Sysco Reports Second Quarter Financial Results, Updates Status of US Foods Merger

HOUSTON, Feb. 2, 2015 (GLOBE NEWSWIRE) -- Sysco Corporation SYY today announced financial results for its 13-week second fiscal quarter ended December 27, 2014. Financial comparisons presented below are compared to the same period in the prior year. Adjusted financial results exclude certain items which, in fiscal 2015, are primarily related to merger and integration expenses. A reconciliation of non-GAAP measures is included below.

Second Quarter Fiscal 2015 Highlights

• Sales increased 7.6% to $12.1 billion;
• Gross profit increased 6.1% to $2.1 billion; gross margin decreased 23 basis points to 17.25%;
• Adjusted operating income increased 3.1% to $396 million;
• Operating income decreased 10.3% to $315 million;
• Adjusted diluted earnings per share (EPS) increased 5.1% to $0.41; and
• Diluted EPS decreased 25.0% to $0.27.

First Half Fiscal 2015 Highlights

• Sales increased 6.9% to $24.5 billion;
• Gross profit increased 6.0% to $4.3 billion; gross margin decreased 14 basis points to 17.42%;
• Adjusted operating income increased 4.7% to $905 million;
• Operating income decreased 5.9% to $781 million;
• Adjusted diluted EPS increased 5.7% to $0.93; and
• Diluted EPS decreased 13.1% to $0.73.

"Our second quarter financial results were generally in-line with our expectations, as we made consistent progress on our business transformation initiatives and did a good job of remaining focused on the needs of our customers. As a result, we generated solid case volume growth of nearly 4% and managed acute inflationary pressures effectively," said Bill DeLaney, Sysco's president and chief executive officer. "We continue to have opportunities to improve our management of operating expenses and have multiple initiatives underway to address this area of our business."

Second Quarter Fiscal 2015 Summary

Sales for the second quarter were $12.1 billion, an increase of 7.6%. Food cost inflation was 6.0%, as measured by the estimated change in Sysco's product costs, driven mainly by inflation in the meat and dairy categories. In addition, sales from acquisitions (within the last 12 months) increased sales by 0.8%, and the impact of changes in foreign exchange rates for the second quarter decreased sales by 0.9%. Case volume for the company's Broadline and SYGMA operations combined grew 3.6% during the quarter including acquisitions, and approximately 3.3% excluding acquisitions.

Gross profit for the second quarter was $2.1 billion, an increase of 6.1%. Gross margin declined 23 basis points to 17.25%.

Adjusted operating expenses for the second quarter increased $108 million, or 6.8%, due to a $115 million increase in payroll expense. Payroll expense increased mainly due to higher incentive accruals, higher pay for our sales organization as a result of higher gross profit, higher delivery costs and acquired operations.

Operating expenses for the second quarter increased $157 million, or 9.7%, primarily due to an increase in payroll expense noted above and a $48 million increase in certain items. Certain items increased primarily due to higher merger and integration planning costs.

Adjusted operating income for the second quarter was $396 million, an increase of $12 million, or 3.1%. Operating income was $315 million, a decrease of $36 million, or 10.3%.

Adjusted interest expense was $25 million, a decrease of $5 million from the same period last year. Interest expense was $77 million, including the impact of $52 million in debt financing costs related to the proposed U.S. Foods merger. 

Adjusted net earnings were $245 million, an increase of $13 million, or 5.5%. Adjusted diluted EPS was $0.41, which was 5.1% higher compared to the same period last year.

Net earnings for the second quarter were $158 million, a decrease of $53 million, or 25.1%, compared to the same period last year. Diluted EPS was $0.27, which was 25.0% lower compared to the same period last year.

First Half Fiscal 2015 Summary

Sales for the first half of fiscal 2015 were $24.5 billion, an increase of 6.9% compared the same period last year. Food cost inflation was 5.4%, as measured by the estimated change in Sysco's product costs, driven mainly by inflation in the meat and dairy categories. In addition, acquisitions (within the last 12 months) contributed 0.7% to sales, and the impact of changes in foreign exchange rates for the first half of the fiscal year decreased sales by 0.7%. Case volume for the company's Broadline and SYGMA operations combined grew 2.9% during the first half including acquisitions, and approximately 2.6% excluding acquisitions.

