01—Abstract
Summary
Summary of the 10-K filed August 26, 2014. Cited figures are marked; the original filing is the authoritative source.
Sysco Corporation (SYY) reported fiscal 2014 (52 weeks ended June 28, 2014) sales of $46.52 billiona, up 4.7% from $44.41 billion in fiscal 2013, while operating income declined 4.3% to $1.59 billion and net earnings fell 6.1% to $931.5 million.
Diluted earnings per share were $1.58b, down 5.4% from $1.67. Adjusted diluted earnings per share, a non-GAAP measure that excludes Certain Items, were $1.76, down 1.1%. Management attributes the pressure to a slow-growth foodservice market, competitive pricing, a shift toward lower-margin corporate-managed customers, and Certain Items such as US Foods merger costs of $90.6 million and a $20 million settlement liability.
Gross margin declined to 17.59%c from 18.01%, while operating expenses rose 4.0%. Business Transformation Project benefits partially offset these pressures. The central investor issue is the pending merger with US Foods.
Sysco agreed to pay approximately $3.7 billiond for US Foods' equity ($3.2 billion in Sysco stock and $500 million in cash) as of August 13, 2014, and to assume or refinance about $4.8 billion of US Foods' net debt, for a total enterprise value of $8.5 billion. The transaction would issue about 87 million shares, roughly 13% of Sysco after closing. The merger is under Federal Trade Commission review, with closing expected in the third quarter or fourth quarter of calendar 2014.
Sysco would owe $300 million to US Foods' owners if the merger were cancelled under certain conditions, including lack of regulatory approval. Sysco has secured a $3.3865 billion bridge term loan. Balance sheet and cash flow remained solid.
Total debt was $2.76 billion at June 28, 2014, with about 74% at fixed rates. Net cash from operating activities was $1.49 billion, free cash flow was $995.4 million, and dividends paid were $667.2 million, or $1.14 per share. Sysco also disclosed risks including a potential $129.0 million letter of credit requirement tied to Canadian tax appeals and a company-sponsored pension obligation of $3.2 billion as of June 28, 2014.
02—Key points
Key Highlights
- Sales rose 4.7% to $46.52 billion, but operating income fell 4.3% to $1.59 billion and net earnings fell 6.1% to $931.5 million.
- Diluted EPS was $1.58, down 5.4% from $1.67; adjusted diluted EPS was $1.76, down 1.1% from $1.78.
- Gross margin declined to 17.59% from 18.01%, reflecting competitive pressure, a slow-growth market and higher sales to lower-margin corporate-managed customers.
- Pending US Foods merger: about $3.7 billion equity value plus assumption or refinancing of roughly $4.8 billion net debt, for an $8.5 billion total enterprise value, with about 87 million new Sysco shares (roughly 13%) issued at closing.
- Merger risks include FTC regulatory review, a $300 million payment to US Foods' owners if the deal is cancelled under certain conditions, and a $300 million termination fee if terminated on antitrust grounds.
- Free cash flow was $995.4 million and operating cash flow was $1.49 billion; dividends paid totaled $667.2 million, or $1.14 per share.
- Total debt was $2.76 billion at June 28, 2014, about 74% fixed-rate, and the company held $413.0 million in cash and cash equivalents.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Sysco kept $0.02.
- Revenue$46.52B100.0%
- Cost of revenue−$38.34B82.4%
- Gross profit$8.18B17.6%
- Operating costs−$6.59B14.2%
- Operating income$1.59B3.4%
- Interest, other & tax−$655.6M1.4%
- Net income$931.5M2.0%
Where FY2014 revenue went
$46.52B- Cost of revenue: $38.34B, 82% of revenue
- Operating costs: $6.59B, 14% of revenue
- Net income: $931.5M, 2.0% of revenue
- Interest, other & tax: $655.6M, 1.4% of revenue
Kept 2.0% as net incomeNet income $931.5M · 2.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed August 26, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $46.52B$44.41B | +4.7% |
| Gross Profit | $8.18B$8.00B | +2.3% |
| Operating Expenses | $6.59B$6.34B | +4.0% |
| Operating Income | $1.59B$1.66B | −4.3% |
| Net Income | $931.53M$992.43M | −6.1% |
| EPS (Basic) | $1.59$1.68 | −5.4% |
| EPS (Diluted) | $1.58$1.67 | −5.4% |
| Shares Outstanding (Basic) | 585.99M589.40M | −0.6% |
| Shares Outstanding (Diluted) | 590.22M592.68M | −0.4% |
05—Questions
Frequently Asked Questions
How did Sysco perform financially in fiscal 2014?
Sales grew 4.7% to $46.52 billion, but operating income fell 4.3% to $1.59 billion and net earnings fell 6.1% to $931.5 million. Diluted EPS was $1.58, down 5.4%. Adjusted diluted EPS, which excludes Certain Items, was $1.76, down 1.1%.
What are the key terms of the proposed US Foods merger?
Sysco agreed to pay about $3.7 billion for US Foods' equity, including $3.2 billion in Sysco common stock and $500 million in cash, and to assume or refinance about $4.8 billion of US Foods' net debt, for a total enterprise value of $8.5 billion as of August 13, 2014. Equity holders of US Foods would own about 87 million shares, roughly 13% of Sysco. The merger is under FTC review and is expected to close in the third quarter or fourth quarter of calendar 2014.
What happens if the US Foods merger is cancelled?
Under certain conditions, including lack of regulatory approval, Sysco would be obligated to pay $300 million to the owners of US Foods. The filing also states that if the agreement is terminated due to a failure to obtain required antitrust approvals, Sysco may owe US Foods a $300 million termination fee.
Why did gross margin and profitability decline?
Gross margin fell to 17.59% from 18.01%, which the company attributed to weak restaurant traffic, increased competition in a slow-growth market, and increased sales to lower-margin corporate-managed customers. Operating expenses rose 4.0%, driven by higher case volumes, acquisitions, depreciation, delivery costs and corporate expenses, partly offset by Business Transformation Project benefits. Certain Items, including $90.6 million of US Foods merger and integration costs, also reduced GAAP operating income.
How strong is Sysco's financial position and cash generation?
Sysco generated $1.49 billion of operating cash flow and $995.4 million of free cash flow in fiscal 2014. Total debt was $2.76 billion, with about 74% at fixed rates. Dividends paid were $667.2 million, and the company held $413.0 million in cash. The company said it is in compliance with all debt covenants and believes its sources of liquidity will be sufficient for the next twelve months.
06—Continue