10-Q 1 syy-20120929x10q.htm 10-Q 96336456dde44f0

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

________________ 

Form 10-Q 

 

 

 

(Mark One)

 

 

R

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

 

 

 

For the quarterly period ended September 29, 2012

 

 

 

 

 

 

£

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

 

Commission File Number 1-6544 

________________ 

Blue_NO_tag_R_500x194 

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 

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 

 

 

 

 

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 

 

587,803,115 shares of common stock were outstanding as of October  27, 2012.

 

  

 

 

 

 

 


 

 

 

 

TABLE OF CONTENTS 

 

 

 

 

 

 

Page No.

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

 

 

 

Signatures

 

36

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 


 

 

 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED BALANCE SHEETS 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept. 29, 2012

 

Jun. 30, 2012

 

Oct. 1, 2011

 

(unaudited)

 

 

 

 

(unaudited)

ASSETS

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

548,415 

 

$

688,867 

 

$

284,101 

Accounts and notes receivable, less  

    allowances of $55,153, $42,919, and $53,796

 

3,193,389 

 

 

2,966,624 

 

 

3,061,145 

Inventories

 

2,370,864 

 

 

2,178,830 

 

 

2,137,451 

Deferred income taxes

 

134,586 

 

 

134,503 

 

 

135,962 

Prepaid expenses and other current assets

 

86,396 

 

 

80,713 

 

 

77,575 

Prepaid income taxes

 

-

 

 

35,271 

 

 

-

Total current assets

 

6,333,650 

 

 

6,084,808 

 

 

5,696,234 

Plant and equipment at cost, less depreciation

 

3,950,668 

 

 

3,883,750 

 

 

3,615,361 

Other assets

 

 

 

 

 

 

 

 

Goodwill

 

1,726,350 

 

 

1,665,611 

 

 

1,621,257 

Intangibles, less amortization

 

125,520 

 

 

113,571 

 

 

108,610 

Restricted cash

 

145,233 

 

 

127,228 

 

 

123,773 

Other assets

 

206,412 

 

 

220,004 

 

 

281,628 

Total other assets

 

2,203,515 

 

 

2,126,414 

 

 

2,135,268 

Total assets

$

12,487,833 

 

$

12,094,972 

 

$

11,446,863 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

 

 

 

Notes payable

$

-

 

$

-

 

$

5,350 

Accounts payable

 

2,343,903 

 

 

2,209,469 

 

 

2,164,695 

Accrued expenses

 

845,695 

 

 

909,144 

 

 

817,703 

Accrued income taxes

 

159,014 

 

 

50,316 

 

 

384,613 

Current maturities of long-term debt

 

254,262 

 

 

254,650 

 

 

206,329 

Total current liabilities

 

3,602,874 

 

 

3,423,579 

 

 

3,578,690 

Other liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

2,764,853 

 

 

2,763,688 

 

 

2,384,986 

Deferred income taxes

 

111,649 

 

 

115,166 

 

 

212,583 

Other long-term liabilities

 

1,114,276 

 

 

1,107,499 

 

 

616,349 

Total other liabilities

 

3,990,778 

 

 

3,986,353 

 

 

3,213,918 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Preferred stock, par value $1 per share  

    Authorized 1,500,000 shares, issued none

 

-

 

 

-

 

 

-

Common stock, par value $1 per share 

    Authorized 2,000,000,000 shares, issued  

    765,174,900 shares

 

765,175 

 

 

765,175 

 

 

765,175 

Paid-in capital

 

939,249 

 

 

939,179 

 

 

891,645 

Retained earnings

 

8,302,859 

 

 

8,175,230 

 

 

7,831,330 

Accumulated other comprehensive loss

 

(613,975)

 

 

(662,866)

 

 

(352,107)

Treasury stock at cost, 177,931,615, 

    179,228,383 and 177,669,492 shares

 

(4,499,127)

 

 

(4,531,678)

 

 

(4,481,788)

Total shareholders' equity

 

4,894,181 

 

 

4,685,040 

 

 

4,654,255 

Total liabilities and shareholders' equity

$

12,487,833 

 

$

12,094,972 

 

$

11,446,863 

 

Note: The June 30, 2012 balance sheet has been derived from the audited financial statements at that date. 

