10-Q 1 syy-20130928x10q.htm 10-Q 41137004df52489

 

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 28, 2013

 

 

 

 

 

 

£

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 

 

581,578,154 shares of common stock were outstanding as of October 26, 2013.

 

 

 

 

 

 


 

 

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

36

 

 

 

Signatures

 

37

 

 

 

 

 

 

  

 

 

 

 


 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED BALANCE SHEETS 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sep. 28, 2013

 

Jun. 29, 2013

 

Sep. 29, 2012

 

(unaudited)

 

 

 

 

(unaudited)

ASSETS

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

359,532 

 

$

412,285 

 

$

548,415 

Accounts and notes receivable, less allowances of
$61,324, $47,345, and $55,153

 

3,423,152 

 

 

3,183,114 

 

 

3,193,389 

Inventories

 

2,540,643 

 

 

2,396,188 

 

 

2,370,864 

Deferred income taxes

 

136,255 

 

 

136,211 

 

 

134,586 

Prepaid expenses and other current assets

 

74,680 

 

 

61,925 

 

 

86,396 

Prepaid income taxes

 

-

 

 

17,704 

 

 

-

Total current assets

 

6,534,262 

 

 

6,207,427 

 

 

6,333,650 

Plant and equipment at cost, less depreciation

 

3,979,351 

 

 

3,978,071 

 

 

3,950,668 

Other assets

 

 

 

 

 

 

 

 

Goodwill

 

1,908,542 

 

 

1,884,235 

 

 

1,726,350 

Intangibles, less amortization

 

200,074 

 

 

205,719 

 

 

125,520 

Restricted cash

 

157,837 

 

 

145,328 

 

 

145,233 

Other assets

 

245,329 

 

 

243,167 

 

 

248,647 

Total other assets

 

2,511,782 

 

 

2,478,449 

 

 

2,245,750 

Total assets

$

13,025,395 

 

$

12,663,947 

 

$

12,530,068 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

 

 

 

Notes payable

$

45,584 

 

$

41,632 

 

$

-

Accounts payable

 

2,475,589 

 

 

2,428,215 

 

 

2,308,181 

Accrued expenses

 

1,017,077 

 

 

1,072,134 

 

 

881,417 

Accrued income taxes

 

139,286 

 

 

-

 

 

159,014 

Current maturities of long-term debt

 

206,158 

 

 

207,301 

 

 

254,262 

Total current liabilities

 

3,883,694 

 

 

3,749,282 

 

 

3,602,874 

Other liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

2,878,391 

 

 

2,639,986 

 

 

2,764,853 

Deferred income taxes

 

256,662 

 

 

266,222 

 

 

111,649 

Other long-term liabilities

 

807,506 

 

 

816,647 

 

 

1,156,511 

Total other liabilities

 

3,942,559 

 

 

3,722,855 

 

 

4,033,013 

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

 

1,086,716 

 

 

1,059,624 

 

 

939,249 

Retained earnings

 

8,635,190 

 

 

8,512,786 

 

 

8,302,859 

Accumulated other comprehensive loss

 

(411,801)

 

 

(446,937)

 

 

(613,975)

Treasury stock at cost, 183,960,944,
    179,068,430 and 177,931,615 shares

 

(4,876,138)

 

 

(4,698,838)

 

 

(4,499,127)

Total shareholders' equity

 

5,199,142 

 

 

5,191,810 

 

 

4,894,181 

Total liabilities and shareholders' equity

$

13,025,395 

 

$

12,663,947 

 

$

12,530,068 

 

Note: The June 29, 2013 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 and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sep. 28, 2013

 

Sep. 29, 2012

 

 

 

 

 

 

 

Sales

 

$

11,714,267 

 

$

11,086,916 

Cost of sales

 

 

9,648,780 

 

 

9,057,121 

Gross profit

 

 

2,065,487 

 

 

2,029,795 

Operating expenses

 

 

1,587,289 

 

 

1,551,013 

Operating income

 

 

478,198 

 

 

478,782 

Interest expense

 

 

30,528 

 

 

30,868 

Other expense (income), net

 

