UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-Q
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(Mark One) |
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R |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 29, 2012 |
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£ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-6544
________________
Sysco Corporation
(Exact name of registrant as specified in its charter)
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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.
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Large Accelerated Filer R |
Accelerated Filer £ |
Non-accelerated Filer £ (Do not check if a smaller reporting company) |
Smaller Reporting Company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No R
587,803,115 shares of common stock were outstanding as of October 27, 2012.
TABLE OF CONTENTS
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Page No. |
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PART I – FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
1 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
32 |
Item 4. |
Controls and Procedures |
32 |
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PART II – OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
34 |
Item 1A. |
Risk Factors |
34 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
34 |
Item 3. |
Defaults Upon Senior Securities |
34 |
Item 4. |
Mine Safety Disclosures |
35 |
Item 5. |
Other Information |
35 |
Item 6. |
Exhibits |
35 |
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Signatures |
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36 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
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Sept. 29, 2012 |
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Jun. 30, 2012 |
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Oct. 1, 2011 |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
548,415 |
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$ |
688,867 |
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$ |
284,101 |
Accounts and notes receivable, less allowances of $55,153, $42,919, and $53,796 |
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3,193,389 |
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2,966,624 |
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3,061,145 |
Inventories |
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2,370,864 |
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2,178,830 |
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2,137,451 |
Deferred income taxes |
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134,586 |
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134,503 |
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135,962 |
Prepaid expenses and other current assets |
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86,396 |
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80,713 |
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77,575 |
Prepaid income taxes |
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- |
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35,271 |
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- |
Total current assets |
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6,333,650 |
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6,084,808 |
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5,696,234 |
Plant and equipment at cost, less depreciation |
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3,950,668 |
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3,883,750 |
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3,615,361 |
Other assets |
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Goodwill |
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1,726,350 |
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1,665,611 |
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1,621,257 |
Intangibles, less amortization |
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125,520 |
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113,571 |
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108,610 |
Restricted cash |
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145,233 |
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127,228 |
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123,773 |
Other assets |
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206,412 |
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220,004 |
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281,628 |
Total other assets |
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2,203,515 |
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2,126,414 |
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2,135,268 |
Total assets |
$ |
12,487,833 |
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$ |
12,094,972 |
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$ |
11,446,863 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
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Notes payable |
$ |
- |
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$ |
- |
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$ |
5,350 |
Accounts payable |
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2,343,903 |
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2,209,469 |
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2,164,695 |
Accrued expenses |
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845,695 |
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909,144 |
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817,703 |
Accrued income taxes |
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159,014 |
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50,316 |
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384,613 |
Current maturities of long-term debt |
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254,262 |
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254,650 |
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206,329 |
Total current liabilities |
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3,602,874 |
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3,423,579 |
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3,578,690 |
Other liabilities |
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Long-term debt |
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2,764,853 |
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2,763,688 |
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2,384,986 |
Deferred income taxes |
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111,649 |
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115,166 |
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212,583 |
Other long-term liabilities |
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1,114,276 |
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1,107,499 |
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616,349 |
Total other liabilities |
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3,990,778 |
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3,986,353 |
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3,213,918 |
Commitments and contingencies |
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Shareholders' equity |
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Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none |
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- |
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- |
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- |
Common stock, par value $1 per share Authorized 2,000,000,000 shares, issued 765,174,900 shares |
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765,175 |
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765,175 |
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765,175 |
Paid-in capital |
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939,249 |
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939,179 |
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891,645 |
Retained earnings |
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8,302,859 |
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8,175,230 |
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7,831,330 |
Accumulated other comprehensive loss |
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(613,975) |
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(662,866) |
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(352,107) |
Treasury stock at cost, 177,931,615, 179,228,383 and 177,669,492 shares |
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(4,499,127) |
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(4,531,678) |
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(4,481,788) |
Total shareholders' equity |
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4,894,181 |
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4,685,040 |
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4,654,255 |
Total liabilities and shareholders' equity |
$ |
12,487,833 |
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$ |
12,094,972 |
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$ |
11,446,863 |
Note: The June 30, 2012 balance sheet has been derived from the audited financial statements at that date.
