Our discussion below of our results includes certain non-GAAP financial measures
that we believe provide important perspective with respect to underlying
business trends. Any non-GAAP financial measure will be denoted as an adjusted
measure and excludes expenses from our Business Transformation Project, from
withdrawals from multiemployer pension plans, restructuring charges,
corporate-owned life insurance policies (COLI) policies, recognized tax benefits
and the impact of the 53rd week in fiscal 2010. More information on the
rationale for the use of these measures and reconciliations to GAAP numbers can
be found under "Non-GAAP Reconciliations."
Overview
Sysco distributes food and related products to restaurants, healthcare and
educational facilities, lodging establishments and other foodservice customers.
Our operations are primarily located throughout the United States, Canada and
Ireland and include broadline companies (which include our custom-cut meat
operations), SYGMA (our chain restaurant distribution subsidiary), specialty
produce companies, hotel supply operations, a company that distributes specialty
imported products and a company that distributes to international customers.
We consider our primary market to be the foodservice market in the United States
and Canada and estimate that we serve about 17.5% of this approximately $225
billion annual market. According to industry sources, the foodservice, or
food-away-from-home, market represents approximately 46% of the total dollars
spent on food purchases made at the consumer level in the United States.
Industry sources estimate the total foodservice market in the United States
experienced a real sales decline of approximately 0.4% in calendar year 2011 and
2.5% in calendar year 2010. Real sales declines do not include the impact of
inflation or deflation.
General economic conditions and consumer confidence can affect the frequency of
purchases and amounts spent by consumers for food-away-from-home and, in turn,
can impact our customers and our sales. We believe the current general economic
conditions, including pressure on consumer disposable income, have contributed
to a decline in the foodservice market. Historically, we have grown at a faster
rate than the overall industry and believe we have continued to grow our market
share in this fragmented industry.
Highlights
High levels of product costs and an uneven economic recovery contributed to a
challenging business environment in fiscal 2012. Our case volume growth has
shown modest improvement in a low growth market environment. However, our
earnings declined due to high levels of inflation and rising operating expenses,
driven in part by our expenses related to our Business Transformation Project.
Comparison of results from fiscal 2012 to fiscal 2011:
· Sales increased 7.8% to $42.4 billion primarily due to increased prices due to
inflation and secondarily from case volume growth.
· Operating income decreased 2.1%, or $40.9 million, to $1.9 billion, primarily
driven by lower gross margins and increased operating expenses partially from
increased expenses from payroll and our Business Transformation Project. These
expense increases were partially offset by increases in gross profit
dollars. Adjusted operating income increased 3.0%, or $60.9 million.
· Net earnings decreased 2.6% to $1.1 billion primarily due to the decline in
operating income. Adjusted net earnings increased 4.7%, or $56.4 million.
· Basic and diluted earnings per share in fiscal 2012 were $1.91 and $1.90,
respectively. This represents a 2.6% decrease from the comparable prior year
period amount for basic earnings per share of $1.96 per share and a 3.1%
decrease from the comparable prior year period amount for diluted earnings per
share of $1.96. Adjusted diluted earnings per share were $2.13 in fiscal 2012
and $2.04 in fiscal 2011, an increase of 4.4%.
See "Non-GAAP Reconciliations" for an explanation of these non-GAAP financial
measures.
Trends and Strategy
Trends
General economic conditions and consumer confidence can affect the frequency of
purchases and amounts spent by consumers for food-away-from-home and, in turn,
can impact our customers and our sales. We believe the current general economic
conditions, including pressure on consumer disposable income, have contributed
to a slow rate of recovery in the foodservice market. According to industry
sources, real sales for the total foodservice market in the United States are
not expected to grow significantly over the next year.
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We experienced prolonged levels of high product cost inflation during most of
fiscal 2012 as compared to fiscal 2011. Our product cost inflation reached a
high of 7.3% in the first quarter of fiscal 2012 and a low of 3.3% in the fourth
quarter of fiscal 2012. While we are generally able to pass on modest levels of
inflation to our customers, we were unable to fully pass through these higher
levels of product cost inflation with the same gross margin percentage without
negatively impacting our customers' business and therefore our business. In the
summer months of 2012, certain agricultural areas of the United States have
experienced severe drought. The impact of this drought is uncertain and could
result in volatile input costs. Input costs could increase at any point in time
for a large portion of the products that we sell for a prolonged period. While
we cannot predict whether inflation will continue at current levels, periods of
high inflation, either overall or in certain product categories, can have a
negative impact on us and our customers, as high food costs can reduce consumer
spending in the food-away-from-home market, and may negatively impact our sales,
gross profit, operating income and earnings.
We have experienced higher operating costs this fiscal year. Some of the
increase has resulted from increased pay-related expenses. Sales compensation
includes commissions which are driven by gross profit dollars and case volumes,
and delivery compensation includes activity-based pay which is driven by case
volumes. Since these drivers are variable in nature, increased gross profit
dollars and case volumes have increased sales and delivery compensation. We
believe pay-related expense could continue to increase if gross profit dollars
and case volumes increase; however, the impact of our productivity related
initiatives could favorably impact the magnitude of this trend. Fuel costs are
expected to stabilize provided that fuel prices do not significantly change from
their current levels. Our Business Transformation Project is a key part of our
strategy to control costs and grow our market share over the long-term. This
project includes an integrated software system that went into deployment in
August 2012. We believe expenses related to the project will increase in fiscal
2013 as compared to fiscal 2012 due to amortization of the software asset and
increased deployment costs.
Net company-sponsored pension costs for our Retirement Plan have experienced
volatility over the past five years primarily due to changes in interest rates
which are used to determine the discount rates for our pension obligations and
our pension asset performance. For most of these periods, we have experienced
significantly increased pension expense. At the end of fiscal 2012, Sysco
decided to freeze future benefit accruals under the Retirement Plan as of
December 31, 2012 for all U.S.-based salaried and non-union hourly
employees. Effective January 1, 2013, these employees will be eligible for
additional contributions under an enhanced, defined contribution plan. Pension
costs will decrease in fiscal 2013 primarily due to this plan freeze. Our
expenses related to our defined contribution plan will increase in fiscal 2013
and will more than offset our reduced pension costs; however, over the
long-term, we believe the changes to both plans will result in reduced
volatility of retirement related expenses and a reduction in total retirement
related expenses.
Strategy
We are focused on optimizing our core broadline business in the U.S. and Canada,
while continuing to explore appropriate opportunities to profitably grow our
market share and create shareholder value by expanding beyond our core
business. Day-to-day, our business decisions are driven by our mission to market
and deliver great products to our customers with exceptional service, with the
aspirational vision of becoming each of our customers' most valued and trusted
business partner. We have identified five strategies to help us achieve our
mission and vision:
· Profoundly enrich the experience of doing business with Sysco: Our primary
focus is to help our customers succeed. We believe that by building on our
current competitive advantages, we will be able to further differentiate our
offering to customers. Our competitive advantages include our sales force of
over 8,000 marketing associates; our diversified product base, which includes
quality-assured Sysco brand products; the suite of services we provide to our
customers such as business reviews and menu analysis; and our wide geographic
presence in the United States and Canada. In addition, we have a portfolio of
businesses spanning broadline, specialty meat, chain restaurant distribution,
specialty produce, hotel amenities, specialty import and export which serves
our customers' needs across a wide array of business segments. We believe this
strategy of enriching the experience of doing business with Sysco will increase
customer retention and profitably accelerate sales growth with both existing
and new customers.
· Continuously improve productivity in all areas of our business: Our multi-year
Business Transformation Project is designed to improve productivity and reduce
costs. An integrated software system is included in this project and will
support a majority of our business processes to further streamline our
operations and reduce costs. These systems are commonly referred to as
Enterprise Resource Planning (ERP) systems. We view the technology as an
important enabler of this project; however the larger outcome of this project
will be from transformed processes that standardize portions of our
operations. This includes a shared business service center to centrally manage
certain back-office functions that are currently performed at a majority of our
operating companies. This project also includes removing costs from our
operations through improved productivity without impacting our service to our
customers. We continue to optimize warehouse and delivery activities across
the corporation to achieve a more efficient delivery of products to our
customers and we seek to improve sales productivity and lower general and
administrative costs. We also have a product cost reduction initiative to
provide the right products to our customers while leveraging our purchasing
power.
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· Expand our portfolio of products and services by initiating a customer-centric
innovation program: We continually explore opportunities to provide new and
improved products, technologies and services to our customers.
· Explore, assess and pursue new businesses and markets: This strategy is focused
on identifying opportunities to expand the core business through growth in new
international markets and in adjacent areas that complement our core
foodservice distribution business. As a part of our ongoing strategic
analysis, we regularly evaluate business opportunities, including potential
acquisitions and sales of assets and businesses.
· Develop and effectively integrate a comprehensive, enterprise-wide talent
management process: Our ability to drive results and grow our business is
directly linked to having the best talent in the industry. We are committed to
the continued enhancement of our talent management programs in terms of how we
recruit, select, train and develop our associates throughout Sysco as well as
succession planning. Our ultimate objective is to provide our associates with
outstanding opportunities for professional growth and career development.
Business Transformation Project
In fiscal 2009, we commenced our Business Transformation Project, which
currently consists of three main components:
· the design and deployment of an ERP system to implement an integrated software
system to support a majority of our business processes and further streamline
our operations;
· a cost transformation initiative to lower our cost structure; and
· a product cost reduction initiative to use market data and customer insights to
make changes to product pricing and product assortment issues.
In fiscal 2012, we continued to refine our ERP system after implementing it at
two pilot operating companies. The system has been deployed to three operating
companies and we are targeting to convert 5 to 15 U.S. Broadline operating
companies in fiscal 2013. Our next five conversions will be in Texas and
Louisiana. We believe future conversions will be 15 to 25 U.S. Broadline
operating companies per year from fiscal 2014 to fiscal 2016. Although we expect
the investment in the ERP system within our Business Transformation Project to
provide meaningful benefits to the company over the long-term, the costs will
exceed the benefits during fiscal 2013.
Expenses related to the Business Transformation Project were $193.1 million in
fiscal 2012 or $0.21 per share, $102.6 million in fiscal 2011 or $0.11 per share
and $81.1 million in fiscal 2010 or $0.09 per share. We anticipate that project
expenses for fiscal 2013 will continue to significantly increase primarily due
to the initiation of software amortization as the system was placed into service
in August 2012. Our costs will also increase from the ramp up of our shared
services center, continuing costs for deployment of the software platform and
information technology support costs. Some of these increased costs will be
partially offset by benefits obtained from the project, primarily in reduced
headcount; however the costs will exceed the benefits in fiscal 2013.
Our cost transformation initiative seeks to lower our cost structure by $300
million to $350 million annually by fiscal 2015. These include initiatives to
increase our productivity in the warehouse and delivery activities including
fleet management and maintenance activities. It also involves improving sales
productivity and reducing general and administrative expenses, partially through
aligning compensation and benefit plans.
Our product cost reduction initiative is designed to lower our total product
costs by $250 million to $300 million annually by fiscal 2015. This initiative
involves the use of market data and customer insights to make changes to product
pricing and product assortment. We believe there are opportunities to more
effectively provide the products that our customers want, to benefit from our
purchasing power and to create mutually beneficial partnerships with our
suppliers. We believe that procuring greater quantities with select vendors will
result in reduced prices for our product purchases.
We expect our expenses related to the Business Transformation Project for fiscal
2013 to be approximately $300 million to $350 million net of benefits obtained
from our shared services center. We expect our capital expenditures related to
this project to be approximately $5 million to $20 million. In fiscal 2013, we
believe we can obtain approximately 25% of the total expected annualized
benefits of $550 million to $650 million. If we are successful in obtaining
these benefits in fiscal 2013, some of the trends noted above could be favorably
impacted.
