SYSCO CORP - Quarter Report: 2017 April (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2017
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6544
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![syy-logoa05.jpg](https://www.sec.gov/Archives/edgar/data/0000096021/000009602117000073/syy-logoa05.jpg)
Sysco Corporation
(Exact name of registrant as specified in its charter)
Delaware | 74-1648137 |
(State or other jurisdiction of | (IRS employer |
incorporation or organization) | identification number) |
1390 Enclave Parkway | 77077-2099 |
Houston, Texas | (Zip Code) |
(Address of principal executive offices) |
Registrant’s Telephone Number, Including Area Code:
(281) 584-1390
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☑ | Accelerated Filer ☐ |
Non-accelerated Filer ☐ (Do not check if a smaller reporting company) | Smaller Reporting Company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
535,197,556 shares of common stock were outstanding as of April 21, 2017.
TABLE OF CONTENTS
Page No. | ||
PART I – FINANCIAL INFORMATION | ||
PART II – OTHER INFORMATION | ||
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
Apr. 1, 2017 | Jul. 2, 2016 | Mar. 26, 2016 | |||||||||
(unaudited) | (unaudited) | ||||||||||
ASSETS | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 855,133 | $ | 3,919,300 | $ | 610,838 | |||||
Accounts and notes receivable, less allowances of $56,525, $37,880, and $66,066 | 4,282,038 | 3,380,971 | 3,509,438 | ||||||||
Inventories | 2,944,327 | 2,639,174 | 2,703,635 | ||||||||
Prepaid expenses and other current assets | 139,298 | 114,454 | 119,408 | ||||||||
Prepaid income taxes | 104,765 | — | 16,714 | ||||||||
Total current assets | 8,325,561 | 10,053,899 | 6,960,033 | ||||||||
Long-term assets | |||||||||||
Plant and equipment at cost, less depreciation | 4,271,707 | 3,880,442 | 3,900,470 | ||||||||
Goodwill | 3,767,906 | 2,121,661 | 2,079,529 | ||||||||
Intangibles, less amortization | 1,085,946 | 207,461 | 193,672 | ||||||||
Deferred income taxes | 190,145 | 207,320 | — | ||||||||
Other assets | 279,635 | 251,021 | 217,390 | ||||||||
Total long-term assets | 9,595,339 | 6,667,905 | 6,391,061 | ||||||||
Total assets | $ | 17,920,900 | $ | 16,721,804 | $ | 13,351,094 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Current liabilities | |||||||||||
Notes payable | $ | 24,676 | $ | 89,563 | $ | 79,836 | |||||
Accounts payable | 3,849,670 | 2,935,982 | 2,906,651 | ||||||||
Accrued expenses | 1,328,773 | 1,289,312 | 1,118,410 | ||||||||
Accrued income taxes | — | 110,690 | — | ||||||||
Current maturities of long-term debt | 526,691 | 8,909 | 7,175 | ||||||||
Total current liabilities | 5,729,810 | 4,434,456 | 4,112,072 | ||||||||
Long-term liabilities | |||||||||||
Long-term debt | 8,026,617 | 7,336,930 | 4,274,884 | ||||||||
Deferred income taxes | 185,178 | 26,942 | 107,136 | ||||||||
Other long-term liabilities | 1,568,523 | 1,368,482 | 810,642 | ||||||||
Total long-term liabilities | 9,780,318 | 8,732,354 | 5,192,662 | ||||||||
Commitments and contingencies | |||||||||||
Noncontrolling interest | 80,244 | 75,386 | 76,929 | ||||||||
Shareholders' equity | |||||||||||
Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none | — | — | — | ||||||||
Common stock, par value $1 per share Authorized 2,000,000,000 shares, issued 765,174,900 shares | 765,175 | 765,175 | 765,175 | ||||||||
Paid-in capital | 1,307,914 | 1,281,140 | 1,039,236 | ||||||||
Retained earnings | 9,317,377 | 9,006,138 | 8,964,542 | ||||||||
Accumulated other comprehensive loss | (1,505,437 | ) | (1,358,118 | ) | (988,101 | ) | |||||
Treasury stock at cost, 229,075,540, 205,577,484 and 200,223,397 shares | (7,554,501 | ) | (6,214,727 | ) | (5,811,421 | ) | |||||
Total shareholders' equity | 2,330,528 | 3,479,608 | 3,969,431 | ||||||||
Total liabilities and shareholders' equity | $ | 17,920,900 | $ | 16,721,804 | $ | 13,351,094 |
See Notes to Consolidated Financial Statements
1
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In thousands, except for share and per share data)
13-Week Period Ended | 39-Week Period Ended | |||||||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | |||||||||||||
Sales | $ | 13,524,172 | $ | 12,002,791 | $ | 40,950,094 | $ | 36,719,028 | ||||||||
Cost of sales | 10,990,037 | 9,859,966 | 33,152,177 | 30,181,394 | ||||||||||||
Gross profit | 2,534,135 | 2,142,825 | 7,797,917 | 6,537,634 | ||||||||||||
Operating expenses | 2,098,173 | 1,765,207 | 6,302,705 | 5,233,959 | ||||||||||||
Operating income | 435,962 | 377,618 | 1,495,212 | 1,303,675 | ||||||||||||
Interest expense | 81,004 | 57,699 | 226,858 | 231,841 | ||||||||||||
Other expense (income), net | (4,815 | ) | (6,952 | ) | (14,351 | ) | (29,956 | ) | ||||||||
Earnings before income taxes | 359,773 | 326,871 | 1,282,705 | 1,101,790 | ||||||||||||
Income taxes | 121,495 | 109,735 | 445,373 | 367,835 | ||||||||||||
Net earnings | $ | 238,278 | $ | 217,136 | $ | 837,332 | $ | 733,955 | ||||||||
Net earnings: | ||||||||||||||||
Basic earnings per share | $ | 0.44 | $ | 0.38 | $ | 1.53 | $ | 1.27 | ||||||||
Diluted earnings per share | 0.44 | 0.38 | 1.52 | 1.26 | ||||||||||||
Average shares outstanding | 539,291,561 | 566,487,516 | 546,619,776 | 576,651,249 | ||||||||||||
Diluted shares outstanding | 544,068,915 | 570,814,798 | 551,797,431 | 580,980,865 | ||||||||||||
Dividends declared per common share | $ | 0.33 | $ | 0.31 | $ | 0.97 | $ | 0.92 |
See Notes to Consolidated Financial Statements
2
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
13-Week Period Ended | 39-Week Period Ended | ||||||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | ||||||||||||
Net earnings | $ | 238,278 | $ | 217,136 | $ | 837,332 | $ | 733,955 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Foreign currency translation adjustment | 89,799 | 50,373 | (189,884 | ) | (81,309 | ) | |||||||||
Items presented net of tax: | |||||||||||||||
Changes in cash flow hedges | (2,941 | ) | 1,769 | 8,153 | 1,435 | ||||||||||
Change in net investment hedge | (16,464 | ) | — | 8,797 | — | ||||||||||
Amortization of prior service cost | 1,752 | 1,715 | 5,256 | 5,145 | |||||||||||
Amortization of actuarial loss, net | 5,013 | 3,275 | 20,359 | 9,825 | |||||||||||
Total other comprehensive income (loss) | 77,159 | 57,132 | (147,319 | ) | (64,904 | ) | |||||||||
Comprehensive income | $ | 315,437 | $ | 274,268 | $ | 690,013 | $ | 669,051 |
See Notes to Consolidated Financial Statements
3
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
39-Week Period Ended | |||||||
Apr. 1, 2017 | Mar. 26, 2016 | ||||||
Cash flows from operating activities: | |||||||
Net earnings | $ | 837,332 | $ | 733,955 | |||
Adjustments to reconcile net earnings to cash provided by operating activities: | |||||||
Share-based compensation expense | 65,560 | 66,333 | |||||
Depreciation and amortization | 667,275 | 460,664 | |||||
Amortization of debt issuance and other debt-related costs | 25,156 | 36,088 | |||||
Loss on extinguishment of debt | — | 86,460 | |||||
Deferred income taxes | (40,286 | ) | 125,527 | ||||
Provision for losses on receivables | 14,483 | 15,596 | |||||
Other non-cash items | (338 | ) | (18,918 | ) | |||
Additional changes in certain assets and liabilities, net of effect of businesses acquired: | |||||||
(Increase) in receivables | (287,758 | ) | (174,826 | ) | |||
(Increase) in inventories | (80,660 | ) | (6,825 | ) | |||
Decrease in prepaid expenses and other current assets | 5,827 | 20,530 | |||||
Increase in accounts payable | 318,760 | 11,358 | |||||
(Decrease) in accrued expenses | (253,577 | ) | (357,503 | ) | |||
(Decrease) increase in accrued income taxes | (182,089 | ) | 93,601 | ||||
(Increase) decrease in other assets | (42,669 | ) | 4,954 | ||||
Increase (decrease) in other long-term liabilities | 11,756 | (84,076 | ) | ||||
Excess tax benefits from share-based compensation arrangements | (33,997 | ) | (23,937 | ) | |||
Net cash provided by operating activities | 1,024,775 | 988,981 | |||||
Cash flows from investing activities: | |||||||
Additions to plant and equipment | (413,776 | ) | (360,883 | ) | |||
Proceeds from sales of plant and equipment | 19,091 | 12,623 | |||||
Acquisition of businesses, net of cash acquired | (2,910,461 | ) | (167,701 | ) | |||
Decrease in restricted cash | — | 168,274 | |||||
Purchase of foreign currency options | — | (34,648 | ) | ||||
Net cash used for investing activities | (3,305,146 | ) | (382,335 | ) | |||
Cash flows from financing activities: | |||||||
Bank and commercial paper borrowings (repayments), net | 1,286,452 | — | |||||
Other debt borrowings | 2,010 | 2,028,639 | |||||
Other debt repayments | (146,780 | ) | (77,842 | ) | |||
Redemption of senior notes | — | (5,050,000 | ) | ||||
Debt issuance costs | (5,094 | ) | (20,491 | ) | |||
Cash paid for settlement of cash flow hedge | — | (6,134 | ) | ||||
Cash received from termination of interest rate swap agreements | — | 14,496 | |||||
Proceeds from stock option exercises | 175,332 | 222,798 | |||||
Treasury stock purchases | (1,531,074 | ) | (1,711,481 | ) | |||
Dividends paid | (521,806 | ) | (523,665 | ) | |||
Excess tax benefits from share-based compensation arrangements | 33,997 | 23,937 | |||||
Net cash used for financing activities | (706,963 | ) | (5,099,743 | ) | |||
Effect of exchange rates on cash and cash equivalents | (76,833 | ) | (26,109 | ) | |||
Net decrease in cash and cash equivalents | (3,064,167 | ) | (4,519,206 | ) | |||
Cash and cash equivalents at beginning of period | 3,919,300 | 5,130,044 | |||||
Cash and cash equivalents at end of period | $ | 855,133 | $ | 610,838 | |||
Supplemental disclosures of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 263,421 | $ | 158,957 | |||
Income taxes | 673,076 | 165,904 |
See Notes to Consolidated Financial Statements
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Sysco Corporation and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the company, without audit, with the exception of the July 2, 2016 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the company's fiscal 2016 Annual Report on Form 10-K, as recast by the Current Report on Form 8-K filed on February 6, 2017. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.
On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group. This is further described in Note 3, "Acquisitions". This acquisition, combined with a change in how the chief operating decision maker assesses performance and allocates resources, resulted in a change in the company's segment reporting. This is further described in Note 12, "Business Segment Information."
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2016 Annual Report on Form 10-K, as recast by the Current Report on Form 8-K filed on February 6, 2017. Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.
The interim financial information herein has been reviewed by Ernst & Young LLP, independent registered public accounting firm, in accordance with established professional standards and procedures for such a review. A Review Report of Independent Registered Public Accounting Firm has been issued by Ernst & Young LLP and is included as Exhibit 15.1 to this Form 10-Q.
2. NEW ACCOUNTING STANDARDS
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requiring that an employer report the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization as applicable. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods, which is the first quarter of fiscal 2019 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.
Guidance in Presentation of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Invitees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods, which is the first quarter of fiscal 2019 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), specifying the accounting for leases, which supersedes the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and
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lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting is largely unchanged from the previous accounting standard. In addition, Topic 842 expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which is fiscal 2020 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The collective guidance is effective for interim and annual periods beginning after December 15, 2017, which is fiscal 2019 for Sysco, and could be early adopted in fiscal 2018. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The company has not selected a transition method and is currently evaluating the impact of the pending adoption of this ASU on its ongoing financial reporting.
3. ACQUISITIONS
During the first 39 weeks of fiscal 2017, the company paid cash of $2.9 billion for acquisitions, net of cash acquired. Certain prior year acquisitions involved contingent consideration that included earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of April 1, 2017, aggregate contingent consideration outstanding was $18.2 million, of which $3.9 million was recorded as earnout liabilities.
Brakes Group
On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group, pursuant to an agreement for the sale and purchase of securities in the capital of the Brakes Group, dated as of February 19, 2016 (the Purchase Agreement), by and among Sysco, entities affiliated with Bain Capital Investors, LLC, and members of management of the Brakes Group (the Acquisition). Following the closing of the Acquisition, the Brakes Group became a wholly-owned subsidiary of Sysco.
The Brakes Group is a leading European foodservice business by revenue, supplying fresh, refrigerated and frozen food products, as well as non-food products and supplies, to more than 50,000 foodservice customers ranging from large customers, including leisure, pub, restaurant, hotel and contract catering groups, to smaller customers, including independent restaurants, hotels, fast food outlets, schools and hospitals. Brakes Group businesses include: Brakes, Brakes Catering Equipment, Brake France, Country Choice, Davigel, Fresh Direct, Freshfayre, M&J Seafood, Menigo Foodservice, Pauley's, Wild Harvest and Woodward Foodservice. The Brakes Group has leading market positions in the U.K., France, and Sweden, in addition to a presence in Ireland, Belgium, Spain and Luxembourg. The principal reasons for the Acquisition were the ability to expand Sysco's footprint and infrastructure in Europe and profitably grow Sysco's business. These contributed to a purchase price that resulted in recognition of goodwill.
The assets, liabilities and operating results of the Brakes Group are reflected in the company’s consolidated financial statements in accordance with ASC Topic No. 805, Business Combinations, commencing from the acquisition date. In certain circumstances, the purchase price allocations may be based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision until Sysco receives final information and other analysis during the measurement period. These include items such as finalizing valuation of acquired tangible and intangible assets and related tax attributes.
Total consideration has been determined to be as follows (in thousands):
Cash consideration paid, net of cash acquired | $ | 626,442 | |
Payment for Brakes outstanding financial debt | 2,284,100 | ||
Total consideration paid, net of cash acquired | $ | 2,910,542 |
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The purchase price was allocated based on the company’s preliminary estimated fair value of the assets acquired and liabilities assumed, as follows (in thousands):
Preliminary Purchase Price Allocation | |||
Accounts receivable | $ | 720,053 | |
Inventory | 248,031 | ||
Plant and equipment | 595,321 | ||
Other assets | 10,002 | ||
Goodwill and other intangibles (1) | 2,796,470 | ||
Total assets | 4,369,877 | ||
Accounts payable | (736,881 | ) | |
Accrued expenses | (242,743 | ) | |
Deferred tax liabilities | (201,777 | ) | |
Other liabilities | (277,934 | ) | |
Total consideration, net of cash acquired | $ | 2,910,542 |
(1) | The excess purchase price of $1.8 billion was assigned to goodwill, none of which is deductible for income tax purposes. This goodwill has been assigned to the International Foodservice Operations reportable segment. Intangible assets added include customer relationships of $897.8 million with a weighted average life of 12 years and trademarks and trade names of $140.6 million that are indefinite lived assets. Amortization expense is recognized on a straight line basis and was $56.6 million for the first 39 weeks of fiscal 2017. |
The 39 week period ended April 1, 2017 includes the results of operations of the Brakes Group for the period from July 5, 2016 to April 1, 2017. The consolidated statement of operations for the third quarter of fiscal 2017 includes $1.2 billion of sales and $3.0 million of net earnings attributable to the Brakes Group. The consolidated statement of operations for the 39 week period ended April 1, 2017 includes $3.9 billion of sales and $53.7 million of net earnings attributable to the Brakes Group. Sysco incurred debt in order to fund the Acquisition; however, the interest expense on that debt is not reflected within the earnings from operations attributable to the Brakes Group.
Unaudited Pro Forma Results
The following table presents the company’s pro forma consolidated sales, earnings before income taxes, and net earnings for the third quarter and 39 week period ended March 26, 2016. The unaudited pro forma results include the historical statements of operations information of the company and of Brakes Group, giving effect to the Acquisition and related financing as if they had occurred at the beginning of each period presented (in thousands, except per share data).
13-Week Period Ended | 39-Week Period Ended | ||||||
Mar. 26, 2016 | Mar. 26, 2016 | ||||||
Sales | $ | 13,291,621 | $ | 41,029,626 | |||
Income before taxes | 284,869 | 958,893 | |||||
Net earnings | 185,165 | 626,717 | |||||
Net earnings: | |||||||
Basic earnings per common share | $ | 0.33 | $ | 1.09 | |||
Diluted earnings per common share | 0.32 | 1.08 |
The pro forma results include the following pro forma adjustments related to the Acquisition:
(i) | Additional amortization expense related to the fair value of intangible assets acquired. |
(ii) | Additional depreciation expense related to the fair value of property and equipment acquired. |
(iii) | The elimination of interest expense, assuming the long-term debt paid off on behalf of the Brakes Group as of the Acquisition date had been retired as of June 28, 2015, the first day of fiscal 2016. |
(iv) | The addition of interest expense incurred by Sysco due to the Acquisition of the Brakes Group. |
(v) | The elimination of interest income from related party debt instruments issued to the Brakes Group prior to the Acquisition. |
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(vi) | The elimination of minority interests in the Brakes Group entities, as the majority of the interests were repurchased before the Acquisition. |
The unaudited pro forma results do not include any operating efficiencies, cost reductions or revenue enhancements that may be achieved through the business combination, or the impact of non-recurring items directly related to the business combination or the nature and amount of any material, nonrecurring pro forma adjustments.
