10-Q 1 syy-20150328x10q.htm 10-Q Q3 20150328

 

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 March 28, 2015

 

 

 

 

 

 

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

 

Commission File Number 1-6544 

________________ 

Picture 2 

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 companySee 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  

 

593,762,499 shares of common stock were outstanding as of April 25, 2015.

 

 

 

 

 

 


 

 

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

45

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

49

 

 

 

Signatures

 

50

 

 

 

 

 

 

  

 

 

 

 


 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED BALANCE SHEETS 

(In thousands, except for share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mar. 28, 2015

 

Jun. 28, 2014

 

Mar. 29, 2014

 

(unaudited)

 

 

 

 

(unaudited)

ASSETS

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,084,704 

 

$

413,046 

 

$

341,090 

Accounts and notes receivable, less allowances of
$75,969, $49,902, and $80,254

 

3,496,254 

 

 

3,398,713 

 

 

3,510,518 

Inventories

 

2,649,752 

 

 

2,602,018 

 

 

2,527,900 

Deferred income taxes

 

140,284 

 

 

141,225 

 

 

139,420 

Prepaid expenses and other current assets

 

80,965 

 

 

83,745 

 

 

74,827 

Prepaid income taxes

 

69,348 

 

 

43,225 

 

 

64,107 

Total current assets

 

11,521,307 

 

 

6,681,972 

 

 

6,657,862 

Plant and equipment at cost, less depreciation

 

3,970,261 

 

 

3,985,618 

 

 

3,956,209 

Other assets

 

 

 

 

 

 

 

 

Goodwill

 

1,933,385 

 

 

1,950,672 

 

 

1,937,075 

Intangibles, less amortization

 

154,277 

 

 

177,227 

 

 

181,036 

Restricted cash

 

166,208 

 

 

145,412 

 

 

157,870 

Other assets

 

238,153 

 

 

227,049 

 

 

266,599 

Total other assets

 

2,492,023 

 

 

2,500,360 

 

 

2,542,580 

Total assets

$

17,983,591 

 

$

13,167,950 

 

$

13,156,651 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

 

 

 

Notes payable

$

79,620 

 

$

70,975 

 

$

71,510 

Accounts payable

 

2,836,430 

 

 

2,831,028 

 

 

2,726,427 

Accrued expenses

 

1,109,887 

 

 

1,160,850 

 

 

1,026,631 

Accrued income taxes

 

-

 

 

-

 

 

-

Current maturities of long-term debt

 

314,111 

 

 

304,777 

 

 

4,454 

Total current liabilities

 

4,340,048 

 

 

4,367,630 

 

 

3,829,022 

Other liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

7,275,195 

 

 

2,384,167 

 

 

2,986,163 

Deferred income taxes

 

117,674 

 

 

121,580 

 

 

214,263 

Other long-term liabilities

 

898,062 

 

 

1,027,878 

 

 

895,828 

Total other liabilities

 

8,290,931 

 

 

3,533,625 

 

 

4,096,254 

Commitments and contingencies

 

 

 

 

 

 

 

 

Noncontrolling interest

 

39,729 

 

 

-

 

 

-

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

 

1,185,012 

 

 

1,139,218 

 

 

1,119,784 

Retained earnings

 

8,857,277 

 

 

8,770,751 

 

 

8,687,098 

Accumulated other comprehensive loss

 

(920,140)

 

 

(642,663)

 

 

(516,922)

Treasury stock at cost, 171,860,470,
    179,050,186 and 181,231,920 shares

 

(4,574,441)

 

 

(4,765,786)

 

 

(4,823,760)

Total shareholders' equity

 

5,312,883 

 

 

5,266,695 

 

 

5,231,375 

Total liabilities and shareholders' equity

$

17,983,591 

 

$

13,167,950 

 

$

13,156,651 

 

Note: The June 28, 2014 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

 

39-Week Period Ended

 

 

Mar. 28, 2015

 

Mar. 29, 2014

 

Mar. 28, 2015

 

Mar. 29, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

11,746,659 

 

$

11,277,484 

 

$

36,278,814 

 