 

(4,534)

 

 

(2,477)

Earnings before income taxes

 

 

452,204 

 

 

450,391 

Income taxes

 

 

166,614 

 

 

163,793 

Net earnings

 

$

285,590 

 

$

286,598 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

Basic earnings per share

 

$

0.49 

 

$

0.49 

Diluted earnings per share

 

 

0.48 

 

 

0.49 

 

 

 

 

 

 

 

Average shares outstanding

 

 

587,621,529 

 

 

587,757,832 

Diluted shares outstanding

 

 

591,458,948 

 

 

589,838,819 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.28 

 

$

0.27 

 

 

See Notes to Consolidated Financial Statements

  

 

2 


 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sep. 28, 2013

 

Sep. 29, 2012

 

 

 

 

 

 

 

Net earnings

 

$

285,590 

 

$

286,598 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

30,807 

 

 

36,160 

Items presented net of tax:

 

 

 

 

 

 

Amortization of cash flow hedges

 

 

96 

 

 

97 

Amortization of prior service cost

 

 

1,742 

 

 

926 

Amortization of actuarial loss (gain), net

 

 

2,491 

 

 

11,686 

Amortization of transition obligation

 

 

-

 

 

22 

Total other comprehensive income (loss)

 

 

35,136 

 

 

48,891 

 

 

 

 

 

 

 

Comprehensive income

 

$

320,726 

 

$

335,489 

 

 

See Notes to Consolidated Financial Statements

 

3 


 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED CASH FLOWS (Unaudited) 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

 

Sep. 28, 2013

 

Sep. 29, 2012

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

285,590 

 

$

286,598 

Adjustments to reconcile net earnings to cash provided by operating
    activities:

 

 

 

 

 

 

Share-based compensation expense

 

 

13,465 

 

 

10,725 

Depreciation and amortization

 

 

133,744 

 

 

120,664 

Deferred income taxes

 

 

(14,926)

 

 

(28,638)

Provision for losses on receivables

 

 

8,437 

 

 

6,782 

Other non-cash items

 

 

1,646 

 

 

241 

Additional investment in certain assets and liabilities, net of effect of
    businesses acquired:

 

 

 

 

 

 

(Increase) in receivables

 

 

(234,441)

 

 

(206,440)

(Increase) in inventories

 

 

(134,849)

 

 

(176,608)

(Increase) in prepaid expenses and other current assets

 

 

(14,266)

 

 

(6,192)

Increase in accounts payable

 

 

34,770 

 

 

110,870 

(Decrease) in accrued expenses

 

 

(61,226)

 

 

(69,813)

Increase in accrued income taxes

 

 

156,251 

 

 

142,649 

(Increase) decrease in other assets

 

 

(617)

 

 

5,183 

(Decrease) increase in other long-term liabilities

 

 

(3,862)

 

 

17,188 

Excess tax benefits from share-based compensation arrangements

 

 

(487)

 

 

(8)

Net cash provided by operating activities

 

 

169,229 

 

 

213,201 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to plant and equipment

 

 

(135,749)

 

 

(155,673)

Proceeds from sales of plant and equipment

 

 

10,573 

 

 

1,393 

Acquisition of businesses, net of cash acquired

 

 

(1,341)

 

 

(60,161)

(Increase) in restricted cash

 

 

(12,509)

 

 

(18,005)

Net cash used for investing activities

 

 

(139,026)

 

 

(232,446)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Bank and commercial paper borrowings (repayments), net

 

 

235,807 

 

 

 -

Other debt borrowings

 

 

1,780 

 

 

1,106 

Other debt repayments

 

 

(5,409)

 

 

(1,423)

Proceeds from common stock reissued from treasury for share-based
    compensation awards

 

 

96,591 

 

 

36,221 

Treasury stock purchases

 

 

(250,601)

 

 

(2,139)

Dividends paid

 

 

(164,138)

 

 

(158,242)

Excess tax benefits from share-based compensation arrangements

 

 

487 

 

 

Net cash used for financing activities

 

 

(85,483)

 

 

(124,469)

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

2,527 

 

 

3,262 

 

 

 

 

 

 

 

Net (decrease) in cash and cash equivalents

 

 

(52,753)

 

 

(140,452)

Cash and cash equivalents at beginning of period

 

 

412,285 

 

 

688,867 

Cash and cash equivalents at end of period

 

$

359,532 

 

$

548,415 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

52,135 

 

$

54,107 

Income taxes

 

 

22,219 

 

 

55,939 

 

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 29, 2013 consolidated balance sheet which was taken from the audited financial statements included in the company's Fiscal 2013 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. 