The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined companies.
4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:
• | Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets; |
• | Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and |
• | Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. |
Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds. Any derivative instruments described below are discussed further in Note 5, "Derivative Financial Instruments."
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:
• | Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 2 measurement in the tables below. |
• | Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents as Level 1 measurements in the tables below. |
• | The interest rate swap agreements are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. These are included as Level 2 measurements in the tables below. |
• | The foreign currency swap agreements, including cross-currency swaps, are valued using a swap valuation model that utilizes an income approach applying observable market inputs including interest rates, LIBOR swap rates for U.S. dollars, pound sterling and Euro currencies, and credit default swap rates. These are included as Level 2 measurements in the tables below. |
• | Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. These are included as Level 2 measurements in the tables below. |
• | Fuel swap contracts are valued based on observable market transactions of forward commodity prices. These are included as Level 2 measurements in the tables below. |
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The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of April 1, 2017, July 2, 2016 and March 26, 2016:
Assets and Liabilities Measured at Fair Value as of Apr. 1, 2017 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | |||||||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Cash equivalents | $ | 91 | $ | 44,270 | $ | — | $ | 44,361 | |||||||
Other assets | |||||||||||||||
Interest rate swap agreements | — | 659 | — | 659 | |||||||||||
Cross-currency swaps | — | 4,211 | — | 4,211 | |||||||||||
Foreign currency swaps | — | 26,691 | — | 26,691 | |||||||||||
Fuel swaps | — | 831 | — | 831 | |||||||||||
Total assets at fair value | $ | 91 | $ | 76,662 | $ | — | $ | 76,753 | |||||||
Liabilities: | |||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 3,871 | $ | 3,871 | |||||||
Other long-term liabilities | |||||||||||||||
Interest rate swap agreements | — | 28,062 | — | 28,062 | |||||||||||
Foreign currency swaps | — | 22,693 | — | 22,693 | |||||||||||
Foreign currency forwards | — | 431 | — | 431 | |||||||||||
Total liabilities at fair value | $ | — | $ | 51,186 | $ | 3,871 | $ | 55,057 |
Assets and Liabilities Measured at Fair Value as of Jul. 2, 2016 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | |||||||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Cash equivalents | $ | 634,230 | $ | 43,270 | $ | — | $ | 677,500 | |||||||
Other assets | |||||||||||||||
Interest rate swap agreements | — | 36,805 | — | 36,805 | |||||||||||
Total assets at fair value | $ | 634,230 | $ | 80,075 | $ | — | $ | 714,305 | |||||||
Liabilities: | |||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 16,439 | $ | 16,439 | |||||||
Total liabilities at fair value | $ | — | $ | — | $ | 16,439 | $ | 16,439 |
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Assets and Liabilities Measured at Fair Value as of Mar. 26, 2016 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(In thousands) | |||||||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Cash equivalents | $ | 134,925 | $ | 34,050 | $ | — | $ | 168,975 | |||||||
Prepaid expenses and other current assets | |||||||||||||||
Foreign exchange option contracts | — | 37,244 | — | 37,244 | |||||||||||
Other assets | |||||||||||||||
Interest rate swap agreement | — | 11,801 | — | 11,801 | |||||||||||
Total assets at fair value | $ | 134,925 | $ | 83,095 | $ | — | $ | 218,020 | |||||||
Liabilities: | |||||||||||||||
Contingent consideration | $ | — | $ | — | $ | 19,965 | $ | 19,965 | |||||||
Total liabilities at fair value | $ | — | $ | — | $ | 19,965 | $ | 19,965 |
The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement. The fair value of total debt approximated $8.9 billion, $7.9 billion and $3.4 billion as of April 1, 2017, July 2, 2016 and March 26, 2016, respectively. The carrying value of total debt was $8.6 billion, $7.4 billion and $3.1 billion as of April 1, 2017, July 2, 2016 and March 26, 2016, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes.
Hedging of interest rate risk
Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. Details of outstanding swap agreements as of April 1, 2017 are below:
Maturity Date of Swap | Notional Value (in millions) | Fixed Coupon Rate on Hedged Debt | Floating Interest Rate on Swap | Floating Rate Reset Terms | |||||||
February 12, 2018 | $ | 500 | 5.25 | % | Six-month LIBOR | Every six months in arrears | |||||
April 1, 2019 | $ | 500 | 1.90 | % | Three-month LIBOR | Every three months in advance | |||||
October 1, 2020 | $ | 750 | 2.60 | % | Three-month LIBOR | Every three months in advance | |||||
July 15, 2021 | $ | 500 | 2.50 | % | Three-month LIBOR | Every three months in advance |
Hedging of foreign currency risk
In the first quarter of fiscal 2017, Sysco entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain pound sterling-denominated intercompany loans with a total notional value of £234.2 million. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates, which are recorded in other expense (income), net in the consolidated results of operations. The company recognizes the difference between the U.S. dollar interest payments received from the swap counterparty and the U.S. dollar equivalent of the pound sterling interest payments made to the swap counterparty in other expense (income), net on the consolidated results of operations. This difference varies over time and is driven by a number of market factors, including relevant interest rate differentials and foreign exchange rates. These swaps have been designated as cash flow hedges and mature in July 2021, at the same time as the related loans. There are no credit-risk-related contingent features associated with these swaps.
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The company entered into cross currency swap contracts to hedge the foreign currency exposure of our net investment in certain foreign operations. The effective portion of the derivative gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to earnings when the hedged net investment is either sold or substantially liquidated. Sysco designated its Euro-denominated debt of €500 million issued in June 2016 as a net investment hedge. Sysco also designated its cross currency swap contracts entered into in August 2016 as a net investment hedge, mitigating the risk in foreign operations, with a total notional value of €534 million. The remeasurement gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
Sysco's operations in the United Kingdom and Sweden have inventory purchases denominated in currencies other than their functional currency, such as Euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of these entities and these currencies. The company enters into foreign currency forward swap contracts to sell the applicable entity's functional currency and buy currencies matching the inventory purchase, which operate as cash flow hedges of the company's foreign currency-denominated inventory purchases. These swap contracts are recorded at fair value on the balance sheet and within accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions affect earnings, which is the period in which the company recognizes the sales associated with the specified foreign currency-denominated inventory purchases.
Hedging of fuel price risk
In the second quarter of fiscal 2017, Sysco began utilizing fuel commodity swaps to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps, with a total notional value of $70 million, have maturity dates extending into June 2018 and have been designated as cash flow hedges. These swap contracts are recorded at fair value on the balance sheet and the effective portion of any derivative gain or loss is initially recorded in accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions occur, which is when the fuel is consumed.
The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of April 1, 2017, July 2, 2016 and March 26, 2016 are as follows:
Derivative Fair Value | |||||||||||||
Balance Sheet location | Apr. 1, 2017 | Jul. 2, 2016 | Mar. 26, 2016 | ||||||||||
(In thousands) | |||||||||||||
Fair Value Hedges: | |||||||||||||
Interest rate swaps | Other current assets | $ | 659 | $ | — | $ | — | ||||||
Interest rate swaps | Other assets | 36,805 | 11,801 | ||||||||||
Interest rate swaps | Other long-term liabilities | 28,062 | — | — | |||||||||
Cash Flow Hedges: | |||||||||||||
Fuel swaps | Other assets | $ | 831 | $ | — | $ | — | ||||||
Cross currency swaps | Other assets | 4,211 | — | — | |||||||||
Foreign currency forwards | Other long-term liabilities | 431 | — | — | |||||||||
Net Investment Hedges: | |||||||||||||
Foreign currency swaps | Other assets | $ | 26,691 | $ | — | $ | — | ||||||
Foreign currency swaps | Other long-term liabilities | 22,693 | — | — |
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The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended April 1, 2017 and March 26, 2016, presented on a pretax basis, are as follows:
Location of (Gain) or Loss Recognized | Amount of (Gain) or Loss Recognized | ||||||||
13-Week Period Ended | |||||||||
Apr. 1, 2017 | Mar. 26, 2016 | ||||||||
(In thousands) | |||||||||
Fair Value Hedge Relationship: | |||||||||
Interest rate swaps | Interest expense | $ | (1,661 | ) | $ | — | |||
Cash Flow Hedge Relationships: | |||||||||
Forward starting interest rate swaps (1) | Interest expense | $ | 2,873 | $ | 2,872 | ||||
Fuel swaps | Other comprehensive income | 2,893 | — | ||||||
Foreign currency forwards | Other comprehensive income | (607 | ) | — | |||||
Cross currency swaps | Other comprehensive income | 8,323 | — | ||||||
Net Investment Hedge Relationships: | |||||||||
Foreign currency swaps | Other comprehensive income | $ | 8,482 | $ | — |
(1) Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.
The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week periods ended April 1, 2017 and March 26, 2016 presented on a pretax basis are as follows:
Location of (Gain) or Loss Recognized | Amount of (Gain) or Loss Recognized | ||||||||
39-Week Period Ended | |||||||||
Apr. 1, 2017 | Mar. 26, 2016 | ||||||||
(In thousands) | |||||||||
Fair Value Hedge Relationships: | |||||||||
Interest rate swaps | Interest expense | $ | (7,510 | ) | $ | — | |||
Cash Flow Hedge Relationships: | |||||||||
Forward starting interest rate swaps (1) | Interest expense | 8,619 | 8,463 | ||||||
Fuel swaps | Other comprehensive income | 831 | — | ||||||
Foreign currency forwards | Other comprehensive income | 1,788 | — | ||||||
Cross currency swaps | Other comprehensive income | 4,211 | — | ||||||
Net Investment Hedge Relationships: | |||||||||
Foreign currency swaps | Other comprehensive income | $ | (3,998 | ) | $ | — |
(1) Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.
For fair value hedges of interest rate risk, hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. For cash flow hedges, hedge ineffectiveness is the lesser of the change in the fair value of the derivative compared to the change in the hedged transaction. Hedge ineffectiveness is recorded directly in earnings within interest expense for interest rate swaps, other income and expense, net for hedging of the foreign exchange risk on intercompany loans, cost of sales for foreign exchange risk on inventory purchases and operating expense for fuel hedging. All amounts were immaterial for the third quarter and first 39 weeks of fiscal 2017 and 2016. None of the instruments contain credit-risk-related contingent features.
6. DEBT
Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $2.0 billion. As of April 1, 2017, there was $1.3 billion in outstanding commercial paper classified as long-term debt due to the underlying long-term revolving credit facility. During the first 39 weeks of 2017, aggregate outstanding commercial paper and short-term bank borrowings ranged from zero to approximately $1.5 billion.
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7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
13-Week Period Ended | 39-Week Period Ended | ||||||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | ||||||||||||
(In thousands, except for share and per share data) | (In thousands, except for share and per share data) | ||||||||||||||
Numerator: | |||||||||||||||
Net earnings | $ | 238,278 | $ | 217,136 | $ | 837,332 | $ | 733,955 | |||||||
Denominator: | |||||||||||||||
Weighted-average basic shares outstanding | 539,291,561 | 566,487,516 | 546,619,776 | 576,651,249 | |||||||||||
Dilutive effect of share-based awards | 4,777,354 | 4,327,282 | 5,177,655 | 4,329,616 | |||||||||||
Weighted-average diluted shares outstanding | 544,068,915 | 570,814,798 | 551,797,431 | 580,980,865 | |||||||||||
Basic earnings per share | $ | 0.44 | $ | 0.38 | $ | 1.53 | $ | 1.27 | |||||||
Diluted earnings per share | $ | 0.44 | $ | 0.38 | $ | 1.52 | $ | 1.26 |
The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,065,000 and 3,100,000 for the third quarter of fiscal 2017 and fiscal 2016, respectively. The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,349,000 and 4,300,000 for the first 39 weeks of fiscal 2017 and fiscal 2016, respectively.
8. OTHER COMPREHENSIVE INCOME
Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, amounts related to cash flow hedging arrangements and certain amounts related to pension and other postretirement plans. Comprehensive income was $315.4 million and $274.3 million for the third quarter of fiscal 2017 and fiscal 2016, respectively. Comprehensive income was $690 million and $669.1 million for the first 39 weeks of fiscal 2017 and fiscal 2016, respectively.
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A summary of the components of other comprehensive (loss) income and the related tax effects for each of the periods presented is as follows:
13-Week Period Ended Apr. 1, 2017 | |||||||||||||
Location of Expense (Income) Recognized in Net Earnings | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||
(In thousands) | |||||||||||||
Pension and other postretirement benefit plans: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Amortization of prior service cost | Operating expenses | $ | 2,844 | $ | 1,092 | $ | 1,752 | ||||||
Amortization of actuarial loss (gain), net | Operating expenses | 8,944 | 3,931 | 5,013 | |||||||||
Total reclassification adjustments | 11,788 | 5,023 | 6,765 | ||||||||||
Foreign currency translation: | |||||||||||||
Other comprehensive income before reclassification adjustments: | |||||||||||||
Foreign currency translation adjustment | N/A | 89,799 | — | 89,799 | |||||||||
Interest rate swaps: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Gains on cash flow hedges | Interest expense | (4,774 | ) | (1,833 | ) | (2,941 | ) | ||||||
Change in net investment hedge | N/A | (12,775 | ) | 3,689 | (16,464 | ) | |||||||
Total other comprehensive income | $ | 84,038 | $ | 6,879 | $ | 77,159 |
13-Week Period Ended Mar. 26, 2016 | |||||||||||||
Location of Expense (Income) Recognized in Net Earnings | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||
(In thousands) | |||||||||||||
Pension and other postretirement benefit plans: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Amortization of prior service cost | Operating expenses | $ | 2,784 | $ | 1,069 | $ | 1,715 | ||||||
Amortization of actuarial loss (gain), net | Operating expenses | 5,317 | 2,042 | 3,275 | |||||||||
Total reclassification adjustments | 8,101 | 3,111 | 4,990 | ||||||||||
Foreign currency translation: | |||||||||||||
Other comprehensive income before reclassification adjustments: | |||||||||||||
Foreign currency translation adjustment | N/A | 50,373 | — | 50,373 | |||||||||
Interest rate swaps: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Losses on cash flow hedges | Interest expense | 2,872 | 1,103 | 1,769 | |||||||||
Change in fair value of cash flow hedges | N/A | — | — | — | |||||||||
Total other comprehensive income | $ | 61,346 | $ | 4,214 | $ | 57,132 |
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39-Week Period Ended Apr. 1, 2017 | |||||||||||||
Location of Expense (Income) Recognized in Net Earnings | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||
(In thousands) | |||||||||||||
Pension and other postretirement benefit plans: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Amortization of prior service cost | Operating expenses | $ | 8,532 | $ | 3,276 | $ | 5,256 | ||||||
Amortization of actuarial loss (gain), net | Operating expenses | 32,152 | 11,793 | 20,359 | |||||||||
Total reclassification adjustments | 40,685 | 15,069 | 25,615 | ||||||||||
Foreign currency translation: | |||||||||||||
Other comprehensive income before reclassification adjustments: | |||||||||||||
Foreign currency translation adjustment | N/A | (189,884 | ) | — | (189,884 | ) | |||||||
Interest rate swaps: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Losses on cash flow hedges | Interest expense | 12,711 | 4,558 | 8,153 | |||||||||
Change in net investment hedge | N/A | 30,604 | 21,807 | 8,797 | |||||||||
Total other comprehensive (loss) income | $ | (105,884 | ) | $ | 41,435 | $ | (147,319 | ) |
39-Week Period Ended Mar. 26, 2016 | |||||||||||||
Location of Expense (Income) Recognized in Net Earnings | Before Tax Amount | Tax | Net of Tax Amount | ||||||||||
(In thousands) | |||||||||||||
Pension and other postretirement benefit plans: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Amortization of prior service cost | Operating expenses | $ | 8,352 | $ | 3,207 | $ | 5,145 | ||||||
Amortization of actuarial loss (gain), net | Operating expenses | 15,951 | 6,126 | 9,825 | |||||||||
Total reclassification adjustments | 24,303 | 9,333 | 14,970 | ||||||||||
Foreign currency translation: | |||||||||||||
Other comprehensive income before reclassification adjustments: | |||||||||||||
Foreign currency translation adjustment | N/A | (81,309 | ) | — | (81,309 | ) | |||||||
Interest rate swaps: | |||||||||||||
Reclassification adjustments: | |||||||||||||
Losses on cash flow hedges | Interest expense | 8,463 | 3,249 | 5,214 | |||||||||
Change in fair value of cash flow hedges | N/A | (6,134 | ) | (2,355 | ) | (3,779 | ) | ||||||
Total other comprehensive (loss) income | $ | (54,677 | ) | $ | 10,227 | $ | (64,904 | ) |
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The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
39-Week Period Ended Apr. 1, 2017 | |||||||||||||||
Pension and Other Postretirement Benefit Plans, net of tax | Foreign Currency Translation | Hedging Arrangements, net of tax | Total | ||||||||||||
(In thousands) | |||||||||||||||
Balance as of Jul. 2, 2016 | $ | (1,104,484 | ) | $ | (136,813 | ) | $ | (116,821 | ) | $ | (1,358,118 | ) | |||
Equity adjustment from foreign currency translation | — | (189,884 | ) | — | (189,884 | ) | |||||||||
Other comprehensive income before reclassification adjustments | — | — | — | — | |||||||||||
Losses on cash flow hedges | — | — | 8,153 | 8,153 | |||||||||||
Change in net investment hedge | — | — | 8,797 | 8,797 | |||||||||||
Amortization of unrecognized prior service cost | 5,256 | — | — | 5,256 | |||||||||||
Amortization of unrecognized net actuarial losses | 20,359 | — | — | 20,359 | |||||||||||
Balance as of Apr. 1, 2017 | $ | (1,078,869 | ) | $ | (326,697 | ) | $ | (99,871 | ) | $ | (1,505,437 | ) |
39-Week Period Ended Mar. 26, 2016 | |||||||||||||||
Pension and Other Postretirement Benefit Plans, net of tax | Foreign Currency Translation | Hedging Arrangements, net of tax | Total | ||||||||||||
(In thousands) | |||||||||||||||
Balance as of Jun. 27, 2015 | $ | (705,311 | ) | $ | (97,733 | ) | $ | (120,153 | ) | $ | (923,197 | ) | |||
Other comprehensive income before reclassification adjustments | — | (81,309 | ) | — | (81,309 | ) | |||||||||
Losses on cash flow hedges | — | — | 5,214 | 5,214 | |||||||||||
Change in fair value of cash flow hedges | — | — | (3,779 | ) | (3,779 | ) | |||||||||
Amortization of unrecognized prior service cost | 5,145 | — | — | 5,145 | |||||||||||
Amortization of unrecognized net actuarial losses | 9,825 | — | — | 9,825 | |||||||||||
Balance as of Mar. 26, 2016 | $ | (690,341 | ) | $ | (179,042 | ) | $ | (118,718 | ) | $ | (988,101 | ) |
9. SHARE-BASED COMPENSATION
Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employee Stock Purchase Plan (ESPP), and various non-employee director plans.