$

34,229,720 

Cost of sales

 

 

9,689,161 

 

 

9,282,743 

 

 

29,947,462 

 

 

28,204,541 

Gross profit

 

 

2,057,498 

 

 

1,994,741 

 

 

6,331,352 

 

 

6,025,179 

Operating expenses

 

 

1,730,190 

 

 

1,662,116 

 

 

5,222,985 

 

 

4,862,579 

Operating income

 

 

327,308 

 

 

332,625 

 

 

1,108,367 

 

 

1,162,600 

Interest expense

 

 

69,550 

 

 

32,224 

 

 

177,526 

 

 

92,536 

Other expense (income), net

 

 

(8,577)

 

 

3,718 

 

 

(8,558)

 

 

(5,027)

Earnings before income taxes

 

 

266,335 

 

 

296,683 

 

 

939,399 

 

 

1,075,091 

Income taxes

 

 

89,380 

 

 

115,746 

 

 

325,652 

 

 

397,729 

Net earnings

 

$

176,955 

 

$

180,937 

 

$

613,747 

 

$

677,362 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.30 

 

$

0.31 

 

$

1.04 

 

$

1.16 

Diluted earnings per share

 

 

0.30 

 

 

0.31 

 

 

1.03 

 

 

1.15 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

 

594,030,427 

 

 

585,885,137 

 

 

591,009,787 

 

 

585,802,651 

Diluted shares outstanding

 

 

598,921,070 

 

 

590,470,283 

 

 

596,047,008 

 

 

589,834,321 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.30 

 

$

0.29 

 

$

0.89 

 

$

0.86 

 

 

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

 

39-Week Period Ended

 

 

Mar. 28, 2015

 

Mar. 29, 2014

 

Mar. 28, 2015

 

Mar. 29, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

176,955 

 

$

180,937 

 

$

613,747 

 

$

677,362 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(97,890)

 

 

(35,397)

 

 

(260,997)

 

 

(43,537)

Items presented net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of cash flow hedges

 

 

1,676 

 

 

97 

 

 

3,441 

 

 

289 

Change in fair value of cash flow hedges

 

 

-

 

 

(39,439)

 

 

(34,111)

 

 

(39,439)

Amortization of prior service cost

 

 

1,737 

 

 

1,742 

 

 

5,211 

 

 

5,227 

Amortization of actuarial loss (gain), net

 

 

2,993 

 

 

2,492 

 

 

8,979 

 

 

7,475 

Total other comprehensive (loss) income

 

 

(91,484)

 

 

(70,505)

 

 

(277,477)

 

 

(69,985)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

85,471 

 

$

110,432 

 

$

336,270 

 

$

607,377 

 

 

See Notes to Consolidated Financial Statements

 

3 


 

Sysco Corporation and its Consolidated Subsidiaries 

CONSOLIDATED CASH FLOWS (Unaudited) 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39-Week Period Ended

 

 

Mar. 28, 2015

 

Mar. 29, 2014

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

613,747 

 

$

677,362 

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

 

 

 

 

 

 

Share-based compensation expense

 

 

61,698 

 

 

60,869 

Depreciation and amortization

 

 

435,899 

 

 

409,072 

Deferred income taxes

 

 

5,237 

 

 

(39,452)

Provision for losses on receivables

 

 

17,256 

 

 

20,887 

Other non-cash items

 

 

(10,177)

 

 

4,810 

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

 

 

 

 

 

 

(Increase) in receivables

 

 

(177,018)

 

 

(350,755)

(Increase) in inventories

 

 

(97,389)

 

 

(134,793)

Decrease (increase) in prepaid expenses and other current assets

 

 

1,540 

 

 

(16,250)

(Decrease) increase in accounts payable

 

 

37,239 

 

 

292,280 

Increase (decrease) in accrued expenses

 

 

100,921 

 

 

(2,216)

Increase (decrease) in accrued income taxes

 

 

(13,323)

 

 

(41,691)

Decrease (increase) in other assets

 

 

(4,396)

 

 

(12,671)

(Decrease) increase in other long-term liabilities

 