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Results of Operations
The following table sets forth the components of our consolidated results of
operations expressed as a percentage of sales for the periods indicated:
2010
2012 2011 (53 Weeks)
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 81.9 81.2 80.7
Gross profit 18.1 18.8 19.3
Operating expenses 13.6 13.9 14.0
Operating income 4.5 4.9 5.3
Interest expense 0.3 0.3 0.3Other expense (income), net (0.0) (0.0) 0.0
Earnings before income taxes 4.2 4.6
5.0
Income taxes 1.6 1.7 1.8
Net earnings 2.6 % 2.9 % 3.2 %
The following table sets forth the change in the components of our consolidated
results of operations expressed as a percentage increase or decrease over the
prior year:
2012 2011
Sales 7.8 % 5.6 %
Cost of sales 8.7 6.2
Gross profit 3.8 2.9
Operating expenses 5.9 4.8
Operating income (2.1) (2.2)
Interest expense (4.1) (5.7)
Other expense (income), net (52.4) (1) (1)
Earnings before income taxes (2.4) (1.2)
Income taxes (1.9) 0.9
Net earnings (2.6) % (2.4) %
Basic earnings per share (2.6) % (1.5) %
Diluted earnings per share (3.1) (1.5)
Average shares outstanding 0.2 (1.0)
Diluted shares outstanding 0.1 (0.8)
(1) Other expense (income), net was income of $6.8 million in fiscal 2012,
income of $14.2 million in fiscal 2011 and expense of $0.8 million in fiscal
2010.
Sales
Sales for fiscal 2012 were 7.8% higher than fiscal 2011. Sales for fiscal
2012 increased as a result of product cost inflation, and the resulting increase
in selling prices, along with improving case volumes. Changes in product cost,
an internal measure of inflation, were approximately 5.5% during fiscal 2012.
Case volumes including acquisitions within the last 12 months improved
approximately 3.0% during fiscal 2012. Case volumes excluding acquisitions
within the last 12 months improved approximately 2.5% during fiscal 2012. Our
case volumes represent our results from our Broadline and SYGMA segments only.
Sales from acquisitions in the last 12 months favorably impacted sales by 0.7%
for fiscal 2012. The changes in the exchange rates used to translate our foreign
sales into U.S. dollars did not have a significant impact on sales when compared
to fiscal 2011.
Sales for fiscal 2011 were 5.6% higher than fiscal 2010. After adjusting for
the estimated impact of the 53rd week in fiscal 2010, the adjusted increase in
sales in fiscal 2011 would have been 7.7%. Sales for fiscal 2011 increased as a
result of product cost inflation, and the resulting increase in selling prices,
along with improving case volumes. Estimated product cost increases, an internal
measure of inflation, were approximately 4.6% during fiscal 2011. Case volumes
including acquisitions within the last 12 months improved approximately 4.1%
during fiscal 2011. Case volumes excluding acquisitions within the last 12
months improved approximately 3.4%
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during fiscal 2011. Sales from acquisitions in the last 12 months favorably
impacted sales by 0.7% for fiscal 2011. The changes in the exchange rates used
to translate our foreign sales into U.S. dollars positively impacted sales by
0.5% compared to fiscal 2010.
Operating Income
Cost of sales primarily includes our product costs, net of vendor consideration,
and includes in-bound freight. Operating expenses include the costs of
facilities, product handling, delivery, selling and general and administrative
activities. Fuel surcharges are reflected within sales and gross profit; fuel
costs are reflected within operating expenses.
Fiscal 2012 vs. Fiscal 2011
Operating income decreased 2.1% in fiscal 2012 over fiscal 2011 to $1.9 billion,
and as a percentage of sales, decreased to 4.5% of sales. This decrease was
primarily driven by declines in gross margin and increased operating expenses
partially from increased expenses from payroll and our Business Transformation
Project. These expense increases were partially offset by increases in gross
profit dollars. Gross profit dollars increased 3.8% in fiscal 2012 as compared
to fiscal 2011, and operating expenses increased 5.9% in fiscal 2012 as compared
to fiscal 2011. Adjusted operating income increased 3.0%, or $60.9 million,
during fiscal 2012.
Gross profit dollars increased in fiscal 2012 as compared to fiscal 2011
primarily due to increased sales. Gross margin, which is gross profit as a
percentage of sales, was 18.11% in fiscal 2012, a decline of 69 basis points
from the gross margin of 18.80% in fiscal 2011. This decline in gross margin was
primarily the result of product cost inflation. Other factors contributing to
our gross margin decline were competitive pressures on pricing, segment mix
changes where certain of our lower margin segments grew faster than our
Broadline segment and our own strategy to gain market share.
Sysco's product cost inflation was estimated as inflation of 5.5% during fiscal
2012. Based on our product sales mix for fiscal 2012, we were most impacted by
higher levels of inflation in the meat, canned and dry and frozen product
categories in the range of 6% to 8%. Our product cost inflation reached a high
of 7.3% in the first quarter of fiscal 2012 and a low of 3.3% in the fourth
quarter of fiscal 2012. While we are generally able to pass through modest
levels of inflation to our customers, we were unable to fully pass through these
higher levels of product cost inflation with the same gross margin in these
product categories without negatively impacting our customers' business and
therefore our business. In the summer months of 2012, certain agricultural
areas of the United States have experienced severe drought. The impact of this
drought is uncertain and could result in volatile input costs. Input costs could
increase at any point in time for a large portion of the products that we sell
for a prolonged period. While we cannot predict whether inflation will continue
at these levels, prolonged periods of high inflation, either overall or in
certain product categories, can have a negative impact on us and our customers,
as high food costs can reduce consumer spending in the food-away-from-home
market, and may negatively impact our sales, gross profit and earnings.
Our product cost reduction initiative is designed to lower our total product
costs by $250 million to $300 million annually by fiscal 2015; however we
believe the impact on our product costs in fiscal 2013 will be modest.
Gross profit dollars for fiscal 2012 also increased as a result of higher fuel
surcharges. Fuel surcharges were approximately $47.5 million higher in fiscal
2012 than in fiscal 2011 due to higher fuel prices incurred during fiscal 2012
and the application of fuel surcharges to a broader customer base for the entire
fiscal period. Assuming that fuel prices do not greatly vary from recent
levels, we expect the level of fuel surcharges in fiscal 2013 to remain
consistent with those experienced in fiscal 2012.
Operating expenses for fiscal 2012 increased 5.9% primarily due to increased
pay-related expenses, increased expenses related to our Business Transformation
Project, increased fuel costs and an unfavorable year-over-year comparison on
the amounts recorded to adjust the carrying value of COLI policies to their cash
surrender values as compared to the prior year period. These increases were
partially offset by decreases in net company-sponsored pension costs and lower
provisions related to multiemployer pension plans. Adjusted operating
expenses increased 4.1%, or $221.0 million, in fiscal 2012 over fiscal 2011.
Pay-related expenses, excluding labor costs associated with our Business
Transformation Project, increased by $153.7 million in fiscal 2012 over fiscal
2011. The increase was primarily due to increased sales and delivery
compensation and added costs from companies acquired within the last 12 months.
Sales compensation includes commissions which are driven by gross profit dollars
and case volumes, and delivery compensation includes activity-based pay which is
driven by case volumes. Since these drivers are variable in nature, increased
gross profit dollars and cases volumes will increase sales and delivery
compensation. However, the impact of our productivity related initiatives could
favorably impact the magnitude of this trend. Also contributing to the increase
was a restructuring charge related to severance incurred in the fourth quarter
of fiscal 2012 of $6.4 million.
Expenses related to our Business Transformation Project, inclusive of
pay-related expense, were $193.1 million in fiscal 2012 and $102.6 million in
fiscal 2011, representing an increase of $90.5 million. The increase in fiscal
2012 resulted from increased project spending, reduced capitalization of
expenditures and expenses due to the ramp up of our shared services center. We
anticipate that project expenses for fiscal 2013 will continue to increase
primarily due to the initiation of software amortization as the system was
placed into service in August 2012. Additionally, the majority of the
expenditures forecasted for fiscal 2013 will be expensed as the company is in
the deployment phase of the project. We believe the increase in project
expenses, including all pay-related expenses,
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related to the Business Transformation Project in fiscal 2013 as compared to
fiscal 2012 will be approximately $105 million to $155 million.
Fuel costs increased by $39.8 million in fiscal 2012 over fiscal 2011 primarily
due to increased contracted and market diesel prices. Our costs per gallon
increased 13.0% in fiscal 2012 over fiscal 2011. Our activities to mitigate
fuel costs include reducing miles driven by our trucks through improved routing
techniques, improving fleet utilization by adjusting idling time and maximum
speeds and using fuel surcharges. We routinely enter into forward purchase
commitments for a portion of our projected monthly diesel fuel requirements with
a goal of mitigating a portion of the volatility in fuel prices.
Our fuel commitments will result in either additional fuel costs or avoided fuel
costs based on the comparison of the prices on the fixed price contracts and
market prices for the respective periods. In fiscal 2012, the forward purchase
commitments resulted in an estimated $20.2 million of avoided fuel costs as the
fixed price contracts were generally lower than market prices for the contracted
volumes. In fiscal 2011, the forward purchase commitments resulted in an
estimated $16.4 million of avoided fuel costs as the fixed price contracts were
generally lower than market prices for the contracted volumes.
As of June 30, 2012, we had forward diesel fuel commitments totaling
approximately $96 million through April 2013. Subsequent to June 30, 2012, we
entered into forward diesel fuel commitments totaling approximately $20 million
for May and June 2013. These contracts will lock in the price of approximately
35% to 45% of our fuel purchase needs for the contracted periods at prices
higher than the current market price for diesel. Assuming that fuel prices do
not rise significantly over recent levels during fiscal 2013, fuel costs
exclusive of any amounts recovered through fuel surcharges, are not expected to
fluctuate significantly as compared to fiscal 2012. Our estimate is based upon
current, published quarterly market price projections for diesel, the cost
committed to in our forward fuel purchase agreements currently in place for
fiscal 2013 and estimates of fuel consumption. Actual fuel costs could vary from
our estimates if any of these assumptions change, in particular if future fuel
prices vary significantly from our current estimates. We continue to evaluate
all opportunities to offset potential increases in fuel expense, including the
use of fuel surcharges and overall expense management.
We adjust the carrying values of our COLI policies to their cash surrender
values on an ongoing basis. The cash surrender values of these policies are
largely based on the values of underlying investments, which through fiscal 2011
included publicly traded securities. As a result, the cash surrender values of
these policies fluctuated with changes in the market value of such
securities. The changes in the financial markets resulted in gains for these
policies of $28.2 million in fiscal 2011. Near the end of fiscal 2011, we
reallocated all of our policies into low-risk, fixed-income securities to reduce
earnings volatility and therefore our adjustments for fiscal 2012 were not
significant. Beginning with fiscal 2013, there should be no significant
year-over-year impact from COLI adjustments as compared to fiscal 2013.
Net company-sponsored pension costs in fiscal 2012 were $27.3 million lower than
in fiscal 2011. The decrease in fiscal 2012 was due primarily to higher returns
on assets of Sysco's Retirement Plan obtained in fiscal 2011. At the end of
fiscal 2012, Sysco decided to freeze future benefit accruals under the
Retirement Plan as of December 31, 2012 for all U.S.-based salaried and
non-union hourly employees. Effective January 1, 2013, these employees will be
eligible for additional contributions under an enhanced, defined contribution
plan. Net company-sponsored pension costs in fiscal 2013 have been determined
as of the fiscal 2012 year-end measurement date and will decrease by
approximately $26.5 million in fiscal 2013. Our expenses related to our defined
contribution plan will increase approximately $45 million to $55 million in
fiscal 2013. The decline in pension cost will occur evenly over fiscal 2013;
however, the increased defined contribution expenses will occur in the last half
of fiscal 2013 when these enhancements go into effect. Over the long-term, we
believe the changes to both plans will result in reduced volatility of
retirement related expenses and a reduction in total retirement related
expenses. Absent the Retirement Plan freeze discussed above, net
company-sponsored pension costs in fiscal 2013 would have increased $106.9
million instead of decreasing $26.5 million.
From time to time, we may voluntarily withdraw from multiemployer pension plans
to minimize or limit our future exposure to these plans. In the last two fiscal
years, we voluntary withdrew from several multiemployer plans and recorded
provisions of $21.9 million in fiscal 2012 and $41.5 million in fiscal 2011.
We also measure our expense performance on a cost per case basis, which we seek
to align with the gross profit that we are able to generate. For our Broadline
companies, our cost per case increased $0.04 per case as compared to fiscal
2011. These increases primarily related to increased payroll costs and fuel
costs discussed above.
