Sysco Corporation — FY2014 Form 10-K
Business context and reporting period. Sysco distributes food and related products to approximately 425,000 foodservice customers through 194 facilities. This annual report covers the 52 weeks ended June 28, 2014; comparisons are primarily with the 52 weeks ended June 29, 2013. The filing also provides unaudited quarterly results, including Q4.
Key financial results
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Sales | $46.52 billion | $44.41 billion | +4.7% |
| Gross profit / margin | $8.18 billion / 17.59% | $8.00 billion / 18.01% | Profit +2.3%; margin down 42 bps |
| Operating income / margin | $1.59 billion / 3.4% | $1.66 billion / 3.7% | -4.3% |
| Net earnings / net margin | $931.5 million / 2.0% | $992.4 million / 2.2% | -6.1% |
| Diluted EPS | $1.58 | $1.67 | -5.4% |
| Cash from operations | $1.49 billion | $1.51 billion | -1.2% |
| Free cash flow (non-GAAP) | $995.4 million | $1.02 billion | -2.0% |
| Capital expenditures | $523.2 million | $511.9 million | +$11.3 million |
Sales growth reflected estimated product-cost inflation of 2.1%, case-volume growth of 3.4% including recent acquisitions (2.2% excluding them), and a 0.7% adverse foreign-exchange impact. Acquisitions contributed 1.4% to sales growth.
Cash and cash equivalents were $413.0 million. Total debt was $2.76 billion, with approximately 74% at fixed rates; the company reported compliance with debt covenants. Shareholders’ equity was $5.27 billion, and long-term debt was 33.8% of capitalization. Sysco said available operating cash flow, commercial paper and credit facilities, bank lines, and access to capital markets should meet its normal cash needs for the next 12 months.
Material changes and management commentary
- Despite higher sales and gross-profit dollars, margins weakened amid competitive pricing, modest industry growth, and a sales mix shift toward lower-margin corporate-managed customers. Management said locally managed customer growth converged with corporate-managed growth in the second half.
- GAAP operating income included $55.1 million more in specified unusual or nonrecurring charges than the prior year. Adjusted operating income, a non-GAAP measure, fell 0.9% to $1.74 billion; adjusted diluted EPS fell 1.1% to $1.76. These measures exclude selected items and should be considered alongside GAAP results.
- Sysco reported lower cost per case by $0.10, while adjusted cost per case declined $0.06. Management expects cost per case in FY2015 to be similar to FY2014.
- Cash from operations was nearly flat year over year. Free cash flow declined modestly as operating cash flow fell and capital spending rose. Dividends paid were $667.2 million; share repurchases totaled $332.4 million.
Outlook, transaction, risks, and unusual items
- Business outlook: Management’s long-term sales-growth expectation is 4%–6% annually, assuming modest inflation. FY2015 net capital expenditures were estimated at $500–$550 million. Sysco said its Business Transformation Project exceeded its FY2014 benefit goals and expected to exceed its $550–$650 million annual-benefit goal again in FY2015. The ERP rollout and operating changes remain in progress; management noted identified system issues and execution risks.
- US Foods merger: The proposed transaction remained subject to FTC review. As of August 13, 2014, estimated enterprise value was $8.5 billion, including approximately $3.7 billion in equity consideration and $4.8 billion of US Foods net debt to assume or refinance. Sysco had secured a $3.3865 billion bridge facility and expected longer-term financing before closing. US Foods holders were expected to receive about 87 million shares, roughly 13% of the combined company. Management projected at least $600 million of annual synergies over three to four years, with $700–$800 million of integration costs over three years. Closing was expected in late 2014; under specified termination conditions, Sysco could owe a $300 million fee. These estimates are subject to change and transaction completion.
- Significant charges and contingencies: FY2014 included $90.6 million of merger and integration costs, a $23.8 million increase in the self-insurance reserve, and a $20 million accrual for a California drop-site settlement. The company later agreed to a $19.4 million settlement, with the cash portion paid in August 2014. It also contributed $76.0 million to multiemployer pension plans, including $40.8 million of withdrawal payments; management estimated potential withdrawal liability of up to $90 million for certain plans, based on dated plan information.
- Other exposures: The company-sponsored pension obligation was $3.67 billion against $2.94 billion in plan assets at year-end. Canadian transfer-pricing assessments could require up to $129 million in additional cash or letters of credit to appeal later-year assessments. Risks also include food and fuel inflation, competitive pressure, supply disruption, labor negotiations, technology and cybersecurity, and merger integration and financing.
Important facts for investors to verify
- FTC review status, any required divestitures or other remedies, final merger financing and consideration, and whether projected synergies justify integration costs and added debt.
- Whether sales and case-volume growth can sustain margins, particularly if locally managed customers lag or food-cost inflation proves difficult to pass through.
- Progress and realized savings from the ERP and broader transformation program, including whether deployments and FY2015 benefit targets are achieved.
- Cash generation, capital spending, dividends and debt levels after any merger-related financing.
- Developments in pension funding and withdrawal exposure, Canadian tax appeals, and the final accounting and payments for the California settlement.