 

(96,838)

 

 

(13,197)

Excess tax benefits from share-based compensation arrangements

 

 

(13,897)

 

 

(6,191)

Net cash provided by operating activities

 

 

860,499 

 

 

848,064 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to plant and equipment

 

 

(437,286)

 

 

(387,451)

Proceeds from sales of plant and equipment

 

 

15,404 

 

 

23,695 

Acquisition of businesses, net of cash acquired

 

 

(29,177)

 

 

(40,462)

(Increase) in restricted cash

 

 

(20,796)

 

 

(12,542)

Net cash used for investing activities

 

 

(471,855)

 

 

(416,760)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Bank and commercial paper borrowings (repayments), net

 

 

(129,999)

 

 

345,596 

Other debt borrowings

 

 

5,045,345 

 

 

30,287 

Other debt repayments

 

 

(34,184)

 

 

(226,249)

Debt issuance costs

 

 

(30,980)

 

 

(21,794)

Cash paid for settlement of cash flow hedge

 

 

(188,840)

 

 

 -

Proceeds from stock option exercises

 

 

201,764 

 

 

193,992 

Treasury stock purchases

 

 

 -

 

 

(332,381)

Dividends paid

 

 

(516,540)

 

 

(497,772)

Excess tax benefits from share-based compensation arrangements

 

 

13,897 

 

 

6,191 

Net cash provided by (used for) financing activities

 

 

4,360,463 

 

 

(502,130)

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

 

(77,449)

 

 

(369)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

4,671,658 

 

 

(71,195)

Cash and cash equivalents at beginning of period

 

 

413,046 

 

 

412,285 

Cash and cash equivalents at end of period

 

$

5,084,704 

 

$

341,090 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

115,969 

 

$

116,179 

Income taxes

 

 

345,624 

 

 

480,729 

 

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 28, 2014 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the company's fiscal 2014 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 flowsIn the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made. 

 

In fiscal 2015, Sysco acquired a 50% interest in a foodservice company in Costa Rica.  It was determined that consolidation of the entity was appropriate and therefore the financial position, results of operations and cash flows for this company have been included in Sysco’s financial statements.  The value of the 50% noncontrolling interest is considered redeemable due to certain features of the investment agreement and has been presented as mezzanine equity, which is outside of permanent equity, in the consolidated balance sheets.  The income attributable to the noncontrolling interest is located within other expense (income), net in the consolidated results of operations, as this amount is not material.  The non-cash add back for the change in the value of the noncontrolling interest is located within Other non-cash items on the consolidated cash flows.

 

Prior year amounts within the consolidated balance sheets and consolidated cash flows have been reclassified to conform to the current year presentation as it relates to the presentation of certain accrued expenses, deferred taxes and other long-term liabilities balances within these statements.  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 2014 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 

 

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

 

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  This update amends Accounting Standards Codification (ASC) 740, Income Taxes, to require that, in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, when such items exist in the same taxing jurisdiction.  The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which was fiscal 2015 for Sysco.  This update did not have a material impact on the company’s financial statements.       

  

  

 

3.  NEW ACCOUNTING STANDARDS 

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  This update creates ASC 606, Revenue from Contracts with Customers, and supercedes the revenue recognition requirements in ASC 605, Revenue Recognition. Additionally, other sections of the ASC were amended to be consistent with the guidance in this update.  The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  A five-step revenue recognition model is to be applied to achieve this core principle.  ASC 606 also specifies comprehensive disclosures to help users of financial statements understand the nature, amount, timing and uncertainty of revenue that is recognized.  The amendments in this update are effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, which is fiscal 2018 for

5 


 

Sysco.  Early adoption is not permitted.  In April 2015, the FASB proposed a one-year deferral of the effective date, with early application permitted as of the original effective date.  Sysco is currently evaluating the impact this update will have on its financial statements.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015, which is fiscal 2017 for Sysco.  Early adoption is permitted for financial statements that have not been previously issued. The company is evaluating the impact of ASU 2015-03 on its consolidated financial statements and whether it will early adopt.