See Notes to Consolidated Financial Statements

 

1 

 


 

 

 

  

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)  

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sept. 29, 2012

 

Oct. 1, 2011

 

 

 

 

 

 

 

Sales

 

$

11,086,916 

 

$

10,586,390 

Cost of sales

 

 

9,083,372 

 

 

8,638,790 

Gross profit

 

 

2,003,544 

 

 

1,947,600 

Operating expenses

 

 

1,524,762 

 

 

1,438,260 

Operating income

 

 

478,782 

 

 

509,340 

Interest expense

 

 

30,868 

 

 

29,474 

Other expense (income), net

 

 

(2,477)

 

 

250 

Earnings before income taxes

 

 

450,391 

 

 

479,616 

Income taxes

 

 

163,793 

 

 

176,963 

Net earnings

 

$

286,598 

 

$

302,653 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

Basic earnings per share

 

$

0.49 

 

$

0.51 

Diluted earnings per share

 

 

0.49 

 

 

0.51 

 

 

 

 

 

 

 

Average shares outstanding

 

 

587,757,832 

 

 

592,003,631 

Diluted shares outstanding

 

 

589,838,819 

 

 

593,449,101 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.27 

 

$

0.26 

 

 

See Notes to Consolidated Financial Statements

 

  

 

2 

 


 

 

 

 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sept. 29, 2012

 

Oct. 1, 2011

 

 

 

 

 

 

 

Net earnings

 

$

286,598 

 

$

302,653 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

36,160 

 

 

(102,267)

Items presented net of tax:

 

 

 

 

 

 

Amortization of cash flow hedges

 

 

97 

 

 

107 

Amortization of prior service cost

 

 

926 

 

 

773 

Amortization of actuarial loss (gain), net

 

 

11,686 

 

 

9,215 

Amortization of transition obligation

 

 

22 

 

 

23 

Total other comprehensive income (loss)

 

 

48,891 

 

 

(92,149)

 

 

 

 

 

 

 

Comprehensive income

 

$

335,489 

 

$

210,504 

 

 

See Notes to Consolidated Financial Statements

 

3 

 


 

 

 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED CASH FLOWS (Unaudited) 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sept. 29, 2012

 

Oct. 1, 2011

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

286,598 

 

$

302,653 

Adjustments to reconcile net earnings to cash provided by operating 

    activities:

 

 

 

 

 

 

Share-based compensation expense

 

 

10,725 

 

 

9,842 

Depreciation and amortization

 

 

120,664 

 

 

99,641 

Deferred income taxes

 

 

(28,638)

 

 

(290,671)

Provision for losses on receivables

 

 

6,782 

 

 

7,075 

Other non-cash items

 

 

241 

 

 

226 

Additional investment in certain assets and liabilities, net of effect of 

    businesses acquired:

 

 

 

 

 

 

(Increase) in receivables

 

 

(206,440)

 

 

(195,451)

(Increase) in inventories

 

 

(176,608)

 

 

(82,322)

(Increase) in prepaid expenses and other current assets

 

 

(6,192)

 

 

(6,347)

Increase (decrease) in accounts payable

 

 

113,695 

 

 

(784)

(Decrease) in accrued expenses

 

 

(72,638)

 

 

(40,867)

Increase in accrued income taxes

 

 

142,649 

 

 

444,905 

Decrease (increase) in other assets

 

 

5,183 

 

 

(3,448)

Increase in other long-term liabilities

 

 

17,188 

 

 

10,895 

Excess tax benefits from share-based compensation arrangements

 

 

(8)

 

 

(4)

Net cash provided by operating activities

 

 

213,201 

 

 

255,343 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to plant and equipment

 

 

(155,673)

 

 

(226,547)

