Sysco 2015 Annual Report Download - page 26
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Please find page 26 of the 2015 Sysco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.SYSCO CORPORATION-Form10-K18
PARTII
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
We have experienced higher operating expenses in scal 2015 as compared to scal 2014, primarily from increased payroll costs and integration planning,
litigation and termination costs in connection with the merger that had been proposed with US Foods. We anticipate a low level of operating expenses
attributable to the merger termination in the rst quarter of scal 2016. Our payroll costs have been in uenced by higher pay in our sales organization as a
result of higher gross pro ts, investment in new administrative support capabilities, higher management incentive accruals due to improved performance
against our incentive targets and companies acquired within the last 12 months. Sales and gross pro t growth partially contributed to an increase in sales
pay-related expenses due to increases in sales commissions and bonuses. In addition, we have increased our marketing associate headcount in certain
markets in order to invest in future sales growth.
In October 2014, we secured long-term nancing for the proposed merger with US Foods; therefore, interest expense increased in scal 2015 as compared
to scal 2014. The October 2014 senior notes contained mandatory redemption features providing that, if the merger agreement were terminated on or
prior to October 8, 2015, we were required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus
accrued interest. In June 2015, we terminated the merger agreement and redeemed the senior notes in July 2015 using cash on hand and the proceeds
from borrowings under our commercial paper facility. In scal 2016, we will recognize several charges from the redemption of these senior notes including
$50.0 million in premium fees, $29 million in unamortized debt issuance costs and $18.0 million in unamortized bond discounts each of which had resulted
from the issuance of the senior notes in October 2014. We had hedged $1.25 billion of this debt by swapping the xed rates to oating rates with the goal
of reducing overall borrowing cost. We terminated these swaps in July 2015 and will recognize a gain of $10.0 million from the fair value adjustment that
had been recorded on the underlying debt. Our interest expense on the notes was treated as a Certain Item in scal 2015, since the proposed merger had
not closed. Similarly, these charges and gain associated with the repayment of these notes will be presented as Certain Items in scal 2016. As discussed
in Note 9, “Derivative Financial Instruments,” two forward starting swap agreements used to hedge interest rate risk exposure on our October 2014 senior
notes issuance were previously terminated and were paid in the amount of $188.8 million. The resulting amounts recorded as a loss are currently amortizing
into interest expense at a rate of $2.5 million per quarter for the next 9 years and $1.1 million per quarter thereafter for another 19 years. These amounts
will continue to amortize into interest expense as the amount hedged is anticipated to remain within our capital structure.
Following the termination of the merger agreement, we announced a $3 billion, two-year share repurchase program. We intend to execute the rst half of
this program through an accelerated repurchase program near the end of rst quarter of scal 2016. We expect to issue $2.0 billion of debt at approximately
the same time and we intend to use a majority of the proceeds to fund these repurchases. These actions will lower our basic and diluted shares outstanding
providing an expected earnings per share bene t of approximately $0.03 to $0.04 per share. This estimate includes a 4% to 5% reduction in average
shares outstanding, partially offset by higher interest expense from the new debt issuance. Because the share repurchase will take place near the end
of the rst quarter of scal 2016, we will not realize a full-year’s bene t from the reduction in shares in scal 2016; however, the full-year bene t will be
realized in scal 2017.
Sysco’s scal year ends on the Saturday nearest to June 30th. We will have a 53-week year ending July 2, 2016 for scal 2016, and this additional week
will be presented as a Certain Item in scal 2016.
Strategy
We are focused on optimizing our core broadline business in the U.S., Bahamas, Canada, Costa Rica, Ireland and Mexico, while continuing to explore
appropriate opportunities to pro tably grow our market share and create shareholder value by expanding beyond our core business. Day-to-day, our
business decisions are driven by our mission to market and deliver great products to our customers with exceptional service, with the aspirational vision
of becoming each of our customers’ most valued and trusted business partner. We have identi ed ve components of our strategy to help us achieve our
mission and vision as follows:
•
Profoundly enrich the experience of doing business with Sysco: Our primary focus is to help our customers succeed. We believe that by building on
our current competitive advantages, we will be able to further differentiate our offering to customers. Our competitive advantages include our sales
force of over 7,300 marketing associates; our diversi ed product base, which includes quality-assured Sysco brand products; the suite of services
we provide to our customers such as business reviews and menu analysis; and our multi-regional presence in the U.S. and Canada. In addition, we
have a portfolio of businesses spanning broadline, chain restaurant distribution, specialty produce, specialty meat, hotel amenities, specialty import
and export which serves our customers’ needs across a wide array of business segments. Through our Sysco Ventures platform, we are developing a
suite of technology solutions that help support the administrative needs of our customers. We believe this strategy of enriching the experience of doing
business with Sysco will increase customer retention and pro tably accelerate sales growth with both existing and new customers.
•
Continuously improve productivity in all areas of our business: We continually strive to improve productivity and reduce costs. From implementing
an integrated software system to leveraging the power of our end-to-end supply chain, we continue to look for ways to improve our service to our
customers and lower costs.
•
Expand our portfolio of products and services by initiating a customer-centric innovation program: We continually explore opportunities to provide new
and improved products, technologies and services to our customers.
•
Explore, assess and pursue new businesses and markets: This strategy is focused on identifying opportunities to expand the core business through
growth in new international markets and in adjacent areas that complement our core foodservice distribution business. As a part of our ongoing strategic
analysis, we regularly evaluate business opportunities, including potential acquisitions, joint ventures and sales of assets and businesses.