Stock Incentive Plans
In the first 39 weeks of fiscal 2017, options to purchase 4,990,396 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first 39 weeks of fiscal 2017 was $6.05.
In the first 39 weeks of fiscal 2017, 824,958 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per performance share unit granted during the first 39 weeks of fiscal 2017 was $52.17. The PSUs will convert into shares of Sysco common stock at the end of the performance period based on financial performance targets consisting of Sysco's earnings per share compound annual growth rate and adjusted return on invested capital. In the first 39 weeks of fiscal 2017, expense was recognized assuming on-target performance will be achieved.
In the first 39 weeks of fiscal 2017, 623,240 restricted stock units were granted to employees. The weighted average grant-date fair value per restricted stock unit granted during the first 39 weeks of fiscal 2017 was $50.04.
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Employee Stock Purchase Plan
Plan participants purchased 838,609 shares of common stock under the Sysco ESPP during the first 39 weeks of fiscal 2017.
The weighted average fair value per right of employee stock purchase rights issued pursuant to the ESPP was $7.71 during the first 39 weeks of fiscal 2017. The fair value of the stock purchase rights is estimated as the difference between the stock price and the employee purchase price.
All Share-Based Payment Arrangements
The total share-based compensation cost that has been recognized in results of operations was $65.6 million and $66.3 million for the first 39 weeks of fiscal 2017 and fiscal 2016, respectively.
As of April 1, 2017, there was $107.7 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.26 years.
10. INCOME TAXES
Uncertain Tax Positions
As of April 1, 2017, the gross amount of unrecognized tax benefit and related accrued interest was $11.1 million and $11.5 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months, either because Sysco prevails on positions challenged upon audit or because the company agrees to the disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.
Effective Tax Rate
Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rates. The effective tax rate for the third quarter of fiscal 2017 of 33.77% and the first 39 weeks of fiscal 2017 of 34.72% was favorably impacted by an increase in earnings in foreign jurisdictions due to the acquisition of the Brakes Group. For the third quarter of fiscal 2017, changes in deferred taxes also impacted these tax rates, with a favorable impact in our European deferred taxes being partially offset by an unfavorable impact from U.S. deferred taxes. For the first 39 weeks of fiscal 2017, factors favorably impacting the tax rate included changes in European deferred taxes and U.S. tax credits. These were partially offset by one-time tax expenses related to the acquisition of the Brakes Group, primarily from non-deductible transaction costs and changes to U.S. deferred taxes. The effective tax rate for the third quarter of fiscal 2016 was 33.57% and the tax rate for the first 39 weeks of fiscal 2016 was 33.39%. Both periods of fiscal 2016 reflected benefits from favorable resolutions of tax contingencies.
Other
The determination of the company’s provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various 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 the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Sysco is engaged in various legal proceedings that have arisen, but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable and reasonably estimable, the losses have been accrued. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company. However, the final results of legal proceedings cannot be predicted with certainty and, if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods.
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12. BUSINESS SEGMENT INFORMATION
The Acquisition, combined with a change in how the chief operating decision maker assesses performance and allocates resources, resulted in a change in Sysco's segment reporting in the first quarter of fiscal 2017. Sysco has aggregated certain of its operating companies into three reportable segments. "Other" financial information is attributable to the company's other operating segments that do not meet the quantitative disclosure thresholds.
• | U.S. Foodservice Operations - primarily includes U.S. broadline operations, custom-cut meat companies, FreshPoint (our specialty produce companies) and European Imports (a specialty import company); |
• | International Foodservice Operations - primarily includes broadline operations in Canada and Europe (including the Brakes Group, which was acquired in fiscal 2017), Bahamas, Mexico, Costa Rica and Panama, as well as a company that distributes to international customers; |
• | SYGMA - our customized distribution subsidiary; and |
• | Other - primarily our hotel supply operations and our Sysco Ventures platform, which includes our suite of technology solutions that help support the business needs of our customers. |
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, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.
The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. 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 services center. These also include all share-based compensation costs. 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 tables set forth certain financial information for Sysco’s business segments. Prior year amounts have been reclassified to conform to the current year presentation and include the impact of a change in allocation between corporate and these segments that is not material but is consistent with management's assessment of segment performance in fiscal 2017.
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13-Week Period Ended | 39-Week Period Ended | ||||||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | ||||||||||||
Sales: | (In thousands) | (In thousands) | |||||||||||||
U.S. Foodservice Operations | $ | 9,233,048 | $ | 9,037,417 | $ | 27,799,728 | $ | 27,580,667 | |||||||
International Foodservice Operations | 2,528,485 | 1,251,815 | 7,882,796 | 3,922,848 | |||||||||||
SYGMA | 1,535,550 | 1,497,365 | 4,560,424 | 4,450,106 | |||||||||||
Other | 227,089 | 216,194 | 707,146 | 765,407 | |||||||||||
Total | $ | 13,524,172 | $ | 12,002,791 | $ | 40,950,094 | $ | 36,719,028 | |||||||
13-Week Period Ended | 39-Week Period Ended | ||||||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | ||||||||||||
Operating income: | (In thousands) | (In thousands) | |||||||||||||
U.S. Foodservice Operations | $ | 689,210 | $ | 643,326 | $ | 2,115,762 | $ | 1,955,211 | |||||||
International Foodservice Operations | 16,076 | 33,021 | 180,324 | 127,153 | |||||||||||
SYGMA | 7,344 | 9,344 | 15,407 | 20,126 | |||||||||||
Other | 6,078 | 6,616 | 17,873 | 23,766 | |||||||||||
Total segments | 718,708 | 692,307 | 2,329,366 | 2,126,256 | |||||||||||
Corporate expenses | (282,746 | ) | (314,689 | ) | (834,154 | ) | (822,581 | ) | |||||||
Total operating income | 435,962 | 377,618 | 1,495,212 | 1,303,675 | |||||||||||
Interest expense | 81,004 | 57,699 | 226,858 | 231,841 | |||||||||||
Other expense (income), net | (4,815 | ) | (6,952 | ) | (14,351 | ) | (29,956 | ) | |||||||
Earnings before income taxes | $ | 359,773 | $ | 326,871 | $ | 1,282,705 | $ | 1,101,790 |
Apr. 1, 2017 | July 2, 2016 | Mar. 26, 2016 | |||||||||
Assets: | (In thousands) | ||||||||||
U.S. Foodservice Operations | $ | 7,001,351 | $ | 6,870,159 | $ | 7,017,455 | |||||
International Foodservice Operations | 6,003,449 | 2,030,917 | 1,904,436 | ||||||||
SYGMA | 600,823 | 541,796 | 558,612 | ||||||||
Other | 443,813 | 469,830 | 448,115 | ||||||||
Total segments | 14,049,436 | 9,912,702 | 9,928,618 | ||||||||
Corporate | 3,871,464 | 6,809,102 | 3,422,476 | ||||||||
Total | $ | 17,920,900 | $ | 16,721,804 | $ | 13,351,094 |
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13. SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES
The wholly owned U.S. Broadline subsidiaries of Sysco Corporation have entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. Borrowings under the company’s revolving credit facility supporting the company’s U.S. commercial paper program are also covered under these guarantees. As of April 1, 2017, Sysco had a total of $8.6 billion in senior notes, debentures and commercial paper outstanding that was covered by these guarantees.
All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional and all guarantees are joint and several, except that the guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances. If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series. Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable subsidiary guarantor shall consolidate with or merge into Sysco Corporation or any successor of Sysco Corporation or (2) Sysco Corporation or any successor of Sysco Corporation consolidates with or merges into the applicable subsidiary guarantor.
The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (the company’s U.S. Broadline subsidiaries), and all other non‑guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.
Condensed Consolidating Balance Sheet | |||||||||||||||||||
Apr. 1, 2017 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Current assets | $ | 172,105 | $ | 3,333,647 | $ | 4,819,809 | $ | — | $ | 8,325,561 | |||||||||
Investment in subsidiaries | 8,794,103 | 303,876 | 10,361,078 | (19,459,057 | ) | — | |||||||||||||
Plant and equipment, net | 323,763 | 1,261,167 | 2,686,777 | — | 4,271,707 | ||||||||||||||
Other assets | 438 | 509,645 | 4,813,549 | — | 5,323,632 | ||||||||||||||
Total assets | $ | 9,290,409 | $ | 5,408,335 | $ | 22,681,213 | $ | (19,459,057 | ) | $ | 17,920,900 | ||||||||
Current liabilities | $ | 2,039,368 | $ | 2,027,763 | $ | 1,662,679 | $ | — | $ | 5,729,810 | |||||||||
Intercompany payables (receivables) | (3,811,509 | ) | 666,597 | 3,144,912 | — | — | |||||||||||||
Long-term debt | 7,943,640 | 6,122 | 76,855 | — | 8,026,617 | ||||||||||||||
Other liabilities | 1,023,651 | 144,031 | 586,019 | — | 1,753,701 | ||||||||||||||
Noncontrolling interest | — | — | 80,244 | — | 80,244 | ||||||||||||||
Shareholders’ equity | 2,095,259 | 2,563,822 | 17,130,504 | (19,459,057 | ) | 2,330,528 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 9,290,409 | $ | 5,408,335 | $ | 22,681,213 | $ | (19,459,057 | ) | $ | 17,920,900 |
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Condensed Consolidating Balance Sheet | |||||||||||||||||||
July 2, 2016 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Current assets | $ | 3,440,206 | $ | 3,813,524 | $ | 2,800,169 | $ | — | $ | 10,053,899 | |||||||||
Investment in subsidiaries | 6,484,258 | 224,138 | (306,219 | ) | (6,402,177 | ) | — | ||||||||||||
Plant and equipment, net | 429,890 | 1,587,702 | 1,862,850 | — | 3,880,442 | ||||||||||||||
Other assets | 213,186 | 642,525 | 1,931,752 | — | 2,787,463 | ||||||||||||||
Total assets | $ | 10,567,540 | $ | 6,267,889 | $ | 6,288,552 | $ | (6,402,177 | ) | $ | 16,721,804 | ||||||||
Current liabilities | $ | 621,925 | $ | 111,728 | $ | 3,700,803 | $ | — | $ | 4,434,456 | |||||||||
Intercompany payables (receivables) | (1,348,425 | ) | 2,097,508 | (749,083 | ) | — | — | ||||||||||||
Long-term debt | 7,145,955 | 62,387 | 128,588 | — | 7,336,930 | ||||||||||||||
Other liabilities | 878,834 | 248,493 | 268,097 | — | 1,395,424 | ||||||||||||||
Noncontrolling interest | — | — | 75,386 | — | 75,386 | ||||||||||||||
Shareholders’ equity | 3,269,251 | 3,747,773 | 2,864,761 | (6,402,177 | ) | 3,479,608 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 10,567,540 | $ | 6,267,889 | $ | 6,288,552 | $ | (6,402,177 | ) | $ | 16,721,804 |
Condensed Consolidating Balance Sheet | |||||||||||||||||||
Mar. 26, 2016 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Current assets | $ | 271,185 | $ | 3,995,180 | $ | 2,693,668 | $ | — | $ | 6,960,033 | |||||||||
Investment in subsidiaries | 9,989,219 | 249,270 | (429,592 | ) | (9,808,897 | ) | — | ||||||||||||
Plant and equipment, net | 460,989 | 1,607,870 | 1,831,611 | — | 3,900,470 | ||||||||||||||
Other assets | 1,638 | 590,248 | 1,898,705 | — | 2,490,591 | ||||||||||||||
Total assets | $ | 10,723,031 | $ | 6,442,568 | $ | 5,994,392 | $ | (9,808,897 | ) | $ | 13,351,094 | ||||||||
Current liabilities | $ | 553,741 | $ | (209,098 | ) | $ | 3,767,429 | $ | — | $ | 4,112,072 | ||||||||
Intercompany payables (receivables) | 1,530,408 | (766,374 | ) | (764,034 | ) | — | — | ||||||||||||
Long-term debt | 4,080,728 | 69,426 | 124,730 | — | 4,274,884 | ||||||||||||||
Other liabilities | 610,479 | 265,785 | 41,514 | — | 917,778 | ||||||||||||||
Noncontrolling interest | — | — | 76,929 | — | 76,929 | ||||||||||||||
Shareholders’ equity | 3,947,675 | 7,082,829 | 2,747,824 | (9,808,897 | ) | 3,969,431 | |||||||||||||
Total liabilities and shareholders’ equity | $ | 10,723,031 | $ | 6,442,568 | $ | 5,994,392 | $ | (9,808,897 | ) | $ | 13,351,094 |
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Condensed Consolidating Statement of Comprehensive Income | |||||||||||||||||||
For the 13-Week Period Ended Apr. 1, 2017 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Sales | $ | — | $ | 6,613,654 | $ | 7,352,744 | $ | (442,226 | ) | $ | 13,524,172 | ||||||||
Cost of sales | — | 5,338,256 | 6,094,007 | (442,226 | ) | 10,990,037 | |||||||||||||
Gross profit | — | 1,275,398 | 1,258,737 | — | 2,534,135 | ||||||||||||||
Operating expenses | 241,123 | 762,490 | 1,094,560 | — | 2,098,173 | ||||||||||||||
Operating income (loss) | (241,123 | ) | 512,908 | 164,177 | — | 435,962 | |||||||||||||
Interest expense (income) | 195,781 | (31,023 | ) | (83,754 | ) | — | 81,004 | ||||||||||||
Other expense (income), net | (3,484 | ) | (445 | ) | (886 | ) | — | (4,815 | ) | ||||||||||
Earnings (losses) before income taxes | (433,420 | ) | 544,376 | 248,817 | — | 359,773 | |||||||||||||
Income tax (benefit) provision | (149,331 | ) | 185,030 | 85,796 | — | 121,495 | |||||||||||||
Equity in earnings of subsidiaries | 522,368 | — | — | (522,368 | ) | — | |||||||||||||
Net earnings | 238,279 | 359,346 | 163,021 | (522,368 | ) | 238,278 | |||||||||||||
Other comprehensive income (loss) | 77,159 | — | 29,292 | (29,292 | ) | 77,159 | |||||||||||||
Comprehensive income | $ | 315,438 | $ | 359,346 | $ | 192,313 | $ | (551,660 | ) | $ | 315,437 |
Condensed Consolidating Statement of Comprehensive Income | |||||||||||||||||||
For the 13-Week Period Ended Mar. 26, 2016 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Sales | $ | — | $ | 8,081,741 | $ | 4,305,318 | $ | (384,268 | ) | $ | 12,002,791 | ||||||||
Cost of sales | — | 6,556,356 | 3,687,878 | (384,268 | ) | 9,859,966 | |||||||||||||
Gross profit | — | 1,525,385 | 617,440 | — | 2,142,825 | ||||||||||||||
Operating expenses | 257,953 | 942,577 | 564,677 | — | 1,765,207 | ||||||||||||||
Operating income (loss) | (257,953 | ) | 582,808 | 52,763 | — | 377,618 | |||||||||||||
Interest expense (income) | 80,266 | (39,749 | ) | 17,182 | — | 57,699 | |||||||||||||
Other expense (income), net | (3,153 | ) | (588 | ) | (3,211 | ) | — | (6,952 | ) | ||||||||||
Earnings (losses) before income taxes | (335,066 | ) | 623,145 | 38,792 | — | 326,871 | |||||||||||||
Income tax (benefit) provision | (112,343 | ) | 209,079 | 12,999 | — | 109,735 | |||||||||||||
Equity in earnings of subsidiaries | 439,859 | — | — | (439,859 | ) | — | |||||||||||||
Net earnings | 217,136 | 414,066 | 25,793 | (439,859 | ) | 217,136 | |||||||||||||
Other comprehensive income (loss) | 57,132 | — | 48,738 | (48,738 | ) | 57,132 | |||||||||||||
Comprehensive income | $ | 274,268 | $ | 414,066 | $ | 74,531 | $ | (488,597 | ) | $ | 274,268 |
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Condensed Consolidating Statement of Comprehensive Income | |||||||||||||||||||
For the 39-Week Period Ended Apr. 1, 2017 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Sales | $ | — | $ | 20,088,294 | $ | 22,194,420 | $ | (1,332,620 | ) | $ | 40,950,094 | ||||||||
Cost of sales | — | 16,184,897 | 18,299,900 | (1,332,620 | ) | 33,152,177 | |||||||||||||
Gross profit | — | 3,903,397 | 3,894,520 | — | 7,797,917 | ||||||||||||||
Operating expenses | 691,851 | 2,310,243 | 3,300,611 | — | 6,302,705 | ||||||||||||||
Operating income (loss) | (691,851 | ) | 1,593,154 | 593,909 | — | 1,495,212 | |||||||||||||
Interest expense (income) | 199,974 | (72,837 | ) | 99,721 | — | 226,858 | |||||||||||||
Other expense (income), net | (23,670 | ) | (1,191 | ) | 10,510 | — | (14,351 | ) | |||||||||||
Earnings (losses) before income taxes | (868,155 | ) | 1,667,182 | 483,678 | — | 1,282,705 | |||||||||||||
Income tax (benefit) provision | (301,888 | ) | 579,047 | 168,214 | — | 445,373 | |||||||||||||
Equity in earnings of subsidiaries | 1,403,600 | — | — | (1,403,600 | ) | — | |||||||||||||
Net earnings | 837,333 | 1,088,135 | 315,464 | (1,403,600 | ) | 837,332 | |||||||||||||
Other comprehensive income (loss) | (147,319 | ) | — | (350,637 | ) | 350,637 | (147,319 | ) | |||||||||||
Comprehensive income | $ | 690,014 | $ | 1,088,135 | $ | (35,173 | ) | $ | (1,052,963 | ) | $ | 690,013 |
Condensed Consolidating Statement of Comprehensive Income | |||||||||||||||||||
For the 39-Week Period Ended Mar. 26, 2016 | |||||||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Eliminations | Consolidated Totals | |||||||||||||||
(In thousands) | |||||||||||||||||||
Sales | $ | — | $ | 24,805,364 | $ | 13,125,059 | $ | (1,211,395 | ) | $ | 36,719,028 | ||||||||
Cost of sales | — | 20,138,552 | 11,254,237 | (1,211,395 | ) | 30,181,394 | |||||||||||||
Gross profit | — | 4,666,812 | 1,870,822 | — | 6,537,634 | ||||||||||||||
Operating expenses | 663,804 | 2,838,705 | 1,731,450 | — | 5,233,959 | ||||||||||||||
Operating income (loss) | (663,804 | ) | 1,828,107 | 139,372 | — | 1,303,675 | |||||||||||||
Interest expense (income) | 296,681 | (119,751 | ) | 54,911 | — | 231,841 | |||||||||||||
Other expense (income), net | (13,066 | ) | (1,417 | ) | (15,473 | ) | — | (29,956 | ) | ||||||||||
Earnings (losses) before income taxes | (947,419 | ) | 1,949,275 | 99,934 | — | 1,101,790 | |||||||||||||
Income tax (benefit) provision | (316,299 | ) | 650,770 | 33,364 | — | 367,835 | |||||||||||||
Equity in earnings of subsidiaries | 1,365,075 | — | — | (1,365,075 | ) | — | |||||||||||||