Proceeds from sales of plant and equipment

 

 

1,393 

 

 

2,092 

Acquisition of businesses, net of cash acquired

 

 

(60,161)

 

 

(36,118)

(Increase) in restricted cash

 

 

(18,005)

 

 

(13,257)

Net cash used for investing activities

 

 

(232,446)

 

 

(273,830)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Bank and commercial paper borrowings (repayments), net

 

 

-

 

 

(68,625)

Other debt borrowings

 

 

1,106 

 

 

984 

Other debt repayments

 

 

(1,423)

 

 

(2,165)

Proceeds from common stock reissued from treasury for share-based  

    compensation awards

 

 

36,221 

 

 

31,216 

Treasury stock purchases

 

 

(2,139)

 

 

(133,370)

Dividends paid

 

 

(158,242)

 

 

(153,790)

Excess tax benefits from share-based compensation arrangements

 

 

 

 

Net cash used for financing activities

 

 

(124,469)

 

 

(325,746)

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

3,262 

 

 

(11,431)

 

 

 

 

 

 

 

Net (decrease) in cash and cash equivalents

 

 

(140,452)

 

 

(355,664)

Cash and cash equivalents at beginning of period

 

 

688,867 

 

 

639,765 

Cash and cash equivalents at end of period

 

$

548,415 

 

$

284,101 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

54,107 

 

$

52,765 

Income taxes

 

 

55,939 

 

 

21,913 

 

See Notes to Consolidated Financial Statements

 

  

 

4 

 


 

 

 

Sysco Corporation and its Consolidated Subsidiaries  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 

 

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

 

1.  BASIS OF PRESENTATION 

 

The consolidated financial statements have been prepared by the company, without audit, with the exception of the June 30,  2012 consolidated balance sheet which was taken from the audited financial statements included in the company's Fiscal 2012 Annual Report on Form 10-K.  The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made. 

 

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2012 Annual Report on Form 10-K 

 

A review of the financial information herein has been made by Ernst & Young LLP, independent auditors, in accordance with established professional standards and procedures for such a review.  A report from Ernst & Young LLP concerning their review is included as Exhibit 15.1 to this Form 10-Q. 

 

2.  CHANGES IN ACCOUNTING 

 

Testing Goodwill for Impairment 

 

In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment.”  This update amends Accounting Standards Codification 350, “Intangibles–Goodwill and Other” to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  In addition, the update provided a revised list of factors that should be considered when evaluating whether a potential goodwill impairment may have occurred at an interim period.  The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption was permitted.  The adoption of this update in the first quarter of fiscal 2013 did not result in a material change to the company’s interim consideration of potential goodwill impairment.  Sysco is evaluating the impact this update may have on its annual goodwill impairment testing in the fourth quarter of fiscal 2013. 

 

3.  FAIR VALUE MEASUREMENTS 

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).  The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The three levels of the fair value hierarchy are as follows: 

·

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets; 

·

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and 

·

Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. 

 

Sysco’s policy is to invest in only high-quality investments.  Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less.   Restricted cash consists of investments in high-quality money market funds.    

 

5 

 


 

 

 

 

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. 

·

Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value.  These are included within cash equivalents as a Level 2 measurement in the tables below. 

·

Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange.  These are included within cash equivalents and restricted cash as Level 1 measurements in the tables below. 

·

The interest rate swap agreements, discussed further in Note 4, “Derivative Financial Instruments,” are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates.  These are included within prepaid expenses and other current assets and other assets as Level 2 measurements in the tables below. 