See Notes to Consolidated Financial Statements
1
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In thousands, except for share data)
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13-Week Period Ended |
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Sept. 29, 2012 |
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Oct. 1, 2011 |
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Sales |
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$ |
11,086,916 |
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$ |
10,586,390 |
Cost of sales |
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9,083,372 |
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8,638,790 |
Gross profit |
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2,003,544 |
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1,947,600 |
Operating expenses |
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1,524,762 |
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1,438,260 |
Operating income |
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478,782 |
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509,340 |
Interest expense |
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30,868 |
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29,474 |
Other expense (income), net |
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(2,477) |
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250 |
Earnings before income taxes |
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450,391 |
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479,616 |
Income taxes |
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163,793 |
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176,963 |
Net earnings |
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$ |
286,598 |
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$ |
302,653 |
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Net earnings: |
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Basic earnings per share |
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$ |
0.49 |
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$ |
0.51 |
Diluted earnings per share |
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0.49 |
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0.51 |
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Average shares outstanding |
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587,757,832 |
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592,003,631 |
Diluted shares outstanding |
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589,838,819 |
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593,449,101 |
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Dividends declared per common share |
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$ |
0.27 |
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$ |
0.26 |
See Notes to Consolidated Financial Statements
2
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands, except for share data)
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13-Week Period Ended |
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Sept. 29, 2012 |
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Oct. 1, 2011 |
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Net earnings |
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$ |
286,598 |
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$ |
302,653 |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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36,160 |
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(102,267) |
Items presented net of tax: |
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Amortization of cash flow hedges |
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97 |
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107 |
Amortization of prior service cost |
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926 |
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773 |
Amortization of actuarial loss (gain), net |
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11,686 |
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9,215 |
Amortization of transition obligation |
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22 |
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23 |
Total other comprehensive income (loss) |
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48,891 |
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(92,149) |
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Comprehensive income |
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$ |
335,489 |
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$ |
210,504 |
See Notes to Consolidated Financial Statements
3
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands, except for share data)
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13-Week Period Ended |
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Sept. 29, 2012 |
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Oct. 1, 2011 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
286,598 |
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$ |
302,653 |
Adjustments to reconcile net earnings to cash provided by operating activities: |
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Share-based compensation expense |
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10,725 |
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9,842 |
Depreciation and amortization |
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120,664 |
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99,641 |
Deferred income taxes |
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(28,638) |
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(290,671) |
Provision for losses on receivables |
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6,782 |
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7,075 |
Other non-cash items |
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|
241 |
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|
226 |
Additional investment in certain assets and liabilities, net of effect of businesses acquired: |
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(Increase) in receivables |
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(206,440) |
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(195,451) |
(Increase) in inventories |
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(176,608) |
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(82,322) |
(Increase) in prepaid expenses and other current assets |
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(6,192) |
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(6,347) |
Increase (decrease) in accounts payable |
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113,695 |
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(784) |
