10-Q 1 syy-20131228x10q.htm 10-Q 5407d68d06894a3

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

________________ 

Form 10-Q 

 

 

 

(Mark One)

 

 

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

 

 

 

For the quarterly period ended December 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    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     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 

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  

 

584,967,675  shares of common stock were outstanding as of January 25, 2014.

 

 

 

 

 

 


 

 

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

41

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

 

 

 

Signatures

 

46

 

 

 

 

 

 

  

 

 

 

 


 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED BALANCE SHEETS 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dec. 28, 2013

 

Jun. 29, 2013

 

Dec. 29, 2012

 

(unaudited)

 

 

 

 

(unaudited)

ASSETS

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

449,863 

 

$

412,285 

 

$

320,805 

Accounts and notes receivable, less allowances of
$69,078, $47,345, and $67,926

 

3,289,930 

 

 

3,183,114 

 

 

3,168,120 

Inventories

 

2,506,581 

 

 

2,396,188 

 

 

2,436,109 

Deferred income taxes

 

121,095 

 

 

136,211 

 

 

116,887 

Prepaid expenses and other current assets

 

73,272 

 

 

61,925 

 

 

68,675 

Prepaid income taxes

 

80,115 

 

 

17,704 

 

 

49,189 

Total current assets

 

6,520,856 

 

 

6,207,427 

 

 

6,159,785 

Plant and equipment at cost, less depreciation

 

3,967,176 

 

 

3,978,071 

 

 

3,960,636 

Other assets

 

 

 

 

 

 

 

 

Goodwill

 

1,915,922 

 

 

1,884,235 

 

 

1,802,630 

Intangibles, less amortization

 

191,568 

 

 

205,719 

 

 

153,358 

Restricted cash

 

157,841 

 

 

145,328 

 

 

145,247 

Other assets

 

259,662 

 

 

243,167 

 

 

249,646 

Total other assets

 

2,524,993 

 

 

2,478,449 

 

 

2,350,881 

Total assets

$

13,013,025 

 

$

12,663,947 

 

$

12,471,302 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

 

 

 

Notes payable

$

57,733 

 

$

41,632 

 

$

42,754 

Accounts payable

 

2,443,704 

 

 

2,428,215 

 

 

2,249,968 

Accrued expenses

 

1,043,656 

 

 

1,072,134 

 

 

941,525 

Current maturities of long-term debt

 

204,157 

 

 

207,301 

 

 

253,170 

Total current liabilities

 

3,749,250 

 

 

3,749,282 

 

 

3,487,417 

Other liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

2,944,083 

 

 

2,639,986 

 

 

2,809,290 

Deferred income taxes

 

230,914 

 

 

266,222 

 

 

94,987 

Other long-term liabilities

 

784,988 

 

 

816,647 

 

 

1,178,035 

Total other liabilities

 

3,959,985 

 

 

3,722,855 

 

 

4,082,312 

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

 

1,105,382 

 

 

1,059,624 

 

 

954,988 

Retained earnings

 

8,676,012 

 

 

8,512,786 

 

 

8,359,768 

Accumulated other comprehensive loss

 

(446,417)

 

 

(446,937)

 

 

(605,709)

Treasury stock at cost, 180,889,626,
    179,068,430 and 179,819,753 shares

 

(4,796,362)

 

 

(4,698,838)

 

 

(4,572,649)

Total shareholders' equity

 

5,303,790 

 

 

5,191,810 

 

 

4,901,573 

Total liabilities and shareholders' equity

$

13,013,025 

 

$

12,663,947 

 

$

12,471,302 

 

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

 

26-Week Period Ended

 

 

Dec. 28, 2013

 

Dec. 29, 2012

 

Dec. 28, 2013

 

Dec. 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

11,237,969 

 

$

10,796,890 

 

$

22,952,236 

 

$

21,883,806 

Cost of sales

 

 

9,273,018 

 

 

8,844,780 

 

 

18,921,798 

 

 

17,901,901 

Gross profit

 

 

1,964,951 

 

 

1,952,110 

 

 

4,030,438 

 

 

3,981,905 

Operating expenses

 

 

1,613,174 

 

 

1,569,459 

 

 

3,200,463 

 

 

3,120,472 

Operating income

 

 

351,777 

 

 

382,651 

 

 

829,975 

 

 

861,433 

Interest expense

 

 

29,784 

 

 

32,242 

 

 

60,312 

 

 

63,110 

Other expense (income), net

 

 

(4,211)

 

 

(1,753)

 

 

(8,745)

 

 

(4,230)

Earnings before income taxes

 

 

326,204 

 

 

352,162 

 

 

778,408 

 

 

802,553 

Income taxes

 

 

115,369 

 

 

130,793 

 

 

281,983 

 

 