 

The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of September 29, 2012, June 30, 2012 and October 1, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Sept. 29, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

134,935 

 

$

196,383 

 

$

 -

 

$

331,318 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

1,598 

 

 

 -

 

 

1,598 

Restricted cash

 

145,233 

 

 

 -

 

 

 -

 

 

145,233 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

5,961 

 

 

 -

 

 

5,961 

Total assets at fair value

$

280,168 

 

$

203,942 

 

$

 -

 

$

484,110 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Jun. 30, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

228,310 

 

$

248,714 

 

$

 -

 

$

477,024 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

2,475 

 

 

 -

 

 

2,475 

Restricted cash

 

127,228 

 

 

 -

 

 

 -

 

 

127,228 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

6,219 

 

 

 -

 

 

6,219 

Total assets at fair value

$

355,538 

 

$

257,408 

 

$

 -

 

$

612,946 

 

6 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Oct. 1, 2011

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

 -

 

$

83,808 

 

$

 -

 

$

83,808 

Restricted cash

 

123,773 

 

 

 -

 

 

 -

 

 

123,773 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

 -

 

 

13,246 

 

 

 -

 

 

13,246 

Total assets at fair value

$

123,773 

 

$

97,054 

 

$

 -

 

$

220,827 

 

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short‑term maturities of these instruments. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement.  The fair value of total debt approximated $3,551.3 million, $3,539.3 million and $3,015.6 million as of September 29, 2012, June 30, 2012 and October 1, 2011, respectively. The carrying value of total debt was $3,019.1 million, $3,018.3 million and $2,596.7 million as of September 29, 2012, June 30, 2012 and October 1, 2011, respectively. 

 

4.  DERIVATIVE FINANCIAL INSTRUMENTS 

 

Sysco manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this position. The company does not use derivative financial instruments for trading or speculative purposes. 

 

In fiscal 2010, the company entered into two interest rate swap agreements that effectively converted $250.0 million of fixed rate debt maturing in fiscal 2013 and $200.0 million of fixed rate debt maturing in fiscal 2014 to floating rate debt.  These transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure.  These transactions  were designated as fair value hedges since the swaps hedge against the changes in fair value of fixed rate debt resulting from changes in interest rates 

 

The location and the fair value of derivative instruments in the consolidated balance sheet as of September 29, 2012, June 30, 2012 and October 1, 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

(In thousands)

Fair value hedge relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

 

 

 

 

 

 

 

Sept. 29, 2012

Prepaid expenses and
other current assets

 

$

1,598 

 

N/A

 

N/A

Sept. 29, 2012

Other assets

 

 

5,961 

 

N/A

 

N/A

Jun. 30, 2012

Prepaid expenses and
other current assets

 

 

2,475 

 

N/A

 

N/A

Jun. 30, 2012

Other assets

 

 

6,219 

 

N/A

 

N/A

Oct. 1, 2011

Other assets

 

 

13,246 

 

N/A

 

N/A

 

 

7 

 


 

 

 

 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the first quarter of fiscal 2013 and fiscal 2012 presented on a pre-tax basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of (Gain) or Loss  

Recognized in Income

 

Amount of (Gain) or Loss 

Recognized in Income

 

 

 

 

13-Week Period Ended

 

 

 

 

Sept. 29, 2012

 

Oct. 1, 2011

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(2,050)

 

$

(487)

 

 

 

 

 

 

 

 

 

Cash Flow  Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

 

157 

 

 

174 

 

 

Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate.  Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the first quarter of fiscal 2013 and 2012.  The interest rate swaps do not contain credit-risk-related contingent features. 

 

5.  DEBT 

 

As of September 29, 2012, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $95.0 million, of which none was outstanding. 

 

Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s United States and Canadian commercial paper programs.  The facility provides for borrowings in both United States and Canadian dollars.  Borrowings by Sysco International, ULC under the agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by the wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures.   The facility in the amount of $1,000.0 million expires on December 29, 2016, but is subject to extension.  There were no commercial paper issuances outstanding as of September 29, 2012.    

 

In September 2012, the company’s Irish subsidiary, Pallas Foods, entered into a €75.0 million (Euro) multicurrency revolving credit facility, which will be utilized for capital needs for the company’s European subsidiaries.  This facility provides for unsecured borrowings and expires September 25, 2013, but is subject to extension.  There were no outstanding borrowings under this facility as of September 29, 2012. 

 

During the first quarter of fiscal 2013,  there were no commercial paper issuances or short-term bank borrowings. 