(Decrease) in accrued expenses |
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(72,638) |
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(40,867) |
Increase in accrued income taxes |
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142,649 |
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444,905 |
Decrease (increase) in other assets |
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5,183 |
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(3,448) |
Increase in other long-term liabilities |
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17,188 |
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10,895 |
Excess tax benefits from share-based compensation arrangements |
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(8) |
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(4) |
Net cash provided by operating activities |
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213,201 |
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255,343 |
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Cash flows from investing activities: |
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Additions to plant and equipment |
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(155,673) |
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(226,547) |
Proceeds from sales of plant and equipment |
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1,393 |
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2,092 |
Acquisition of businesses, net of cash acquired |
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(60,161) |
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(36,118) |
(Increase) in restricted cash |
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(18,005) |
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(13,257) |
Net cash used for investing activities |
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(232,446) |
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(273,830) |
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Cash flows from financing activities: |
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Bank and commercial paper borrowings (repayments), net |
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- |
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(68,625) |
Other debt borrowings |
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1,106 |
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|
984 |
Other debt repayments |
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(1,423) |
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(2,165) |
Proceeds from common stock reissued from treasury for share-based compensation awards |
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36,221 |
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31,216 |
Treasury stock purchases |
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(2,139) |
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(133,370) |
Dividends paid |
|
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(158,242) |
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(153,790) |
Excess tax benefits from share-based compensation arrangements |
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8 |
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4 |
Net cash used for financing activities |
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(124,469) |
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(325,746) |
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Effect of exchange rates on cash |
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3,262 |
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(11,431) |
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Net (decrease) in cash and cash equivalents |
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(140,452) |
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(355,664) |
Cash and cash equivalents at beginning of period |
|
|
688,867 |
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|
639,765 |
Cash and cash equivalents at end of period |
|
$ |
548,415 |
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$ |
284,101 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
54,107 |
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$ |
52,765 |
Income taxes |
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|
55,939 |
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|
21,913 |
See Notes to Consolidated Financial Statements
4
Sysco Corporation and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the company, without audit, with the exception of the June 30, 2012 consolidated balance sheet which was taken from the audited financial statements included in the company's Fiscal 2012 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2012 Annual Report on Form 10-K.
A review of the financial information herein has been made by Ernst & Young LLP, independent auditors, in accordance with established professional standards and procedures for such a review. A report from Ernst & Young LLP concerning their review is included as Exhibit 15.1 to this Form 10-Q.
2. CHANGES IN ACCOUNTING
Testing Goodwill for Impairment
In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment.” This update amends Accounting Standards Codification 350, “Intangibles–Goodwill and Other” to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. In addition, the update provided a revised list of factors that should be considered when evaluating whether a potential goodwill impairment may have occurred at an interim period. The amendments in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The adoption of this update in the first quarter of fiscal 2013 did not result in a material change to the company’s interim consideration of potential goodwill impairment. Sysco is evaluating the impact this update may have on its annual goodwill impairment testing in the fourth quarter of fiscal 2013.
3. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
· | Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets; |
· | Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and |
· | Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. |
Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds.
5
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value.
· | Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 2 measurement in the tables below. |
· | Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents and restricted cash as Level 1 measurements in the tables below. |
· | The interest rate swap agreements, discussed further in Note 4, “Derivative Financial Instruments,” are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. These are included within prepaid expenses and other current assets and other assets as Level 2 measurements in the tables below. |
The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of September 29, 2012, June 30, 2012 and October 1, 2011:
