Sysco 2015 Annual Report Download - page 29
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Please find page 29 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-K 21
PARTII
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
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 North American Broadline companies by the number of cases sold. Adjusted cost per case is calculated similarly; however, the operating
expense component excludes severance and multiemployer pension withdrawal charges, which are the Certain Items applicable to these companies,
divided by the number of cases sold. Our corporate expenses are not included in the cost per cases metrics because the metric is a measure of ef ciency
in our operations. We seek to grow our sales and either minimize or reduce our costs on a per case basis. Our cost per case and adjusted cost per case
increased $0.04 per case in scal 2015 as compared to scal 2014. The impact of foreign exchange rates lowered our cost per case results by $0.05 per
case for scal 2015 as compared to scal 2014, which partially offset the rate of increase occurring primarily from increased pay-related expenses. We
are focused on driving improvement across our operations with multiple initiatives that implement best practices, enhance our operating training programs
and improve our ability to measure and analyze our performance. More information on the rationale for the use of adjusted operating income and adjusted
cost per case and reconciliations can be found under “Non-GAAP Reconciliations.”
Certain Items within Operating Expenses
Sysco’s operating expenses are impacted by Certain Items, which are expenses that can be dif cult to predict, can be unanticipated or do not represent
core operating expenses. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under
“Non-GAAP Reconciliations.” Our signi cant Certain Items applicable for scal 2015 included costs related to integration planning, litigation costs and
termination costs in connection with the merger that had been proposed with US Foods. Our signi cant Certain Items applicable for scal 2014 related
to costs in connection with the then proposed merger with US Foods, a change in estimate of our self-insurance reserve and a liability for a settlement.
We incurred costs in connection with the proposed merger with US Foods announced in the second quarter of scal 2014 primarily from integration
planning, litigation costs and termination costs. These costs totaled $554.7 million in scal 2015 and $90.6 million in scal 2014.
Our self-insurance program covers portions of workers’ compensation, general and vehicle liability and property insurance costs. The amounts in excess
of the self-insured levels are fully insured by third party insurers. Liabilities associated with these risks are estimated in part by considering historical claims
experience, medical cost trends, demographic factors, severity factors and other actuarial assumptions. In the second quarter of scal 2014, based on the
historical trends of increased costs primarily attributable to our workers’ compensation claims, we increased our estimates of our self-insurance reserve
to a higher point in an estimated range of liability as opposed to our past position at the lower end of the range. This resulted in a charge of $23.8 million
in scal 2014.
During the rst quarter of scal 2014, Sysco was made aware of certain alleged violations of California law relating to its use of remote storage units in the
delivery of products. These are commonly referred to as drop sites. As of June 28, 2014, we recorded a liability for a settlement of $20 million. In July2014,
Sysco agreed to a $19.4 million settlement, which includes a payment of $15.0 million in penalties, $3.3 million to fund four California Department of Public
Health investigator positions for ve years, a $1.0 million donation to food banks across California, and $0.1 million in legal fees. In the rst quarter of
scal 2014, we eliminated the use of drop sites across Sysco. During scal 2014, we introduced mandatory, annual food safety training for all employees
across Sysco. We are implementing additional and improved food safety reporting, monitoring and compliance controls across our operations to ensure
adherence to our policies.
Fiscal 2014 vs. Fiscal 2013
The following table sets forth the change in the components of operating income and adjusted operating income expressed as a percentage increase or
decrease over the prior year:
(Dollars in thousands)
2014 2013 Change in Dollars % Change
Gross pro t $ 8,181,035 $ 7,996,607 $ 184,428 2.3%
Operating expenses 6,593,913 6,338,129 255,784 4.0
OPERATING INCOME $ 1,587,122 $ 1,658,478 $ (71,356) (4.3)%
Gross pro t $ 8,181,035 $ 7,996,607 $ 184,428 2.3%
Adjusted operating expenses (Non-GAAP) 6,444,076 6,243,414 200,662 3.2
ADJUSTED OPERATING INCOME (NON-GAAP) $ 1,736,959 $ 1,753,193 $ (16,234) (0.9)%
The decrease in operating income was impacted by an increase in $55.1 million in operating expenses attributable to Certain Items. Operating income
and adjusted operating income for scal 2014 were lower than scal 2013 primarily from a lower rate of growth in our gross pro t, increased expenses
from higher case volumes, some of which is attributable to our acquired operations, increased depreciation and amortization, increased delivery costs and
higher corporate expenses. These were partially offset by lower Business Transformation Project expenses and bene ts from Business Transformation
Project initiatives. As a percentage of sales, we experienced favorable expense management due in part to bene ts from our Business Transformation
Project initiatives.
Gross pro t dollars increased in scal 2014 as compared to scal 2013 primarily due to increased sales volumes. The rst half of scal 2014 contained
weaker gross pro t growth of 1.2% as compared to the same period in scal 2013. In ation and locally-managed customers case growth was lower in the
rst half of scal 2014. In ation increased as did local-managed customers case growth in the second half of scal 2014. Gross pro ts grew at a greater