Gross profit for the first half of fiscal 2015 was $4.3 billion, an increase of 6.0%, compared to the same period last year. Gross margin declined 14 basis points to 17.42%.

Adjusted operating expenses for the first half of the fiscal year increased $203 million, or 6.4%, due to a $180 million increase in payroll expense. Payroll expense increased mainly due to higher incentive accruals, higher pay for our sales organization as a result of higher gross profit, higher delivery costs and acquired operations.

Operating expenses for the first half of the fiscal year increased $292 million, or 9.1%, primarily due to an increase in payroll expense noted above and a $90 million increase in certain items. Certain items increased primarily due to higher merger and integration planning costs.

Adjusted operating income was $905 million, increasing $41 million, or 4.7%. Operating income was $781 million, decreasing $49 million, or 5.9%.

Adjusted interest expense was $52 million, a decrease of $8 million from the same period last year. Interest expense was $108 million, including the impact of $56 million in debt financing costs related to the proposed U.S. Foods merger. 

Adjusted net earnings were $554 million, an increase of $35 million or 6.8% compared to the same period last year. Adjusted diluted EPS was $0.93, which was 5.7% higher compared to the same period last year.

Net earnings for the first half of fiscal 2015 were $437 million, a decrease of $60 million, or 12.0%, compared to the same period last year. Diluted EPS was $0.73, which was 13.1% lower compared to the same period last year. 

Cash Flow and Capital Spending

Cash flow from operations was $452 million for the first half of fiscal 2015, which was $6 million lower compared to the same period last year. Free cash flow was $157 million, which was $55 million lower compared to the same period last year. Both cash flow from operations and free cash flow were negatively impacted during the first half of the year by a $96 million year-over-year increase in the cash impact of certain items, and a $50 million increase in pension contributions.

Capital expenditures, net of proceeds from sales of plant and equipment, totaled $178 million for the second quarter of fiscal 2015, and $296 million for the first half of the fiscal year. The primary areas for investment included replacements to Sysco's fleet, as well as facility replacements and expansions. In addition, capital spending related to merger integration planning was $16 million for the first half of the fiscal year. 

US Foods Merger Update

Sysco today announced a definitive agreement to divest certain assets to Performance Food Group contingent upon the closing of its proposed merger with US Foods. Sysco has worked with the Federal Trade Commission (FTC) over the past 12 months to find a solution to the concerns raised by the FTC, and believes that this divestiture package solves those concerns. At this time, the FTC has not agreed to this solution, so the company will now present its position, including this proposed remedy, to the five FTC commissioners and seek to obtain their approval. Please see a separate release dated February 2, 2015, with information about the divestiture agreement.

Conference Call & Webcast

Sysco's second quarter fiscal 2015 earnings conference call will be held on Monday, February 2, 2015, at 10:00 a.m. Eastern. A live webcast of the call, a copy of this press release and a slide presentation will be available online at www.sysco.com in the Investors section. 

About Sysco

Sysco is the global leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, lodging establishments and other customers who prepare meals away from home. Its family of products also includes equipment and supplies for the foodservice and hospitality industries. The company operates 194 distribution facilities serving approximately 425,000 customers. For Fiscal Year 2014 that ended June 28, 2014, the company generated sales of more than $46 billion. For more information, visit www.sysco.com or connect with Sysco on Facebook at www.facebook.com/SyscoCorporation or Twitter at https://twitter.com/Sysco. For important news regarding Sysco, visit the Investor Relations section of the company's Internet home page at www.sysco.com/investors, follow us at www.twitter.com/SyscoStock and download the new Sysco IR App, available on the iTunes App Store and the Google Play Market. In addition, investors should also continue to review our press releases and filings with the Securities and Exchange Commission. It is possible that the information we disclose through any of these channels of distribution could be deemed to be material information.