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Assets Measured at Fair Value as of Sept. 29, 2012 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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(In thousands) |
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Assets: |
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Cash and cash equivalents |
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Cash equivalents |
$ |
134,935 |
|
$ |
196,383 |
|
$ |
- |
|
$ |
331,318 |
Prepaid expenses and other current assets |
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|
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|
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|
|
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Interest rate swap agreement |
|
- |
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|
1,598 |
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|
- |
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|
1,598 |
Restricted cash |
|
145,233 |
|
|
- |
|
|
- |
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|
145,233 |
Other assets |
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Interest rate swap agreement |
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- |
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|
5,961 |
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- |
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|
5,961 |
Total assets at fair value |
$ |
280,168 |
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$ |
203,942 |
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$ |
- |
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$ |
484,110 |
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Assets Measured at Fair Value as of Jun. 30, 2012 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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(In thousands) |
||||||||||
Assets: |
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Cash and cash equivalents |
|
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Cash equivalents |
$ |
228,310 |
|
$ |
248,714 |
|
$ |
- |
|
$ |
477,024 |
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreement |
|
- |
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|
2,475 |
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|
- |
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|
2,475 |
Restricted cash |
|
127,228 |
|
|
- |
|
|
- |
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|
127,228 |
Other assets |
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|
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|
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Interest rate swap agreement |
|
- |
|
|
6,219 |
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|
- |
|
|
6,219 |
Total assets at fair value |
$ |
355,538 |
|
$ |
257,408 |
|
$ |
- |
|
$ |
612,946 |
6
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|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value as of Oct. 1, 2011 |
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
(In thousands) |
||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
- |
|
$ |
83,808 |
|
$ |
- |
|
$ |
83,808 |
Restricted cash |
|
123,773 |
|
|
- |
|
|
- |
|
|
123,773 |
Other assets |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
- |
|
|
13,246 |
|
|
- |
|
|
13,246 |
Total assets at fair value |
$ |
123,773 |
|
$ |
97,054 |
|
$ |
- |
|
$ |
220,827 |
The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short‑term maturities of these instruments. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement. The fair value of total debt approximated $3,551.3 million, $3,539.3 million and $3,015.6 million as of September 29, 2012, June 30, 2012 and October 1, 2011, respectively. The carrying value of total debt was $3,019.1 million, $3,018.3 million and $2,596.7 million as of September 29, 2012, June 30, 2012 and October 1, 2011, respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
Sysco manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this position. The company does not use derivative financial instruments for trading or speculative purposes.
In fiscal 2010, the company entered into two interest rate swap agreements that effectively converted $250.0 million of fixed rate debt maturing in fiscal 2013 and $200.0 million of fixed rate debt maturing in fiscal 2014 to floating rate debt. These transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure. These transactions were designated as fair value hedges since the swaps hedge against the changes in fair value of fixed rate debt resulting from changes in interest rates.
The location and the fair value of derivative instruments in the consolidated balance sheet as of September 29, 2012, June 30, 2012 and October 1, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|||||
|
Balance Sheet Location |
|
Fair Value |
|
Balance Sheet Location |
|
Fair Value |
|
|
(In thousands) |
|||||||
Fair value hedge relationships: |
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
|
|
|
|
|
Sept. 29, 2012 |
Prepaid expenses and |
|
$ |
1,598 |
|
N/A |
|
N/A |
Sept. 29, 2012 |
Other assets |
|
|
5,961 |
|
N/A |
|
N/A |
Jun. 30, 2012 |
Prepaid expenses and |
|
|
2,475 |
|
N/A |
|
N/A |
Jun. 30, 2012 |
Other assets |
|
|
6,219 |
|
N/A |
|
N/A |
Oct. 1, 2011 |
Other assets |
|
|
13,246 |
|
N/A |
|
N/A |
7
The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the first quarter of fiscal 2013 and fiscal 2012 presented on a pre-tax basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of (Gain) or Loss Recognized in Income |
|
Amount of (Gain) or Loss Recognized in Income |
||||
|
|
|
|
13-Week Period Ended |
||||
|
|
|
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
||
|
|
|
|
(In thousands) |
||||
Fair Value Hedge Relationships: |
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
Interest expense |
|
$ |
(2,050) |
|
$ |
(487) |
|
|
|
|
|
|
|
|
|
Cash Flow Hedge Relationships: |
|
|
|
|
|
|
|
|
Interest rate contracts |
|
Interest expense |
|
|
157 |
|
|
174 |
Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the first quarter of fiscal 2013 and 2012. The interest rate swaps do not contain credit-risk-related contingent features.
5. DEBT
As of September 29, 2012, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $95.0 million, of which none was outstanding.
Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s United States and Canadian commercial paper programs. The facility provides for borrowings in both United States and Canadian dollars. Borrowings by Sysco International, ULC under the agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by the wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures. The facility in the amount of $1,000.0 million expires on December 29, 2016, but is subject to extension. There were no commercial paper issuances outstanding as of September 29, 2012.