Fiscal 2011 vs. Fiscal 2010
Operating income decreased 2.2% in fiscal 2011 over fiscal 2010 to $1.9 billion,
and as a percentage of sales, declined to 4.9% of sales. The decrease was
driven by the absence of the 53rd week in fiscal 2011, gross profit dollars
growing at a slower rate than sales and operating expenses increasing faster
than gross profit partially due to charge of $41.5 million from withdrawals from
multiemployer pension plans. Gross profit dollars increased 2.9% in fiscal 2011
as compared to fiscal 2010, and operating expenses increased 4.8% in fiscal
2011. Adjusted operating income increased 2.5%, or $50.8 million, in fiscal
2011 over fiscal 2010.
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Gross profit dollars increased in fiscal 2011 as compared to fiscal 2010
primarily due to increased sales, partially offset by the negative comparison of
the additional week included in fiscal 2010. Gross margin was 18.80% in fiscal
2011, a decline of 50 basis points from the gross margin of 19.30% in fiscal
2010. This decline in gross margin was primarily the result of the following
factors described in the paragraphs below.
First, Sysco's product cost inflation was estimated as inflation of 4.6% during
fiscal 2011. Based on our product sales mix for fiscal 2011, we were most
impacted by higher levels of inflation in the dairy, meat and seafood product
categories in the range of 10% to 12%. Our largest selling product category,
canned and dry, experienced inflation of 4%.
Second, ongoing strategic pricing initiatives in fiscal 2011 lowered our prices
to our customers in certain product categories in order to increase sales
volumes. These initiatives are being phased in over time and resulted in
short-term gross profit declines as a percentage of sales, but we believe will
result in long-term gross profit dollar growth due to higher sales volumes and
increased market share. We have experienced meaningful year over year volume
growth with those items included in the early phases of these programs in the
geographies where this program has been implemented. We believe the long-term
benefits of these strategic initiatives will result in profitable market share
growth.
Third, gross profit dollars for fiscal 2011 increased as a result of higher fuel
surcharges. Fuel surcharges were approximately $26.0 million higher in fiscal
2011 than in the comparable prior year period due to higher fuel prices incurred
during fiscal 2011 and the application of fuel surcharges to a broader customer
base for a small portion of the third quarter and the entire fourth quarter.
Operating expenses for fiscal 2011 increased 4.8% primarily due to higher
pay-related expense, an increase in net company-sponsored pension costs,
provisions for withdrawal from multiemployer pension plans and higher fuel costs
as compared to the prior year period. The impact of these operating expense
increases was partially offset by a decrease in operating expenses of
approximately $101.4 million resulting from the absence of the 53rd week in
fiscal 2010. Adjusted operating expense increased 5.9%, or $298.8 million, in
fiscal 2011 over fiscal 2010.
Pay-related expenses, excluding labor costs associated with our Business
Transformation Project, increased by $61.1 million in fiscal 2011 over fiscal
2010. The increase was primarily due to increased sales and delivery
compensation. Pay-related expenses from acquired companies and changes in the
exchange rates used to translate our foreign sales into U.S. dollars also
contributed to the increase. Partially offsetting these increases were lower
provisions for current management incentive bonuses of $13.9 million.
Net company-sponsored pension costs in fiscal 2011 were $60.3 million higher
than in fiscal 2010. The increase in fiscal 2011 was due primarily to a decrease
in discount rates used to calculate our projected benefit obligation and related
pension expense at the end of fiscal 2010, partially offset by reduced
amortization of our net actuarial loss resulting from actuarial gains from
higher returns on assets of Sysco's Retirement Plan during fiscal 2010.
From time to time, we may voluntarily withdraw from multiemployer pension plans
to minimize or limit our future exposure to these plans. In fiscal years 2011
and 2010, we voluntary withdrew from several multiemployer plans and recorded
provisions of $41.5 million in fiscal 2011 and $2.9 million in fiscal 2010.
Fuel costs increased by $33.0 million in fiscal 2011 over fiscal 2010 primarily
due to increased contracted and market diesel prices. Our costs per gallon
increased 14.3% in fiscal 2011 over fiscal 2010. Our forward fuel commitments
will result in either additional fuel costs or avoided fuel costs based on the
comparison of the prices on the fixed price contracts and market prices for the
respective periods. In fiscal 2011, the forward purchase commitments resulted in
an estimated $16.4 million of avoided fuel costs as the fixed price contracts
were generally lower than market prices for the contracted volumes. In fiscal
2010, the forward purchase commitments resulted in an estimated $1.5 million of
additional fuel costs as the fixed price contracts were higher than market
prices for the contracted volumes for a portion of the fiscal year.
For our Broadline companies, our cost per case increased $0.11 per case as
compared to fiscal 2010. These increases primarily related to increased payroll
costs, increased fuel costs and charges created by withdrawing from
multiemployer plans, all of which are discussed above.
Net Earnings
Net earnings for fiscal 2012 decreased 2.6% over the comparable prior year
period. This decrease was primarily due to changes in operating income discussed
above. Adjusted net earnings increased 4.7% during fiscal 2012.
Net earnings for fiscal 2011 decreased 2.4% over the comparable prior year
period. This decrease was primarily due to the absence of the 53rd week in
fiscal 2011, the factors discussed above and an increase in the effective tax
rate. The effective tax rate for fiscal 2011 was 36.96%, compared to an
effective tax rate of 36.20% for fiscal 2010. The difference between the tax
rates for the two periods resulted largely from the one-time reversal of
interest accruals for tax contingencies related to our settlement with the
Internal Revenue Service (IRS) in the first quarter of fiscal 2010. Adjusted
net earnings increased 3.6% during fiscal 2011.
22
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The effective tax rate for fiscal 2012 was 37.13%. Indefinitely reinvested
earnings taxed at foreign statutory tax rates less than our domestic tax rate
had the impact of reducing the effective tax rate.
The effective tax rate of 36.96% for fiscal 2011 was favorably impacted
primarily by two items. First, we recorded a tax benefit of approximately $17.0
million for the reversal of valuation allowances previously recorded on state
net operating loss carryforwards. Second, we adjust the carrying values of our
COLI policies to their cash surrender values. The gain of $28.2 million recorded
in fiscal 2011 was primarily non-taxable for income tax purposes, and had the
impact of decreasing income tax expense for the period by $11.1
million. Partially offsetting these favorable impacts was the recording of $9.3
million in tax and interest related to various federal, foreign and state
uncertain tax positions.
The effective tax rate of 36.20% for fiscal 2010 was favorably impacted
primarily by two items. First, we recorded an income tax benefit of
approximately $29.0 million resulting from the one-time reversal of a previously
accrued liability related to the settlement with the IRS (See Note 18, "Income
Taxes" for additional discussion). Second, the gain of $21.6 million recorded to
adjust the carrying value of COLI policies to their cash surrender values in
fiscal 2010 was non-taxable for income tax purposes, and had the impact of
decreasing income tax expense for the period by $8.3 million.
Earnings Per Share
Basic and diluted earnings per share in fiscal 2012 were $1.91 and $1.90,
respectively. This represents a 2.6% decrease from the comparable prior year
period amount for basic earnings per share of $1.96 per share and a 3.1%
decrease from the comparable prior year period amount for diluted earnings per
share of $1.96. This decrease was primarily the result of the factors discussed
above. Adjusted diluted earnings per share was $2.13 in fiscal 2012 and $2.04
in fiscal 2011, or an increase of 4.4%.
Basic and diluted earnings per share decreased 1.5% in fiscal 2011 from the
prior year. This decrease was primarily the result of the absence of the 53rd
week in fiscal 2011 and the factors discussed above, as well as a net reduction
in shares outstanding. The net reduction in both average and diluted shares
outstanding was primarily due to share repurchases which occurred during the
first 26 weeks of fiscal 2011. Adjusted diluted earnings per share were $2.04
in fiscal 2011 and $1.95 in fiscal 2010, or an increase of 4.6%.
Non-GAAP Reconciliations
Sysco's results of operations are impacted by costs from our multi-year Business
Transformation Project (BTP), significant charges from the withdrawal from a
multiemployer pension plan (MEPP), restructuring charges and recognized tax
benefits. Additionally, near the end of fiscal 2011, we reallocated all of our
investments in our COLI policies into low-risk, fixed-income securities and
therefore we do not expect significant volatility in operating expenses,
operating income, net earnings and diluted earnings per share in future periods
related to these policies. We experienced significant gains in these policies
during fiscal 2011. Management believes that adjusting its operating expenses,
operating income, net earnings and diluted earnings per share to remove the
impact of the Business Transformation Project expenses, multiemployer pension
plan charges, restructuring charges, COLI gains and tax benefits provides an
important perspective with respect to underlying business trends and results and
provides meaningful supplemental information to both management and investors
that is indicative of the performance of the company's underlying operations and
facilitates comparison on a year-over year basis.
In addition, Sysco's fiscal year ends on the Saturday nearest to June 30th. This
resulted in a 52-week year ending June 30, 2012 for fiscal 2012, a 52-week year
ending July 2, 2011 for fiscal 2011 and a 53-week year ending July 3, 2010 for
fiscal 2010. Because the fourth quarter of fiscal 2010 contained an additional
week as compared to fiscal 2011, our results of operations for fiscal 2010 are
not directly comparable to fiscal 2011. Management believes that adjusting the
fiscal 2010 results of operations for the estimated impact of the additional
week provides more comparable financial results on a year-over-year basis. As a
result, in the non-GAAP reconciliation below for fiscal 2011 compared to fiscal
2010, in addition to the specific line item impacts noted above, operating items
have been adjusted by one-fourteenth of the total metric for the fourth quarter
of fiscal 2010. Failure to make these adjustments would cause the year-over-year
changes in certain metrics such as sales, operating income, net earnings and
diluted earnings per share to be overstated, whereas in certain cases, a metric
may actually have increased rather than declined or declined rather than
increased on a more comparable year-over-year basis.
The company uses these non-GAAP measures when evaluating its financial results
as well as for internal planning and forecasting purposes. These financial
measures should not be used as a substitute in assessing the company's results
of operations for periods presented. An analysis of any non-GAAP financial
measure should be used in conjunction with results presented in accordance with
GAAP. As a result, in the tables below, each period presented is adjusted to
remove expenses related to the Business Transformation Project, significant
charges incurred from the withdrawal from a multiemployer pension plan,
restructuring charges, gains recorded on the adjustments to the carrying value
of COLI policies and to remove the impact of tax benefits in fiscal 2011. In
addition, fiscal 2010 results are adjusted to remove the estimate impact of the
53rd week.
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Set forth below is a reconciliation of actual operating expenses, operating
income, net earnings and diluted earnings per share to adjusted results for
these measures for fiscal 2012 and fiscal 2011:
Change in
2012 2011 Dollars % Change
(In thousands, except for share and per share data)
Operating expenses (GAAP) $ 5,785,945 $ 5,463,210 $ 322,735 5.9 %
Impact of BTP costs (193,126) (102,623) (90,503) 88.2
Impact of MEPP charge (21,899) (41,544) 19,645 (47.3)
Impact of restructuring charge (6,415) - (6,415)
Impact of COLI 3,721 28,197 (24,476) (86.8)
Adjusted operating expenses $ 5,568,226 $ 5,347,240 $ 220,986 4.1 %
(Non-GAAP)
Operating Income (GAAP) $ 1,890,632 $ 1,931,502 $ (40,870) (2.1) %
Impact of BTP costs 193,126 102,623 90,503 88.2
Impact of MEPP charge 21,899 41,544 (19,645) (47.3)
Impact of restructuring charge 6,415 - 6,415
Impact of COLI (3,721) (28,197) 24,476 (86.8)
Adjusted operating income $ 2,108,351 $ 2,047,472 $ 60,879 3.0 %
(Non-GAAP)
Net earnings (GAAP) $ 1,121,585 $ 1,152,030 $ (30,445) (2.6) %
Impact of BTP costs (net of tax) 121,416 64,694 56,722 87.7
(1)
Impact of MEPP charge (net of 13,768 26,189 (12,421) (47.4)
tax) (1)
Impact of restructuring charge 4,033 - 4,033
(net of tax) (1)
Impact of COLI (3,721) (28,197) 24,476 (86.8)
Impact of tax benefits - (14,032) 14,032 0.0
Adjusted net earnings (Non-GAAP) $ 1,257,081$ 1,200,684$ 56,397 4.7 %
Diluted earnings per share $ 1.90 $ 1.96 $ (0.06) (3.1) %
(GAAP)
Impact of BTP costs (2)
0.21 0.11 0.10 90.9
Impact of MEPP charge (2) 0.02 0.04 (0.02) (50.0)
Impact of restructuring charge 0.01 - 0.01
(2)
Impact of COLI (2) (0.00) (0.05) 0.05
Impact of tax benefits (2) - (0.02) 0.02
Adjusted diluted earnings per $ $ $ %
share (Non-GAAP) 2.13 2.04 0.09 4.4
Diluted shares outstanding 588,991,441 588,691,546
(1) Tax impact of adjustments for Business Transformation Project,
multiemployer pension plan expenses, restructuring charges was $82.2 million and
$53.3 million for fiscal 2012 and 2011, respectively.
(2) Individual components of diluted earnings per share may not sum to the
total adjusted diluted earnings due to rounding.
24
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Set forth below is a reconciliation of actual sales, operating expenses,
operating income, net earnings and diluted earnings per share to adjusted
results for these measures for fiscal 2011 and fiscal 2010:
2010 Change in
2011 (53 Weeks) Dollars % Change
(In thousands, except for share and per share data)
Sales (GAAP) $ 39,323,489 $ 37,243,495 $ 2,079,994 5.6 %
Impact of 53rd week - 739,177 (739,177)
Adjusted sales (Non-GAAP) $ 39,323,489 $ 36,504,318 $ 2,819,171 7.7 %
Operating expenses (GAAP) $ 5,463,210 $ 5,212,439 $ 250,771 4.8 %
Impact of 53rd week - (101,442) 101,442
Impact of BTP costs (102,623) (81,140) (21,483) 26.5
Impact of MEPP charge (41,544) (2,944) (38,600)
Impact of COLI 28,197 21,554 6,643 30.9
Adjusted operating expenses $ 5,347,240 $ 5,048,467 $ 298,773 5.9 %
(Non-GAAP)
Operating Income (GAAP) $ 1,931,502 $ 1,975,868 $ (44,366) (2.2) %
Impact of 53rd week - (41,720) 41,720
Impact of BTP costs 102,623 81,140 21,483 26.5
Impact of MEPP charge 41,544 2,944 38,600
Impact of COLI (28,197) (21,544) (6,653) 30.9
Adjusted operating income $ 2,047,472 $ 1,996,688 $ 50,784 2.5 %
(Non-GAAP)
Net earnings (GAAP) $ 1,152,030 $ 1,179,983 $ (27,953) (2.4) %
Impact of 53rd week - (24,127) 24,127
Impact of BTP costs (net of tax) 64,694 51,767 12,927 25.0
(1)
Impact of MEPP charge (net of 26,189 1,878 24,311
tax) (1)
Impact of COLI (28,197) (21,544) (6,653) 30.9
Impact of tax benefits (14,032) (28,895) 14,863 (51.4)Adjusted net earnings (Non-GAAP) $ 1,200,684$ 1,159,062$ 41,622 3.6 %
Diluted earnings per share $ 1.96 $ 1.99 $ (0.03) (1.5) %
(GAAP)
Impact of 53rd week (2) - (0.04) 0.04
Impact of BTP costs (2) 0.11 0.09 0.02 22.2
Impact of MEPP charge (2) 0.04 0.00 0.04
Impact of COLI (2) (0.05) (0.04) (0.01) 25.0
Impact of tax benefits (2) (0.02) (0.05) 0.03 (60.0)
Adjusted diluted earnings per $ $ $ %
share (Non-GAAP) 2.04 1.95 0.09 4.6
Diluted shares outstanding 588,691,546 593,590,042
(1) Tax impact of adjustments for Business Transformation Project,
multiemployer pension plan expenses, restructuring charges was $53.3 million and
$16.3 million for fiscal 2011 and 2010, respectively.
(2) Individual components of diluted earnings per share may not sum to the
total adjusted diluted earnings due to rounding.
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Segment Results
We have aggregated our operating companies into a number of segments, of which
only Broadline and SYGMA are reportable segments as defined in accounting
provisions related to disclosures about segments of an enterprise. The
accounting policies for the segments are the same as those disclosed by Sysco
within the Financial Statements and Supplementary Data within Part II Item 8 of
this Form 10-K. Intersegment sales represent specialty produce and imported
specialty products distributed by the Broadline and SYGMA operating companies.
Management evaluates the performance of each of our 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. While a segment's operating income
may be impacted in the short term by increases or decreases in gross profits,
expenses, or a combination thereof, over the long-term each business segment is
expected to increase its operating income at a greater rate than sales
growth. This is consistent with our long-term goal of leveraging earnings growth
at a greater rate than sales growth.
The following table sets forth the operating income of each of our reportable
segments and the other segment expressed as a percentage of each segment's sales
for each period reported and should be read in conjunction with Note 21,
"Business Segment Information" to the Consolidated Financial Statements in Item
8:
Operating Income as a
Percentage of Sales
2010
2012 2011 (53 Weeks)
Broadline 7.0 % 7.3 % 7.7 %
SYGMA 1.1 1.2 1.0
Other 3.8 4.5 4.1
The following table sets forth the change in the selected financial data of each
of our reportable segments and the other segment expressed as a percentage
increase over the prior year and should be read in conjunction with Note 21,
"Business Segment Information" to the Consolidated Financial Statements in Item
8:
2012 2011
Operating Operating
Sales Income Sales Income
Broadline 7.8 % 3.8 % 5.1 % (1.0) %
SYGMA 7.4 (2.0) (1) 9.2 26.8 (1)
Other 7.0 (9.2) 5.1 14.3
(1) SYGMA had operating income of $61.0 million in fiscal 2012, $62.2 million
in fiscal 2011 and $49.1 million in fiscal 2010.
The following table sets forth sales and operating income of each of our
reportable segments, the other segment, and intersegment sales, expressed as a
percentage of aggregate segment sales, including intersegment sales, and
operating income, respectively. For purposes of this statistical table,
operating income of our segments excludes corporate expenses of $677.6 million
in fiscal 2012, $558.8 million in fiscal 2011 and $513.3 million in fiscal 2010
that are not charged to our segments. This information should be read in
conjunction with Note 21, "Business Segment Information" to the Consolidated
Financial Statements in Item 8:
2010
2012 2011 (53 Weeks)
Segment Segment Segment
Operating Operating Operating
Sales Income Sales Income Sales Income
Broadline 81.2 % 94.1 % 81.2 % 93.5 % 81.6 % 94.5 %
SYGMA 13.5 2.4 13.6 2.5 13.1 2.0
Other 5.7 3.5 5.7 4.0 5.7 3.5
Intersegment sales (0.4) - (0.5) - (0.4) -
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
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Broadline Segment
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. Broadline operations have significantly higher operating
margins than the rest of Sysco's operations. In fiscal 2012, the Broadline
operating results represented approximately 81.2% of Sysco's overall sales and
94.1% of the aggregate operating income of Sysco's segments, which excludes
corporate expenses.
There are several factors which contribute to these higher operating results as
compared to the SYGMA and Other operating segments. We have invested substantial
amounts in assets, operating methods, technology and management expertise in
this segment. The breadth of its sales force, geographic reach of its
distribution area and its purchasing power allow us to benefit from this
segment's earnings.
Sales
Sales for fiscal 2012 were 7.8% greater than fiscal 2011. Product cost
inflation and the resulting increase in selling prices, combined with case
volume improvement, contributed to the increase in sales in fiscal 2012. Changes
in product costs, an internal measure of inflation or deflation, were estimated
as inflation of 5.7% in fiscal 2012. Non-comparable acquisitions contributed
0.7% to the overall sales comparison for fiscal 2012. The changes in the
exchange rates used to translate our foreign sales into U.S. dollars negatively
impacted sales by 0.1% compared to fiscal 2011.
Sales for fiscal 2011 were 5.1% greater than fiscal 2010. Negatively affecting
the sales comparison of fiscal 2011 to fiscal 2010 was the additional week in
fiscal 2010. Product cost inflation and the resulting increase in selling
prices, combined with case volume improvement, contributed to the increase in
sales in fiscal 2011. Changes in product costs, an internal measure of inflation
or deflation, were estimated as inflation of 4.9% in fiscal 2011. Non-comparable
acquisitions contributed 0.8% to the overall sales comparison for fiscal
2011. The changes in the exchange rates used to translate our foreign sales into
U.S. dollars positively impacted sales by 0.6% compared to fiscal 2010.
Operating Income
Operating income increased by 3.8% in fiscal 2012 over fiscal 2011. This
increase was driven by gross profit dollars increasing more than operating
expenses.
Gross profit dollars increased in fiscal 2012 primarily due to increased sales;
however, gross profit dollars increased at a lower rate than sales. This
decline in gross margin was primarily the result of product cost inflation and
competitive pressures on pricing. Based on Broadline's product sales mix for
fiscal 2012, we were most impacted by higher levels of inflation in the meat,
canned and dry and frozen product categories. While we are generally able to
pass through modest levels of inflation to our customers, we were unable pass
through fully these higher levels of product cost inflation with the same gross
margin in these product categories without negatively impacting our customers'
business and therefore our business. In the summer months of 2012, certain
agricultural areas of the United States have experienced severe drought. The
impact of this drought is uncertain and could result in volatile input
costs. Input costs could increase at any point in time for a large portion of
the products that we sell for a prolonged period. While we cannot predict
whether inflation will continue at these levels, prolonged periods of high
inflation, either overall or in certain product categories, can have a negative
impact on our customers, as high food costs can reduce consumer spending in the
food-away-from-home market, and may negatively impact the Broadline segment's
sales, gross profit and earnings. Our product cost reduction initiative is
designed to lower our total product costs by $250 million to $300 million
annually by fiscal 2015; however we believe the impact on our product costs in
fiscal 2013 will be modest.
In addition, gross profit dollars for fiscal 2012 increased as a result of
higher fuel surcharges. Fuel surcharges were approximately $39.1 million higher
in fiscal 2012 than the prior year due to the application of fuel surcharges to
a broader customer base during fiscal 2012 due to higher fuel prices incurred
during these periods. Assuming that fuel prices do not greatly vary from recent
levels, we expect the level of fuel surcharges in fiscal 2013 to remain
consistent with those experienced in fiscal 2012.
Operating expenses for the Broadline segment increased in fiscal 2012 as
compared to fiscal 2011. The expense increases in fiscal 2012 were driven
largely by an increase in pay-related expenses and fuel costs, partially offset
by a favorable comparison in the provisions recorded for the withdrawal from
multiemployer pension plans in each fiscal year. Sales compensation includes
commissions which are driven by gross profit dollars and case volumes, and
delivery compensation includes activity-based pay which is driven by case
volumes. Since these drivers are variable in nature, increased gross profit
dollars and case volumes will increase sales and delivery compensation.
However, the impact of our productivity related initiatives could favorably
impact the magnitude of this trend. Fuel costs were $26.5 million higher in
fiscal 2012 than the prior year. Assuming that fuel prices do not rise
significantly over recent levels during fiscal 2013, fuel costs exclusive of any
amounts recovered through fuel surcharges, are not expected to fluctuate
significantly as compared to fiscal 2012. Our estimate is based upon current,
published quarterly market price projections for diesel, the cost committed to
in our forward fuel purchase agreements currently in place for fiscal 2013 and
estimates of fuel
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consumption. Actual fuel costs could vary from our estimates if any of these
assumptions change, in particular if future fuel prices vary significantly from
our current estimates. We continue to evaluate all opportunities to offset
potential increases in fuel expense, including the use of fuel surcharges and
overall expense management.
From time to time, we may voluntarily withdraw from multiemployer pension plans
to minimize or limit our future exposure to these plans. We recorded provisions
related to the withdrawal from multiemployer pension plans of $21.9 million in
fiscal 2012 and $41.5 million in fiscal 2011.
We also measure our expense performance on a cost per case basis, which we seek
to align with the gross profit that we are able to generate. For our Broadline
companies, our cost per case increased $0.04 per case as compared to fiscal 2011
and $0.11 per case as compared to fiscal 2010. The increases in both periods
primarily related to increased fuel costs and payroll costs discussed above.
Charges created by withdrawing from multiemployer plans also contributed to the
increase in fiscal 2011 as compared to fiscal 2010.
Operating income decreased 1.0% in fiscal 2011 over fiscal 2010 to $2.3 billion,
and as a percentage of sales, declined to 7.3% of sales. Gross profit dollars
increased slightly below the rate that operating expenses increased; however,
operating expenses included a significant unfavorable comparison in the
provisions recorded for the withdrawal from multiemployer pension plans in each
fiscal year.
Gross profit dollars increased in fiscal 2011 primarily due to increased sales;
however, gross profit dollars increased at a lower rate than sales. This slower
growth in gross profit dollars was primarily the result of two factors. First,
based on Broadline's product sales mix for fiscal 2011, it was most impacted by
higher levels of inflation in the dairy, meat and seafood product categories in
the range of 10% to 12%. Broadline's largest selling product category, canned
and dry, experienced inflation of 4%. Second, ongoing strategic pricing
initiatives largely lowered our prices to our customers in certain product
categories in order to increase sales volumes. These initiatives are being
phased in over time and resulted in short-term gross profit declines as a
percentage of sales, but we believe will result in long-term gross profit dollar
growth due to higher sales volumes and increased market share. We have
experienced meaningful year over year volume growth with those items included in
the early phases of these programs in the geographies where this program has
been implemented. We believe the long-term benefits of these strategic
initiatives will result in profitable market share growth.
In addition, gross profit dollars for fiscal 2011 increased as a result of
higher fuel surcharges. Fuel surcharges were approximately $19.4 million higher
in fiscal 2011 than the prior year due to the application of fuel surcharges to
a broader customer base for a small portion of the third quarter and the entire
fourth quarter due to higher fuel prices incurred during these periods.
The expense increases in fiscal 2011 were driven largely by provisions for
withdrawal from a multiemployer pension plan, an increase in pay-related
expenses and increased fuel costs. In fiscal 2011, we recorded provisions of
$41.5 million for withdrawal liabilities from multiemployer pension plans from
which union members elected to withdraw, compared to provisions of $2.9 million
in fiscal 2010. The increase in pay-related expenses was primarily due to
increased sales and delivery compensation. Portions of our pay-related expense
are variable in nature and are expected to increase when sales and gross profit
increase. Pay-related expenses from acquired companies and changes in the
exchange rates used to translate our foreign sales into U.S. dollars also
contributed to the increase. Fuel costs were $22.0 million higher in fiscal 2011
than the prior year.
SYGMA Segment
SYGMA operating companies distribute a full line of food products and a wide
variety of non-food products to certain chain restaurant customer
locations. SYGMA operations have traditionally had lower operating income as a
percentage of sales than Sysco's other segments. This segment of the foodservice
industry has generally been characterized by lower overall operating margins as
the volume that these customers command allows them to negotiate for reduced
margins. These operations service chain restaurants through contractual
agreements that are typically structured on a fee per case delivered basis.
Sales
Sales were 7.4% greater in fiscal 2012 than in fiscal 2011. The increase in
sales was primarily due to product cost inflation and the resulting increase in
selling prices. Sales to new customers also contributed to the increase.
Sales were 9.2% greater in fiscal 2011 than in fiscal 2010. Negatively
affecting the sales comparison of fiscal 2011 to fiscal 2010 was the additional
week in fiscal 2010. The increase in sales was primarily due to case volume
improvement largely attributable to new customers and, to a lesser extent, from
an increase in volume from certain existing customers.
One chain restaurant customer (The Wendy's Company) accounted for approximately
29% of the SYGMA segment sales for the fiscal year ended June 30, 2012. SYGMA
maintains multiple regional contracts with varied expiration dates with this
customer. While the loss of this customer would have a material adverse effect
on SYGMA, we do not believe that the loss of this customer would have a material
adverse effect on Sysco as a whole.
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Operating Income
Operating income decreased $1.2 million in 2012 from the prior year due to
rising operating expenses. Gross profit dollars increased 4.3% while operating
expenses increased 5.3% in fiscal 2012 from fiscal 2011. Contributing to the
gross profit increase in fiscal 2012 were increased sales and an increase of
approximately $8.3 million in the fuel surcharges charged to customers in fiscal
2012 from prior year due to higher fuel prices in fiscal 2012. The increase in
operating expenses for fiscal 2012 was largely driven by increased fuel
costs. Fuel costs in fiscal 2012 were $11.3 million greater than the prior
year. Assuming that fuel prices do not significantly rise above recent levels
during fiscal 2013, we expect fuel costs and fuel surcharges for our SYGMA
segment not to fluctuate significantly as compared to fiscal 2012.
Operating income increased $13.1 million in 2011 over the prior year due to
increased sales and improved productivity. Gross profit dollars increased 9.5%
while operating expenses increased 7.2% in fiscal 2011 from fiscal
2010. Contributing to the gross profit increase in fiscal 2011 were increased
sales and an increase of approximately $6.6 million in the fuel surcharges
charged to customers in fiscal 2011 from prior year due to higher fuel prices in
fiscal 2011. The increase in operating expenses for fiscal 2011 was largely
driven by increased delivery and warehouse personnel payroll costs resulting
from increased sales as well as increased fuel cost. Productivity improvements
occurred within our warehouse and delivery functions in fiscal 2011 and expense
reductions occurred within our administrative functions in fiscal 2011 as
compared to the prior year. Fuel costs in fiscal 2011 were $12.9 million greater
than the prior year.
Other Segment
"Other" financial information is attributable to our other operating segments,
including our specialty produce and lodging industry products, a company that
distributes specialty imported products and a company that distributes to
international customers. These operating segments are discussed on an aggregate
basis as they do not represent reportable segments under segment accounting
literature.
On an aggregate basis, our "Other" segment has had a lower operating income as a
percentage of sales than Sysco's Broadline segment. Sysco has acquired the
operating companies within these segments in relatively recent years. These
operations generally operate in a niche within the foodservice industry except
for our lodging supply company. Each individual operation is also generally
smaller in sales and scope than an average Broadline operation and each of these
operating segments is considerably smaller in sales and overall scope than the
Broadline segment. In fiscal 2012, in the aggregate, the "Other" segment
represented approximately 5.7% of Sysco's overall sales and 3.5% of the
aggregate operating income of Sysco's segments, which excludes corporate
expenses.
Operating income decreased 9.2% for fiscal 2012 from fiscal 2011. The decrease
in operating income was caused partially due to increased expenses in our
specialty produce segment.
Operating income increased 14.3% for fiscal 2011 from fiscal 2010. The operating
income comparison was negatively affected by the additional week in fiscal 2010.
The increase in operating income was caused primarily by increased sales in the
specialty produce segment and favorable expense management in the specialty
produce and lodging industry products segments.
Liquidity and Capital Resources
Highlights
Comparisons of the cash flows from fiscal 2012 to fiscal 2011:
· Cash flows from operations were $1.4 billion this year compared to $1.1 billion
last year.
· Settlement payments to the IRS were $212.0 million in both periods.
· Capital expenditures totaled $784.5 million this year compared to $636.4
million last year.
· Bank borrowings, net were a net repayment of $182.0 million this year compared
to a net borrowing $182.0 million last year.
· Treasury stock purchases were $272.3 million this year compared to $291.6
million last year.
· Dividends paid were $622.9 million this year compared to $597.1 million last
year.
Sources and Uses of Cash
Sysco's strategic objectives include continuous investment in our business;
these investments are funded by a combination of cash from operations and access
to capital from financial markets. Our operations historically have produced
significant cash flow. Cash generated from operations is generally allocated to:
· working capital requirements;
· investments in facilities, systems, fleet, other equipment and technology;
· cash dividends;
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· acquisitions compatible with our overall growth strategy;
· contributions to our various retirement plans; and
· debt repayments.
Any remaining cash generated from operations may be invested in high-quality,
short-term instruments or applied toward the cost of the share repurchase
program. As a part of our ongoing strategic analysis, we regularly evaluate
business opportunities, including potential acquisitions and sales of assets and
businesses, and our overall capital structure. Any transactions resulting from
these evaluations may materially impact our liquidity, borrowing capacity,
leverage ratios and capital availability.
We continue to generate substantial cash flows from operations and remain in a
strong financial position, however our liquidity and capital resources can be
influenced by economic trends and conditions. Uncertain economic conditions and
uneven levels of consumer confidence and the resulting pressure on consumer
disposable income have lowered our sales growth and our cash flows from
operations. Product cost inflation has lowered our gross profit and cash flows
from operations as we were unable to pass through all of the increased product
costs with the same gross margin to our customers. We believe our mechanisms to
manage working capital, such as credit monitoring, optimizing inventory levels
and maximizing payment terms with vendors, and our mechanisms to manage product
cost inflation have been sufficient to limit a significant unfavorable impact on
our cash flows from operations. We believe these mechanisms will continue
prevent a significant unfavorable impact on our cash flows from operations. At
June 30, 2012, we had $688.9 million in cash and cash equivalents, approximately
20% of which was held by our international subsidiaries generated from our
earnings of international operations. If these earnings were transferred among
countries or repatriated to the U.S., such amounts may be subject to additional
tax obligations; however, we do not currently anticipate the need to relocate
this cash.
We believe the following sources will be sufficient to meet our anticipated cash
requirements for the next twelve months and beyond, while maintaining sufficient
liquidity for normal operating purposes:
· our cash flows from operations;
· the availability of additional capital under our existing commercial paper
programs, supported by our revolving credit facility, and bank lines of credit;
· our ability to access capital from financial markets, including issuances of
debt securities, either privately or under our shelf registration statement
filed with the Securities and Exchange Commission (SEC).
Due to our strong financial position, we believe that we will continue to be
able to effectively access the commercial paper market and long-term capital
markets, if necessary. We believe our cash flows from operations will improve in
fiscal 2013 due to benefits from our Business Transformation Project and
initiatives to improve our working capital management.
Cash Flows
Operating Activities
Fiscal 2012 vs. Fiscal 2011
We generated $1.4 billion in cash flow from operations in fiscal 2012, as
compared to $1.1 billion in fiscal 2011. The increase of $312.7 million between
fiscal 2012 and fiscal 2011 was largely attributable to changes in working
capital, a year-over-year reduction in tax payments and the redemption of some
of our COLI policies. These increases were partially offset by the
year-over-year impact of multiemployer withdrawal provisions and payments. These
items are more fully described below.
Changes in working capital, specifically accounts receivable, inventory and
accounts payable, contributed $144.3 million to the increase in cash flow from
operations in fiscal 2012 as compared to fiscal 2011. Both periods were affected
by increases in accounts receivable and inventory, partially offset by an
increase in accounts payable resulting primarily from inflation-driven increases
in product cost and sales. However, fiscal 2012 was impacted by these items to a
lesser extent due primarily to working capital improvements within accounts
receivable and inventory and also less growth in average daily sales in the
final month of fiscal 2012 as compared to the same period in fiscal 2011.
Tax payments were $135.2 million less in fiscal 2012 than in fiscal 2011. The
decrease in tax payments was partially due to the company being in a prepaid
position at the end of fiscal 2011 in certain jurisdictions. In addition,
various movements in taxable temporary differences caused estimated taxable
income to be lower in fiscal 2012, requiring less tax payments in fiscal 2012
than in fiscal 2011. We made our final payments on a previous IRS tax settlement
of $212 million in fiscal 2012. The completion of these settlement payments will
have a positive impact on our cash flows in fiscal 2013.
We received approximately $75 million in cash from the one-time redemption
during the period of some of our investments in COLI policies that we maintained
to meet a portion of our obligations under the Supplemental Executive Retirement
Plan (SERP). This resulted in a positive impact to cash flow from operations in
fiscal 2012 by decreasing other assets by $57.1 million. Those
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redeemed COLI policies were replaced by less volatile existing corporate-owned
real estate assets as part of our plan to reduce the market-driven COLI impact
on our earnings.
Multiemployer withdrawal provisions and payments had a negative impact of $53.3
million on the comparison of cash flow from operations in fiscal 2012 to fiscal
2011. The net impact of withdrawal provisions and payments was a cash outflow of
$11.7 million in fiscal 2012, compared to a $41.5 million accrual in fiscal
2011.
Fiscal 2011 vs. Fiscal 2010
We generated $1.1 billion in cash flow from operations in fiscal 2011, as
compared to $0.9 billion in fiscal 2010. The increase of $206.1 million between
fiscal 2011 and fiscal 2010 was driven largely by a reduction in the amount of
payments made in relation to the IRS settlement of $316.0 million and reduced
pension contributions in the amount of $136.3 million in fiscal 2011 as compared
to fiscal 2010. These increases were partially offset by changes in working
capital discussed in more detail below.
Payments related to the IRS settlement were $212.0 million in fiscal 2011 and
$528.0 million in fiscal 2010. See further discussion of the IRS settlement in
Note 18, "Income Taxes" to the Consolidated Financial Statements in Item 8.
Our contributions to our company-sponsored defined benefit plans were $161.7
million in fiscal 2011 and $297.9 million in fiscal 2010, respectively. Included
in the $161.7 million of contributions in fiscal 2011 was a $140.0 million
contribution to our Retirement Plan that would normally have been made in fiscal
2012. Included in the $297.9 million of contributions in fiscal 2010 was a
$140.0 million contribution to our Retirement Plan that would normally have been
made in fiscal 2011 and quarterly contributions totaling $140.0 million for
fiscal 2010.
Changes in working capital, specifically accounts receivable, inventory and
accounts payable, reduced cash flow from operations by $202.2 million in fiscal
2011 as compared to fiscal 2010. The increases in accounts receivable and
inventory balances in fiscal 2011 and fiscal 2010 were primarily due to sales
growth. An increase in daily sales outstanding also contributed to the increase
in accounts receivable and inventory balances in fiscal 2011. The increase in
accounts payable balances in fiscal 2011 and fiscal 2010 was primarily from the
growth in inventory resulting from sales growth.
Investing Activities
Fiscal 2012 capital expenditures included:
· replacement or significant expansion of facilities in San Diego, California;
Boston, Massachusetts; Lincoln, Nebraska; Syracuse, New York and central Texas;
· construction of fold-out facilities in southern California and Long Island, New
York;
· the continued remodeling of our shared services facility purchased in fiscal
2010;
· fleet replacements; and
· investments in technology including our Business Transformation Project.
Fiscal 2011 capital expenditures included:
· investments in technology including our Business Transformation Project;
· fleet replacements;
· replacement or significant expansion of facilities in Philadelphia,
Pennsylvania and central Texas;
· the purchase of land for a fold-out facility in southern California; and
· the remodeling of our shared services facility purchased in fiscal 2010.
Fiscal 2010 capital expenditures included:
· investments in technology including our Business Transformation Project;
· fleet replacements;
· replacement or significant expansion of facilities in Vancouver, British
Columbia, Canada; Winnipeg, Manitoba, Canada; Billings, Montana; Plainfield,
New Jersey; Philadelphia, Pennsylvania and Houston, Texas;
· the purchase of a facility for our future shared services operations in
connection with our Business Transformation Project; and
· the purchase of land for a fold-out facility in Long Island, New York.
Capital expenditures in fiscal 2012 increased by $148.1 million primarily due to
a greater number of new facilities and expansion projects underway this
year. Capital expenditures in fiscal 2012 and 2011 for our Business
Transformation Project were $146.2 million and $195.8 million, respectively.
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We expect total capital expenditures in fiscal 2013 to be in the range of $600
million to $650 million. Fiscal 2013 expenditures will include facility, fleet
and other equipment replacements and expansions; new facility construction,
including fold-out facilities; and investments in technology.
During fiscal 2012, in the aggregate, the company paid cash of $110.6 million
for operations acquired during fiscal 2012 and for contingent consideration
related to operations acquired in previous fiscal years. During fiscal 2012, we
acquired for cash broadline foodservice operations in Sacramento, California;
Quebec, Canada; New Haven, Connecticut; Grand Rapids, Michigan; Minneapolis,
Minnesota; Columbia, South Carolina and Spokane, Washington. In addition, Sysco
acquired for cash a company that distributes specialty imported products
headquartered in Chicago, Illinois.
During fiscal 2011, in the aggregate, the company paid cash of $101.1 million
for operations acquired during fiscal 2011 and for contingent consideration
related to operations acquired in previous fiscal years. During fiscal 2011, we
acquired for cash broadline foodservice operations in central California; Los
Angeles, California; Ontario, Canada; Lincoln, Nebraska; and Trenton, New
Jersey.
During fiscal 2010, in the aggregate, the company paid cash of $29.3 million for
operations acquired during fiscal 2010 and for contingent consideration related
to operations acquired in previous fiscal years. During fiscal 2010, we acquired
for cash a broadline foodservice operation in Syracuse, New York, a produce
distributor in Atlanta, Georgia and a seafood distributor in Edmonton, Alberta,
Canada.
Financing Activities
Equity Transactions
Proceeds from common stock reissued from treasury for share-based compensation
awards were $99.4 million in fiscal 2012, $332.7 million in fiscal 2011 and
$94.8 million in fiscal 2010. The increase in proceeds in fiscal 2011 was due
to an increase in the number of options exercised in fiscal 2011, as compared to
fiscal 2012 and 2010. The level of option exercises, and thus proceeds, will
vary from period to period and is largely dependent on movements in our stock
price.
We traditionally have engaged in Board-approved share repurchase programs. The
number of shares acquired and their cost during the past three fiscal years were
10,000,000 shares for $272.3 million in fiscal 2012, 10,000,000 shares for
$291.6 million in fiscal 2011 and 6,000,000 shares for $179.2 million in fiscal
2010. There were 75,200 additional shares repurchased through August 15, 2012,
resulting in a remaining authorization by our Board of Directors to repurchase
up to 23,311,400 shares, based on the trades made through that date. Our current
share repurchase strategy is to purchase enough shares to keep our diluted
average shares outstanding relatively constant. To achieve this goal, we
believe we will not have to purchase as many shares in fiscal 2013 as were
purchased in fiscal 2012.
We have made dividend payments to our shareholders in each fiscal year since our
company inception over 40 years ago. We target a dividend payout of 40% to 50%
of net earnings. We paid in excess of that range in fiscal 2012 primarily due to
increased expenses from our Business Transformation Project. We believe as we
realize benefits from this project, our dividend payout will return to this
targeted range. Dividends paid were $622.9 million, or $1.06 per share, in
fiscal 2012, $597.1 million, or $1.02 per share, in fiscal 2011 and $579.8
million, or $0.98 per share, in fiscal 2010. In May 2012, we declared our
regular quarterly dividend for the first quarter of fiscal 2013 of $0.27 per
share, which was paid in July 2012.
In November 2000, we filed with the SEC a shelf registration statement covering
30,000,000 shares of common stock to be offered from time to time in connection
with acquisitions. As of August 15, 2012, 29,477,835 shares remained available
for issuance under this registration statement.
Debt Activity and Borrowing Availability
Short-term Borrowings
We have uncommitted bank lines of credit, which provided for unsecured
borrowings for working capital of up to $95.0 million, of which none was
outstanding as of June 30, 2012 or August 15, 2012.
Our Irish subsidiary, Pallas Foods Limited, has a €10.0 million (Euro) committed
facility for unsecured borrowings for working capital. There were no borrowings
outstanding under this facility as of June 30, 2012 or August 15, 2012.
On June 30, 2011, a Canadian subsidiary of Sysco entered into a short-term
demand loan facility for the purpose of facilitating a distribution from the
Canadian subsidiary to Sysco, and Sysco concurrently entered into an agreement
with the bank to guarantee the loan. The amount borrowed was $182.0 million and
was repaid in full on July 4, 2011.
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Commercial Paper and Revolving Credit Facility
We have a Board-approved commercial paper program allowing us to issue
short-term unsecured notes in an aggregate amount not to exceed $1.3 billion.
In December 2011, we terminated our previously existing revolving credit
facility that supported the company's U.S. and Canadian commercial paper
programs. At the same time, Sysco and one of its subsidiaries, Sysco
International, ULC, entered into a new $1.0 billion credit facility supporting
the company's U.S. and Canadian commercial paper programs. This facility
provides for borrowings in both U.S. and Canadian dollars. Borrowings by Sysco
International, ULC under the credit agreement are guaranteed by Sysco, and
borrowings by Sysco and Sysco International, ULC under the credit agreement and
guaranteed by all the wholly-owned subsidiaries of Sysco that are guarantors of
the company's senior notes and debentures. The facility expires on December 29,
2016, but is subject to extension.
There were no commercial paper issuances outstanding as of June 30, 2012 or
August 15, 2012. During fiscal 2012, 2011 and 2010, aggregate outstanding
commercial paper issuances and short-term bank borrowings ranged from
approximately zero to $563.1 million, zero to $330.3 million, and zero to $1.8
million, respectively. During fiscal 2012, 2011 and 2010, our aggregate
commercial paper issuances and short-term bank borrowings had a weighted average
interest rate of 0.16%, 0.25% and 0.80%, respectively.
Fixed Rate Debt
Included in current maturities of long-term debt as June 30, 2012 are the 4.2%
senior notes totaling $250.0 million, which mature in February 2013. It is our
intention to fund the repayment of these notes at maturity through cash on hand,
cash flow from operations, issuances of commercial paper, senior notes or a
combination thereof.
In September 2009, we entered into an interest rate swap agreement that
effectively converted $200.0 million of fixed rate debt maturing in fiscal 2014
to floating rate debt. In October 2009, we entered into an interest rate swap
agreement that effectively converted $250.0 million of fixed rate debt maturing
in fiscal 2013 to floating rate debt. Both 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.
In February 2012, we filed with the SEC an automatically effective well-known
seasoned issuer shelf registration statement for the issuance of an
indeterminate amount of common stock, preferred stock, debt securities and
guarantees of debt securities that may be issued from time to time.
In June 2012, we repaid the 6.1% senior notes totaling $200.0 million at
maturity utilizing a combination of cash flow from operations and commercial
paper issuances.
In May 2012, we entered into an agreement with a notional amount of $200.0
million to lock in a component of the interest rate on our then forecasted debt
offering. We designated this derivative as a cash flow hedge of the variability
in the cash outflows of interest payments on a portion of the then forecasted
June 2012 debt issuance due to changes in the benchmark interest rate. In June
2012, in conjunction with the issuance of the $450.0 million senior notes
maturing in fiscal 2022, we settled the treasury lock, locking in the effective
yields on the related debt. Upon settlement, we received cash of $0.7 million,
which represented the fair value of the swap agreement at the time of
settlement. This amount is being amortized as an offset to interest expense over
the 10-year term of the debt, and the unamortized balance is reflected as a
gain, net of tax, Accumulated other comprehensive loss.
In June 2012, we issued 0.55% senior notes totaling $300.0 million due June 12,
2015 (the 2015 notes) and 2.6% senior notes totaling $450.0 million due June 12,
2022 (the 2022 notes) under its February 2012 shelf registration. The 2015 and
2022 notes, which were priced at 99.319% and 98.722% of par, respectively, are
unsecured, are not subject to any sinking fund requirement and include a
redemption provision which 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. Proceeds
from the notes will be utilized over a period of time for general corporate
purposes, which may include acquisitions, refinancing of debt, working capital,
share repurchases and capital expenditures.
Total Debt
Total debt as of June 30, 2012 was $3.0 billion of which approximately 84% was
at fixed rates with a weighted average of 4.7% and an average life of 13 years,
and the remainder was at floating rates with a weighted average of 2.3% and an
average life of one year. Certain loan agreements contain typical debt covenants
to protect note holders, including provisions to maintain the company's
long-term debt to total capital ratio below a specified level. We are currently
in compliance with all debt covenants.
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Other
As part of normal business activities, we issue letters of credit through major
banking institutions as required by certain vendor and insurance agreements. In
addition, in connection with our audits in certain tax jurisdictions, we have
posted of letters of credit in order to proceed to the appeals process. As of
June 30, 2012 and July 2, 2011, letters of credit outstanding were $29.8 million
and $23.0 million, respectively.
Other Considerations - Multiemployer Pension Plans
As discussed in Note 14, "Multiemployer Employee Benefit Plans", to the
Consolidated Financial Statements in Item 8, we contribute to several
multiemployer defined benefit pension plans based on obligations arising under
collective bargaining agreements covering union-represented employees.
Under certain circumstances, including our voluntary withdrawal or a mass
withdrawal of all contributing employers from certain underfunded plans, we
would be required to make payments to the plans for our proportionate share of
the multiemployer plan's unfunded vested liabilities. We believe that one of the
above-mentioned events is reasonably possible with certain plans in which we
participate and estimate our share of withdrawal liability for these plans could
have been as much as $100.0 million as of June 30, 2012 and August 15,
2012. This estimate excludes plans for which we have recorded withdrawal
liabilities or where the likelihood of the above-mentioned events is deemed
remote. Due to the lack of current information, we believe our current share of
the withdrawal liability could materially differ from this estimate.
Required contributions to multiemployer plans could increase in the future as
these plans strive to improve their funding levels. 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. We believe that any unforeseen requirements to pay such increased
contributions, withdrawal liability and excise taxes would be funded through
cash flow from operations, borrowing capacity or a combination of these items.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations
The following table sets forth, as of June 30, 2012, certain information
concerning our obligations and commitments to make contractual future payments:
Payments Due by Period
More Than
Total < 1 Year 1-3 Years 3-5 Years 5 Years
(In thousands)
Recorded Contractual
Obligations:
Long-term debt $ 2,980,291 $ 250,036 $ 505,900 $ 140 $ 2,224,215
Capital lease obligations 38,047 4,614 7,034 4,007 22,392
Deferred compensation (1) 88,883 9,551 14,060 10,215 55,057
SERP and other
postretirement plans (2) 298,994 23,739 51,042 57,532 166,681
Multiemployer pension plans
(3) 30,695 30,695 - - -
Unrecognized tax benefits
and interest (4) 80,106
Unrecorded Contractual
Obligations:
Interest payments related
to debt (5) 1,399,766 126,268 234,625 226,064 812,809
Retirement plan (6) 335,937 - 7,355 147,521 181,061
Long-term non-capitalized
leases 225,121 48,680 72,226 43,581 60,634
Purchase obligations (7) 2,263,446 1,919,677 342,108 1,626 35
Total contractual cash
obligations $ 7,741,286 $ 2,413,260 $ 1,234,350 $ 490,686 $ 3,522,884
(1)The estimate of the timing of future payments under the Executive Deferred
Compensation Plan involves the use of certain assumptions, including retirement
ages and payout periods.
(2)Includes estimated contributions to the unfunded SERP and other
postretirement benefit plans made in amounts needed to fund benefit payments for
vested participants in these plans through fiscal 2022, based on actuarial
assumptions.
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(3)Represents voluntary withdrawal liabilities recorded and excludes normal
contributions required under our collective bargaining agreements.
(4) Unrecognized tax benefits relate to uncertain tax positions recorded under
accounting standards related to uncertain tax positions. As of June 30, 2012, we
had a liability of $52.2 million for unrecognized tax benefits for all tax
jurisdictions and $27.9 million for related interest that could result in cash
payment. We are not able to reasonably estimate the timing of non-current
payments or the amount by which the liability will increase or decrease over
time. Accordingly, the related non-current balances have not been reflected in
the "Payments Due by Period" section of the table.
(5)Includes payments on floating rate debt based on rates as of June 30, 2012,
assuming amount remains unchanged until maturity, and payments on fixed rate
debt based on maturity dates. The impact of our outstanding fixed-to-floating
interest rate swaps on the fixed rate debt interest payments is included as well
based on the floating rates in effect as of June 30, 2012.
(6) Provides the estimated minimum contribution to the Retirement Plan through
fiscal 2022 to meet ERISA minimum funding requirements under the assumption that
we only make minimum funding requirement contributions each year, based on
actuarial assumptions.
(7)For purposes of this table, purchase obligations include agreements for
purchases of product in the normal course of business, for which all significant
terms have been confirmed, including minimum quantities resulting from our
sourcing initiative. Such amounts included in the table above are based on
estimates. Purchase obligations also includes amounts committed with a third
party to provide hardware and hardware hosting services over a ten-year period
ending in fiscal 2015 (See discussion under Note 20, "Commitments and
Contingencies", to the Notes to Consolidated Financial Statements in Item 8),
fixed electricity agreements and fixed fuel purchase commitments. Purchase
obligations exclude full requirements electricity contracts where no stated
minimum purchase volume is required.
Certain acquisitions involve contingent consideration, typically payable only in
the event that certain operating results are attained or certain outstanding
contingencies are resolved. Aggregate contingent consideration amounts
outstanding as of June 30, 2012 included $66.1 million. This amount is not
included in the table above.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, sales and expenses in the
accompanying financial statements. Significant accounting policies employed by
Sysco are presented in the notes to the financial statements.
Critical accounting policies and estimates are those that are most important to
the portrayal of our financial condition and results of operations. These
policies require our most subjective or complex judgments, often employing the
use of estimates about the effect of matters that are inherently uncertain. We
have reviewed with the Audit Committee of the Board of Directors the development
and selection of the critical accounting policies and estimates and this related
disclosure. Our most critical accounting policies and estimates pertain to the
allowance for doubtful accounts receivable, self-insurance programs,
company-sponsored pension plans, income taxes, vendor consideration, goodwill
and intangible assets and share-based compensation.
Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable and determine the
appropriate reserve for doubtful accounts based on a combination of factors. We
utilize specific criteria to determine uncollectible receivables to be written
off, including whether a customer has filed for or has been placed in
bankruptcy, has had accounts referred to outside parties for collection or has
had accounts past due over specified periods. Allowances are recorded for all
other receivables based on analysis of historical trends of write-offs and
recoveries. In addition, in circumstances where we are aware of a specific
customer's inability to meet its financial obligation, a specific allowance for
doubtful accounts is recorded to reduce the receivable to the net amount
reasonably expected to be collected. Our judgment is required as to the impact
of certain of these items and other factors as to ultimate realization of our
accounts receivable. If the financial condition of our customers were to
deteriorate, additional allowances may be required.
Self-Insurance Program
We maintain a self-insurance program covering portions of workers' compensation,
general liability and vehicle liability costs. The amounts in excess of the
self-insured levels are fully insured by third party insurers. We also maintain
a fully self-insured group medical program. Liabilities associated with these
risks are estimated in part by considering historical claims experience, medical
cost trends, demographic factors, severity factors and other actuarial
assumptions. Projections of future loss expenses are inherently uncertain
because of the random nature of insurance claims occurrences and could be
significantly affected if future occurrences and claims differ from these
assumptions and historical trends. In an attempt to mitigate the risks of
workers' compensation, vehicle and general liability claims, safety procedures
and awareness programs have been implemented.
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Company-Sponsored Pension Plans
Amounts related to defined benefit plans recognized in the financial statements
are determined on an actuarial basis. Three of the more critical assumptions in
the actuarial calculations are the discount rate for determining the current
value of plan benefits, the assumption for the rate of increase in future
compensation levels and the expected rate of return on plan assets.
For guidance in determining the discount rates, we calculate the implied rate of
return on a hypothetical portfolio of high-quality fixed-income investments for
which the timing and amount of cash outflows approximates the estimated payouts
of the pension plan. The discount rate assumption is reviewed annually and
revised as deemed appropriate. The discount rate for determining fiscal 2012 net
pension costs for the Retirement Plan, which was determined as of the July 2,
2011 measurement date, decreased 21 basis points to 5.94%. The discount rate
for determining fiscal 2012 net pension costs for the SERP, which was determined
as of the July 2, 2011 measurement date, decreased 42 basis points to 5.93%.
The combined effect of these discount rate changes increased our net
company-sponsored pension costs for all plans for fiscal 2012 by an estimated
$14.3 million. The discount rate for determining fiscal 2013 net pension costs
for the Retirement Plan, which was determined as of the June 30, 2012
measurement date, decreased 113 basis points to 4.81%. The discount rate for
determining fiscal 2013 net pension costs for the SERP, which was determined as
of the June 30, 2012 measurement date, decreased 104 basis points to 4.89%. The
combined effect of these discount rate changes will increase our net
company-sponsored pension costs for all plans for fiscal 2013 by an estimated
$84.1 million. A 100 basis point increase in the discount rates for fiscal 2013
would decrease Sysco's net company-sponsored pension cost by $41.9 million,
while a 100 basis point decrease in the discount rates would increase pension
cost by $50.6 million. The impact of a 100 basis point increase in the discount
rates differs from the impact of a 100 basis point decrease in discount rates
because the liabilities are less sensitive to change at higher discount
rates. Therefore, a 100 basis point increase in the discount rate will not
generate the same magnitude of change as a 100 basis point decrease in the
discount rate.
We look to actual plan experience in determining the rates of increase in
compensation levels. We used a plan specific age-related set of rates for the
Retirement Plan, which are equivalent to a single rate of 5.30% as of June 30,
2012 and July 2, 2011. For determining the benefit obligations as of June 30,
2012 and July 2, 2011, the SERP calculations use an age-graded salary growth
assumption.
The expected long-term rate of return on plan assets of the Retirement Plan was
7.75% for fiscal 2012 and 8.00% for fiscal 2011. The expectations of future
returns are derived from a mathematical asset model that incorporates
assumptions as to the various asset class returns, reflecting a combination of
historical performance analysis and the forward-looking views of the financial
markets regarding the yield on bonds, historical returns of the major stock
markets and returns on alternative investments. Although not determinative of
future returns, the effective annual rate of return on plan assets, developed
using geometric/compound averaging, was approximately 7.0%, 4.2%, 1.6%, and
-0.2%, over the 20-year, 10-year, 5-year and 1-year periods ended December 31,
2011, respectively. In addition, in eight of the last 15 years, the actual
return on plan assets has exceeded 10%. The rate of return assumption is
reviewed annually and revised as deemed appropriate.
The expected return on plan assets impacts the recorded amount of net pension
costs. The expected long-term rate of return on plan assets of the Retirement
Plan is 7.75% for fiscal 2013. A 100 basis point increase (decrease) in the
assumed rate of return for fiscal 2013 would decrease (increase) Sysco's net
company-sponsored pension costs for fiscal 2013 by approximately $22.1 million.
Pension accounting standards require the recognition of the funded status of our
defined benefit plans in the statement of financial position, with a
corresponding adjustment to accumulated other comprehensive income, net of
tax. The amount reflected in accumulated other comprehensive loss related to the
recognition of the funded status of our defined benefit plans as of June 30,
2012 was a charge, net of tax, of $823.9 million. The amount reflected in
accumulated other comprehensive loss related to the recognition of the funded
status of our defined benefit plans as of July 2, 2011 was a charge, net of tax,
of $501.1 million.
Changes in the assumptions, including changes to the discount rate discussed
above, together with the normal growth of the plans, the impact of actuarial
losses from prior periods, the impact of plan amendments and the timing and
amount of contributions decreased net company-sponsored pension costs by $27.3
million in fiscal 2012. At the end of fiscal 2012, Sysco decided to freeze
future benefit accruals under the Retirement Plan as of December 31, 2012 for
all U.S.-based salaried and non-union hourly employees. Effective January 1,
2013, these employees will be eligible for additional contributions under an
enhanced, defined contribution plan. Changes in the assumptions, including
changes to the discount rate discussed above, together with the plan freeze, the
impact of actuarial losses from prior periods, the impact of plan amendments and
the timing and amount of contributions are expected to decrease net
company-sponsored pension costs in fiscal 2013 by approximately $26.5 million.
Absent the Retirement Plan freeze discussed above, net company-sponsored
pension costs in fiscal 2013 would have increased $106.9 million instead of
decreasing $26.5 million.
We made cash contributions to our company-sponsored pension plans of $162.4
million and $161.7 million in fiscal years 2012 and 2011, respectively. The
$140.0 million contribution to the Retirement Plan in fiscal 2012 exceeded the
minimum required contribution for the calendar 2011 plan year to meet ERISA
minimum funding requirements. The $140.0 million contribution to the Retirement
Plan in fiscal 2011 was voluntary, as there was no minimum required contribution
for the calendar 2010 plan year. There
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are no required contributions to the Retirement Plan to meet ERISA minimum
funding requirements in fiscal 2013. The estimated fiscal 2013 contributions to
fund benefit payments for the SERP plan are approximately $23 million.
Income Taxes
The determination of our provision for income taxes requires significant
judgment, the use of estimates and the interpretation and application of complex
tax laws. Our provision for income taxes primarily reflects a combination of
income earned and taxed in the various U.S. federal and state, as well as
foreign jurisdictions. Jurisdictional tax law changes, increases or decreases in
permanent differences between book and tax items, accruals or adjustments of
accruals for unrecognized tax benefits or valuation allowances, and our change
in the mix of earnings from these taxing jurisdictions all affect the overall
effective tax rate.
Our liability for unrecognized tax benefits contains uncertainties because
management is required to make assumptions and to apply judgment to estimate the
exposures associated with our various filing positions. We believe that the
judgments and estimates discussed herein are reasonable; however, actual results
could differ, and we may be exposed to losses or gains that could be
material. To the extent we prevail in matters for which a liability has been
established, or pay amounts in excess of recorded liabilities, our effective
income tax rate in a given financial statement period could be materially
affected. An unfavorable tax settlement generally would require use of our cash
and may result in an increase in our effective income tax rate in the period of
resolution. A favorable tax settlement may be recognized as a reduction in our
effective income tax rate in the period of resolution.
Vendor Consideration
We recognize consideration received from vendors when the services performed in
connection with the monies received are completed and when the related product
has been sold by Sysco. There are several types of cash consideration received
from vendors. In many instances, the vendor consideration is in the form of a
specified amount per case or per pound. In these instances, we will recognize
the vendor consideration as a reduction of cost of sales when the product is
sold. In some instances, vendor consideration is received upon receipt of
inventory in our distribution facilities. We estimate the amount needed to
reduce our inventory based on inventory turns until the product is sold. Our
inventory turnover is usually less than one month; therefore, amounts deferred
against inventory do not require long-term estimation. In the situations where
the vendor consideration is not related directly to specific product purchases,
we will recognize these as a reduction of cost of sales when the earnings
process is complete, the related service is performed and the amounts
realized. Historically, adjustments to our estimates related to vendor
consideration have not been significant.
Goodwill and Intangible Assets
Goodwill and intangible assets represent the excess of consideration paid over
the fair value of tangible net assets acquired. Certain assumptions and
estimates are employed in determining the fair value of assets acquired,
including goodwill and other intangible assets, as well as determining the
allocation of goodwill to the appropriate reporting unit.
In addition, annually in our fourth quarter or more frequently as needed, we
assess the recoverability of goodwill and indefinite-lived intangibles by
determining whether the fair values of the applicable reporting units exceed the
carrying values of these assets. The reporting units used in assessing goodwill
impairment are our nine operating segments as described in Note 21, "Business
Segment Information," to the Consolidated Financial Statements in Item 8. The
components within each of our nine operating segments have similar economic
characteristics and therefore are aggregated into nine reporting units.
We arrive at our estimates of fair value using a combination of discounted cash
flow and earnings multiple models. The results from each of these models are
then weighted and combined into a single estimate of fair value for each of our
nine operating segments. We use a 60% weighting for our discounted cash flow
valuation and 40% for the earnings multiple models giving greater emphasis to
our discounted cash flow model because the forecasted operating results that
serve as a basis for the analysis incorporate management's outlook and
anticipated changes for the businesses. The primary assumptions used in these
various models include estimated earnings multiples of comparable acquisitions
in the industry including control premiums, earnings multiples on acquisitions
completed by Sysco in the past, future cash flow estimates of the reporting
units, which are dependent on internal forecasts and projected growth rates, and
weighted average cost of capital, along with working capital and capital
expenditure requirements. When possible, we use observable market inputs in our
models to arrive at the fair values of our reporting units. We update our
projections used in our discounted cash flow model based on historical
performance and changing business conditions for each of our reporting units.
Our estimates of fair value contain uncertainties requiring management to make
assumptions and to apply judgment to estimate industry economic factors and the
profitability of future business strategies. Actual results could differ from
these assumptions and projections, resulting in the company revising its
assumptions and, if required, recognizing an impairment loss. There were no
impairments of goodwill or indefinite-lived intangibles recorded as a result of
assessment in fiscal 2012, 2011 and 2010. Our past estimates of fair value for
fiscal 2011 and 2010 have not been materially different when revised to include
subsequent years' actual results. Sysco has not made any material changes in
its impairment assessment methodology during the past three fiscal years. We do
not believe the estimates used in the analysis are reasonably likely to change
materially in the future but we will continue to assess the
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estimates in the future based on the expectations of the reporting units. In the
fiscal 2012 analysis our estimates of fair value did not require additional
analysis; however, we would have performed additional analysis to determine if
an impairment existed for the following reporting units if our estimates of fair
value were decreased by the following amounts. First, our European Broadline
company would have required additional analysis if the estimated fair value had
been 45% lower. Second, our specialty produce operations would have required
additional analysis if the estimated fair value had been 38% lower. At June 30,
2012, these two reporting units had goodwill aggregating $316.9 million. For the
remainder of our reporting units which at June 30, 2012 had goodwill aggregating
$1.3 billion, we would have performed additional analysis to determine if an
impairment existed for a reporting unit if the estimated fair value for any of
these reporting units had declined by greater than 50%.
Certain reporting units (European Broadline, specialty produce, custom-cut meat,
lodging industry products, imported specialty products and international
distribution operations) have a greater proportion of goodwill recorded to
estimated fair value as compared to the United States Broadline, Canadian
Broadline or SYGMA reporting units. This is primarily due to these businesses
having been recently acquired, and as a result there has been less history of
organic growth than in the United States Broadline, Canadian Broadline and SYGMA
reporting units. In addition, these businesses also have lower levels of cash
flow than the United States Broadline reporting units. As such, these reporting
units have a greater risk of future impairment if their operations were to
suffer a significant downturn.
Share-Based Compensation
We provide 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, the Management Incentive
Plan and various non-employee director plans.
As of June 30, 2012, there was $63.7 million of total unrecognized compensation
cost related to share-based compensation arrangements. That cost is expected to
be recognized over a weighted-average period of 2.36 years.
The fair value of each option award is estimated on the date of grant using a
Black-Scholes option pricing model. Expected volatility is based on historical
volatility of Sysco's stock, implied volatilities from traded options on Sysco's
stock and other factors. We utilize historical data to estimate option exercise
and employee termination behavior within the valuation model; separate groups of
employees that have similar historical exercise behavior are considered
separately for valuation purposes. Expected dividend yield is estimated based on
the historical pattern of dividends and the average stock price for the year
preceding the option grant. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of each restricted stock unit award granted with a dividend
equivalent is based on the company's stock price as of the date of grant. For
restricted stock units granted without dividend equivalents, the fair value is
reduced by the present value of expected dividends during the vesting period.
The fair value of the stock issued under the Employee Stock Purchase Plan is
calculated as the difference between the stock price and the employee purchase
price.
The fair value of restricted stock granted to employees is based on the stock
price on grant date. The application of a discount to the fair value of a
restricted stock grant is dependent upon whether or not each individual grant
contains a post-vesting restriction.
The compensation cost related to these share-based awards is recognized over the
requisite service period. The requisite service period is generally the period
during which an employee is required to provide service in exchange for the
award. The compensation cost related to stock issuances resulting from employee
purchases of stock under the Employees' Stock Purchase Plan is recognized during
the quarter in which the employee payroll withholdings are made.
Our share-based awards are generally subject to graded vesting over a service
period. We will recognize compensation cost on a straight-line basis over the
requisite service period for the entire award.
In addition, certain of our share-based awards provide that the awards continue
to vest as if the award holder continued to be an employee or director if the
award holder meets certain age and years of service thresholds upon retirement.
In these cases, we will recognize compensation cost for such awards over the
period from the grant date to the date the employee or director first becomes
eligible to retire with the options continuing to vest after retirement.
Our option grants include options that qualify as incentive stock options for
income tax purposes. In the period the compensation cost related to incentive
stock options is recorded, a corresponding tax benefit is not recorded as it is
assumed that we will not receive a tax deduction related to such incentive stock
options. We may be eligible for tax deductions in subsequent periods to the
extent that there is a disqualifying disposition of the incentive stock option.
In such cases, we would record a tax benefit related to the tax deduction in an
amount not to exceed the corresponding cumulative compensation cost recorded in
the financial statements on the particular options multiplied by the statutory
tax rate.
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Forward-Looking Statements
Certain statements made herein that look forward in time or express management's
expectations or beliefs with respect to the occurrence of future events are
forward-looking statements under the Private Securities Litigation Reform Act of
1995. They include statements about Sysco's ability to increase its sales and
market share and grow earnings, the continuing impact of economic conditions on
consumer confidence and our business, sales and expense trends, including
expectations regarding pay-related expense defined contribution plan costs and
pension costs, anticipated multiemployer pension related liabilities and
contributions to various multiemployer pension plans, expectations regarding
potential payments of unrecognized tax benefits and interest, expectations
regarding share repurchases, dividend payments, expected trends in fuel pricing,
usage costs and surcharges, our expectation regarding the provision for losses
on accounts receivable, expected implementation, costs and benefits of the ERP
system, estimated expenses and capital expenditures related to our Business
Transformation Project in fiscal 2013, beliefs regarding future ERP conversions
at our operating companies, expectations regarding our other Business
Transformation initiatives including cost transformation and product cost
reduction initiatives, beliefs regarding the timeline for the realization of
benefits from each of our initiatives within our Business Transformation
Project, our plan to continue to explore and identify opportunities to grow in
international markets and adjacent areas that complement our core business, the
impact of ongoing legal proceedings, the loss of SYGMA's largest customer not
having a material adverse effect on Sysco as a whole, compliance with laws and
government regulations not having a material effect on our capital expenditures,
earnings or competitive position, anticipated acquisitions and capital
expenditures and the sources of financing for them, continued competitive
advantages and positive results from strategic initiatives, anticipated
company-sponsored pension plan liabilities, our expectations regarding cash flow
from operations, our intentions regarding the repayment of debt, the impact of
initiatives to improve working capital, the availability and adequacy of
insurance to cover liabilities, predictions regarding the impact of changes in
estimates used in impairment analyses, expectations regarding the cost of
hardware and hardware hosting services, the anticipated impact of changes in
foreign currency exchange rates and Sysco's ability to meet future cash
requirements and remain profitable.
These statements are based on management's current expectations and estimates;
actual results may differ materially due in part to the risk factors discussed
at Item 1.A. in the Annual Report on Form 10-K and elsewhere. In addition, the
success of Sysco's strategic initiatives could be affected by conditions in the
economy and the industry and internal factors such as the ability to control
expenses, including fuel costs. Expected trends related to fuel costs and usage
are impacted by fluctuations in the economy generally and numerous factors
affecting the oil industry that are beyond our control. Our efforts to lower our
cost of goods sold may be impacted by factors beyond our control, including
actions by our competitors and/or customers. We have experienced delays in the
implementation of our Business Transformation Project and the expected costs of
our Business Transformation Project may be greater or less than currently
expected, as we may encounter the need for changes in design or revisions of the
project calendar and budget. Our business and results of operations may be
adversely affected if we experience operating problems, scheduling delays, cost
overages, or limitations on the extent of the business transformation during the
ERP implementation process. As implementation of the ERP system and other
initiatives within the Business Transformation Project begins, there may be
changes in design or timing that impact near-term expense and cause us to revise
the project calendar and budget, and additional hiring and training of employees
and consultants may be required, which could also impact project expense and
timing. Our Business Transformation Project initiatives related to ERP
implementation, cost transformation and produce cost reduction may not provide
the expected benefits or cost savings in a timely fashion, if at all. If we are
unable to realize the anticipated benefits from our cost cutting efforts, we
could become cost disadvantaged in the marketplace, and our competitiveness and
our profitability could decrease. Defined contribution plan costs are impacted
by the number of employees participating in the plan and the level of
contributions made by each employee. Company-sponsored pension plan liabilities
are impacted by a number of factors including the discount rate for determining
the current value of plan benefits, the assumption for the rate of increase in
future compensation levels and the expected rate of return on plan assets. The
amount of shares repurchased in a given period is subject to a number of
factors, including available cash and our general working capital needs at the
time. Meeting our dividend target objectives depends on our level of earnings.
Our plans with respect to growth in international markets and adjacent areas
that complement our core business are subject to the company's other strategic
initiatives and plans and economic conditions generally. Legal proceedings are
impacted by events, circumstances and individuals beyond the control of
Sysco. The need for additional borrowing or other capital is impacted by factors
that include capital expenditures or acquisitions in excess of those currently
anticipated, stock repurchases at historical levels, or other unexpected cash
requirements. Plans regarding the repayment of debt are subject to change at
any time based on management's assessment of the overall needs of the company.
The anticipated impact of compliance with laws and regulations also involves the
risk that estimates may turn out to be materially incorrect, and laws and
regulations, as well as methods of enforcement, are subject to change.
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