294,586 

Net earnings

 

$

210,835 

 

$

221,369 

 

$

496,425 

 

$

507,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.36 

 

$

0.38 

 

$

0.85 

 

$

0.86 

Diluted earnings per share

 

 

0.36 

 

 

0.38 

 

 

0.84 

 

 

0.86 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

584,253,842 

 

 

587,091,968 

 

 

585,761,409 

 

 

587,760,060 

Diluted shares outstanding

 

 

587,926,287 

 

 

589,751,933 

 

 

589,516,342 

 

 

590,130,537 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.29 

 

$

0.28 

 

$

0.57 

 

$

0.55 

 

 

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

 

26-Week Period Ended

 

 

Dec. 28, 2013

 

Dec. 29, 2012

 

Dec. 28, 2013

 

Dec. 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

210,835 

 

$

221,369 

 

$

496,425 

 

$

507,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(38,947)

 

 

(8,771)

 

 

(8,140)

 

 

27,389 

Items presented net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of cash flow hedges

 

 

96 

 

 

96 

 

 

192 

 

 

193 

Amortization of prior service cost

 

 

1,743 

 

 

6,535 

 

 

3,485 

 

 

7,461 

Amortization of actuarial loss (gain), net

 

 

2,492 

 

 

11,258 

 

 

4,983 

 

 

22,944 

Amortization of transition obligation

 

 

-

 

 

22 

 

 

-

 

 

44 

Prior service cost arising in current year

 

 

-

 

 

(24,828)

 

 

-

 

 

(24,828)

Actuarial gain (loss), net arising in current year

 

 

-

 

 

23,954 

 

 

-

 

 

23,954 

Total other comprehensive (loss) income

 

 

(34,616)

 

 

8,266 

 

 

520 

 

 

57,157 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

176,219 

 

$

229,635 

 

$

496,945 

 

$

565,124 

 

 

See Notes to Consolidated Financial Statements

 

3 


 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED CASH FLOWS (Unaudited) 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26-Week Period Ended

 

 

Dec. 28, 2013

 

Dec. 29, 2012

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

496,425 

 

$

507,967 

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

 

 

 

 

 

 

Share-based compensation expense

 

 

43,906 

 

 

39,423 

Depreciation and amortization

 

 

271,147 

 

 

249,593 

Deferred income taxes

 

 

(27,126)

 

 

(39,603)

Provision for losses on receivables

 

 

12,704 

 

 

16,422 

Other non-cash items

 

 

1,729 

 

 

(246)

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

 

 

 

 

 

 

(Increase) in receivables

 

 

(113,716)

 

 

(157,073)

(Increase) in inventories

 

 

(110,043)

 

 

(222,170)

(Increase) decrease in prepaid expenses and other current assets

 

 

(14,088)

 

 

11,367 

Increase in accounts payable

 

 

8,529 

 

 

23,619 

(Decrease) in accrued expenses

 

 

(21,130)

 

 

(32,644)

(Decrease) in accrued income taxes

 

 

(59,172)

 

 

(64,663)

(Increase) decrease in other assets

 

 

(7,161)

 

 

1,785 

(Decrease) increase in other long-term liabilities

 

 

(19,620)

 

 

53,364 

Excess tax benefits from share-based compensation arrangements

 

 

(4,220)

 

 

(356)

Net cash provided by operating activities

 

 

458,164 

 

 

386,785 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to plant and equipment

 

 

(270,432)

 

 

(261,576)

Proceeds from sales of plant and equipment

 

 

23,480 

 

 

3,229 

Acquisition of businesses, net of cash acquired

 

 

(22,461)

 

 

(194,237)

(Increase) in restricted cash

 

 

(12,513)

 

 

(18,019)

Net cash used for investing activities

 

 

(281,926)

 

 

(470,603)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Bank and commercial paper borrowings (repayments), net

 

 

304,471 

 

 

48,100 

Other debt borrowings

 

 

14,731 

 

 

43,482 

Other debt repayments

 

 

(13,056)

 

 

(10,789)

Debt issuance costs

 

 

(15,262)

 

 

 -

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

 

 

160,422 

 

 

90,853 

Treasury stock purchases

 

 

(266,638)

 

 

(143,526)

Dividends paid

 

 

(328,279)

 

 

(315,904)

Excess tax benefits from share-based compensation arrangements

 

 

4,220 

 

 

356 

Net cash used for financing activities

 

 

(139,391)

 

 

(287,428)

 

 

 

 

 

 

 

Effect of exchange rates on cash

 

 

731 

 

 

3,184 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

37,578 

 

 

(368,062)

Cash and cash equivalents at beginning of period

 

 

412,285 

 

 

688,867 

Cash and cash equivalents at end of period

 

$

449,863 

 

$

320,805 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

63,185 

 