In September 2012, the company’s Irish subsidiary, Pallas Foods, entered into a €75.0 million (Euro) multicurrency revolving credit facility, which will be utilized for capital needs for the company’s European subsidiaries. This facility provides for unsecured borrowings and expires September 25, 2013, but is subject to extension. There were no outstanding borrowings under this facility as of September 29, 2012.
During the first quarter of fiscal 2013, there were no commercial paper issuances or short-term bank borrowings.
8
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 (Retirement Plan) and the Supplemental Executive Retirement Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Postretirement Plans |
||||||||
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
||||
|
(In thousands) |
||||||||||
Service cost |
$ |
17,780 |
|
$ |
27,055 |
|
$ |
135 |
|
$ |
114 |
Interest cost |
|
37,700 |
|
|
36,879 |
|
|
154 |
|
|
158 |
Expected return on plan assets |
|
(42,801) |
|
|
(40,401) |
|
|
- |
|
|
- |
Amortization of prior service cost |
|
1,461 |
|
|
1,201 |
|
|
42 |
|
|
54 |
Amortization of actuarial loss (gain) |
|
19,022 |
|
|
15,041 |
|
|
(51) |
|
|
(83) |
Amortization of transition obligation |
|
- |
|
|
- |
|
|
35 |
|
|
38 |
Net periodic benefit cost |
$ |
33,162 |
|
$ |
39,775 |
|
$ |
315 |
|
$ |
281 |
At the end of fiscal 2012, Sysco approved a plan to freeze future benefit accruals under the Retirement Plan as of December 31, 2012 for all United States-based salaried and non-union hourly employees. Effective January 1, 2013, these employees will be eligible for additional contributions under the company’s defined contribution 401(k) plan. The measurements for the Retirement Plan at June 30, 2012 and the resulting expense for fiscal 2013 included the impact of the freeze.
Sysco’s contributions to its company-sponsored defined benefit plans were $5.6 million and $5.7 million during the first quarter of fiscal 2013 and fiscal 2012, respectively.
7. MULTIEMPLOYER EMPLOYEE BENEFIT PLANS
Sysco contributes to several multiemployer defined benefit pension plans in the United States and Canada based on obligations arising under collective bargaining agreements covering union-represented employees. Sysco does not directly manage these multiemployer plans, which are generally managed by boards of trustees, half of whom are appointed by the unions and the other half by other employers contributing to the plan.
Based upon the information available from plan administrators, management believes that several of these multiemployer plans are underfunded. In addition, pension-related legislation in the United States requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, Sysco expects its contributions to these plans to increase in the future. In addition, if a United States multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund.
Withdrawal Activity
Sysco has voluntarily withdrawn from various multiemployer pension plans. Total withdrawal liability provisions recorded were zero in the first quarter of fiscal 2013 and $4.5 million in the first quarter of fiscal 2012. As of September 29, 2012, June 30, 2012 and October 1, 2011, Sysco had approximately $30.7 million, $30.7 million and $46.9 million, respectively, in liabilities recorded related to certain multiemployer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred. Recorded withdrawal liabilities are estimated at the time of withdrawal based on the most recently available valuation and participant data for the respective plans; amounts are subsequently adjusted to the period of payment to reflect any changes to these estimates. If any of these plans were to undergo a mass withdrawal, as defined by the Pension Benefit Guaranty Corporation, within a two year time frame from the point of our withdrawal, Sysco could have additional liability. The company does not currently believe any mass withdrawals are probable to occur in the applicable two year time frame relating to the plans from which Sysco has voluntarily withdrawn.