 

Prior year amounts within the consolidated balance sheets have been reclassified to conform to the current year presentation as it relates to the presentation of certain accounts payable, accrued expenses and tax-related balances.  Prior year amounts within the consolidated results of operations have been reclassified to conform to the current year presentation as it relates to the classification of certain amounts within cost of sales and operating expenses.  The impact of these reclassifications was immaterial to the prior year period.    

 

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2013 Annual Report on Form 10-K.   Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

 

A review of the financial information herein has been made by Ernst & Young LLP, independent registered public accounting firm, in accordance with established professional standards and procedures for such a review.  A Review Report of Independent Registered Public Accounting Firm has been issued by Ernst & Young LLP and is included as Exhibit 15.1 to this Form 10-Q. 

 

 

2.  CHANGES IN ACCOUNTING 

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.”  This update amends ASC 350, “Intangibles—Goodwill and Other” to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test.  Under that option, an entity no longer would be required to calculate the fair value of the intangible asset 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.  The amendments in this update were effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption was permitted.  The adoption of this update in the first quarter of fiscal 2014 did not result in a material change to the company’s interim consideration of impairment of indefinite-lived intangible assets.  Sysco does not believe this update will have an impact on its annual testing for impairment of indefinite-lived intangibles in the fourth quarter of fiscal 2014.

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

 

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  This update amends ASC 220, “Comprehensive Income” to require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net earnings if the amount is being reclassified in its entirety to net earnings.  For other amounts that are not being reclassified in their entirety to net earnings, an entity is required to cross-reference other disclosures that provide additional detail about those amounts.  The amendments in this update were effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012.   The additional disclosures required by this update are included in Note 9, “Comprehensive Income.”

  

  

 

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 

5 


 

·

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.    

 

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 measured at fair value on a recurring basis as of September 28, 2013,  June 29, 2013 and September 29, 2012:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Sep. 28, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

 -

 

$

129,510 

 

$

 -

 

$

129,510 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

2,015 

 

 

 -

 

 

2,015 

Restricted cash

 

157,837 

 

 

 -

 

 

 -

 

 

157,837 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

4,125 

 

 

 -

 

 

4,125 

Total assets at fair value

$

157,837 

 

$

135,650 

 

$

 -

 

$

293,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Jun. 29, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

1,160 

 

$

132,731 

 

$

 -

 

$

133,891 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

2,988 

 

 

 -

 

 

2,988 

Restricted cash

 

145,328 

 

 

 -

 

 

 -

 

 

145,328 

Total assets at fair value

$

146,488 

 

$

135,719 

 

$

 -

 

$

282,207 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Sep. 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 

 

6 


 

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 $3,327.5 million, $3,207.6 million and $3,551.3 million as of September 28, 2013,  June 29, 2013 and September 29, 2012, respectively. The carrying value of total debt was $3,130.1 million, $2,888.9 million and $3,019.1 million as of September 28, 2013,  June 29, 2013 and September 29, 2012, 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 August 2013, the company entered into an interest rate swap agreement that effectively converted $500.0 million of fixed rate debt maturing in fiscal 2018 to floating rate debt.  In addition, in fiscal 2010, we entered into an interest rate swap agreement that effectively converted $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 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 28, 2013,  June 29, 2013 and September 29, 2012 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

 

 

 

 

 

 

 

 

Sep. 28, 2013

Prepaid expenses and
other current assets

 

$

2,015 

 

N/A

 

N/A

Sep. 28, 2013

Other assets

 

 

4,125 

 

N/A

 