 

  

 

 

8 

 


 

 

6COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS 

 

The components of net company-sponsored benefit cost for the 13-week periods presented are as follows.  The caption “Pension Benefits” in the table below includes both the company-sponsored qualified pension plan (Retirement Plan) and the Supplemental Executive Retirement Plan. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Sept. 29, 2012

 

Oct. 1, 2011

 

Sept. 29, 2012

 

Oct. 1, 2011

 

(In thousands)

Service cost

$

17,780 

 

$

27,055 

 

$

135 

 

$

114 

Interest cost

 

37,700 

 

 

36,879 

 

 

154 

 

 

158 

Expected return on plan assets

 

(42,801)

 

 

(40,401)

 

 

 -

 

 

 -

Amortization of prior service cost

 

1,461 

 

 

1,201 

 

 

42 

 

 

54 

Amortization of actuarial loss (gain)

 

19,022 

 

 

15,041 

 

 

(51)

 

 

(83)

Amortization of transition obligation

 

 -

 

 

 -

 

 

35 

 

 

38 

Net periodic benefit cost

$

33,162 

 

$

39,775 

 

$

315 

 

$

281 

 

 

At the end of fiscal 2012, Sysco approved a plan to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all United States-based salaried and non-union hourly employees.  Effective January 1, 2013, these employees will be eligible for additional contributions under the company’s defined contribution 401(k) plan.  The measurements for the Retirement Plan at June 30, 2012 and the resulting expense for fiscal 2013 included the impact of the freeze. 

 

Sysco’s contributions to its company-sponsored defined benefit plans were $5.6 million and $5.7 million during the first quarter of fiscal 2013 and fiscal 2012, respectively. 

 

7.  MULTIEMPLOYER EMPLOYEE BENEFIT PLANS 

 

Sysco contributes to several multiemployer defined benefit pension plans in the United States and Canada based on obligations arising under collective bargaining agreements covering union-represented employees. Sysco does not directly manage these multiemployer plans, which are generally managed by boards of trustees, half of whom are appointed by the unions and the other half by other employers contributing to the plan.   

 

Based upon the information available from plan administrators, management believes that several of these multiemployer plans are underfunded.  In addition, pension-related legislation in the United States requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding.  As a result, Sysco expects its contributions to these plans to increase in the future.  In addition, if a United States multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund.   

 

Withdrawal Activity 

 

Sysco has voluntarily withdrawn from various multiemployer pension plans.  Total withdrawal liability provisions recorded were zero in the first quarter of fiscal 2013 and $4.5 million in the first quarter of fiscal 2012.  As of September 29, 2012, June 30, 2012 and October 1, 2011, Sysco had approximately $30.7 million, $30.7 million and $46.9 million, respectively, in liabilities recorded related to certain multiemployer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred.   Recorded withdrawal liabilities are estimated at the time of withdrawal based on the most recently available valuation and participant data for the respective plans; amounts are subsequently adjusted to the period of payment to reflect any changes to these estimates.  If any of these plans were to undergo a mass withdrawal, as defined by the Pension Benefit Guaranty Corporation, within a two year time frame from the point of our withdrawal, Sysco could have additional liability.  The company does not currently believe any mass withdrawals are probable to occur in the applicable two year time frame relating to the plans from which Sysco has voluntarily withdrawn. 

 

9 

 


 

 

 

Potential Withdrawal Liability 

 

Under current law regarding multiemployer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multiemployer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multiemployer plan’s unfunded vested liabilities.  Generally, Sysco does not have the greatest share of liability among the participants in any of the plans in which it participates.  Sysco believes that one of the above-mentioned events is reasonably possible for certain plans in which it participates and estimates its share of withdrawal liability for these plans could have been as much as $115.0 million as of September 29, 2012.  This estimate excludes plans for which Sysco has recorded withdrawal liabilities or where the likelihood of the above-mentioned events is deemed remote.  This estimate is based on the information available from plan administrators, which has valuation dates ranging from December 31, 2009 to December 31, 2011. The majority of these plans have a valuation date of calendar year-end and therefore the estimate results from plans for which the valuation date was December 31, 2011; therefore, the company’s estimate reflects the condition of the financial markets as of that date.  Due to the lack of current information, management believes Sysco’s current share of the withdrawal liability could materially differ from this estimate. 

 

8.  EARNINGS PER SHARE 

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sept. 29, 2012

 

Oct. 1, 2011

 

 

(In thousands, except for share

and per share data)

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net earnings

 

$

286,598 

 

$

302,653 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted-average basic shares outstanding

 

 

587,757,832 

 

 

592,003,631 

Dilutive effect of share-based awards

 

 

2,080,987 

 

 

1,445,470 

Weighted-average diluted shares outstanding

 

 

589,838,819 

 

 

593,449,101 

 

 

 

 

 

 

 

Basic earnings per share:

 

$

0.49 

 

$

0.51 

 

 

 

 

 

 

 

Diluted earnings per share:

 

$

0.49 

 

$

0.51 

 

The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 37,000,000 and 50,000,000 for the first quarter of fiscal 2013 and fiscal 2012, respectively.   

 

9SHARE-BASED COMPENSATION  

 

Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employees’ Stock Purchase Plan, and various non‑employee director plans. 

 

Stock Incentive Plans 

 

In the first quarter of fiscal 2013, options to purchase 18,750 shares were granted to employees from the 2007 Stock Incentive Plan. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per share of options granted during the first quarter of fiscal 2013 was $3.76. 

 

In the first quarter of fiscal 2013,  2,552 restricted stock units were granted to employees from the 2007 Stock Incentive Plan. Some of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit

10 

 


 

 

 

award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per share of restricted stock units granted during the first quarter of fiscal 2013 was $29.39. 

 

Employees' Stock Purchase Plan 

 

Plan participants purchased 398,165 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first quarter of fiscal 2013. 

 

The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees' Stock Purchase Plan was $4.47 during the first quarter of fiscal 2013. The fair value of the stock purchase rights is estimated as the difference between the stock price and the employee purchase price. 

 

All Share-Based Payment Arrangements 

 

The total share-based compensation cost that has been recognized in results of operations was $10.7 million and $9.8 million for the first quarter of fiscal 2013 and fiscal 2012, respectively. 

 

As of September 29, 2012, there was $53.6 million of total unrecognized compensation cost related to share-based compensation arrangements.  This cost is expected to be recognized over a weighted-average period of 2.24 years. 

 

10.  INCOME TAXES 

 

Uncertain Tax Positions 

 

As of September 29, 2012, the gross amount of unrecognized tax benefits was $63.4 million and the gross amount of liability for accrued interest related to unrecognized tax benefits was  $35.1 million. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance.  Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions.  At this time, an estimate of the range of the reasonably possible change cannot be made. 

 

 Effective Tax Rates 

 

The effective tax rate of 36.37% for the first quarter of fiscal 2013 was favorably impacted by the recording of $3.7 million in net tax benefit related to various federal, foreign and state uncertain tax positions.  Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had also the impact of reducing the effective tax rate. 

 

The effective tax rate of 36.90% for the first quarter of fiscal 2012 was favorably impacted by a decrease in a tax provision for a foreign tax liability of approximately $3.6 million resulting from changes in exchange rates.  Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate. 

 

Other 

 

The determination of the company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various United States federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. 

 

  

 

11 

 


 

 

11.  ACQUISITIONS 

 

During the first quarter of fiscal 2013, in the aggregate, the company paid cash of $60.2 million for acquisitions made during fiscal 2013 and for contingent consideration related to operations acquired in previous fiscal years.   Acquisitions in the first quarter of fiscal 2013 were immaterial, individually and in the aggregate, to the consolidated financial statements. 