9
Potential Withdrawal Liability
Under current law regarding multiemployer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multiemployer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multiemployer plan’s unfunded vested liabilities. Generally, Sysco does not have the greatest share of liability among the participants in any of the plans in which it participates. Sysco believes that one of the above-mentioned events is reasonably possible for certain plans in which it participates and estimates its share of withdrawal liability for these plans could have been as much as $115.0 million as of September 29, 2012. This estimate excludes plans for which Sysco has recorded withdrawal liabilities or where the likelihood of the above-mentioned events is deemed remote. This estimate is based on the information available from plan administrators, which has valuation dates ranging from December 31, 2009 to December 31, 2011. The majority of these plans have a valuation date of calendar year-end and therefore the estimate results from plans for which the valuation date was December 31, 2011; therefore, the company’s estimate reflects the condition of the financial markets as of that date. Due to the lack of current information, management believes Sysco’s current share of the withdrawal liability could materially differ from this estimate.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended |
||||
|
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
||
|
|
(In thousands, except for share and per share data) |
||||
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
Net earnings |
|
$ |
286,598 |
|
$ |
302,653 |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
Weighted-average basic shares outstanding |
|
|
587,757,832 |
|
|
592,003,631 |
Dilutive effect of share-based awards |
|
|
2,080,987 |
|
|
1,445,470 |
Weighted-average diluted shares outstanding |
|
|
589,838,819 |
|
|
593,449,101 |
|
|
|
|
|
|
|
Basic earnings per share: |
|
$ |
0.49 |
|
$ |
0.51 |
|
|
|
|
|
|
|
Diluted earnings per share: |
|
$ |
0.49 |
|
$ |
0.51 |
The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 37,000,000 and 50,000,000 for the first quarter of fiscal 2013 and fiscal 2012, respectively.
9. 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 2013, options to purchase 18,750 shares were granted to employees from the 2007 Stock Incentive Plan. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per share of options granted during the first quarter of fiscal 2013 was $3.76.
In the first quarter of fiscal 2013, 2,552 restricted stock units were granted to employees from the 2007 Stock Incentive Plan. Some of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit
10
award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per share of restricted stock units granted during the first quarter of fiscal 2013 was $29.39.
Employees' Stock Purchase Plan
Plan participants purchased 398,165 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first quarter of fiscal 2013.
The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees' Stock Purchase Plan was $4.47 during the first quarter of fiscal 2013. The fair value of the stock purchase rights is estimated as the difference between the stock price and the employee purchase price.
All Share-Based Payment Arrangements
The total share-based compensation cost that has been recognized in results of operations was $10.7 million and $9.8 million for the first quarter of fiscal 2013 and fiscal 2012, respectively.
As of September 29, 2012, there was $53.6 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.24 years.
10. INCOME TAXES
Uncertain Tax Positions
As of September 29, 2012, the gross amount of unrecognized tax benefits was $63.4 million and the gross amount of liability for accrued interest related to unrecognized tax benefits was $35.1 million. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.
Effective Tax Rates
The effective tax rate of 36.37% for the first quarter of fiscal 2013 was favorably impacted by the recording of $3.7 million in net tax benefit related to various federal, foreign and state uncertain tax positions. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had also the impact of reducing the effective tax rate.
The effective tax rate of 36.90% for the first quarter of fiscal 2012 was favorably impacted by a decrease in a tax provision for a foreign tax liability of approximately $3.6 million resulting from changes in exchange rates. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.
Other
The determination of the company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various United States federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
11
11. ACQUISITIONS
During the first quarter of fiscal 2013, in the aggregate, the company paid cash of $60.2 million for acquisitions made during fiscal 2013 and for contingent consideration related to operations acquired in previous fiscal years. Acquisitions in the first quarter of fiscal 2013 were immaterial, individually and in the aggregate, to the consolidated financial statements.
Certain acquisitions involve contingent consideration typically payable over periods up to five years only in the event that certain operating results are attained or certain outstanding contingencies are resolved. As of September 29, 2012, aggregate contingent consideration amounts outstanding relating to acquisitions was $79.9 million, of which $36.4 million could result in the recording of additional goodwill.
12. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Sysco is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable, the losses have been accrued. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company. However, the final results of legal proceedings cannot be predicted with certainty and if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods.
Fuel Commitments
Sysco routinely enters into forward purchase commitments for a portion of its projected diesel fuel requirements. As of September 29, 2012, outstanding forward diesel fuel purchase commitments totaled approximately $96.4 million at a fixed price through August 2013.