$

63,598 

Income taxes

 

 

368,596 

 

 

404,791 

 

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 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 December 28, 2013,  June 29, 2013 and December 29, 2012:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

144,400 

 

$

125,665 

 

$

 -

 

$

270,065 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

945 

 

 

 -

 

 

945 

Restricted cash

 

157,841 

 

 

 -

 

 

 -

 

 

157,841 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

1,248 

 

 

 -

 

 

1,248 

Total assets at fair value

$

302,241 

 

$

127,858 

 

$

 -

 

$

430,099 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Dec. 29, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

 -

 

$

178,033 

 

$

 -

 

$

178,033 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

488 

 

 

 -

 

 

488 

Restricted cash

 

145,247 

 

 

 -

 

 

 -

 

 

145,247 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

5,048 

 

 

 -

 

 

5,048 

Total assets at fair value

$

145,247 

 

$

183,569 

 

$

 -

 

$

328,816 

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 $3,360.0 million, $3,207.6 million and $3,604.2 million as of December 28, 2013,  June 29, 2013 and December 29, 2012, respectively. The carrying value of total debt was $3,206.0 million, $2,888.9 million and $3,105.2 million as of December 28, 2013,  June 29, 2013 and December 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 December 28, 2013,  June 29, 2013 and December 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

 

 

 

 

 

 

 

 

Dec. 28, 2013

Prepaid expenses and
other current assets

 

$

945 

 

N/A

 

N/A

Dec. 28, 2013

Other assets

 

 

1,248 

 

N/A

 

N/A

Jun. 29, 2013

Prepaid expenses and
other current assets

 

 

2,988 

 

N/A

 

N/A

Dec. 29, 2012

Prepaid expenses and
other current assets

 

 

488 

 

N/A

 

N/A

Dec. 29, 2012

Other assets

 

 

5,048 

 

N/A

 

N/A

 

 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the second 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

 

 

 

 

Dec. 28, 2013

 

Dec. 29, 2012

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(4,075)

 

$

(2,274)

 

 

 

 

 

 

 

 

 

Cash Flow  Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

 

156 

 

 

156 

 

7 


 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 26-week periods ended December 28, 2013 and December 29, 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

 

 

 

 

26-Week Period Ended

 

 

 

 

Dec. 28, 2013

 

Dec. 29, 2012

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(7,250)

 

$

(4,324)

 

 

 

 

 

 

 

 

 

Cash Flow  Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

 

312 

 

 

313 

 

 

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 second quarter of fiscal 2014 and 2013 and the 26-week periods ended December 28, 2013 and December 29, 2012.  The interest rate swaps do not contain credit-risk-related contingent features. 

 

 

 

5.  DEBT 

 

As of December 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 none was outstanding.  Such amounts when outstanding are reflected in 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 December 28, 2013, commercial paper issuances outstanding were $400.0 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 26-week period ended December 28, 2013, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $769.5 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 €42.0 million (Euro) as of December 28, 2013, reflected in Notes payable on the consolidated balance sheet. 

 

       In December 2013, Sysco secured a commitment for an unsecured bridge facility in the amount of $3.3865 billion in connection with its proposed merger with US Foods, Inc. (US Foods) (discussed further in Note 12, Acquisitions). 

 

Subsequent Events

 

Subsequent to quarter-end, the following transactions were entered in contemplation of securing financing and hedging interest rate risk relating to our assumption or refinancing of US Foods’ net debt that will occur upon closing of the proposed merger.

 

In January 2014, the bridge facility commitment noted above was replaced with a $3.3865 billion bridge term loan agreement with multiple lenders.  Sysco may borrow up to $3.386.5 billion in term loans on the closing date of the US Foods acquisition to fund the acquisition, refinance certain indebtedness of US Foods and pay related fees and expenses. The facility expires on March 8, 2015, but is subject to extension if regulatory approvals have not yet been obtained.   Borrowings under the bridge term loan agreement are guaranteed by the same subsidiaries of Sysco that are guarantee the company’s revolving credit facility, and in certain circumstances may also be guaranteed by US Foods. 

 

8 


 

In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling of $2.0 billion. The company designated these derivatives as cash flow hedges of the variability in the cash outflows of interest payments on 10-year and 30-year debt due to changes in the benchmark interest rates for debt the company expects to issue in fiscal 2015.

 

In January 2014, Sysco and Sysco International, ULC, extended and increased the size of the revolving credit facility described above that supports the company’s U.S. and Canadian commercial paper programs.  The facility was increased to $1.5 billion with an expiration date of December 29, 2018, but is subject to further extension.  The other terms and conditions of the extended facility are substantially the same.