 

4.  ACQUISITIONS 

 

During the first 39 weeks of fiscal 2015, in the aggregate, the company paid cash of $29.2 million for acquisitions made during fiscal 2015. Acquisitions in the first 39 weeks of fiscal 2015 were immaterial, individually and in the aggregate, to the consolidated financial statements. 

 

Certain acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years only in the event that certain operating results are attained.  As of March 28, 2015, aggregate contingent consideration amounts outstanding relating to completed acquisitions were $38.8 million, of which $33.3 million was recorded as earnout liabilities as of March 28, 2015.

 

In the second quarter of fiscal 2014, the company announced an agreement to merge with US Foods, Inc. (US Foods).  US Foods is a leading foodservice distributor in the United States (U.S.) that markets and distributes fresh, frozen and dry food and non-food products to more than 200,000 foodservice customers, including independently owned single location restaurants, regional and national chain restaurants, healthcare and educational institutions, hotels and motels, government and military organizations and retail locations.  Following completion of the proposed merger, the combined company will continue to be named Sysco and headquartered in Houston, Texas. 

 

As of the time the merger agreement was announced in December 2013, Sysco agreed to pay approximately $3.5 billion for the equity of US Foods, comprised of $3 billion of Sysco common stock and $500 million of cash.  As part of the transaction, Sysco will also assume or refinance US Foods’ net debt, which was approximately $4.7 billion as of September 28, 2013, bringing the total enterprise value to $8.2 billion at the time of the merger announcement.  As of March 28, 2015, the merger consideration is estimated as follows:  approximately $3.8 billion for the equity of US Foods, comprised of $3.3 billion of Sysco common stock, valued using the seven day average through March 28, 2015 and $500 million of cash.  US Foods' net debt to be assumed or refinanced was approximately $4.7 billion as of December 27, 2014, bringing the total enterprise value to $8.5 billion.  The value of Sysco’s common stock and the amount of US Foods’ net debt will fluctuate.  As such, the components of the transaction and total enterprise value noted above will not be finalized until the merger is consummated. 

 

After completion of the transaction, the equity holders of US Foods will own approximately 87 million shares, or roughly 13% of Sysco.  A representative from each of US Foods’ two majority shareholders will join Sysco’s Board of Directors upon closing.  The Federal Trade Commission (FTC) has completed its review of the merger, and in February 2015, the FTC commissioners voted 3 to 2 to authorize the FTC staff to seek a preliminary injunction in the U.S. District Court for the District of Columbia.  The preliminary injunction, if granted, would prevent the parties from closing the transaction while a parallel administrative proceeding determines the legality of the merger. The hearing on the FTC's preliminary injunction motion is scheduled to begin May 5, 2015.  The merger agreement may be terminated by either Sysco or the owners of US Foods if the merger has not closed prior to May 7, 2015.  However, if all of the conditions for closing the merger, other than receiving clearance under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, are satisfied by that date, the termination date may be extended for 60 day intervals, up to September 8, 2015.  On March 6, 2015, Sysco extended the termination date to May 7, 2015.  If the merger agreement is terminated because the antitrust approvals cannot be obtained, under certain conditions, Sysco would be obligated to pay $300 million to the owners of US Foods.  This termination fee would be accrued in the period in which it becomes probable that it would be paid.      

 

During the review period with the FTC, Sysco created a divestiture package to address the concerns raised by the FTC. The company has signed a definitive agreement to divest 11 US Foods’ distribution centers to Performance Food Group (PFG), contingent upon closing of the proposed merger with US Foods, for an aggregate consideration of $850 million in cash.  In US Foods’ most recent fiscal year, these distribution centers generated $4.6 billion in annual revenue.  Performance Food Group would be entitled to receive a $25 million termination fee if the sale of the divestiture package is terminated before July 6, 2015, increasing to $50 million if the sale of the divestiture package is terminated after July 6, 2015, with each of Sysco and US Foods responsible for one half of the applicable fee.