Net earnings | 733,955 | 1,298,505 | 66,570 | (1,365,075 | ) | 733,955 | |||||||||||||
Other comprehensive income (loss) | (64,904 | ) | — | (179,111 | ) | 179,111 | (64,904 | ) | |||||||||||
Comprehensive income | $ | 669,051 | $ | 1,298,505 | $ | (112,541 | ) | $ | (1,185,964 | ) | $ | 669,051 |
23
Condensed Consolidating Cash Flows | |||||||||||||||
For the 39-Week Period Ended Apr. 1, 2017 | |||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Consolidated Totals | ||||||||||||
(In thousands) | |||||||||||||||
Cash flows provided by (used for): | |||||||||||||||
Operating activities | $ | 984,603 | $ | 3,554,439 | $ | (3,514,267 | ) | $ | 1,024,775 | ||||||
Investing activities | (72,243 | ) | (68,157 | ) | (3,164,746 | ) | (3,305,146 | ) | |||||||
Financing activities | (425,517 | ) | (64,558 | ) | (216,888 | ) | (706,963 | ) | |||||||
Effect of exchange rates on cash | — | — | (76,833 | ) | (76,833 | ) | |||||||||
Intercompany activity | (3,751,063 | ) | (3,426,770 | ) | 7,177,833 | — | |||||||||
Net increase (decrease) in cash and cash equivalents | (3,264,220 | ) | (5,046 | ) | 205,099 | (3,064,167 | ) | ||||||||
Cash and cash equivalents at the beginning of period | 3,376,412 | 34,072 | 508,816 | 3,919,300 | |||||||||||
Cash and cash equivalents at the end of period | $ | 112,192 | $ | 29,026 | $ | 713,915 | $ | 855,133 |
Condensed Consolidating Cash Flows | |||||||||||||||
For the 39-Week Period Ended Mar. 26, 2016 | |||||||||||||||
Sysco | U.S. Broadline Subsidiaries | Other Non-Guarantor Subsidiaries | Consolidated Totals | ||||||||||||
(In thousands) | |||||||||||||||
Cash flows provided by (used for): | |||||||||||||||
Operating activities | $ | (485,524 | ) | $ | (377,988 | ) | $ | 1,852,493 | $ | 988,981 | |||||
Investing activities | 58,442 | (133,141 | ) | (307,636 | ) | (382,335 | ) | ||||||||
Financing activities | (5,171,619 | ) | 52,399 | 19,477 | (5,099,743 | ) | |||||||||
Effect of exchange rates on cash | — | — | (26,109 | ) | (26,109 | ) | |||||||||
Intercompany activity | 931,696 | 471,256 | (1,402,952 | ) | — | ||||||||||
Net increase (decrease) in cash and cash equivalents | (4,667,005 | ) | 12,526 | 135,273 | (4,519,206 | ) | |||||||||
Cash and cash equivalents at the beginning of period | 4,851,067 | 26,380 | 252,597 | 5,130,044 | |||||||||||
Cash and cash equivalents at the end of period | $ | 184,062 | $ | 38,906 | $ | 387,870 | $ | 610,838 |
14. SUBSEQUENT EVENTS
In May 2017, a Sysco subsidiary voluntarily withdrew from a multiemployer pension plan and has recorded a $35.6 million withdrawal liability subsequent to the third quarter of fiscal 2017. This withdrawal liability was estimated at the time of withdrawal based on the most recently available valuation and participant data for the plan and amounts could be subsequently adjusted to the period of payment to reflect any changes to this estimate. If this plan were to undergo a mass withdrawal, as defined by the Pension Benefit Guaranty Corporation, within the two plan years following the plan year in which we withdrew from that plan, Sysco could have additional liability. The May 2017 withdrawal was not pursuant to an agreement or arrangement with any other entity.
Potential Withdrawal Liability
Under current law regarding multiemployer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multiemployer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multiemployer plan’s unfunded vested liabilities. Generally, Sysco does not have the greatest share of potential withdrawal liability among the contributing employers in any of the multiemployer pension plans to which it contributes. Sysco believes that one of the above-mentioned events is reasonably possible for certain plans in which it participates; however, the company estimates its share of withdrawal liability for these plans is not significant. This estimate excludes plans for which Sysco has recorded a withdrawal liability or where the likelihood of the above-mentioned events is deemed remote. This estimate is based on the information available from plan administrators, which had valuation dates ranging from December 31, 2013 to January 1, 2015, with January 1, 2015 being the date for a majority of the plans. The company’s estimate reflects the condition of each applicable multiemployer pension plan as
24
of those dates. Due to the lack of current information, management believes Sysco’s share of any potential withdrawal liability at the time of a withdrawal event could materially differ from this estimate.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our consolidated financial statements as of July 2, 2016, and the fiscal year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year ended July 2, 2016, as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report and a Current Report on Form 8-K filed on February 6, 2017, which includes recast sections from our Annual Report on Form 10-K for the fiscal year ended July 2, 2016.
Sysco’s results of operations are impacted by restructuring costs consisting of (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we recorded accelerated depreciation on our existing system and incurred costs to convert to a modernized version of our established platform, (2) professional fees related to our three-year strategic plan, (3) restructuring expenses within our Brakes Group operations, and (4) severance charges related to restructuring. Our results of operations are also impacted by the following acquisition-related items: (1) intangible amortization expense, (2) transaction costs, and (3) integration costs. All acquisition-related costs in fiscal 2017 that have been excluded relate to the Brakes Group acquisition (the Brakes Acquisition). Fiscal 2016 acquisition-related costs, however, include (i) Brakes Group related acquisition costs, (ii) termination costs in connection with the merger that had been proposed with US Foods, Inc. (US Foods) and (iii) financing costs related to the senior notes that were issued in fiscal 2015 to fund the proposed US Foods merger. These senior notes were redeemed in the first quarter of fiscal 2016, triggering a redemption loss of $86.5 million, and we incurred interest on these notes through the redemption date. The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs. These fiscal 2017 and fiscal 2016 items are collectively referred to as "Certain Items."
Although Sysco has a history of growth through acquisitions, the Brakes Group is significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant periods solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for the third quarter and first 39 weeks of fiscal 2017 to the same periods in fiscal 2016. Also, given the significance of the Brakes Acquisition, management believes that presenting Sysco’s financial measures, excluding the Brakes Group operating results (including, for this purpose, Brakes Group financing costs, which are not included in the Brakes Group GAAP operating results and are also not Certain Items), enhances comparability of the period over period financial performance of Sysco’s legacy business and allows investors to more effectively measure Sysco’s progress against the financial goals under Sysco’s three-year strategic plan.
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 primary operations are located in North America and Europe. The company has aggregated certain of its operating segments into three reportable segments. "Other" financial information is attributable to the company's other operating segments that do not meet the quantitative disclosure thresholds.
• | U.S. Foodservice Operations - primarily includes U.S. Broadline, custom-cut meat companies, FreshPoint (our specialty produce companies) and European Imports (a specialty import company); |
• | International Foodservice Operations - primarily includes broadline operations in Canada and Europe (including the Brakes Group, which was acquired in fiscal 2017), Bahamas, Mexico, Costa Rica and Panama, as well as a company that distributes to international customers; |
• | SYGMA - our customized distribution subsidiary; and |
• | Other - primarily our hotel supply operations and our Sysco Ventures platform, which includes our suite of technology solutions that help support the business needs of our customers. |
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, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.
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Sysco's segments have changed in fiscal 2017, as discussed in Note 12, "Business Segment Information." Any segment results presented for the third quarter and first 39 weeks of fiscal 2016 have been reclassified to conform to the fiscal 2017 presentation.
Acquisition of the Brakes Group
On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group, pursuant to an agreement for the sale and purchase of securities in the capital of the Brakes Group, dated as of February 19, 2016 (the Purchase Agreement), by and among Sysco, entities affiliated with Bain Capital Investors, LLC, and members of management of the Brakes Group. Following the closing of the Brakes Acquisition, the Brakes Group became a wholly-owned subsidiary of Sysco.
The Brakes Group is a leading European foodservice business by revenue, supplying fresh, refrigerated and frozen food products, as well as non-food products and supplies, to more than 50,000 foodservice customers. The Brakes Group has leading market positions in the U.K., France, and Sweden, in addition to a presence in Ireland, Belgium, Spain, and Luxembourg. The Brakes Acquisition significantly strengthens Sysco's position as the world's leading foodservice distributor and offers attractive opportunities for organic growth and future expansion in European markets.
Highlights
Sysco's results for the third quarter and first 39 weeks of fiscal 2017 reflect strong local case growth, solid gross profit dollar growth and effective expense management. Sales increased primarily due to the Brakes Acquisition, partially offset by deflation. While the Brakes Group contributed favorably to our results, excluding Brakes, we grew our gross profit at a faster rate than operating expenses due to (1) accelerating local case growth and (2) our improved expense management resulting from productivity initiatives and process enhancements, which improved our supply chain performance, as well as administrative cost reductions. Our net earnings and earnings per share, both including and excluding Certain Items, increased for the third quarter and first 39 weeks of fiscal 2017, as compared to the corresponding periods in fiscal 2016, primarily due to these factors. A decrease in outstanding shares resulting from our share repurchases also favorably impacted our per-share amounts.
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Comparisons of results from the third quarter of fiscal 2017 to the third quarter of fiscal 2016:
• | Sales: |
◦ | increased 12.7%, or $1.5 billion, to $13.5 billion; |
◦ | adjusted sales, excluding Brakes, increased 2.3%, or $281.7 million, to $12.3 billion; |
• | Operating income: |
◦ | increased 15.5%, or $58.3 million, to $436.0 million; |
◦ | adjusted operating income increased 14.3%, or $62.7 million, to $500.3 million; |
◦ | adjusted operating income, excluding Brakes, increased 13.6%, or $59.6 million, to $497.3 million; |
• | Net earnings: |
◦ | increased 9.7%, or $21.1 million, to $238.3 million; |
◦ | adjusted net earnings increased 5.6%, or $14.5 million, to $275.9 million; |
◦ | adjusted net earnings, excluding Brakes, increased 3.3%, or $8.5 million, to $269.9 million; |
• | Basic earnings per share: |
◦ | increased 15.8%, or $0.06, to $0.44 per share; |
• | Diluted earnings per share: |
◦ | increased 15.8%, or $0.06, to $0.44 per share; |
◦ | adjusted diluted earnings per share increased 10.9%, or $0.05, to $0.51 per share; and |
◦ | adjusted diluted earnings per share, excluding Brakes, increased 8.7%, or $0.04, to $0.50 per share. |
Comparisons of results from the first 39 weeks of fiscal 2017 to the first 39 weeks of fiscal 2016:
• | Sales: |
◦ | increased 11.5%, or $4.2 billion, to $41.0 billion; |
◦ | adjusted sales, excluding Brakes, increased 1.0%, or $378.9 million, to $37.1 billion; |
• | Operating income: |
◦ | increased 14.7%, or $191.5 million, to $1.5 billion; |
◦ | adjusted operating income increased 22.0%, or $304.0 million, to $1.7 billion; |
◦ | adjusted operating income, excluding Brakes, increased 13.9%, or $192.2 million, to $1.6 billion; |
• | Net earnings: |
◦ | increased 14.1%, or $103.4 million, to $837.3 million; |
◦ | adjusted net earnings increased 14.4%, or $122.3 million, to $970.8 million; |
◦ | adjusted net earnings, excluding Brakes, increased 6.5%, or $55.3 million, to $903.8 million; |
• | Basic earnings per share: |
◦ | increased 20.5%, or $0.26, to $1.53 per share; |
• | Diluted earnings per share: |
◦ | increased 20.6%, or $0.26, to $1.52 per share; |
◦ | adjusted diluted earnings per share increased 20.5%, or $0.30, to $1.76 per share; and |
◦ | adjusted diluted earnings per share, excluding Brakes, increased 12.2%, or $0.18, to $1.64 per share. |
See “Non-GAAP Reconciliations” for an explanation of the non-GAAP financial measures listed above.
Trends and Strategy
Our Annual Report on Form 10-K for the fiscal year ended July 2, 2016 (our 2016 Form 10-K) and a Current Report on Form 8-K filed on February 6, 2017, which includes recast sections from our 2016 Form 10-K, contain a discussion of trends impacting our industry and Sysco and strategy. Our discussion herein provides updates to that discussion.
Trends
During the past few months, in the markets in which we operate, we have seen modest economic growth and stable employment levels. While the energy related downturn has resulted in regional economic headwinds in certain areas of the United States and Canada, and political developments continue to contribute to economic uncertainty in some of the countries we operate in, overall consumer confidence generally remains favorable.
Negatively impacting sales and gross profit, we experienced deflation at a rate of 0.3% and 1.7% for the third quarter and first 39 weeks of fiscal 2017, respectively. The industry has been in a deflationary environment for six consecutive quarters; however, that trend is beginning to shift towards inflation. Meat prices are abating, and dairy and produce prices have begun to rise, and, based on those changes, we are anticipating overall modest inflation in the fourth quarter. Our deflation rate is a year-over-year measurement and, therefore, does not include the impact of the Brakes Group operations.
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The Brakes Group was approximately $0.01 per share dilutive to our consolidated earnings per share for the third quarter of fiscal 2017 and contributed approximately $0.10 per share to our consolidated earnings per share for the first 39 weeks of fiscal 2017. The Brakes Group experiences some seasonality with lower volumes in the third quarter, leading to lower earnings growth during the quarter. On an adjusted basis, our Brakes Group operations contributed approximately $0.01 and $0.12 per share to our consolidated earnings per share for the third quarter and first 39 weeks of fiscal 2017, respectively. The Brakes Group performed well amidst a challenging environment in the United Kingdom and is making progress in its supply chain transformational efforts. Growth in France remains steady and Sweden continues to produce favorable results. The accretive performance, on an adjusted basis, for the third quarter of fiscal 2017 was largely attributable to changes in deferred taxes. We believe the Brakes Acquisition will be modestly accretive to earnings per share by low to mid double-digits on a cents-per-share basis for fiscal 2017 on a GAAP basis and excluding Certain Items relating to the Brakes Acquisition, with acceleration in fiscal 2018 and beyond. Certain Items attributable to the Brakes Acquisition primarily related to amortization of intangible assets. Based on our preliminary purchase price allocation, this intangible amortization is estimated to be $19 million per quarter in fiscal 2017. See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.
Strategy
In fiscal 2016, we set three-year financial targets consisting of: (1) improving adjusted operating income by at least $500 million, (2) growing earnings per share faster than operating income, and (3) achieving 15% in adjusted return on invested capital for existing businesses. The key levers to achieve these targets include delivering accelerated case growth through a focus on local customers, growing gross profit dollars and managing overall expenses. Our business strategy is predicated on disciplined, profitable and sustainable growth, with particular emphasis on (1) utilizing customer insights to enrich our customers' experience, (2) continuously improving productivity in all areas of our business, (3) enhancing our product, service and business solution offerings, and (4) leveraging our talented associates while further developing our rich culture. We are more than half way through the three-year period under our strategic plan, and have exceeded our initial expectations with respect to our operating income improvement goal. Due to our favorable business performance and confidence in the execution of our plans, we increased our adjusted operating income growth target to approximately $600 to $650 million by the end of fiscal 2018. We believe the majority of the increase in adjusted operating income growth, as compared to our original target, will occur in fiscal 2018. Because our original targets were set without the contemplation of the Brakes Acquisition, our Brakes Group operations are not included in our operating improvement goal. See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.
Multiemployer Pension Plan Withdrawal
In May 2017, a Sysco subsidiary voluntarily withdrew from a multiemployer pension plan and has recorded a $35.6 million withdrawal liability subsequent to the third quarter of fiscal 2017. This withdrawal liability was estimated at the time of withdrawal based on the most recently available valuation and participant data for the plan and amounts could be subsequently adjusted to the period of payment to reflect any changes to this estimate. Sysco considers this fourth quarter charge to operating expense a Certain Item.
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:
13-Week Period Ended | 39-Week Period Ended | ||||||||||
Apr. 1, 2017 | Mar. 26, 2016 | Apr. 1, 2017 | Mar. 26, 2016 | ||||||||
Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 81.3 | 82.1 | 81.0 | 82.2 | |||||||
Gross profit | 18.7 | 17.9 | 19.0 | 17.8 | |||||||
Operating expenses | 15.5 | 14.7 | 15.4 | 14.3 | |||||||
Operating income | 3.2 | 3.1 | 3.7 | 3.6 | |||||||
Interest expense | 0.6 | 0.5 | 0.6 | 0.6 | |||||||
Other expense (income), net | — | (0.1 | ) | — | (0.1 | ) | |||||
Earnings before income taxes | 2.7 | 2.7 | 3.1 | 3.0 | |||||||
Income taxes | 0.9 | 0.9 | 1.1 | 1.0 | |||||||
Net earnings | 1.8 | % | 1.8 | % | 2.0 | % | 2.0 | % |
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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 comparable period in the prior year:
13-Week Period Ended | 39-Week Period Ended | |||||
Sales | 12.7 | % | 11.5 | % | ||
Cost of sales | 11.5 | 9.8 | ||||
Gross profit | 18.3 | 19.3 | ||||
Operating expenses | 18.9 | 20.4 | ||||
Operating income | 15.5 | 14.7 | ||||
Interest expense | 40.4 | (2.1 | ) | |||
Other expense (income), net | (30.7 | ) | (1) | (52.1 | ) | (2) |
Earnings before income taxes | 10.1 | 16.4 | ||||
Income taxes | 10.7 | 21.1 | ||||
Net earnings | 9.7 | % | 14.1 | % | ||
Basic earnings per share | 15.8 | % | 20.5 | % | ||
Diluted earnings per share | 15.8 | 20.6 | ||||
Average shares outstanding | (4.8 | ) | (5.2 | ) | ||
Diluted shares outstanding | (4.7 | ) | (5.0 | ) |
(1) Other expense (income), net was income of $4.8 million in the third quarter of fiscal 2017 and income of $7.0 million in the third quarter of fiscal 2016.
(2) Other expense (income), net was income of $14.4 million in the first 39 weeks of fiscal 2017 and income of $30.0 million in the first 39 weeks of fiscal 2016.
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The following represents our results by reportable segments, and also demonstrates the impact of the Brakes Group's results on our international foodservice operations segment:
13-Week Period Ended Apr 1, 2017 | |||||||||||||||||||||||||||||||
U.S. Foodservice Operations | International Foodservice Operations | Brakes | International Foodservice Operations Excluding Brakes (Non-GAAP) | SYGMA | Other | Corporate | Consolidated Totals | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Sales | $ | 9,233,048 | $ | 2,528,485 | $ | 1,239,721 | $ | 1,288,764 | $ | 1,535,550 | $ | 227,089 | $ | — | $ | 13,524,172 | |||||||||||||||
Sales increase (decrease) | 2.2 | % | 102.0 | % | NM | 3.0 | % | 2.6 | % | 5.0 | % | 12.7 | % | ||||||||||||||||||
Percentage of total | 68.3 | % | 18.7 | % | 9.2 | % | 9.5 | % | 11.4 | % | 1.7 | % | 100.0 | % | |||||||||||||||||
Operating income | $ | 689,210 | $ | 16,076 | $ | (18,823 | ) | $ | 34,899 | $ | 7,344 | $ | 6,078 | $ | (282,746 | ) | $ | 435,962 | |||||||||||||
Operating income increase (decrease) | 7.1 | % | (51.3 | )% | NM | 5.7 | % | (21.4 | )% | (8.1 | )% | 15.5 | % | ||||||||||||||||||
Percentage of total segments | 95.9 | % | 2.2 | % | (2.6 | )% | 4.9 | % | 1.0 | % | 0.8 | % | 100.0 | % | |||||||||||||||||
Operating income as a percentage of sales | 7.5 | % | 0.6 | % | (1.5 | )% | 2.7 | % | 0.5 | % | 2.7 | % | 3.2 | % |
13-Week Period Ended Mar. 26, 2016 | |||||||||||||||||||||||
U.S. Foodservice Operations | International Foodservice Operations | SYGMA | Other | Corporate | Consolidated Totals | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Sales | $ | 9,037,417 | $ | 1,251,815 | $ | 1,497,365 | $ | 216,194 | $ | — | $ | 12,002,791 | |||||||||||
Percentage of total | 75.3 | % | 10.4 | % | 12.5 | % | 1.8 | % | 100.0 | % | |||||||||||||
Operating income | $ | 643,326 | $ | 33,021 | $ | 9,344 | $ | 6,616 | $ | (314,689 | ) | $ | 377,618 | ||||||||||
Percentage of total segments | 92.9 | % | 4.8 | % | 1.3 | % | 1.0 | % | 100.0 | % | |||||||||||||
Operating income as a percentage of sales | 7.1 | % | 2.6 | % | 0.6 | % | 3.1 | % | 3.1 | % |
39-Week Period Ended Apr. 1, 2017 | |||||||||||||||||||||||||||||||
U.S. Foodservice Operations | International Foodservice Operations | Brakes | International Foodservice Operations Excluding Brakes (Non-GAAP) | SYGMA | Other | Corporate | Consolidated Totals | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Sales | $ | 27,799,728 | $ | 7,882,796 | $ | 3,852,145 | $ | 4,030,651 | $ | 4,560,424 | $ | 707,146 | $ | — | $ | 40,950,094 | |||||||||||||||
Sales increase (decrease) | 0.8 | % | 100.9 | % | NM | 2.7 | % | 2.5 | % | (7.6 | )% | 11.5 | % | ||||||||||||||||||
Percentage of total | 67.9 | % | 19.2 | % | 9.4 | % | 9.8 | % | 11.1 | % | 1.6 | % | 100.0 | % | |||||||||||||||||
Operating income | $ | 2,115,762 | $ | 180,324 | $ | 45,206 | $ | 135,118 | $ | 15,407 | $ | 17,873 | $ | (834,154 | ) | $ | 1,495,212 | ||||||||||||||
Operating income increase (decrease) | 8.2 | % | 41.8 | % | NM | 6.3 | % | (23.4 | )% | (24.8 | )% | 14.7 | % | ||||||||||||||||||
Percentage of total segments | 90.8 | % | 7.7 | % | 1.9 | % | 5.8 | % | 0.7 | % | 0.8 | % | 100.0 | % | |||||||||||||||||
Operating income as a percentage of sales | 7.6 | % | 2.3 | % | 1.2 | % | 3.4 | % | 0.3 | % | 2.5 | % | 3.7 | % |
NM represent that the percentage change is not meaningful.
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39-Week Period Ended Mar. 26, 2016 | |||||||||||||||||||||||
U.S. Foodservice Operations | International Foodservice Operations | SYGMA | Other | Corporate | Consolidated Totals | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Sales | $ | 27,580,667 | $ | 3,922,848 | $ | 4,450,106 | $ | 765,407 | $ | — | $ | 36,719,028 | |||||||||||
Percentage of total | 75.2 | % | 10.7 | % | 12.1 | % | 2.0 | % | 100.0 | % | |||||||||||||
Operating income | $ | 1,955,211 | $ | 127,153 | $ | 20,126 | $ | 23,766 | $ | (822,581 | ) | $ | 1,303,675 | ||||||||||
Percentage of total segments | 92.0 | % | 6.0 | % | 0.9 | % | 1.1 | % | 100.0 | % | |||||||||||||
Operating income as a percentage of sales | 7.1 | % | 3.2 | % | 0.5 | % | 3.1 | % | 3.6 | % |
See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.
Based on information in Note 12 "Business Segment Information." in the third quarter and first 39 weeks of fiscal 2017, U.S. Foodservice Operations and International Foodservice Operations, collectively, represented approximately 87.0% and 87.1% of Sysco’s overall sales. In the third quarter and first 39 weeks of fiscal 2017, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 98.1% and 98.5% of the total segment operating income. This illustrates that these segments represent the majority of our total segment results when compared to other reportable segments.
Results of U.S. Foodservice Operations
The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
13-Week Period Ended Apr. 1, 2017 | 13-Week Period Ended Mar. 26, 2016 | 13-Week Period Ended Change in Dollars | 13-Week Period % Change | |||||||||||
(In thousands) | ||||||||||||||
Sales | $ | 9,233,048 | $ | 9,037,417 | $ | 195,631 | 2.2 | % | ||||||
Gross profit | 1,836,226 | 1,765,279 | 70,947 | 4.0 | ||||||||||
Operating expenses | 1,147,016 | 1,121,953 | 25,063 | 2.2 | ||||||||||
Operating income | $ | 689,210 | $ | 643,326 | $ | 45,884 | 7.1 | % | ||||||
Gross profit | $ | 1,836,226 | $ | 1,765,279 | $ | 70,947 | 4.0 | % | ||||||
Adjusted operating expenses (Non-GAAP) | 1,147,016 | 1,121,211 | 25,805 | 2.3 | ||||||||||
Adjusted operating income (Non-GAAP) | $ | 689,210 | $ | 644,068 | $ | 45,142 | 7.0 | % |
39-Week Period Ended Apr. 1, 2017 | 39-Week Period Ended Mar. 26, 2016 | 39-Week Period Ended Change in Dollars | 39-Week Period % Change | |||||||||||
(In thousands) | ||||||||||||||
Sales | $ | 27,799,728 | $ | 27,580,667 | $ | 219,061 | 0.8 | % | ||||||
Gross profit | 5,572,364 | 5,359,023 | 213,341 | 4.0 | ||||||||||
Operating expenses | 3,456,602 | 3,403,812 | 52,790 | 1.6 | ||||||||||
Operating income | $ | 2,115,762 | $ | 1,955,211 | $ | 160,551 | 8.2 | % | ||||||
Gross profit | $ | 5,572,364 | $ | 5,359,023 | $ | 213,341 | 4.0 | % | ||||||
Adjusted operating expenses (Non-GAAP) | 3,456,132 | 3,401,636 | 54,496 | 1.6 | ||||||||||
Adjusted operating income (Non-GAAP) | $ | 2,116,232 | $ | 1,957,387 | $ | 158,845 | 8.1 | % |
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Sales
The following table sets forth the percentage and dollar value increase or decrease in sales over the comparable prior year period in order to demonstrate the cause and magnitude of change.
Increase (Decrease) | ||||||
13-Week Period | ||||||
(Dollars in millions) | ||||||
Cause of change | Percentage | Dollars | ||||
Case volume | 1.8 | % | $ | 164.0 | ||
Deflation | (0.2 | ) | (20.7 | ) | ||
Acquisitions | 0.4 | 31.3 | ||||
Other (1) | 0.2 | 21.1 | ||||
Total sales increase | 2.2 | % | $ | 195.7 |
Increase (Decrease) | ||||||
39-Week Period | ||||||
(Dollars in millions) | ||||||
Cause of change | Percentage | Dollars | ||||
Case volume | 1.2 | % | $ | 316.4 | ||
Deflation | (1.3 | ) | (361.0 | ) | ||
Acquisitions | 0.4 | 103.8 | ||||
Other (1) | 0.6 | 160.0 | ||||
Total sales increase | 0.8 | % | $ | 219.1 |
(1) Case volume excludes the volume impact from our custom-cut meat companies that do not measure volume in cases. Any impact in volumes from these operations are included within "Other".
Sales for the third quarter of fiscal 2017 were 2.2% higher than the third quarter of fiscal 2016. The largest driver of the increase was case volume growth from our U.S. Broadline operations, which increased 1.8% in the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016, and included an increase of 3.5% in locally managed customer case volume, which was partially offset by declines in case volume for our multi-unit business, including chain restaurants and multi-locational restaurants, and the impact of product cost deflation in our U.S. Broadline operations. As we strive to deliver disciplined, profitable growth as a part of our three-year strategic plan, our continued focus on providing value to our local customers through innovative product offerings and value added services, along with improved e-commerce capabilities, has enabled our growth with locally managed customers for 12 straight quarters. Sales for the first 39 weeks of fiscal 2017 were 0.8% higher than the first 39 weeks of fiscal 2016. The largest driver of this increase was case volume growth from our U.S. Broadline operations, which improved 1.2% in the first 39 weeks of fiscal 2017 compared to the first 39 weeks of fiscal 2016, and included a 2.4% improvement in locally managed customer case volume, which was partially offset by a decline in case volume for our multi-unit business and the impact of product cost deflation in our U.S. Broadline operations.
Operating income increased 7.1% and 7.0% on a reported and adjusted basis, respectively, for the third quarter of fiscal 2017, as compared to the third quarter of fiscal 2016. Operating income increased 8.2% and 8.1% on a reported and adjusted basis, respectively, for the first 39 weeks of fiscal 2017, as compared to fiscal 2016. These increases reflect gross profit growth that exceeded our operating expense growth.
Gross profit dollars increased 4.0% in both the third quarter and first 39 weeks of fiscal 2017, as compared to the third quarter and first 39 weeks of fiscal 2016. Gross margin, which is gross profit as a percentage of sales, was 19.9% and 20.0% in the third quarter and first 39 weeks of fiscal 2017, an improvement of 35 and 61 basis points from the gross margin of 19.5% and 19.4% in the third quarter and first 39 weeks of fiscal 2016, respectively. These results reflect (1) local case volume that grew at a pace greater than our multi-unit business, (2) our ongoing category management efforts, including continued focus on providing innovative product offerings and value-added services, (3) revenue management tools that are focused on delivering a more proactive and disciplined approach to pricing and (4) effective management of deflation. Our Sysco brand sales to local customers increased by approximately 60 and 57 basis points for the third quarter and first 39 weeks of fiscal 2017, respectively. The change in product costs, an internal measure of inflation or deflation, for the third quarter and first 39 weeks of fiscal 2017 for our U.S. Broadline operations was deflation of 0.2% and 1.3%, respectively. Deflation in the third quarter and first 39 weeks of fiscal 2017 occurred primarily in the meat, dairy and produce categories.
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Operating expenses for the third quarter of fiscal 2017 increased 2.2%, or $25.1 million, compared to the third quarter of fiscal 2016. The increases in operating expenses for the period resulted primarily from expenses attributable to higher case volumes, including a $6.7 million increase in pay-related expenses. Operating expenses for the first 39 weeks of fiscal 2017 increased 1.6%, or $52.8 million, compared to the first 39 weeks of fiscal 2016. The increases in operating expenses for the period resulted primarily from expenses attributable to higher case volumes, including a $45.9 million increase in pay-related expenses, partially offset by $19.5 million of reduced fuel costs. We have limited our expense growth in both the areas of (1) supply chain (from our productivity initiatives and continuing process improvements, which are driving efficiencies, specifically in the warehouse) and (2) sales and general administrative expense (by managing our administrative expense with a more standardized approach).
In the first 39 weeks of fiscal 2017, the U.S. Broadline operations represented approximately 92% of the U.S. Foodservice Operations segment's sales and nearly 85% of its operating expenses. We seek to grow our sales and reduce our costs on a per-case basis. Our cost per case and adjusted cost per case both decreased $0.02 in the third quarter of fiscal 2017, as compared to the third quarter of fiscal 2016. This included approximately $0.01 of benefit attributable to lower fuel prices. Our cost per case and adjusted cost per case both decreased $0.03 in the first 39 weeks of fiscal 2017, as compared to the first 39 weeks of fiscal 2016. This included a $0.03 benefit attributable to lower fuel prices. Reducing our cost per case amounts, after considering the reductions from fuel price, reflects our progress in productivity improvements and cost reductions in our sales, general administrative and supply chain areas. More information on the rationale for our use of adjusted cost per case and reconciliations can be found under "Non-GAAP Reconciliations and Adjusted Cost per Case."
Results of International Foodservice Operations
The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
13-Week Period Ended Apr. 1, 2017 | 13-Week Period Ended Mar. 26, 2016 | 13-Week Period Ended Change in Dollars | 13-Week Period % Change | |||||||||||
(In thousands) | ||||||||||||||
Sales | $ | 2,528,485 | $ | 1,251,815 | $ | 1,276,670 | NM | |||||||
Gross profit | 516,748 | 210,682 | 306,066 | NM | ||||||||||
Operating expenses | 500,672 | 177,661 | 323,011 | NM | ||||||||||
Operating income | $ | 16,076 | $ | 33,021 | $ | (16,945 | ) | (51.3 | )% | |||||
Gross profit | $ | 516,748 | $ | 210,682 | $ | 306,066 | NM | |||||||
Adjusted operating expenses (Non-GAAP) | 476,845 | 177,353 | 299,492 | NM | ||||||||||
Adjusted operating income (Non-GAAP) | $ | 39,903 | $ | 33,329 | $ | 6,574 | 19.7 | % |
39-Week Period Ended Apr. 1, 2017 | 39-Week Period Ended Mar. 26, 2016 | 39-Week Period Ended Change in Dollars | 39-Week Period % Change | |||||||||||
(In thousands) | ||||||||||||||
Sales | $ | 7,882,796 | $ | 3,922,848 | $ | 3,959,948 | NM | |||||||
Gross profit | 1,691,368 | 677,342 | 1,014,026 | NM | ||||||||||
Operating expenses | 1,511,044 | 550,189 | 960,855 | NM | ||||||||||
Operating income | $ | 180,324 | $ | 127,153 | $ | 53,171 | 41.8 | % | ||||||
Gross profit | $ | 1,691,368 | $ | 677,342 | $ | 1,014,026 | NM | |||||||
Adjusted operating expenses (Non-GAAP) | 1,437,157 | 548,052 | 889,105 | NM | ||||||||||
Adjusted operating income (Non-GAAP) | $ | 254,211 | $ | 129,290 | $ | 124,921 | 96.6 | % |
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Sales
The following table sets forth the percentage and dollar value increase or decrease in sales over the comparable prior year period in order to demonstrate the cause and magnitude of change.
Increase (Decrease) | ||||||
13-Week Period | ||||||
(Dollars in millions) | ||||||
Cause of change | Percentage | Dollars | ||||
Case volume | (0.1 | )% | $ | (1.8 | ) | |
Acquisitions (1) | 99.0 | 1,239.7 | ||||
Foreign currency | 2.1 | 25.9 | ||||
Other | 1.0 | 12.9 | ||||
Total sales increase | 102.0 | % | $ | 1,276.7 |
Increase (Decrease) | ||||||
39-Week Period | ||||||
(Dollars in millions) | ||||||
Cause of change | Percentage | Dollars | ||||
Case volume | (0.9 | )% | $ | (36.4 | ) | |
Acquisitions (1) | 100.8 | 3,955.2 | ||||
Foreign currency | 0.4 | 14.1 | ||||
Other | 0.7 | 27.1 | ||||
Total sales increase | 101.0 | % | $ | 3,959.9 |
(1) The impact of the Brakes Acquisition is included within this line only.
Sales for the third quarter and first 39 weeks of fiscal 2017 were $1.3 billion and $4.0 billion higher than the third quarter and first 39 weeks of fiscal 2016, respectively, primarily due to the Brakes Group, which added $1.2 billion and $3.9 billion, respectively. In Canada, our sales increased in the third quarter of fiscal 2017, despite the continued softness in Alberta from the energy market decline. We had a modest decrease in sales in Canada for the first 39 weeks of fiscal 2017 due to deflation and a somewhat softer market environment. Also impacting our 39 week comparison is our sales in Mexico, which have increased due to consolidating our joint venture's results in fiscal 2017, which were not consolidated in the first 26 weeks of fiscal 2016.
Operating income decreased by $16.9 million, or 51.3%, for the third quarter of fiscal 2017 as compared to the third quarter of fiscal 2016. The decrease was primarily attributable to seasonality in the Brakes Group's business, which generally experiences lower earnings during our third quarter. Operating income increased by $53.2 million, 41.8%, for the first 39 weeks of fiscal 2017, respectively, as compared to the first 39 weeks of fiscal 2016. This increase was primarily attributable to the Brakes Acquisition. The Brakes Group performed well amidst a challenging environment in the United Kingdom and is making progress in its supply chain transformational efforts. Growth in France remains steady and Sweden continues to produce favorable results. Excluding the Brakes Group, non-GAAP operating income increased 10.6% and 10.1% for the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016, primarily from managing costs effectively in Canada within a deflationary and somewhat softer market environment. Our joint venture in Costa Rica also experienced improved operating income performance.
Gross profit dollars increased by $306.1 million and $1.0 billion in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016, primarily attributable to the Brakes Group, which added $298.9 million and $995.1 million in the third quarter and first 39 weeks of fiscal 2017.
Operating expenses for the third quarter and first 39 weeks of fiscal 2017 increased $323.0 million and $960.9 million, respectively, compared to the third quarter and first 39 weeks of fiscal 2016, with $317.8 million and $949.9 million added from the Brakes Group. Certain Items applicable to this segment include Brakes Acquisition-related costs and restructuring costs within our Canadian operations and the Brakes Group. Excluding the Brakes Group, non-GAAP operating expenses for the third quarter and first 39 weeks of fiscal 2017 increased $3.6 million and $5.8 million, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016.
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Results of SYGMA and Other Segment
For SYGMA, sales were 2.6% and 2.5% higher in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016, primarily from case growth. Case growth was primarily due to increased volume from existing customers, with additional new business also contributing to the growth in the first 39 weeks of fiscal 2017. Operating income decreased by $2.0 million and $4.7 million in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016. SYGMA’s profitability has been negatively impacted primarily by rising operating expenses.
For the operations that are grouped within Other, operating income decreased 8.1%, or $0.5 million, and 24.8%, or $5.9 million, in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of fiscal 2016. These decreases are largely the result of expenses for businesses in the early stage of operations in this segment, partially offset by higher earnings from our hotel lodging supply operations.
Corporate Expenses
Corporate expenses in the third quarter of fiscal 2017 decreased $31.9 million, or 10.2%, as compared to the third quarter of fiscal 2016, due primarily to lower pay-related expenses and Certain Items, partially offset by an increase in our estimates for our reserves for our self-insurance program (which covers portions of workers' compensation, general and vehicle liability), resulting from wage increases and unfavorable claim developments. Corporate expenses in the first 39 weeks of fiscal 2017 increased $11.6 million, or 1.4%, as compared to the first 39 weeks of fiscal 2016, which change is primarily attributable to Certain Items and an increase in our estimates for our reserves for our self-insurance program, partially offset by a decrease in pay-related expenses.
Included in corporate expenses are Certain Items that totaled $40.5 million and $115.4 million in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to $58.9 million and $72.9 million in the third quarter and first 39 weeks of fiscal 2016. Certain Items impacting the third quarter and first 39 weeks of fiscal 2017 were primarily expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we recorded accelerated depreciation on our existing system and incurred expenses of $27.7 million and $83.6 million in the third quarter and first 39 weeks of fiscal 2017, respectively, to convert to a modernized version of our established platform in conjunction with our revised business technology strategy. We incurred $12.8 million and $31.9 million in the third quarter and first 39 weeks of fiscal 2017, respectively, related to Brakes Acquisition transaction costs, project costs to convert to a modernized version of our established platform in conjunction with our revised business technology strategy, professional fees on 3-year financial objectives, and severance charges. Certain Items for the first 39 weeks of fiscal 2016 primarily related to termination costs incurred during the first quarter of fiscal 2016 in connection with the merger that had been proposed with US Foods.
Interest Expense
Interest expense increased $23.3 million for the third quarter of fiscal 2017, as compared to the third quarter of fiscal 2016, due to higher relative debt levels in the third quarter of fiscal 2017. Interest expense decreased $5.0 million for the first 39 weeks of fiscal 2017, as compared to the first 39 weeks of fiscal 2016, due to Certain Item interest costs specific to the first 39 weeks of fiscal 2016, partially offset by higher relative debt levels in the first 39 weeks of fiscal 2017. The first 39 weeks of fiscal 2016 included a loss of $86.5 million in connection with the redemption of the notes issued in fiscal 2015 to fund the merger that was proposed with US Foods. These items, along with interest expense incurred in fiscal 2016 through the date the senior notes were redeemed, are included in our Certain Items. Our interest expense increased $33.8 million and $100.3 million, excluding Certain Items, for the third quarter and first 39 weeks of fiscal 2017, respectively, from the third quarter and first 39 weeks of fiscal 2016 due to higher debt balances from senior notes that were issued in fiscal 2016 and commercial paper borrowings issued in fiscal 2017.
Net Earnings
Net earnings increased 9.7% and 14.1% in the third quarter and first 39 weeks of fiscal 2017, respectively, as compared to the third quarter and first 39 weeks of the prior year due primarily to the items noted above, as well as items impacting our income taxes that are discussed in Note 10, "Income Taxes". Adjusted net earnings increased 5.6% and 14.4% in the third quarter and first 39 weeks of fiscal 2017, respectively, primarily from gross profit growth, strong expense management and the results of the Brakes Group. Partially offsetting these increases were increased interest expense and negative tax impacts to our domestic business due to changes in deferred taxes, which resulted in earnings growth that was lower than our operating income growth.
Earnings Per Share
Basic and diluted earnings per share in the third quarter of fiscal 2017 were both $0.44, a 15.8% increase from the comparable prior period amounts of $0.38 per share. Adjusted diluted earnings per share in the third quarter of fiscal 2017 were
35
$0.51, a 10.9% increase from the comparable prior period amount of $0.46 per share. These results were primarily attributable to the factors discussed above related to net earnings in the third quarter of fiscal 2017.
Basic earnings per share in the first 39 weeks of fiscal 2017 were $1.53, a 20.5% increase from the comparable prior period amount of $1.27 per share. Diluted earnings per share in the first 39 weeks of fiscal 2017 were $1.52, a 20.6% increase from the comparable prior period amount of $1.26 per share. Adjusted diluted earnings per share in the first 39 weeks of fiscal 2017 were $1.76, a 20.5% increase from the comparable prior period amount of $1.46 per share. These results were primarily from the factors discussed above related to net earnings and a decrease in outstanding shares that resulted from our share repurchases in fiscal 2016 and in the first 39 weeks of fiscal 2017, which generated an approximate year over year impact of $0.04 per share benefit for the first 39 weeks of fiscal 2017, net of interest expense associated with the debt issued to repurchase the shares.
Non-GAAP Reconciliations
Sysco’s results of operations are impacted by restructuring costs consisting of (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we recorded accelerated depreciation on our existing system and incurred costs to convert to a modernized version of our established platform, (2) professional fees related to our three-year strategic plan, (3) restructuring expenses within our Brakes Group operations, and (4) severance charges related to restructuring. Our results of operations are also impacted by the following acquisition-related items: (1) intangible amortization expense, (2) transaction costs, and (3) integration costs. All acquisition-related costs in fiscal 2017 that have been excluded relate to the Brakes Acquisition. Fiscal 2016 acquisition-related costs, however, include (i) Brakes Acquisition related costs, (ii) termination costs in connection with the merger that had been proposed with US Foods, Inc. (US Foods) and (iii) financing costs related to the senior notes that were issued in fiscal 2015 to fund the proposed US Foods merger. These senior notes were redeemed in the first quarter of fiscal 2016, triggering a redemption loss of $86.5 million, and we incurred interest on these notes through the redemption date. The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs. These fiscal 2017 and fiscal 2016 items are collectively referred to as "Certain Items."
Management believes that adjusting its operating expenses, operating income, operating margin as a percentage of sales, interest expense, net earnings and diluted earnings per share to remove these Certain Items provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company's underlying operations and facilitates comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated, and which as a result, are difficult to include in analysts' financial models and our investors' expectations with any degree of specificity.
Although Sysco has a history of growth through acquisitions, the Brakes Group is significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for the third quarter and first 39 weeks of fiscal 2017 to the same periods in fiscal 2016. Also, given the significance of the Brakes Acquisition, management believes that presenting Sysco’s financial measures, excluding the Brakes Group operating results (including, for this purpose, Brakes Group financing costs, which are not included in the Brakes Group GAAP operating results and are also not Certain Items), enhances comparability of the period over period financial performance of Sysco’s legacy business and allows investors to more effectively measure Sysco’s progress against the financial goals under Sysco’s three-year strategic plan.
Set forth below is a reconciliation of sales, operating expenses, operating income, interest expense, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
13-Week Period Ended Apr. 1, 2017 | 13-Week Period Ended Mar. 26, 2016 | 13-Week Period Change in Dollars | 13-Week Period %/bps Change (3) | |||||||||||
(In thousands, except for share and per share data) | ||||||||||||||
Sales | $ | 13,524,172 | $ | 12,002,791 | $ | 1,521,381 | 12.7 | % | ||||||
Impact of Brakes | (1,239,721 | ) | — | (1,239,721 | ) | NM | ||||||||
Sales excluding the impact of Brakes (Non-GAAP) | $ | 12,284,451 | $ | 12,002,791 | $ | 281,660 | 2.3 | % | ||||||
Operating expenses (GAAP) | $ | 2,098,173 | $ | 1,765,207 | $ | 332,966 | 18.9 | % | ||||||
Impact of restructuring costs (1) | (40,064 | ) | (59,443 | ) | 19,380 | NM | ||||||||
Impact of acquisition-related costs (2) | (24,273 | ) | (586 | ) | (23,686 | ) | NM |
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Operating expenses adjusted for certain items (Non-GAAP) | $ | 2,033,836 | $ | 1,705,178 | $ | 328,658 | 19.3 | % | ||||||
Impact of Brakes | $ | (317,770 | ) | $ | — | $ | (317,770 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | 4,813 | — | 4,813 | NM | ||||||||||
Impact of Brakes acquisition-related costs (2) | 17,048 | — | 17,048 | NM | ||||||||||
Operating expenses adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 1,737,926 | $ | 1,705,178 | $ | 32,748 | 1.9 | % | ||||||
Operating income (GAAP) | $ | 435,962 | $ | 377,618 | $ | 58,344 | 15.5 | % | ||||||
Impact of restructuring costs (1) | 40,064 | 59,443 | (19,380 | ) | NM | |||||||||
Impact of acquisition-related costs (2) | 24,273 | 586 | 23,686 | NM | ||||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 500,299 | $ | 437,647 | $ | 62,652 | 14.3 | % | ||||||
Impact of Brakes | $ | 18,823 | $ | — | $ | 18,823 | NM | |||||||
Impact of Brakes restructuring costs (3) | (4,813 | ) | — | (4,813 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (17,048 | ) | — | (17,048 | ) | NM | ||||||||
Operating income adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 497,262 | $ | 437,647 | $ | 59,615 | 13.6 | % | ||||||
Operating margin (GAAP) | 3.22 | % | 3.15 | % | 8 bps | |||||||||
Operating margin (Non-GAAP) | 3.70 | % | 3.65 | % | 5 bps | |||||||||
Operating margin excluding Certain Items and Brakes (Non-GAAP) | 4.05 | % | 3.65 | % | 40 bps | |||||||||
Interest expense (GAAP) | $ | 81,004 | $ | 57,699 | $ | 23,305 | 40.4 | % | ||||||
Impact of acquisition financing costs | — | (10,495 | ) | 10,495 | NM | |||||||||
Interest expense adjusted for certain items (Non-GAAP) | $ | 81,004 | $ | 47,204 | $ | 33,800 | 71.6 | % | ||||||
Net earnings (GAAP) | $ | 238,278 | $ | 217,136 | $ | 21,142 | 9.7 | % | ||||||
Impact of restructuring costs (1) | 40,064 | 59,443 | (19,379 | ) | (32.6 | ) | ||||||||
Impact of acquisition-related costs (2) | 24,273 | 586 | 23,687 | NM | ||||||||||
Impact of acquisition financing costs | — | 10,495 | (10,495 | ) | NM | |||||||||
Tax impact of restructuring costs (5) | (17,524 | ) | (22,172 | ) | 4,648 | (21.0 | ) | |||||||
Tax impact of acquisition-related costs (5) | (9,229 | ) | (218 | ) | (9,011 | ) | NM | |||||||
Tax impact of acquisition financing costs (5) | — | (3,914 | ) | 3,914 | NM | |||||||||
Net earnings adjusted for certain items (Non-GAAP) | $ | 275,862 | $ | 261,356 | $ | 14,506 | 5.6 | % | ||||||
Impact of Brakes | $ | (3,020 | ) | $ | — | $ | (3,020 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | (3,125 | ) | — | (3,125 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (11,065 | ) | — | (11,065 | ) | NM | ||||||||
Impact of interest expense on debt issued for the Brakes acquisition (6) | 20,937 | — | 20,937 | NM | ||||||||||
Tax impact of interest expense on debt issued for the Brakes acquisition (5) | (9,733 | ) | — | (9,733 | ) | NM | ||||||||
Net earnings adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 269,856 | $ | 261,356 | $ | 8,500 | 3.3 | % | ||||||
Diluted earnings per share (GAAP) | $ | 0.44 | $ | 0.38 | $ | 0.06 | 15.8 | % | ||||||
Impact of restructuring costs (1) | 0.07 | 0.11 | (0.04 | ) | (36.4 | ) | ||||||||
Impact of acquisition-related costs (2) | 0.04 | — | 0.04 | NM | ||||||||||
Impact of acquisition financing costs | — | 0.02 | (0.02 | ) | NM | |||||||||
Tax impact of restructuring costs (5) | (0.03 | ) | (0.04 | ) | 0.01 | (22.8 | ) |
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Tax impact of acquisition-related costs (5) | (0.02 | ) | — | (0.02 | ) | NM | ||||||||
Tax impact of acquisition financing costs (5) | — | (0.01 | ) | 0.01 | NM | |||||||||
Diluted EPS adjusted for certain items (Non-GAAP) (4) | $ | 0.51 | $ | 0.46 | $ | 0.05 | 10.9 | % | ||||||
Impact of Brakes | $ | 0.01 | $ | — | $ | 0.01 | NM | |||||||
Impact of Brakes restructuring costs (3) | (0.01 | ) | — | (0.01 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (0.02 | ) | — | (0.02 | ) | NM | ||||||||
Impact of interest expense on debt issued for the Brakes acquisition (6) | 0.04 | — | 0.04 | NM | ||||||||||
Tax impact of interest expense on debt issued for the Brakes acquisition (5) | (0.02 | ) | — | (0.02 | ) | NM | ||||||||
Net earnings adjusted for certain items and excluding the impact of Brakes (Non-GAAP) (7) | $ | 0.50 | $ | 0.46 | $ | 0.04 | 8.7 | % | ||||||
Total Brakes accretion | $ | 0.01 | $ | — | $ | 0.01 | NM |
(1) Includes $28 million in accelerated depreciation associated with our revised business technology strategy and $12 million related to restructuring expenses within our Brakes Group operations, costs to convert to legacy systems in conjunction with our revised business technology strategy, severance charges related to restructuring and professional fees on 3-year financial objectives.
(2) Fiscal 2017 Includes $19 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group and $7 million in transaction costs. Fiscal 2016 includes US Foods merger termination costs.
(3) Includes Brakes Acquisition restructuring charges.
(4) Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
(5) The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(6) Sysco Corporation issued debt to fund the Brakes Acquisition. The interest expense arising from the debt issued is attributed to the incremental impact of the Brakes Group operating results, even though it is not a direct obligation of the Brakes Group and is not considered a Certain Item.
NM represent that the percentage change is not meaningful.
39-Week Period Ended Apr. 1, 2017 | 39-Week Period Ended Mar. 26, 2016 | 39-Week Period Change in Dollars | 39-Week Period %/bps Change | |||||||||||
Sales | $ | 40,950,094 | $ | 36,719,028 | $ | 4,231,066 | 11.5 | % | ||||||
Impact of Brakes | (3,852,145 | ) | — | (3,852,145 | ) | NM | ||||||||
Sales excluding the impact of Brakes (Non-GAAP) | $ | 37,097,949 | $ | 36,719,028 | $ | 378,921 | 1.0 | % | ||||||
Operating expenses (GAAP) | $ | 6,302,705 | $ | 5,233,959 | $ | 1,068,746 | 20.4 | % | ||||||
Impact of restructuring costs (1) | (118,438 | ) | (66,913 | ) | (51,524 | ) | 77.0 | |||||||
Impact of acquisition-related costs (2) | (71,352 | ) | (10,402 | ) | (60,950 | ) | NM | |||||||
Operating expenses adjusted for certain items (Non-GAAP) | $ | 6,112,915 | $ | 5,156,644 | $ | 956,271 | 18.5 | % | ||||||
Impact of Brakes | $ | (949,926 | ) | $ | — | $ | (949,926 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | 9,794 | — | 9,794 | NM | ||||||||||
Impact of Brakes acquisition-related costs (2) | 56,838 | — | 56,838 | NM | ||||||||||
Operating expenses adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 5,229,621 | $ | 5,156,644 | $ | 72,976 | 1.4 | % | ||||||
Operating income (GAAP) | $ | 1,495,212 | $ | 1,303,675 | $ | 191,537 | 14.7 | % | ||||||
Impact of restructuring costs (1) | 118,438 | 66,913 | 51,524 | 77.0 | ||||||||||
Impact of acquisition-related costs (2) | 71,352 | 10,402 | 60,950 | NM | ||||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 1,685,002 | $ | 1,380,990 | $ | 304,012 | 22.0 | % |
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Impact of Brakes | $ | (45,206 | ) | $ | — | $ | (45,206 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | (9,794 | ) | — | (9,794 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (56,838 | ) | — | (56,838 | ) | NM | ||||||||
Operating income adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 1,573,164 | $ | 1,380,990 | $ | 192,174 | 13.9 | % | ||||||
Operating margin (GAAP) | 3.65 | % | 3.55 | % | 10 bps | |||||||||
Operating margin (Non-GAAP) | 4.11 | % | 3.76 | % | 35 bps | |||||||||
Operating margin excluding Certain Items and Brakes (Non-GAAP) | 4.24 | % | 3.76 | % | 48 bps | |||||||||
Interest expense (GAAP) | $ | 226,858 | $ | 231,841 | $ | (4,983 | ) | (2.1 | )% | |||||
Impact of acquisition financing costs | — | (105,330 | ) | 105,330 | NM | |||||||||
Interest expense adjusted for certain items (Non-GAAP) | $ | 226,858 | $ | 126,511 | $ | 100,347 | 79.3 | % | ||||||
Net earnings (GAAP) | $ | 837,332 | $ | 733,955 | $ | 103,377 | 14.1 | % | ||||||
Impact of restructuring costs (1) | 118,438 | 66,913 | 51,525 | 77.0 | ||||||||||
Impact of acquisition-related costs (2) | 71,352 | 10,402 | 60,950 | NM | ||||||||||
Impact of acquisition financing costs | — | 105,330 | (105,330 | ) | NM | |||||||||
Tax impact of restructuring costs (5) | (36,840 | ) | (24,958 | ) | (11,882 | ) | 47.6 | |||||||
Tax impact of acquisition-related costs (5) | (19,515 | ) | (3,880 | ) | (15,635 | ) | NM | |||||||
Tax impact of acquisition financing costs (5) | — | (39,288 | ) | 39,288 | NM | |||||||||
Net earnings adjusted for certain items (Non-GAAP) | $ | 970,767 | $ | 848,474 | $ | 122,293 | 14.4 | % | ||||||
Impact of Brakes | $ | (53,747 | ) | $ | — | $ | (53,747 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | (7,220 | ) | — | (7,220 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (41,901 | ) | — | (41,901 | ) | NM | ||||||||
Impact of interest expense on debt issued for the Brakes acquisition (6) | 60,618 | — | 60,618 | NM | ||||||||||
Tax impact of interest expense on debt issued for the Brakes acquisition (5) | (24,732 | ) | — | (24,732 | ) | NM | ||||||||
Net earnings adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 903,785 | $ | 848,474 | $ | 55,311 | 6.5 | % | ||||||
Diluted earnings per share (GAAP) | $ | 1.52 | $ | 1.26 | $ | 0.26 | 20.6 | % | ||||||
Impact of restructuring costs (1) | 0.21 | 0.11 | 0.10 | 90.9 | ||||||||||
Impact of acquisition-related costs (2) | 0.13 | 0.02 | 0.11 | NM | ||||||||||
Impact of acquisition financing costs | — | 0.18 | (0.18 | ) | NM | |||||||||
Tax impact of restructuring costs (5) | (0.07 | ) | (0.04 | ) | (0.03 | ) | 75.0 | |||||||
Tax impact of acquisition-related costs (5) | (0.04 | ) | (0.01 | ) | (0.03 | ) | NM | |||||||
Tax impact of acquisition financing costs (5) | — | (0.07 | ) | 0.07 | NM | |||||||||
Diluted EPS adjusted for certain items (Non-GAAP) (4) | $ | 1.76 | $ | 1.46 | $ | 0.30 | 20.5 | % | ||||||
Impact of Brakes | $ | (0.10 | ) | $ | — | $ | (0.10 | ) | NM | |||||
Impact of Brakes restructuring costs (3) | (0.01 | ) | — | (0.01 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs (2) | (0.08 | ) | — | (0.08 | ) | NM | ||||||||
Impact of interest expense on debt issued for the Brakes acquisition (6) | 0.11 | — | 0.11 | NM | ||||||||||
Tax impact of interest expense on debt issued for the Brakes acquisition (5) | (0.04 | ) | — | (0.04 | ) | NM | ||||||||
Net earnings adjusted for certain items and excluding the impact of Brakes (Non-GAAP) (4) | $ | 1.64 | $ | 1.46 | $ | 0.18 | 12.2 | % |
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Total Brakes accretion | $ | 0.12 | $ | — | $ | 0.12 | NM |
(1) Includes $84 million in accelerated depreciation associated with our revised business technology strategy and $35 million related to professional fees on 3-year financial objectives, restructuring expenses within our Brakes Group operations, costs to convert to legacy systems in conjunction with our revised business technology strategy and severance charges related to restructuring.
(2) Fiscal 2017 includes $57 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group and $15 million in transaction costs. Fiscal 2016 includes US Foods merger termination costs.
(3) Includes the Brakes Acquisition-related restructuring charges.
(4) Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
(5) The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred. The adjustments also include $7 million in non-deductible transaction costs and $4 million in other one-time costs related to the Brakes Acquisition.
(6) Sysco Corporation issued debt to fund the Brakes Acquisition. The interest expense arising from the debt issued is attributed to the incremental impact of Brakes Group operating results, even though it is not a direct obligation of the Brakes Group and is not considered a Certain Item.
NM represent that the percentage change is not meaningful.
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Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for the periods presented:
13-Week Period Ended Apr. 1, 2017 | 13-Week Period Ended Mar. 26, 2016 | 13-Week Period Ended Change in Dollars | 13-Week Period %/bps Change | |||||||||||
U.S. FOODSERVICE OPERATIONS | ||||||||||||||
Sales (GAAP) | $ | 9,233,048 | $ | 9,037,417 | $ | 195,631 | 2.2 | % | ||||||
Gross Profit (GAAP) | 1,836,226 | 1,765,279 | 70,947 | 4.0 | ||||||||||
Gross Margin (GAAP) | 19.89 | % | 19.53 | % | 35 bps | |||||||||
Operating expenses (GAAP) | $ | 1,147,016 | $ | 1,121,953 | $ | 25,063 | 2.2 | % | ||||||
Impact of restructuring costs | — | (742 | ) | 742 | NM | |||||||||
Operating expenses adjusted for certain items (Non-GAAP) | $ | 1,147,016 | $ | 1,121,211 | $ | 25,805 | 2.3 | % | ||||||
Operating income (GAAP) | $ | 689,210 | $ | 643,326 | $ | 45,884 | 7.1 | % | ||||||
Impact of restructuring costs | — | 742 | (742 | ) | NM | |||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 689,210 | $ | 644,068 | $ | 45,142 | 7.0 | % | ||||||
INTERNATIONAL FOODSERVICE OPERATIONS | ||||||||||||||
Sales (GAAP) | $ | 2,528,485 | $ | 1,251,815 | $ | 1,276,670 | NM | |||||||
Gross Profit (GAAP) | 516,748 | 210,682 | 306,066 | NM | ||||||||||
Gross Margin (GAAP) | 20.44 | % | 16.83 | % | 361 bps | |||||||||
Operating expenses (GAAP) | $ | 500,672 | $ | 177,661 | $ | 323,011 | NM | |||||||
Impact of restructuring costs (1) | (6,779 | ) | (308 | ) | (6,471 | ) | NM | |||||||
Impact of acquisition-related costs (2) | (17,048 | ) | — | (17,048 | ) | NM | ||||||||
Operating expenses adjusted for certain items (Non-GAAP) | $ | 476,845 | $ | 177,353 | $ | 299,492 | NM | |||||||
Impact of Brakes | (317,770 | ) | — | (317,770 | ) | NM | ||||||||
Impact of Brakes restructuring costs | 4,813 | — | 4,813 | NM | ||||||||||
Impact of Brakes acquisition-related costs | 17,048 | — | 17,048 | NM | ||||||||||
Operating expenses adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 180,936 | $ | 177,353 | $ | 3,583 | 2.0 | % | ||||||
Operating income (GAAP) | $ | 16,076 | $ | 33,021 | $ | (16,945 | ) | (51.3 | )% | |||||
Impact of restructuring costs (1) | 6,779 | 308 | 6,470 | NM | ||||||||||
Impact of acquisition related costs (2) | 17,048 | — | 17,048 | NM | ||||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 39,903 | $ | 33,329 | $ | 6,575 | 19.7 | % | ||||||
Impact of Brakes | 18,823 | — | 18,823 | NM | ||||||||||
Impact of Brakes restructuring costs | (4,813 | ) | — | (4,813 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs | (17,048 | ) | — | (17,048 | ) | NM | ||||||||
Operating income adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 36,865 | $ | 33,329 | $ | 3,536 | 10.6 | % |
(1) Fiscal 2017 includes acquisition-related costs, restructuring charges and other severance charges related to restructuring.
(2) Fiscal 2017 includes $19 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group.
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(3) Fiscal 2017 includes $28 million in accelerated depreciation associated with our revised business technology strategy. Also includes $5 million related to professional fees on 3-year financial objectives and costs to convert to legacy systems in conjunction with our revised business technology strategy.
(4) Fiscal 2017 includes $7 million related to transaction costs from the Brakes Acquisition. Fiscal 2016 includes US Foods merger termination costs.
NM represent that the percentage change is not meaningful.
U.S. FOODSERVICE OPERATIONS | 39-Week Period Ended Apr. 1, 2017 | 39-Week Period Ended Mar. 26, 2016 | 39-Week Period Change in Dollars | 39-Week Period %/bps Change | ||||||||||
Sales (GAAP) | $ | 27,799,728 | $ | 27,580,667 | $ | 219,061 | 0.8 | % | ||||||
Gross Profit (GAAP) | 5,572,364 | 5,359,023 | 213,341 | 4.0 | ||||||||||
Gross Margin (GAAP) | 20.04 | % | 19.43 | % | 61 bps | |||||||||
Operating expenses (GAAP) | $ | 3,456,602 | $ | 3,403,812 | $ | 52,790 | 1.6 | % | ||||||
Impact of restructuring costs | (470 | ) | (2,176 | ) | 1,706 | (78.4 | ) | |||||||
Operating expenses adjusted for certain items (Non-GAAP) | $ | 3,456,132 | $ | 3,401,636 | $ | 54,496 | 1.6 | % | ||||||
Operating income (GAAP) | $ | 2,115,762 | $ | 1,955,211 | $ | 160,551 | 8.2 | % | ||||||
Impact of restructuring costs | 470 | 2,176 | (1,706 | ) | (78.4 | ) | ||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 2,116,232 | $ | 1,957,387 | $ | 158,845 | 8.1 | % | ||||||
INTERNATIONAL FOODSERVICE OPERATIONS | ||||||||||||||
Sales (GAAP) | $ | 7,882,796 | $ | 3,922,848 | $ | 3,959,948 | NM | |||||||
Gross Profit (GAAP) | 1,691,368 | 677,342 | 1,014,026 | NM | ||||||||||
Gross Margin (GAAP) | 21.46 | % | 17.27 | % | 419 bps | |||||||||
Operating expenses (GAAP) | $ | 1,511,044 | $ | 550,189 | $ | 960,855 | NM | |||||||
Impact of restructuring costs (1) | (17,049 | ) | (2,137 | ) | (14,912 | ) | NM | |||||||
Impact of acquisition-related costs (2) | (56,838 | ) | — | (56,838 | ) | NM | ||||||||
Operating expenses adjusted for certain items (Non-GAAP) | $ | 1,437,157 | $ | 548,052 | $ | 889,105 | NM | |||||||
Impact of Brakes | $ | (949,926 | ) | $ | — | $ | (949,926 | ) | NM | |||||
Impact of Brakes restructuring costs | 9,794 | — | 9,794 | NM | ||||||||||
Impact of Brakes acquisition-related costs | 56,838 | — | 56,838 | NM | ||||||||||
Operating expenses adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 553,863 | $ | 548,052 | $ | 5,811 | 1.1 | % | ||||||
Operating income (GAAP) | $ | 180,324 | $ | 127,153 | $ | 53,171 | 41.8 | % | ||||||
Impact of restructuring costs (1) | 17,049 | 2,137 | 14,912 | NM | ||||||||||
Impact of acquisition related costs (2) | 56,838 | — | 56,838 | NM | ||||||||||
Operating income adjusted for certain items (Non-GAAP) | $ | 254,211 | $ | 129,290 | $ | 124,921 | 96.6 | % | ||||||
Impact of Brakes | $ | (45,206 | ) | $ | — | $ | (45,206 | ) | NM | |||||
Impact of Brakes restructuring costs | (9,794 | ) | — | (9,794 | ) | NM | ||||||||
Impact of Brakes acquisition-related costs | (56,838 | ) | — | (56,838 | ) | NM | ||||||||
Operating income adjusted for certain items and excluding the impact of Brakes (Non-GAAP) | $ | 142,373 | $ | 129,290 | $ | 13,083 | 10.1 | % |
(1) Fiscal 2017 includes acquisition-related costs, restructuring charges and other severance charges.
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(2) Fiscal 2017 includes $57 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group.
(3) Fiscal 2017 includes $84 million in accelerated depreciation associated with our revised business technology strategy. Also includes $18 million related to professional fees on 3-year financial objectives and costs to convert to legacy systems in conjunction with our revised business technology strategy.
(4) Fiscal 2017 includes $15 million related to transaction costs from the Brakes Acquisition. Fiscal 2016 includes US Foods merger termination costs.
NM represent that the percentage change is not meaningful.
Adjusted Cost per Case
Cost per case is an important metric management uses to measure our expense performance. This metric is calculated by dividing the total operating expense of our U.S. Broadline companies by the number of cases sold. Adjusted cost per case is calculated similarly; however, the operating expense component excludes Certain Items applicable to these companies, prior to dividing by the number of cases sold. In the first 39 weeks of fiscal 2017, the U.S. Broadline operations represented approximately 92% of the U.S. Foodservice Operations segment's sales and nearly 85% of its operating expenses. We seek to grow our sales and reduce our costs on a per-case basis.
In the table that follows, the change in adjusted cost per case is reconciled to cost per case for the 13-week and 39-week periods in fiscal 2017.
13-Week Period Change | 39-Week Period Change | ||||||
Decrease in cost per case | $ | (0.019 | ) | $ | (0.030 | ) | |
Impact of Certain Items (1) | (0.003 | ) | (0.003 | ) | |||
Decrease in adjusted cost per case (Non-GAAP basis) | $ | (0.016 | ) | $ | (0.028 | ) |
(1) For all periods, the impact of Certain Items excludes charges for restructuring costs, primarily related to severance charges.
Three-Year Financial Targets
Sysco management considers adjusted ROIC to be a measure that provides useful information to management and investors in evaluating the efficiency and effectiveness of the company's long-term capital investments. In addition, we have targets and expectations that are based on adjusted results including an ROIC target of 15%, We cannot predict with certainty when we will achieve these results or whether the calculation of our ROIC in such future period will be on an adjusted basis due to the effect of certain items, which would be excluded from such calculation. Due to these uncertainties, to the extent our future calculation of ROIC is on an adjusted basis excluding certain items, we cannot provide a quantitative reconciliation of this non-GAAP measure to the most directly comparable GAAP measure without unreasonable effort. However, we would expect to calculate adjusted ROIC, if applicable, in the same manner as we have calculated this historically. All components of our adjusted ROIC calculation would be impacted by Certain Items. We calculate adjusted ROIC as adjusted net earnings divided by (i) stockholders’ equity, computed as the average of adjusted stockholders’ equity at the beginning of the year and at the end of each fiscal quarter during the year; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year.
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Form of calculation: |
Net earnings (GAAP) |
Impact of Certain Items on net earnings |
Adjusted net earnings (Non-GAAP) |
Invested Capital (GAAP) |
Adjustments to invested capital |
Adjusted Invested capital (GAAP) |
Return on investment capital (GAAP) |
Return on investment capital (Non-GAAP) |
Additional targets and expectations include our adjusted operating income target that we expect to achieve by fiscal 2018 and our expectations that the Brakes Acquisition will be accretive to earnings per share stated on an adjusted basis. Due to uncertainties in projecting Certain Items, we cannot provide a quantitative reconciliation of these non-GAAP measures to the most directly comparable GAAP measures without unreasonable effort. However, we would expect to calculate these adjusted results in the same manner as the reconciliations provided for the historical periods that are presented herein. The impact of future Certain Items could cause projected non-GAAP amounts to differ significantly from our GAAP results.
Liquidity and Capital Resources
Highlights
Comparisons of the cash flows from the first 39 weeks of fiscal 2017 to the first 39 weeks of fiscal 2016:
• | Cash flows from operations were $1.0 billion in 2017, compared to $989.0 million in 2016; |
• | Capital expenditures totaled $413.8 million in 2017, compared to $360.9 million in 2016; |
• | Free cash flow was $630.1 million in 2017, compared to $640.7 million in 2016 (see "Non-GAAP reconciliation" below under the heading “Free Cash Flow”); |
• | Cash used for acquisition of businesses, net of cash received, was $2.9 billion in 2017, compared to $167.7 million in 2016; |
• | Commercial paper and net bank borrowings were $1.3 billion in 2017, compared to no commercial paper or bank borrowings in 2016; |
• | Dividends paid were $521.8 million in 2017, compared to $523.7 million in 2016; and |
• | Cash paid for treasury stock repurchases was $1.5 billion in 2017, compared to $1.7 billion in 2016. |
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; |
• | return of capital to shareholders, including cash dividends and share repurchases; |
• | 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. 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.
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Our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations. 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 the items impacting our gross profits have been sufficient to limit a significant unfavorable impact on our cash flows from operations. We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations. Seasonal trends also impact our cash flows from operations and free cash flow, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year. As of April 1, 2017, we had $855.1 million in cash and cash equivalents, approximately 74.0% 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 repatriate this cash.
We believe the following sources will be sufficient to meet our anticipated cash requirements for the next twelve months, 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 line of credit; and |
• | 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.
Cash Flows
Operating Activities
We generated $1.0 billion in cash flows from operations in the first 39 weeks of fiscal 2017, compared to cash flows of $989.0 million in the first 39 weeks of fiscal 2016. This increase of $35.8 million year-over-year was largely attributable to higher operating results, improved working capital management, a favorable comparison on accrued expenses. These were principally offset by increased tax payments. The cash impact of our Certain Items decreased $213.2 million year-over-year primarily due to merger termination payments in fiscal 2016 relating to the proposed merger with US Foods. The cash impact of Certain Items will differ from the earnings impact of Certain Items, as the payments for these items may occur in a different period from the period in which the Certain Item charges were recognized in the Statement of Consolidated Results of Operations.
Changes in working capital, specifically accounts receivable, inventory and accounts payable, had a positive impact of $120.6 million on the period-over-period comparison of cash flow from operations. We made seasonal investments in net working capital in both periods; however, the amount required in the first 39 weeks of fiscal 2017 was less than in the first 39 weeks of fiscal 2016 partially due to improved working capital management, with a larger contribution from accounts payable.
The positive comparison on accrued expenses was primarily due to $312.5 million in US Foods merger termination fees that were paid in the first 39 weeks of fiscal 2016, partially offset by a $98.0 million decrease from incentive payments. Our annual incentive payments from the prior fiscal year are paid in the first quarter of each fiscal year, and our fiscal 2016 performance resulted in higher incentive payments as compared to our fiscal 2015 performance.
Our tax payments in the first 39 weeks of fiscal 2017 were higher than in the first 39 weeks of fiscal 2016 by $507.2 million. Sysco's fourth quarter fiscal 2016 U.S. estimated federal tax payment was deferred to the second quarter of fiscal 2017 due to a disaster area designation for companies located in the Houston area, the location of our corporate headquarters. Additionally, we experienced lower tax payments in the first 39 weeks of fiscal 2016 due to changes in tax elections allowing us to accelerate tax deductions from method changes and from the US Foods merger termination fees.
Investing Activities
Our capital expenditures in the first 39 weeks of fiscal 2017 primarily consisted of facility replacements and expansions, fleet, technology and warehouse equipment, including supply chain opportunities involving the Brakes Group. Our capital expenditures in the first 39 weeks of fiscal 2017 are higher by $52.9 million as compared to the first 39 weeks of fiscal 2016.
We estimate that our capital expenditures, net of proceeds from sales of assets, in fiscal 2017 will be in the range of approximately 1.0% to 1.1% of total sales.
During the first 39 weeks of fiscal 2017, we paid cash of $2.9 billion for acquisitions made during fiscal 2017, net of cash acquired, primarily for the Brakes Acquisition.
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Free Cash Flow
Free cash flow represents net cash provided from operating activities, less purchases of plant and equipment, plus proceeds from sales of plant and equipment. Sysco considers free cash flow to be a non-GAAP liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash, including dividend payments, share repurchases and acquisitions. However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments. Our free cash flow for the first 39 weeks of fiscal 2017 decreased by $10.6 million, to $630.1 million, as compared to the first 39 weeks of fiscal 2016, principally as a result of increased tax payments.
Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. In the table that follows, free cash flow for each period presented is reconciled to net cash used in / provided by operating activities.
39-Week Period Ended Apr. 1, 2017 | 39-Week Period Ended Mar. 26, 2016 | ||||||
(In thousands) | |||||||
Net cash provided by operating activities (GAAP) | $ | 1,024,775 | $ | 988,981 | |||
Additions to plant and equipment | (413,776 | ) | (360,883 | ) | |||
Proceeds from sales of plant and equipment | 19,091 | 12,623 | |||||
Free Cash Flow (Non-GAAP) | $ | 630,090 | $ | 640,721 |
Financing Activities
Equity Transactions
Proceeds from exercises of share-based compensation awards were $175.3 million in the first 39 weeks of fiscal 2017, as compared to $222.8 million in the first 39 weeks of fiscal 2016. The decrease in proceeds in the first 39 weeks of fiscal 2017 was due to a decrease in the number of options exercised in this period, as compared to the first 39 weeks of fiscal 2016. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.
We routinely engage in share repurchase programs. In June 2015, our Board of Directors approved a repurchase program to repurchase, from time to time in the open market, through an accelerated share repurchase program or through privately negotiated transactions, shares of the company's common stock in an amount not to exceed $3.0 billion during the two-year period ending July 1, 2017, in addition to amounts normally repurchased to offset benefit plan and stock option dilution. In addition, in August 2015, our Board of Directors approved the repurchase of up to 20,000,000 shares for an aggregate purchase price not to exceed $800 million. The authorization expires on August 21, 2017. Also, in February 2017, our Board of Directors approved a separate repurchase program authorizing the repurchase of shares of the company's common stock not to exceed $1.0 billion through the end of fiscal 2019. This repurchase program, which is in addition to any amounts remaining under the prior repurchase programs, is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company's benefit plans.
We purchased 29.1 million shares during the first 39 weeks of fiscal 2017 for $1.5 billion, resulting in a remaining authorization under the three programs of approximately $1.4 billion. There were 32.3 million shares repurchased in the first 39 weeks of fiscal 2016 for $1.7 billion. We purchased 1.4 million additional shares under these authorizations through April 21, 2017. The number of shares we repurchase during the remainder of fiscal 2017 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash.
Dividends paid in the first 39 weeks of fiscal 2017 were $521.8 million, or $0.95 per share, as compared to $523.7 million, or $0.91 per share, in the first 39 weeks of fiscal 2016. In February 2017, we declared our regular quarterly dividend for the third quarter of fiscal 2017 of $0.33 per share, which was paid in April 2017.
Debt Activity and Borrowing Availability
Our debt activity and borrowing availability is described in Note 6, "Debt". Our outstanding borrowings at April 1, 2017, and subsequently, are disclosed within that note. Updated amounts through April 21, 2017, include:
• | $1.3 billion outstanding from our commercial paper program |
• | No amounts outstanding from the credit facility supporting the company’s U.S. commercial paper program. |
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During the first 39 weeks of fiscal 2017 and 2016, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 0.85% and 0.44%, respectively.
Included in current maturities of long-term debt as of April 1, 2017 are the 5.25% senior notes totaling $500.0 million, which mature in February 2018. 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, issuances of senior notes or a combination thereof.
Multiemployer Plans
Our exposure to multiemployer defined benefit plans is discussed in Note 14 "Subsequent Events" including our estimate of our share of withdrawal liability for these plans.
Contractual Obligations
Our Annual Report on Form 10-K for the fiscal year ended July 2, 2016 (our 2016 Form 10-K), contains a table that summarizes our obligations and commitments to make specified contractual future cash payments as of July 2, 2016. Since July 2, 2016, there have been no material changes to our specified contractual obligations.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that are most important to the portrayal of our financial position 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. Sysco’s most critical accounting policies and estimates include those that pertain to the company sponsored pension plans, income taxes, goodwill and intangible assets and share-based compensation, which are described in Item 7 of our 2016 Form 10-K and a Current Report on Form 8-K filed on February 6, 2017, which includes recast sections from our 2016 Form 10-K.
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:
• | consumer confidence; |
• | expectations regarding earnings per share growth and the factors impacting it, including the earnings per share impact of the Brakes Acquisition, and its estimated intangible amortization expense; |
• | expectations with respect to achieving our three-year financial targets; |
• | expectations regarding segment operating income increasing at a greater rate than segment sales growth; |
• | expectations regarding leveraging earnings growth at a greater rate than sales growth; |
• | expectations regarding future fuel costs; |
• | Sysco's ability to achieve accelerated case growth through a focus on local customers, grow gross profit dollars and manage overall expenses; |
• | the ability of the Brakes Group to manage its supply chain, and the related anticipated benefits; |
• | anticipated performance in our European operations; |
• | anticipated fuel needs for the remainder of fiscal 2017 and fiscal 2018; |
• | the impact of general economic conditions on our business and our industry; |
• | expectations regarding inflation and deflation; |
• | anticipated capital expenditures; |
• | expectations regarding potential multiemployer pension plan liability; |
• | expectations and goals related to sales and cost per case for our U.S. Broadline companies; |
• | expectations regarding the allocation of cash generated from operations; |
• | Sysco’s expectations regarding cash held by international subsidiaries; |
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• | the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms; |
• | Sysco’s ability to meet future cash requirements, including the ability to access debt markets effectively, and maintain sufficient liquidity; |
• | Sysco’s ability to effectively access the commercial paper market and long-term capital markets; |
• | our expectations regarding the impact of seasonal trends on cash flow from operations and free cash flow; |
• | our strategy and expectations regarding share repurchases; and |
• | expectations related to our forward diesel fuel commitments. |
These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below and those discussed in Item 1A of our 2016 Form 10-K:
• | periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability; |
• | risks related to unfavorable conditions in the U.S. economy and local markets and the impact on our results of operations and financial condition; |
• | the risks related to our efforts to meet our long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated; |
• | the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs; |
• | the risk that competition in our industry may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability; |
• | the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs; |
• | the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control; |
• | the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products; |
• | risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers; |
• | the risk that we may not realize anticipated benefits from our operating cost reduction efforts; |
• | difficulties in successfully expanding into international markets and complimentary lines of business; |
• | the potential impact of product liability claims; |
• | the risk that we fail to comply with requirements imposed by applicable law or government regulations; |
• | risks related to our ability to effectively finance and integrate acquired businesses; |
• | risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity; |
• | our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position; |
• | the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; |
• | the risk that the results of the referendum on June 23, 2016 in the United Kingdom to exit the European Union, commonly referred to as Brexit, may adversely impact our operations in the United Kingdom, including those of the Brakes Group; |
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• | the risk that factors beyond management’s control, including fluctuations in the stock market, as well as management’s future subjective evaluation of the company’s needs, would impact the timing of share repurchases; |
• | due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business; |
• | the risk that a cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers; |
• | the potential requirement to pay material amounts under our multiemployer defined benefit pension plans; |
• | our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines; |
• | labor issues, including the renegotiation of union contracts and shortage of qualified labor; |
• | capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; and |
• | the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders. |
For a more detailed discussion of factors that could cause actual results to differ from those contained in the forward-looking statements, see the risk factors discussion contained in Item 1A of our 2016 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risks consist of interest rate risk, foreign currency exchange rate risk, fuel price risk and investment risk. For a discussion on our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risks” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2016. There have been no significant changes to our market risks since July 2, 2016, except as noted below.
Interest Rate Risk
At April 1, 2017, there were $1.3 billion in commercial paper issuances outstanding. Total debt as of April 1, 2017 was $8.6 billion, of which approximately 59% was at fixed rates of interest, including the impact of our interest rate swap agreements.
Fuel Price Risk
Due to the nature of our distribution business, we are exposed to potential volatility in fuel prices. The price and availability of diesel fuel fluctuates due to changes in production, seasonality and other market factors generally outside of our control. During the first 39 weeks of fiscal 2017 and fiscal 2016, fuel costs related to outbound deliveries represented approximately 0.5% of sales in both periods.
We have used both forward purchase contracts and fuel swap contracts to fix the price of a portion of our projected monthly diesel fuel requirements. As of April 1, 2017, we had forward diesel fuel commitments totaling approximately $25.0 million through June 2017 and fuel swap contracts with notional amounts of $70.0 million through June 2018. These contracts will lock in the price of approximately 40% to 45% of our fuel purchase needs through June 2018. Our remaining fuel purchase needs will occur at market rates, unless contracted for a fixed price at a later date.
Foreign Currency Risk
See Note 5, "Derivative Financial Instruments," for a discussion of our foreign currency risk hedging.
Item 4. Controls and Procedures
Sysco’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of April 1, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Sysco’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of April 1, 2017, our chief executive officer and chief financial officer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level. Sysco closed the Brakes Acquisition on July 5, 2016, and the Brakes Group's total assets and sales constituted 23.7% and 9.4%, respectively, of Sysco's consolidated total assets and sales as shown on our consolidated financial statements as of and for the 39 weeks ended April 1, 2017. As the Acquisition occurred in the first quarter of 2017, we excluded the internal control over financial reporting of the Brakes Group entities from the scope of our assessment of the effectiveness of Sysco’s disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently-acquired business may be omitted from our scope in the year of acquisition, if specified conditions are satisfied.
There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended April 1, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Brakes Acquisition had a material impact on internal control over financial reporting. Due to the timing of the Brakes Acquisition, we will exclude the internal control over financial reporting of the Brakes Group from our evaluation of internal control over financial reporting of the Company for the year ending July 1, 2017. This exclusion is in accordance with general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recent business acquisition may be omitted from management’s report on internal control over financial reporting in the first year of consolidating an acquired business, if specified conditions are satisfied.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended July 2, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
We made the following share repurchases during the first 39 weeks of fiscal 2017:
ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||
Period | (a) Total Number of Shares Purchased (1) | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
Month #1 | |||||||||
January 1 - January 28 | 1,913,297 | $ | 54.93 | 1,911,083 | — | ||||
Month #2 | |||||||||
January 29 - February 25 | 2,170,800 | 52.48 | 2,170,800 | — | |||||
Month #3 | |||||||||
February 26 - April 1 | 2,292,511 | 52.44 | 2,286,394 | — | |||||
Total | 6,376,608 | $ | 53.20 | 6,368,277 | — |
(1) The total number of shares purchased includes 2,214, 0 and 6,117 shares tendered by individuals in connection with stock option exercises in Month #1, Month #2 and Month #3, respectively.
We routinely engage in share repurchase programs. In June 2015, our Board of Directors approved a repurchase program to repurchase, from time to time in the open market, through an accelerated share repurchase program or through privately negotiated transactions, shares of the company's common stock in an amount not to exceed $3.0 billion during the two-year period ending July 1, 2017, in addition to amounts normally repurchased to offset benefit plan and stock option dilution. This share repurchase program was approved using a dollar value limit and, therefore, is not included in the table above for "Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs." In addition, in August 2015, our Board of Directors approved the repurchase of up to 20,000,000 shares for an aggregate purchase price not to exceed $800 million. The authorization expires on August 21, 2017. Also, in February 2017, our Board of Directors approved a separate repurchase program authorizing the repurchase of shares of the company's common stock not to exceed $1.0 billion through the end of fiscal 2019. This repurchase program, which is in addition to any amounts remaining under the prior repurchase programs, is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company's benefit plans.
We purchased 29.1 million shares during the first 39 weeks of fiscal 2017, resulting in a remaining authorization under these three programs of approximately $1.4 billion. We purchased 32.3 million shares in the first 39 weeks of fiscal 2016. We purchased 1.4 million additional shares under these authorizations through April 21, 2017. The number of shares we repurchase
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during the remainder of fiscal 2017 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as a part of this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Sysco Corporation | |
(Registrant) |
By | /s/ WILLIAM J. DELANEY | ||
Date: May 8, 2017 | William J. DeLaney | ||
Chief Executive Officer | |||
By | /s/ JOEL T. GRADE | ||
Date: May 8, 2017 | Joel T. Grade | ||
Executive Vice President and | |||
Chief Financial Officer | |||
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EXHIBIT INDEX
3.1 | — | Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). |
3.2 | — | Certificate of Amendment to Restated Certificate of Incorporation increasing authorized shares, incorporated by reference to Exhibit 3(e) to Form 10-Q for the quarter ended December 27, 2003 (File No. 1-6544). |
3.3 | — | Form of Amended Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(c) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). |
3.4 | — | Amended and Restated Bylaws of Sysco Corporation dated August 26, 2016, incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 31, 2016 (File No. 1-6544). |
12.1# | — | Statement regarding Computation of Ratio of Earnings to Fixed Charges. |
15.1# | — | Review Report from Ernst & Young LLP dated May 8, 2017, re: unaudited financial statements. |
15.2# | — | Acknowledgment letter from Ernst & Young LLP. |
31.1# | — | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2# | — | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1# | — | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2# | — | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.1# | — | The following financial information from Sysco Corporation’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2017 filed with the SEC on May 8, 2017, formatted in XBRL includes: (i) Consolidated Balance Sheets as of April 1, 2017, July 2, 2016 and Mar 26, 2016, (ii) Consolidated Results of Operations for the thirteen and thirty nine week periods ended April 1, 2017 and March 26, 2016, (iii) Consolidated Statements of Comprehensive Income for the thirteen and thirty nine week periods ended April 1, 2017 and March 26, 2016, (iv) Consolidated Cash Flows for the thirty nine week periods ended April 1, 2017 and March 26, 2016, and (v) the Notes to Consolidated Financial Statements. |
___________
# Filed herewith
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