 

 

$

298,773 

 

5.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (GAAP)

$

1,931,502 

 

$

1,975,868 

 

$

(44,366)

 

(2.2)

%

Impact of 53rd week

 

 -

 

 

(41,720)

 

 

41,720 

 

 

 

Impact of BTP costs

 

102,623 

 

 

81,140 

 

 

21,483 

 

26.5 

 

Impact of MEPP charge

 

41,544 

 

 

2,944 

 

 

38,600 

 

 

 

Impact of COLI

 

(28,197)

 

 

(21,544)

 

 

(6,653)

 

30.9 

 

Adjusted operating income (Non-GAAP)

$

2,047,472 

 

$

1,996,688 

 

$

50,784 

 

2.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (GAAP)

$

1,152,030 

 

$

1,179,983 

 

$

(27,953)

 

(2.4)

%

Impact of 53rd week

 

 -

 

 

(24,127)

 

 

24,127 

 

 

 

Impact of BTP costs (net of tax) (1)

 

64,694 

 

 

51,767 

 

 

12,927 

 

25.0 

 

Impact of MEPP charge (net of tax) (1)

 

26,189 

 

 

1,878 

 

 

24,311 

 

 

 

Impact of COLI

 

(28,197)

 

 

(21,544)

 

 

(6,653)

 

30.9 

 

Impact of tax benefits

 

(14,032)

 

 

(28,895)

 

 

14,863 

 

(51.4)

 

Adjusted net earnings (Non-GAAP)

$

1,200,684 

 

$

1,159,062 

 

$

41,622 

 

3.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share (GAAP)

$

1.96