Forward-Looking Statements

Statements made in this press release or in our earnings call for the second quarter of fiscal 2015 that look forward in time or that express management's beliefs, expectations or hopes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from current expectations. These statements include our plans and expectations related to and the benefits and expected timing of our business transformation initiatives, expectations and efforts regarding management of operating expenses, our plans and expectations related to and the benefits of the proposed merger with US Foods, and our plans and expectations related to acquisitions. These statements also include expectations regarding our sales growth, operating expense growth and operating performance results, trends in our locally-managed business and overall sales mix, market conditions and trends, growth opportunities, inflation, fuel expense, interest expense, our expense management and cost per case performance, share repurchases, business transformation costs and expenses, investments in technology resources, free cash flow and capital expenditures. The success of our business transformation initiatives and expectations regarding our operating performance are subject to the general risks associated with our business, including the risks of interruption of supplies due to lack of long-term contracts, severe weather, crop conditions, work stoppages, intense competition, technology disruptions, dependence on large regional and national customers, inflation risks, the impact of fuel prices, adverse publicity, and labor issues. Risks and uncertainties also include risks impacting the economy generally, including the risks that the current general economic conditions will deteriorate, or consumer confidence in the economy may not increase and decreases in consumer spending, particularly on food-away-from-home, may not reverse. Market conditions may not improve as anticipated. If sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, our gross margins may continue to decline. Our ability to meet our long-term strategic objectives to grow the profitability of our business depends largely on the success of our Business Transformation Project. There are various risks related to the project, including the risk that the project and its various components 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 the ERP system may be greater or less than currently expected because we have encountered, and may continue to encounter, the need for changes in design or revisions of the project calendar and budget, including the incurrence of expenses at an earlier or later time than currently anticipated; the risk that our business and results of operations may be adversely affected if we experience delays in deployment, operating problems, cost overages or limitations on the extent of the business transformation during the ERP implementation process; and the risk of adverse effects to our business, results of operations and liquidity if the ERP system, and the associated process changes, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Planned deployments in the coming quarters are dependent upon the success of the ERP system and the updates at the current locations. We may experience delays, cost overages or operating problems when we deploy the system to additional locations. Our plans related to and the timing of the implementation of the ERP system, as well as the cost transformation and category management initiatives, are subject to change at any time based on management's subjective evaluation of our overall business needs. We may fail to realize anticipated benefits, particularly expected cost savings, from our cost transformation initiative. If we are unable to realize the anticipated benefits from our cost cutting efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease. We may also fail to realize the full anticipated benefits of our category management initiative, and may be unable to successfully execute the initiative in our anticipated timeline. Capital expenditures may vary from those projected based on changes in business plans and other factors, including risks related to the implementation of our business transformation initiatives and our regional distribution centers, the timing and successful completions of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Periods of high inflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit, operating income and earnings. Expanding into international markets presents unique challenges and risks, including compliance with local laws, regulations and customs and the impact of local political and economic conditions, and such expansion efforts may not be successful. Any business that we acquire may not perform as expected, and we may not realize the anticipated benefits of our acquisitions. The consummation of the merger with US Foods is subject to regulatory approval and the satisfaction of certain conditions, and we cannot predict whether the necessary conditions will be satisfied or waived and the requisite regulatory approvals received. We also may be subject to potential antitrust or similar lawsuits at the federal or state level. Sysco and US Foods may be required to take certain actions to obtain regulatory approval for the merger, including the divestiture of assets, which could negatively impact the projected benefits of the merger. Termination of the merger agreement with US Foods could require Sysco to make a termination payment of $300 million, which could adversely impact Sysco's stock price, liquidity and financial condition. As a result of uncertainties surrounding the proposed merger, prospective suppliers and customers may delay or decline to enter into agreements with us, and we may also lose current suppliers and customers, and fail to retain key employees. The pending merger and our current pre-merger integration planning efforts may divert our management's attention from day-to-day business operations and the execution of our business transformation initiatives, which could result in performance shortfalls. Integration of the businesses of Sysco and US Foods may be more difficult, costly or time consuming than expected, and the merger may not result in any or all of the anticipated benefits, including cost synergies. We may fail to retain some of US Foods' vendors and customers after the proposed merger. In relation to the merger, we have issued additional debt and our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position. For a discussion of additional factors impacting Sysco's business, see the Company's Annual Report on Form 10-K for the year ended June 28, 2014, as filed with the Securities and Exchange Commission, and the Company's subsequent filings with the SEC. Sysco does not undertake to update its forward-looking statements.