Other Commitments
Sysco has committed with various third party service providers to provide information technology services. The services have been committed for periods up to fiscal 2016 and may be extended. As of September 29, 2012, the total remaining cost of the services over that period is expected to be approximately $477.5 million. A portion of this amount may be reduced by Sysco utilizing less than estimated resources and can be increased by Sysco utilizing more than estimated resources. Certain agreements allow adjustments for inflation. Sysco may also cancel a portion or all of the services provided subject to termination fees which decrease over time. If Sysco were to terminate all of the services in fiscal 2013, the estimated termination fees incurred in fiscal 2013 would be approximately $35.9 million.
13. BUSINESS SEGMENT INFORMATION
The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise. The Broadline reportable segment is an aggregation of the company’s United States, Canadian and European Broadline segments. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers and also provide custom-cut meat operations. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. "Other" financial information is attributable to the company's other operating segments, including the company's specialty produce and lodging industry segments, a company that distributes specialty imported products and a company that distributes to international customers.
12
The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Intersegment sales represent specialty produce and imported specialty products distributed by the Broadline and SYGMA operating companies. Management evaluates the performance of each of the operating segments based on its respective operating income results. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared service center. These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project.
The following tables set forth certain financial information for Sysco’s business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended |
||||
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
||
Sales: |
(In thousands) |
||||
Broadline |
$ |
9,057,664 |
|
$ |
8,658,521 |
SYGMA |
|
1,420,755 |
|
|
1,384,469 |
Other |
|
660,601 |
|
|
588,561 |
Intersegment sales |
|
(52,104) |
|
|
(45,161) |
Total |
$ |
11,086,916 |
|
$ |
10,586,390 |
|
|
|
|
|
|
|
13-Week Period Ended |
||||
|
Sept. 29, 2012 |
|
Oct. 1, 2011 |
||
Operating income: |
(In thousands) |
||||
Broadline |
$ |
642,836 |
|
$ |
624,115 |
SYGMA |
|
12,085 |
|
|
15,691 |
Other |
|
22,359 |
|
|
24,485 |
Total segments |
|
677,280 |
|
|
664,291 |
Corporate expenses |
|
(198,498) |
|
|
(154,951) |
Total operating income |
|
478,782 |
|
|
509,340 |
Interest expense |
|
30,868 |
|
|
29,474 |
Other expense (income), net |
|
(2,477) |
|
|
250 |
Earnings before income taxes |
$ |
450,391 |
|
$ |
479,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 29, 2012 |
|
Jun. 30, 2012 |
|
Oct. 1, 2011 |
|||
Assets: |
|
|
|
(In thousands) |
|||||||
Broadline |
|
|
|
$ |
8,573,548 |
|
$ |
8,025,677 |
|
$ |
7,482,833 |
SYGMA |
|
|
|
|
467,855 |
|
|
475,877 |
|
|
448,525 |
Other |
|
|
|
|
910,434 |
|
|
877,207 |
|
|
826,334 |
Total segments |
|
|
|
|
9,951,837 |
|
|
9,378,761 |
|
|
8,757,692 |
Corporate |
|
|
|
|
2,535,996 |
|
|
2,716,211 |
|
|
2,689,171 |
Total |
|
|
|
$ |
12,487,833 |
|
$ |
12,094,972 |
|
$ |
11,446,863 |
13
14. SUPPLEMENTAL GUARANTOR INFORMATION – SUBSIDIARY GUARANTEES
On January 19, 2011, the wholly-owned United States Broadline (U.S. Broadline) subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. As of September 29, 2012, Sysco had a total of $2,975.0 million in senior notes and debentures outstanding that are covered by these guarantees.