 

 

6.  COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS 

 

In the tables below, the caption “Pension Benefits” includes both the company-sponsored qualified pension plan and the Supplemental Executive Retirement Plan.  The components of net company-sponsored benefit cost for the second quarter of fiscal 2014 and fiscal 2013 are as follows:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Dec. 28, 2013

 

Dec. 29, 2012

 

Dec. 28, 2013

 

Dec. 29, 2012

 

(In thousands)

Service cost

$

2,414 

 

$

17,589 

 

$

136 

 

$

136 

Interest cost

 

40,109 

 

 

37,253 

 

 

187 

 

 

153 

Expected return on plan assets

 

(48,199)

 

 

(42,800)

 

 

 -

 

 

 -

Amortization of prior service cost

 

2,786 

 

 

2,273 

 

 

42 

 

 

42 

Amortization of actuarial loss (gain)

 

4,082 

 

 

18,328 

 

 

(36)

 

 

(51)

Amortization of transition obligation

 

 -

 

 

 -

 

 

 -

 

 

36 

Curtailment loss

 

 -

 

 

8,293 

 

 

 -

 

 

 -

Net periodic benefit cost

$

1,192 

 

$

40,936 

 

$

329 

 

$

316 

 

The components of net company-sponsored benefit cost for the 26-week periods ended December 28, 2013 and December 29, 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Dec. 28, 2013

 

Dec. 29, 2012

 

Dec. 28, 2013

 

Dec. 29, 2012

 

(In thousands)

Service cost

$

4,828 

 

$

35,369 

 

$

272 

 

$

271 

Interest cost

 

80,218 

 

 

74,953 

 

 

374 

 

 

307 

Expected return on plan assets

 

(96,398)

 

 

(85,601)

 

 

 -

 

 

 -

Amortization of prior service cost

 

5,572 

 

 

3,734 

 

 

84 

 

 

84 

Recognized net actuarial loss (gain)

 

8,164 

 

 

37,350 

 

 

(72)

 

 

(102)

Amortization of transition obligation

 

 -

 

 

 -

 

 

 -

 

 

71 

Curtailment loss

 

 -

 

 

8,293 

 

 

 -

 

 

 -

Net periodic benefit cost

$

2,384 

 

$

74,098 

 

$

658 

 

$

631 

 

 

Sysco’s contributions to its company-sponsored defined benefit plans were  $11.7 million and $11.3 million during the 26-week periods ended December 28, 2013 and December 29, 2012, 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,

9 


 

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 $1.5 million in the first 26 weeks of fiscal 2014 and $2.5 million in the first 26 weeks of fiscal 2013As of December 28, 2013,  June 29, 2013, and December 29, 2012, Sysco had approximately $1.5 million, $40.7 million and $14.0 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 December 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

 

26-Week Period Ended

 

 

Dec. 28, 2013

 

Dec. 29, 2012

 

Dec. 28, 2013

 

Dec. 29, 2012

 

 

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

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

210,835 

 

$

221,369 

 

$

496,425 

 

$

507,967 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic shares outstanding

 

 

584,253,842 

 

 

587,091,968 

 

 

585,761,409 

 

 

587,760,060 

Dilutive effect of share-based awards

 

 

3,672,445 

 

 

2,659,965 

 

 

3,754,933 

 

 

2,370,477 

Weighted-average diluted shares outstanding

 

 

587,926,287 

 

 

589,751,933 

 

 

589,516,342 

 

 

590,130,537 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

$

0.36 

 

$

0.38 

 

$

0.85 

 

$

0.86 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

$

0.36 

 

$

0.38 

 

$

0.84 

 

$

0.86 

 

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 3,100,000 and 25,000,000 for the second quarter of fiscal 2014 and fiscal 2013, respectivelyThe number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately  1,600,000 and 31,000,000 for the first 26 weeks of fiscal 2014 and 2013, respectively.

 

 

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 $176.2 million and $229.6 million for the second quarter of fiscal 2014 and fiscal

10 


 

2013, respectively.  Comprehensive income was $496.9 million and $565.1 million for the first 26 weeks of fiscal 2014 and fiscal 2013 respectively.

 

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 Dec. 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 

 

$

1,085 

 

$

1,743 

Amortization of actuarial loss (gain), net

Operating expenses

 

4,046 

 

 

1,554 

 

 

2,492 

Total reclassification adjustments

 

 

6,874 

 

 

2,639 

 

 

4,235 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

Other comprehensive income before
    reclassification adjustments:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

N/A

 

(38,947)

 

 

 -

 

 

(38,947)

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

Reclassification adjustments:

 

 

 

 

 

 

 

 

 

Amortization of cash flow hedges

Interest expense

 

156 

 

 

60 

 

 

96 

Total other comprehensive (loss) income

 

$

(31,917)

 

$

2,699 

 

$

(34,616)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended Dec. 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: