Sysco Corporation — Form 10-K Summary
Reporting period: Fiscal year ended June 27, 2015 (52 weeks), with fiscal 2014 as the principal comparison. Although the request metadata refers to “2014 Q4,” the filing is the FY2015 annual report and includes quarterly results, including Q4 ended June 27, 2015.
Business context
Sysco is a North American foodservice distributor serving approximately 425,000 customers through 197 distribution facilities. Broadline distribution is its principal business; SYGMA primarily serves chain restaurant locations. The filing estimates Sysco held about 17.7% of its approximately $264 billion U.S., Canadian and Irish foodservice market.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Sales | $48.68 billion | $46.52 billion | +4.7% |
| Gross profit | $8.55 billion | $8.18 billion | +4.5% |
| Gross margin | 17.57% | 17.59% | -2 basis points |
| Operating income (GAAP) | $1.23 billion | $1.59 billion | -22.5% |
| Net earnings (GAAP) | $686.8 million | $931.5 million | -26.3% |
| Diluted EPS (GAAP) | $1.15 | $1.58 | -27.2% |
| Operating cash flow | $1.56 billion | $1.49 billion | +4.2% |
| Free cash flow (non-GAAP) | $1.04 billion | $995.4 million | +4.2% |
Management’s adjusted, non-GAAP results excluded specified “Certain Items,” principally costs associated with the proposed US Foods merger. Adjusted operating income rose 3.4% to $1.79 billion, adjusted net earnings rose 6.4% to $1.10 billion, and adjusted diluted EPS increased 5.1% to $1.84. These measures supplement, and do not replace, GAAP results.
Sales growth reflected estimated food-cost inflation of 3.7%, case-volume growth of 2.6% including acquisitions (2.4% excluding them), and a 0.6% contribution from recent acquisitions; currency translation reduced sales growth by 1.0%. Outbound delivery fuel costs were about 0.6% of sales.
Q4 FY2015 sales increased approximately 1% year over year, while operating income and net earnings each declined approximately 71%. Quarterly GAAP net earnings were $73.0 million and diluted EPS was $0.12, versus $254.2 million and $0.43 in Q4 FY2014; merger-related costs were a major factor.
Cash, debt and capital allocation
At June 27, 2015, cash and cash equivalents were $5.13 billion, total debt was $7.32 billion, shareholders’ equity was $5.26 billion, and reported current liabilities were $9.40 billion. Current maturities of long-term debt included approximately $5.0 billion of senior notes issued to finance the proposed US Foods transaction. Sysco redeemed those notes in July 2015 using cash on hand and commercial-paper borrowings. As of August 13, 2015, commercial paper outstanding was $744 million; no amounts were outstanding under the supporting revolving credit facility.
Operating cash flow was $1.56 billion; capital expenditures were $542.8 million, or $518.4 million net of asset-sale proceeds. Dividends paid were $695.3 million. Sysco made no open-market share repurchases in FY2015. The company had a $1.5 billion revolving credit facility, expiring December 2018, supporting its commercial-paper programs, and reported compliance with debt covenants.
Material changes, unusual items and outlook
- The FTC obtained a preliminary injunction against the proposed US Foods merger; the parties terminated the agreement on June 26, 2015. Sysco accrued $312.5 million in termination payments, paid in July 2015. FY2015 also included $554.7 million of merger-related operating costs and $138.4 million of merger-related financing costs.
- Sysco expected additional FY2016 charges from redeeming the merger-financing notes, including a $50 million premium, $29 million of unamortized issuance costs and $18 million of unamortized bond discounts, partly offset by a stated $10 million hedge-related gain. These were to be treated as Certain Items.
- Management described the market as modestly improved but said FY2016 industry growth remained uncertain. Technomic’s cited forecast was roughly 2% annual real market growth; this is an industry estimate, not company guidance.
- Management estimated FY2016 net capital expenditures of $550 million to $600 million. It anticipated similar SYGMA sales due to account losses and pricing pressure, but expected SYGMA operating income to improve through customer mix and productivity.
- Sysco announced a share-repurchase authorization of up to $3 billion over two years, including a planned $1.5 billion accelerated repurchase in FY2016. Management expected approximately $0.03–$0.04 of EPS benefit, including higher interest expense from expected debt issuance. An additional authorization of up to $800 million was approved in August 2015.
- FY2016 will have 53 weeks; Sysco said the extra week would be presented as a Certain Item. The company completed its three-year Business Transformation objectives and said annualized benefits exceeded its $550 million–$650 million target range.
Risks and contingencies
- Intense competition, low industry growth, price sensitivity and changing customer mix may pressure margins; corporate-managed customers generally carry lower gross margins than locally managed customers.
- Food-cost inflation or deflation, fuel-price volatility, supply interruptions, food-safety or product-liability events, and foreign-exchange movements could affect sales, costs and reputation.
- Debt and refinancing needs increased materially around the proposed merger and planned repurchases. The notes redemption and repurchase plans may affect leverage, interest expense and liquidity.
- Sysco estimated potential multiemployer-plan withdrawal liability as high as $245 million in its risk discussion; a separate note estimated up to $90 million for certain reasonably possible events, excluding specified plans. Multiemployer plans were described as underfunded, and FY2015 contributions were $38.1 million.
- The company-sponsored pension obligation was approximately $3.7 billion, with plan assets of $3.0 billion and a reported funded deficit of about $676 million. Market performance and discount rates could change future funding needs.
- Sysco had posted approximately $90 million in letters of credit to appeal Canadian transfer-pricing assessments and could need up to another $16 million in cash or letters of credit for further appeals. Other legal proceedings were not expected by management to have a material adverse effect, though outcomes are uncertain.
- Other disclosed risks include union contract renegotiations, labor availability, ERP and cybersecurity disruptions, regulatory compliance, and potential impairment of goodwill in certain reporting units.
Important facts for investors to verify
- Reconcile FY2015 GAAP earnings declines with the nature, cash timing and tax treatment of merger-related “Certain Items”; compare adjusted measures with GAAP results.
- Confirm the post-year-end redemption funding, subsequent debt and commercial-paper balances, and the effect of planned buybacks on leverage and interest expense.
- Track execution and realized savings from the Business Transformation, cost control, margin initiatives and planned capital spending.
- Monitor food inflation/deflation, customer and channel mix, case-volume growth, currency effects, and SYGMA account retention and profitability.
- Assess exposure to pension funding, multiemployer withdrawal liabilities, Canadian tax appeals, and upcoming union contract renewals.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective as of June 27, 2015.