 

At the time of the merger announcement, Sysco secured a fully committed bridge financing that could be used for funding a portion of the purchase price.  In contemplation of issuing long-term financing for this merger, in January 2014, the company entered into two 

6 


 

forward starting swap agreements with notional amounts totaling $2 billion to reduce interest rate exposure on 10-year and 30-year debt that was anticipated to be issued.  In October 2014, Sysco obtained long-term financing for this merger by completing a six-part senior notes offering totaling $5 billion.  At the same time, (i) the bridge financing was terminated and (ii) the forward starting interest rate swaps were terminated and cash settlement of these swaps was made.  Concurrent with the issuance of the new senior notes, Sysco entered into new interest rate swap agreements that effectively converted two series of the senior notes totaling $1.25 billion to floating rate debt.  These swaps were designated as fair value hedges.  Detailed discussion of these transactions is located in Note 6, Derivative Financial Instruments, and Note 7, Debt.

 

 

 

5.  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.    

 

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 6, “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, other assets, accrued expenses and other long-term liabilities 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 March 28, 2015,  June 28, 2014 and March 29, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities Measured at Fair Value as of Mar. 28, 2015

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

4,760,760 

 

$

63,213 

 

$

 -

 

$

4,823,973 

Restricted cash

 

166,208 

 

 

 -

 

 

 -

 

 

166,208 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

23,295 

 

 

 -

 

 

23,295 

Total assets at fair value

$

4,926,968 

 

$

86,508 

 

$

 -

 

$

5,013,476 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

 -

 

$

1,770,798 

 

$

 -

 

$

1,770,798 

Other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

 -

 

 

 -

 

 

 -

 

 

 -

Total liabilities at fair value

$

 -

 

$

1,770,798 

 

$

 -

 

$

1,770,798 

 

7 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities Measured at Fair Value as of Jun. 28, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

  Cash equivalents

$

2,770 

 

$

131,966 

 

$

 -

 

$

134,736 

Restricted cash

 

145,412 

 

 

 -

 

 

 -

 

 

145,412 

Other assets

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap agreement

 

 -

 

 

4,828 

 

 

 -

 

 

4,828 

Total assets at fair value

$

148,182 

 

$

136,794 

 

$

 -

 

$

284,976 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap agreement

$

 -

 

$

133,466 

 

$

 -

 

$

133,466 

Total liabilities at fair value

$

 -

 

$

133,466 

 

$

 -

 

$

133,466 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value as of Mar. 29, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

2,650 

 

$

105,500 

 

$

 -

 

$

108,150 

Restricted cash

 

157,870 

 

 

 -

 

 

 -

 

 

157,870 

Other assets

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreement

 

 -

 

 

1,673 

 

 

 -

 

 

1,673 

Total assets at fair value

$

160,520 

 

$

107,173 

 

$

 -

 

$

267,693 

 

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short‑term maturities of these instrumentsThe 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 $8.2  billion, $3.0 billion and $3.3 billion as of March 28, 2015,  June 28, 2014 and March 29, 2014, respectivelyThe carrying value of total debt was $7.7  billion, $2.8 billion and $3.1 billion as of March 28, 2015,  June 28, 2014 and March 29, 2014, respectively.

 

 

6.  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 positionThe company does not use derivative financial instruments for trading or speculative purposes. 

 

In fiscal 2014, the company entered into an interest rate swap agreement that effectively converted $500 million of fixed rate debt maturing in fiscal 2018 to floating rate debt.  In fiscal 2015, the company entered into new interest rate swap agreements that effectively converted $500 million of the new senior notes maturing in fiscal 2018 and $750 million of the new senior notes maturing in fiscal 2020 to floating rate debt.  See Note 7, Debt, for further discussion of the senior notes issuance.  These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates.

 

In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2 billion  in contemplation of securing long-term financing for the US Foods merger.  The company designated these derivatives as cash flow hedges to reduce interest rate exposure on forecasted 10-year and 30-year debt.  In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing in fiscal 2025 and the $1 billion senior notes maturing in fiscal 2045, the company terminated these swaps, locking in the effective yields on the related debt.  Cash of $58.9 million was paid to settle the 10-year swap in September 2014, and cash of $129.9 million was paid to settle the 30-year swap in October 2014.  The cash payments are located within the line Cash paid for settlement of cash flow hedge within financing activities in the statement of consolidated cash flows.  The cumulative losses recorded in Accumulated other comprehensive (loss) income related to these swaps will be amortized through interest expense over the term of the issued debt. 