N/A

Jun. 29, 2013

Prepaid expenses and
other current assets

 

 

2,988 

 

N/A

 

N/A

Sep. 29, 2012

Prepaid expenses and
other current assets

 

 

1,598 

 

N/A

 

N/A

Sep. 29, 2012

Other assets

 

 

5,961 

 

N/A

 

N/A

 

 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the first quarter of fiscal 2014 and fiscal 2013 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

 

 

 

 

Sep. 28, 2013

 

Sep. 29, 2012

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(3,175)

 

$

(2,050)

 

 

 

 

 

 

 

 

 

Cash Flow  Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

 

156 

 

 

157 

 

 

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 2014 and 2013.  The interest rate swaps do not contain credit-risk-related contingent features. 

 

7 


 

 

5.  DEBT 

 

As of September 28, 2013, Sysco had uncommitted bank lines of credit which provides for unsecured borrowings for working capital of up to $95.0 million, of which $2.3 million was outstanding, located within Notes payable on the consolidated balance sheet.  

 

Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s United States (U.S.) and Canadian commercial paper programs.  The facility provides for borrowings in both U.S. 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 original facility in the amount of $1,000.0 million expires on December 29, 2016, and the extended facility in the amount of $925.0 million expires on December 29, 2017, but is subject to further extension.   As of September 28, 2013, commercial paper issuances outstanding were $329.0 million and were classified as long-term debt, as the company’s commercial paper programs are supported by the long-term revolving credit facility described above.

 

During the first quarter of fiscal 2014, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $585.8  million. 

 

The company’s Irish subsidiary, Pallas Foods, has a multicurrency revolving credit facility, which provides for capital needs for the company’s European subsidiaries.  In September 2013, the facility was extended and increased to 100.0  million (Euro).  This facility provides for unsecured borrowings and expires September 24, 2014, but is subject to extension.  Outstanding borrowings under this facility were €32.0 million (Euro) as of September 28, 2013, located within Notes payable on the consolidated balance sheet. 

 

 

6.  COMPANY-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 and the Supplemental Executive Retirement Plan. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Sep. 28, 2013

 

Sep. 29, 2012

 

Sep. 28, 2013

 

Sep. 29, 2012

 

(In thousands)

Service cost

$

2,414 

 

$

17,780 

 

$

136 

 

$

135 

Interest cost

 

40,109 

 

 

37,700 

 

 

187 

 

 

154 

Expected return on plan assets

 

(48,199)

 

 

(42,801)

 

 

 -

 

 

 -

Amortization of prior service cost

 

2,786 

 

 

1,461 

 

 

42 

 

 

42 

Recognized net actuarial loss (gain)

 

4,082 

 

 

19,022 

 

 

(36)

 

 

(51)

Amortization of transition obligation

 

 -

 

 

 -

 

 

 -

 

 

35 

Net periodic benefit cost

$

1,192 

 

$

33,162 

 

$

329 

 

$

315 

 

 

Sysco’s contributions to its company-sponsored defined benefit plans were $5.8 million and $5.6 million during the first quarter of fiscal 2014 and 2013, respectively. 

 

 

7.  MULTIEMPLOYER EMPLOYEE BENEFIT PLANS 

 

Sysco contributes to several multiemployer defined benefit pension plans in the U.S. 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 Sysco and the 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 U.S. 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 U.S. 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.   

 

8 


 

Withdrawal Activity 

 

Sysco has voluntarily withdrawn from various multiemployer pension plans.  There were no withdrawal liability provisions recorded in the first quarter of fiscal 2014 or the first quarter of fiscal 2013 As of September 28, 2013,  June 29, 2013, and September 29, 2012, Sysco had approximately $40.3 million, $40.7 million and $30.7 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 the two plan years following the plan year in which we completely withdraw from that plan, Sysco could have additional liability.  The company does not currently believe any mass withdrawals are probable to occur in the applicable two-plan year time frame relating to the plans from which Sysco has voluntarily withdrawn. 

 

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 $90.0 million as of September 28, 2013.  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, the majority of which had a valuation date of December 31, 2012. As the valuation date for most of these plans was December 31, 2012, 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

 

 

Sep. 28, 2013

 

Sep. 29, 2012

 

 

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

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

Net earnings

 

$

285,590 

 

$

286,598 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

Weighted-average basic shares outstanding

 

 

587,621,529 

 

 

587,757,832 

Dilutive effect of share-based awards

 

 

3,837,419 

 

 

2,080,987 

Weighted-average diluted shares outstanding

 

 

591,458,948 

 

 

589,838,819 

 

 

 

 

 

 

 

Basic earnings per share:

 

$

0.49 

 

$

0.49 

 

 

 

 

 

 

 

Diluted earnings per share:

 

$

0.48 

 

$

0.49 

 

The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was insignificant for the first quarter of fiscal 2014 and approximately 37,000,000 for the first quarter of fiscal 2013

 

 

9.  COMPREHENSIVE INCOME

 

Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustments, amounts related to cash flow hedging arrangements and certain amounts related to pension and other postretirement plans.  Comprehensive income was $320.7 million and $335.5 million for the first quarter of fiscal 2014 and fiscal 2013, respectively.

 

9 


 

A summary of the components of other comprehensive income (loss) and the related tax effects for each of the periods presented is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended Sep. 28, 2013

   

 

Location of Expense
(Income) Recognized
in Net Earnings

 

Before Tax
Amount

 

Tax

 

Net of Tax
Amount

 

 

 

 

(In thousands)

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

Operating expenses

 

$

2,828 

 

$

1,086 

 

$

1,742 

Amortization of actuarial loss (gain), net

 

Operating expenses

 

 

4,046 

 

 

1,555 

 

 

2,491 

Total reclassification adjustments

 

 

 

 

6,874 

 

 

2,641 

 

 

4,233 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before
    reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

N/A

 

 

30,807 

 

 

 -

 

 

30,807 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of cash flow hedges

 

Interest expense

 

 

156 

 

 

60 

 

 

96 

Total other comprehensive income (loss)

 

 

 

$

37,837 

 

$

2,701 

 

$

35,136 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended Sep. 29, 2012

   

 

Location of Expense
(Income) Recognized
in Net Earnings

 

Before Tax
Amount

 

Tax

 

Net of Tax
Amount

 

 

 

 

(In thousands)

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

Operating expenses

 

$

1,503 

 

$

577 

 

$

926 

Amortization of actuarial loss (gain), net

 

Operating expenses

 

 

18,971 

 

 

7,285 

 

 

11,686 

Amortization of transition obligation

 

Operating expenses

 

 

35 

 

 

13 

 

 

22 

Total reclassification adjustments

 

 

 

 

20,509 

 

 

7,875 

 

 

12,634 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before
    reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

N/A

 

 

36,160 

 

 

 -

 

 

36,160 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of cash flow hedges

 

Interest expense

 

 

157 

 

 

60 

 

 

97 

Total other comprehensive income (loss)

 

 

 

$

56,826 

 

$

7,935 

 

$

48,891 

 

 

10 


 

The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended Sep. 28, 2013

 

 

Pension and Other Postretirement Benefit Plans,
net of tax

 

Foreign Currency Translation

 

Interest Rate Swaps,
net of tax

 

Total

 

 

(In thousands)

Balance as of Jun. 29, 2013

 

$

(575,167)

 

$

137,558 

 

$

(9,328)

 

$

(446,937)

Other comprehensive income before
    reclassification adjustments

 

 

 -

 

 

30,807 

 

 

 -

 

 

30,807 

Amounts reclassified from accumulated
    other comprehensive loss

 

 

4,233 

 

 

 -

 

 

96 

 

 

4,329 

Balance as of Sep. 28, 2013

 

$

(570,934)

 

$

168,365 

 

$

(9,232)

 

$

(411,801)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended Sep. 29, 2012

 

 

Pension and Other Postretirement Benefit Plans,
net of tax

 

Foreign Currency Translation

 

Interest Rate Swaps,
net of tax

 

Total

 

 

(In thousands)

Balance as of Jun. 30, 2012

 

$

(823,901)

 

$

170,749 

 

$

(9,714)

 

$

(662,866)

Other comprehensive income before
    reclassification adjustments

 

 

 -

 

 

36,160 

 

 

 -

 

 

36,160 

Amounts reclassified from accumulated
    other comprehensive loss

 

 

12,634 

 

 

 -

 

 

97 

 

 

12,731 

Balance as of Sep. 29, 2012

 

$

(811,267)

 

$

206,909 

 

$

(9,617)

 

$

(613,975)

 

 

10.  SHARE-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 2014, options to purchase  364,583 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 2014 was $3.97. 

 

In the first quarter of fiscal 2014, 74,950 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 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 2014 was $33.29. 

 

Employees' Stock Purchase Plan 

 

Plan participants purchased 332,270 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first quarter of fiscal 2014

 

The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees' Stock Purchase Plan was $5.12 during the first quarter of fiscal 2014. 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 $13.5 million and $10.7 million for the first quarter of fiscal 2014 and fiscal 2013, respectively. 

 

11 


 

As of September 28, 2013, there was $56.2 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 2.34  years.

 

 

11.  INCOME TAXES 

 

Uncertain Tax Positions 

 

As of September 28, 2013, the gross amount of unrecognized tax benefits was $108.2 million and the gross amount of liability for accrued interest related to unrecognized tax benefits was $37.9 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 for the first quarter of fiscal 2014 was 36.84%.  Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had the impact of reducing the effective tax rate. 

 

The effective tax rate for the first quarter of fiscal 2013 of 36.37% 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 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 U.S. 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 unrecognized tax benefits or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.    

 

 

12.  ACQUISITIONS 

 

During the first quarter of fiscal 2014, in the aggregate, the company paid cash of $1.3 million for acquisitions made during fiscal 2014.  Acquisitions in the first quarter of fiscal 2014 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.  As of September 28, 2013, aggregate contingent consideration amounts outstanding relating to acquisitions were $106.5  million, of which $25.3 million could result in the recording of additional goodwill when paid and $71.6 million was recorded as earnout liabilities as of September 28, 2013. 

 

 

13.  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. 

 

Sysco was made aware of certain alleged violations of California law relating to its use of drop sites in the delivery of products.  Sysco is cooperating fully with the investigation being conducted by authorities in California, but could be subject to fines and injunctive relief.  Discussions with authorities in California are ongoing and Sysco’s financial exposure cannot be estimated at this time. 

12 


 

 Fuel Commitments 

 

Sysco routinely enters into forward purchase commitments for a portion of its projected diesel fuel requirements.  As of September 28, 2013, outstanding forward diesel fuel purchase commitments totaled approximately $187.4 million at a fixed price through November 2014. 

 

Other Commitments 

 

Sysco has committed to aggregate product purchases for resale in order to benefit from a centralized approach to purchasing.  A majority of these agreements expire within one year;  however, certain agreements have terms through fiscal 2018.  These agreements commit the company to a minimum volume at various pricing terms, including fixed pricing, variable pricing or a combination thereof.  Minimum amounts committed to as of September 28, 2013 totaled approximately $3,032.4 million.

 

 

 14.  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 U.S., Canadian, Caribbean 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, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served.  These companies 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,   a company that distributes to international customers and the company’s Sysco Ventures platform, a suite of technology solutions that help support the business needs of Sysco’s customers.   

 

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 and adjustments 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. 

 

13 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

Sep. 28, 2013

 

Sep. 29, 2012

Sales:

(In thousands)

Broadline

$

9,546,388 

 

$

9,057,664 

SYGMA

 

1,523,190 

 

 

1,420,755 

Other

 

711,882 

 

 

660,601 

Intersegment sales

 

(67,193)

 

 

(52,104)

Total

$

11,714,267 

 

$

11,086,916 

 

 

 

 

 

 

 

13-Week Period Ended

 

Sep. 28, 2013

 

Sep. 29, 2012

Operating income:

(In thousands)

Broadline

$

654,707 

 

$

642,836 

SYGMA

 

8,343 

 

 

12,085 

Other

 

22,542 

 

 

22,359