 

Certain acquisitions involve contingent consideration typically payable over periods up to five years only in the event that certain operating results are attained or certain outstanding contingencies are resolved.  As of September 29, 2012, aggregate contingent consideration amounts outstanding relating to acquisitions was $79.9 million, of which $36.4 million could result in the recording of additional goodwill. 

 

12.  COMMITMENTS AND CONTINGENCIES 

 

Legal Proceedings 

 

Sysco is engaged in various legal proceedings which have arisen but have not been fully adjudicated.  The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable.  When probable, the losses have been accrued.  Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company.  However, the final results of legal proceedings cannot be predicted with certainty and if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods. 

 

Fuel Commitments 

 

Sysco routinely enters into forward purchase commitments for a portion of its projected diesel fuel requirements.  As of September 29, 2012, outstanding forward diesel fuel purchase commitments totaled approximately $96.4 million at a fixed price through August 2013. 

 

Other Commitments 

 

Sysco has committed with various third party service providers to provide information technology services. The services have been committed for periods up to fiscal 2016 and may be extended.  As of September 29, 2012, the total remaining cost of the services over that period is expected to be approximately $477.5 million. A portion of this amount may be reduced by Sysco utilizing less than estimated resources and can be increased by Sysco utilizing more than estimated resources.  Certain agreements allow adjustments for inflation. Sysco may also cancel a portion or all of the services provided subject to termination fees which decrease over time. If Sysco were to terminate all of the services in fiscal 2013, the estimated termination fees incurred in fiscal 2013 would be approximately $35.9 million.

 

13.  BUSINESS SEGMENT INFORMATION 

 

The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise.    The Broadline reportable segment is an aggregation of the company’s United States, Canadian and European Broadline segments.  Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers and also provide custom-cut meat operations.  SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.  "Other" financial information is attributable to the company's other operating segments, including the company's specialty produce and lodging industry segments, a company that distributes specialty imported products and a company that distributes to international customers.   

 

12 

 


 

 

 

The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements.  Intersegment sales represent specialty produce and imported specialty products distributed by the Broadline and SYGMA operating companies. Management evaluates the performance of each of the operating segments based on its respective operating income results.  Corporate expenses generally include all expenses of the corporate office and Sysco’s shared service center.  These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project. 

 

The following tables set forth certain financial information for Sysco’s business segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

Sept. 29, 2012

 

Oct. 1, 2011

Sales:

(In thousands)

Broadline

$

9,057,664 

 

$

8,658,521 

SYGMA

 

1,420,755 

 

 

1,384,469 

Other

 

660,601 

 

 

588,561 

Intersegment sales

 

(52,104)

 

 

(45,161)

Total

$

11,086,916 

 

$

10,586,390 

 

 

 

 

 

 

 

13-Week Period Ended

 

Sept. 29, 2012

 

Oct. 1, 2011

Operating income:

(In thousands)

Broadline

$

642,836 

 

$

624,115 

SYGMA

 

12,085 

 

 

15,691 

Other

 

22,359 

 

 

24,485 

Total segments

 

677,280 

 

 

664,291 

Corporate expenses

 

(198,498)

 

 

(154,951)

Total operating income

 

478,782 

 

 

509,340 

Interest expense

 

30,868 

 

 

29,474 

Other expense (income), net

 

(2,477)

 

 

250 

Earnings before income taxes

$

450,391 

 

$

479,616 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept. 29, 2012

 

Jun. 30, 2012

 

Oct. 1, 2011

Assets:

 

 

 

(In thousands)

Broadline

 

 

 

$

8,573,548 

 

$

8,025,677 

 

$

7,482,833 

SYGMA

 

 

 

 

467,855 

 

 

475,877 

 

 

448,525 

Other

 

 

 

 

910,434 

 

 

877,207 

 

 

826,334 

Total segments

 

 

 

 

9,951,837 

 

 

9,378,761 

 

 

8,757,692 

Corporate

 

 

 

 

2,535,996 

 

 

2,716,211 

 

 

2,689,171 

Total

 

 

 

$

12,487,833 

 

$

12,094,972 

 

$

11,446,863 

 

 

 

13 

 


 

 

14.  SUPPLEMENTAL GUARANTOR INFORMATION – SUBSIDIARY GUARANTEES 

 

On January 19, 2011, the wholly-owned United States Broadline (U.S. Broadline) subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation.   As of September 29, 2012, Sysco had a total of $2,975.0 million in senior notes and debentures outstanding that are covered by these guarantees. 

 

The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors  (the majority of the company’s U.S. Broadline subsidiaries), and all other nonguarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheet

 

Sept. 29, 2012

 

Sysco

 

U.S. 

Broadline  

Subsidiaries

 

Other 

Non-Guarantor 

Subsidiaries

 

Eliminations

 

Consolidated 

Totals

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

Current assets

$

411,095 

 

$

3,970,191 

 

$

1,952,364 

 

$

 -

 

$

6,333,650 

Investment in subsidiaries

 

10,609,447 

 

 

 -

 

 

 -

 

 

(10,609,447)

 

 

 -

Plant and equipment,  net

 

626,429 

 

 

2,010,057 

 

 

1,314,182 

 

 

 -

 

 

3,950,668 

Other assets

 

341,778 

 

 

502,823 

 

 

1,358,914 

 

 

 -

 

 

2,203,515 

Total assets

$

11,988,749 

 

$

6,483,071 

 

$

4,625,460 

 

$

(10,609,447)

 

$

12,487,833 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

$

640,071 

 

$

978,653 

 

$

1,984,150 

 

$

 -

 

$

3,602,874 

Intercompany payables (receivables)

 

3,106,736 

 

 

(3,280,070)

 

 

173,334 

 

 

 -

 

 

 -

Long-term debt

 

2,714,267 

 

 

25,482 

 

 

25,104 

 

 

 -

 

 

2,764,853 

Other liabilities

 

840,402 

 

 

286,330 

 

 

99,193 

 

 

 -

 

 

1,225,925 

Shareholders’ equity  

 

4,687,273 

 

 

8,472,676 

 

 

2,343,679 

 

 

(10,609,447)

 

 

4,894,181 

Total liabilities and  shareholders’ equity

$

11,988,749 

 

$

6,483,071 

 

$

4,625,460 

 

$

(10,609,447)

 

$

12,487,833 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheet

 

Jun. 30, 2012

 

Sysco

 

U.S.
Broadline
Subsidiaries

 

Other
Non-Guarantor
Subsidiaries

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

Current assets

$

538,451 

 

$

3,675,676 

 

$

1,870,681 

 

$

 -

 

$

6,084,808 

Investment in subsidiaries

 

10,163,398 

 

 

 -

 

 

 -

 

 

(10,163,398)

 

 

 -

Plant and equipment,  net

 

703,658 

 

 

1,923,925 

 

 

1,256,167 

 

 

 -

 

 

3,883,750 

Other assets

 

324,839 

 

 

503,357 

 

 

1,298,218 

 

 

 -

 

 

2,126,414 

Total assets

$

11,730,346 

 

$

6,102,958 

 

$

4,425,066 

 

$

(10,163,398)

 

$

12,094,972 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

$

678,527 

 

$

900,416 

 

$

1,844,636 

 

$

 -

 

$

3,423,579 

Intercompany payables (receivables)

 

3,068,001 

 

 

(3,334,860)

 

 

266,859 

 

 

 -

 

 

 -

Long-term debt

 

2,714,415 

 

 

25,459 

 

 

23,814 

 

 

 -

 

 

2,763,688 

Other liabilities

 

755,112 

 

 

367,094 

 

 

100,459 

 

 

 -

 

 

1,222,665 

Shareholders’ equity  

 

4,514,291 

 

 

8,144,849 

 

 

2,189,298 

 

 

(10,163,398)

 

 

4,685,040 

Total liabilities and  shareholders’ equity

$

11,730,346 

 

$

6,102,958 

 

$

4,425,066 

 

$

(10,163,398)

 

$

12,094,972 

 

 

14