The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (the majority of the company’s U.S. Broadline subsidiaries), and all other non‑guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet |
|||||||||||||
|
Sept. 29, 2012 |
|||||||||||||
|
Sysco |
|
U.S. Broadline Subsidiaries |
|
Other Non-Guarantor Subsidiaries |
|
Eliminations |
|
Consolidated Totals |
|||||
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
Current assets |
$ |
411,095 |
|
$ |
3,970,191 |
|
$ |
1,952,364 |
|
$ |
- |
|
$ |
6,333,650 |
Investment in subsidiaries |
|
10,609,447 |
|
|
- |
|
|
- |
|
|
(10,609,447) |
|
|
- |
Plant and equipment, net |
|
626,429 |
|
|
2,010,057 |
|
|
1,314,182 |
|
|
- |
|
|
3,950,668 |
Other assets |
|
341,778 |
|
|
502,823 |
|
|
1,358,914 |
|
|
- |
|
|
2,203,515 |
Total assets |
$ |
11,988,749 |
|
$ |
6,483,071 |
|
$ |
4,625,460 |
|
$ |
(10,609,447) |
|
$ |
12,487,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
$ |
640,071 |
|
$ |
978,653 |
|
$ |
1,984,150 |
|
$ |
- |
|
$ |
3,602,874 |
Intercompany payables (receivables) |
|
3,106,736 |
|
|
(3,280,070) |
|
|
173,334 |
|
|
- |
|
|
- |
Long-term debt |
|
2,714,267 |
|
|
25,482 |
|
|
25,104 |
|
|
- |
|
|
2,764,853 |
Other liabilities |
|
840,402 |
|
|
286,330 |
|
|
99,193 |
|
|
- |
|
|
1,225,925 |
Shareholders’ equity |
|
4,687,273 |
|
|
8,472,676 |
|
|
2,343,679 |
|
|
(10,609,447) |
|
|
4,894,181 |
Total liabilities and shareholders’ equity |
$ |
11,988,749 |
|
$ |
6,483,071 |
|
$ |
4,625,460 |
|
$ |
(10,609,447) |
|
$ |
12,487,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet |
|||||||||||||
|
Jun. 30, 2012 |
|||||||||||||
|
Sysco |
|
U.S. |
|
Other |
|
Eliminations |
|
Consolidated |
|||||
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
Current assets |
$ |
538,451 |
|
$ |
3,675,676 |
|
$ |
1,870,681 |
|
$ |
- |
|
$ |
6,084,808 |
Investment in subsidiaries |
|
10,163,398 |
|
|
- |
|
|
- |
|
|
(10,163,398) |
|
|
- |
Plant and equipment, net |
|
703,658 |
|
|
1,923,925 |
|
|
1,256,167 |
|
|
- |
|
|
3,883,750 |
Other assets |
|
324,839 |
|
|
503,357 |
|
|
1,298,218 |
|
|
- |
|
|
2,126,414 |
Total assets |
$ |
11,730,346 |
|
$ |
6,102,958 |
|
$ |
4,425,066 |
|
$ |
(10,163,398) |
|
$ |
12,094,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
$ |
678,527 |
|
$ |
900,416 |
|
$ |
1,844,636 |
|
$ |
- |
|
$ |
3,423,579 |
Intercompany payables (receivables) |
|
3,068,001 |
|
|
(3,334,860) |
|
|
266,859 |
|
|
- |
|
|
- |
Long-term debt |
|
2,714,415 |
|
|
25,459 |
|
|
23,814 |
|
|
- |
|
|
2,763,688 |
Other liabilities |
|
755,112 |
|
|
367,094 |
|
|
100,459 |
|
|
- |
|
|
1,222,665 |
Shareholders’ equity |
|
4,514,291 |
|
|
8,144,849 |
|
|
2,189,298 |
|
|
(10,163,398) |
|
|
4,685,040 |
Total liabilities and shareholders’ equity |
$ |
11,730,346 |
|
$ |
6,102,958 |
|
$ |
4,425,066 |
|
$ |
(10,163,398) |
|
$ |