8 


 

 

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of March 28, 2015, June 28, 2014 and March 29, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

Liability Derivatives

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

(In thousands)

Interest rate swap agreements:

 

 

 

 

 

 

 

 

Mar. 28, 2015

Other assets

 

$

23,296 

 

Other liabilities

$

 -

Mar. 29, 2014

Other assets

 

 

1,673 

 

Accrued expenses

 

64,025 

 

 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended March 28, 2015 and March 29, 2015 presented on a pre-tax basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of (Gain) or Loss
Recognized in Comprehensive Income

 

Amount of (Gain) or Loss
Recognized in Comprehensive Income

 

 

 

 

13-Week Period Ended

 

 

 

 

Mar. 28, 2015

 

Mar. 29, 2014

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(6,451)

 

$

(1,815)

 

 

 

 

 

 

 

 

 

Cash Flow  Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other comprehensive income

 

 

 -

 

 

64,025 

Interest rate contracts

 

Interest expense

 

 

2,720 

 

 

157 

 

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week periods ended March 28, 2015 and March 29, 2014 presented on a pre-tax basis are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of (Gain) or Loss
Recognized in
Comprehensive Income

 

Amount of (Gain) or Loss
Recognized in Comprehensive Income

 

 

 

 

39-Week Period Ended

 

 

 

 

Mar. 28, 2015

 

Mar. 29, 2014

 

 

 

 

(In thousands)

Fair Value Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Interest expense

 

$

(15,550)

 

$

(9,065)

 

 

 

 

 

 

 

 

 

Cash Flow Hedge Relationships:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other comprehensive income

 

 

 -

 

 

64,025 

Interest rate contracts

 

Interest expense

 

 

5,585 

 

 

469 

 

 

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 rates.  Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the third quarter of fiscal 2015 and 2014 and the 39-week periods ended March 28, 2015 and March 29, 2014.  The interest rate swaps do not contain credit-risk-related contingent features.

 

 

7.  DEBT 

 

As of March 28, 2015, Sysco had an uncommitted bank line of credit, which provided for unsecured borrowings for working capital of up to $20 million.  There were no borrowings outstanding under this line of credit as of March 28, 2015.  

 

9 


 

Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion.

 

Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s 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 facility in the amount of $1.5 billion expires December 29, 2018, but is subject to extension.  As of March 28, 2015,  there were no commercial paper issuances outstanding.  In periods where Sysco has commercial paper borrowings, the amounts are classified within long-term debt, as the program is supported by a long-term revolving credit facility described above.  During the first 39 weeks of 2015, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $659.4 million

 

The company’s Irish subsidiary, Pallas Foods, has a multicurrency revolving credit facility in the amount of €100 million (Euro), which provides for capital needs for the company’s European subsidiaries.  This facility provides for unsecured borrowings and expires September 23, 2015, but is subject to extension.  Outstanding borrowings under this facility were €72.0 million (Euro) as of March 28, 2015, reflected in Notes payable on the consolidated balance sheet. 

 

In October 2014, Sysco issued senior notes and terminated a previously outstanding unsecured bridge facility that was established as a potential financing mechanism for funding the US Foods merger until longer-term funding could be obtained.  The senior notes, issued under the company’s February 2012 registration statement, are unsecured, are not subject to any sinking fund requirement and include a redemption provision that allows Sysco to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the note holders are not penalized by early redemption.  In addition, if the merger has not closed by October 8, 2015, or if the merger agreement is terminated on or prior to October 8, 2015, Sysco is required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus accrued interest.  This condition cannot be waived or modified without the written consent of each holder of the notes.  The notes are fully and unconditionally guaranteed initially by the wholly-owned U.S. Broadline subsidiaries that guarantee Sysco’s other senior notes.  Proceeds from the notes were used to pay the settlement of cash flow hedges that Sysco also entered into in contemplation of this debt issuance and to repay commercial paper outstanding.  Proceeds from the notes will be used, among other things, to pay the cash portion of the consideration for the proposed merger, to refinance certain indebtedness of US Foods and to pay expected future direct transaction costs related to the merger.  Details of the senior notes are below:

 

 

 

 

 

 

 

 

 

 

 

Maturity Date

 

Par Value
(in millions)

 

Coupon Rate

 

Pricing
(percentage of par)

October 2, 2017

 

$

500 

 

1.45 

%

 

99.962 

%

October 2, 2019

 

 

750 

 

2.35 

 

 

99.864 

 

October 2, 2021

 

 

750 

 

3.00 

 

 

99.781 

 

October 2, 2024

 

 

1,250 

 

3.50 

 

 

99.616 

 

October 2, 2034

 

 

750 

 

4.35 

 

 

99.841 

 

October 2, 2044

 

 

1,000 

 

4.50 

 

 

98.992 

 

 

   

 

10 


 

8.  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 third quarter of fiscal 2015 and fiscal 2014 are as follows:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Mar. 28, 2015

 

Mar. 29, 2014

 

Mar. 28, 2015

 

Mar. 29, 2014

 

(In thousands)

Service cost

$

2,815 

 

$

2,414 

 

$

134 

 

$

136 

Interest cost

 

42,779 

 

 

40,109 

 

 

148 

 

 

187 

Expected return on plan assets

 

(57,156)

 

 

(48,199)

 

 

 -

 

 

 -

Amortization of prior service cost

 

2,778 

 

 

2,786 

 

 

42 

 

 

42 

Amortization of actuarial loss (gain)

 

4,968 

 

 

4,082 

 

 

(109)

 

 

(36)

Amortization of transition obligation

 

 -

 

 

 -

 

 

 -

 

 

 -

Net periodic benefit cost

$

(3,816)

 

$

1,192 

 

$

215 

 

$

329 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Postretirement Plans

 

Mar. 28, 2015

 

Mar. 29, 2014

 

Mar. 28, 2015

 

Mar. 29, 2014

 

(In thousands)

Service cost

$

8,445 

 

$

7,242 

 

$

402 

 

$

409 

Interest cost

 

128,338 

 

 

120,327 

 

 

444 

 

 

561 

Expected return on plan assets

 

(171,468)

 

 

(144,597)

 

 

 -

 

 

 -

Amortization of prior service cost

 

8,332 

 

 

8,358 

 

 

126 

 

 

126 

Recognized net actuarial loss (gain)

 

14,904 

 

 

12,246 

 

 

(327)

 

 

(108)

Net periodic benefit cost

$

(11,449)

 

$

3,576 

 

$

645 

 

$

988 

 

 

Sysco’s contributions to its company-sponsored defined benefit plans were $68.8 million and $18.5 million during the first 39 weeks of fiscal 2015 and 2014, respectively. 

 

 

9.  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 appointed 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.    

 

Withdrawal Activity 

 

Sysco has voluntarily withdrawn from various multiemployer pension plans.  There were no withdrawal liability provisions recorded in the first 39 weeks of fiscal 2015 and $1.5 million in the first 39 weeks of fiscal 2014.  As of March 28, 2015, June 28, 2014, and March 29, 2014, Sysco had approximately zero, $1.4 million and $1.5 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. 

11 


 

 

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 $89.0 million as of March 28, 2015.  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, 2013As the valuation date for most of these plans was December 31, 2013, 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. 

 

10.  EARNINGS PER SHARE 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13-Week Period Ended

 

39-Week Period Ended

 

 

Mar. 28, 2015

 

Mar. 29, 2014

 

Mar. 28, 2015

 

Mar. 29, 2014

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

176,955 

 

$

180,937 

 

$

613,747 

 

$

677,362 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic shares outstanding

 

 

594,030,427 

 

 

585,885,137 

 

 

591,009,787 

 

 

585,802,651 

Dilutive effect of share-based awards

 

 

4,890,643 

 

 

4,585,146