10-Q 1 h20047e10vq.txt SYSCO CORPORATION - OCTOBER 2, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-6544 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 Houston, Texas 77077-2099 (Address of principal executive offices) (Zip code) 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [ ] 639,793,373 shares of common stock were outstanding as of October 29, 2004. TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits 24 Signatures 27
1 PART I - FINANCIAL INFORMATION Item 1. Financial Statements SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data)
Oct. 2, 2004 July 3, 2004 Sept. 27, 2003 ------------ ------------ -------------- (unaudited) (unaudited) ASSETS Current assets Cash $ 189,603 $ 199,706 $ 221,544 Accounts and notes receivable, less allowances of $45,245, $34,175 and $46,242 2,247,088 2,189,127 2,123,716 Inventories 1,457,180 1,404,410 1,313,497 Deferred taxes 53,019 --- 53,983 Prepaid expenses 65,891 54,903 63,433 Prepaid income taxes --- 3,265 --- ----------- ----------- ----------- Total current assets 4,012,781 3,851,411 3,776,173 Plant and equipment at cost, less depreciation 2,196,550 2,166,809 1,958,067 Other assets Goodwill and intangibles, less amortization 1,221,978 1,218,700 1,156,358 Restricted cash 169,439 169,326 125,877 Prepaid pension cost 307,549 243,996 --- Other assets 197,509 197,390 197,719 ----------- ----------- ----------- Total other assets 1,896,475 1,829,412 1,479,954 ----------- ----------- ----------- Total assets $ 8,105,806 $ 7,847,632 $ 7,214,194 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 54,129 $ 73,834 $ 87,967 Accounts payable 1,710,066 1,742,578 1,674,898 Accrued expenses 586,605 724,970 628,296 Accrued income taxes 450,763 --- 351,826 Deferred taxes --- 422,419 --- Current maturities of long-term debt 368,780 162,833 21,967 ----------- ----------- ----------- Total current liabilities 3,170,343 3,126,634 2,764,954 Other liabilities Long-term debt 1,082,345 1,231,493 1,195,282 Deferred taxes 836,298 686,705 632,939 Other long-term liabilities 254,914 238,294 296,425 ----------- ----------- ----------- Total other liabilities 2,173,557 2,156,492 2,124,646 Contingencies Shareholders' equity Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none --- --- --- Common stock, par value $1 per share Authorized shares 2,000,000,000 at Oct. 2, 2004 and July 3, 2004, 1,000,000,000 at Sept. 27, 2003; issued 765,174,900 shares 765,175 765,175 765,175 Paid-in capital 354,910 332,041 278,251 Retained earnings 4,102,437 3,959,714 3,511,438 Other comprehensive income (loss) 34,153 17,640 (152,770) ----------- ----------- ----------- 5,256,675 5,074,570 4,402,094 Less cost of treasury stock, 127,086,344, 128,639,869 and 120,395,714 shares 2,494,769 2,510,064 2,077,500 ----------- ----------- ----------- Total shareholders' equity 2,761,906 2,564,506 2,324,594 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 8,105,806 $ 7,847,632 $ 7,214,194 =========== =========== ===========
Note: The July 3, 2004 balance sheet has been derived from the audited financial statements at that date. 2 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share and Per Share Data)
13-Week Period Ended -------------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------- -------------- Sales $ 7,531,925 $ 7,134,281 Costs and expenses Cost of sales 6,094,931 5,753,767 Operating expenses 1,055,412 1,024,336 Interest expense 17,699 18,631 Other, net (1,969) (1,983) ------------- ------------- Total costs and expenses 7,166,073 6,794,751 ------------- ------------- Earnings before income taxes 365,852 339,530 Income taxes 139,938 130,719 ------------- ------------- Net earnings $ 225,914 $ 208,811 ============= ============= Net earnings: Basic earnings per share $ 0.35 $ 0.32 ============= ============= Diluted earnings per share $ 0.35 $ 0.32 ============= ============= Average shares outstanding 638,167,698 645,862,376 ============= ============= Diluted shares outstanding 650,779,334 657,274,982 ============= ============= Dividends declared per common share $ 0.13 $ 0.11 ============= =============
3 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS (Unaudited) (In Thousands)
13-Week Period Ended ---------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Operating activities: Net earnings $ 225,914 $ 208,811 Add non-cash items: Depreciation and amortization 74,065 69,679 Deferred tax provision 147,999 128,924 Provision for losses on receivables 7,498 7,332 Additional investment in certain assets and liabilities, net of effect of businesses acquired: (Increase) in receivables (57,114) (110,285) (Increase) in inventories (47,435) (77,681) (Increase) in prepaid expenses (10,812) (11,056) (Decrease) increase in accounts payable (39,571) 39,307 (Decrease) in accrued expenses, other long-term liabilities and prepaid pension cost, net (163,578) (45,007) (Decrease) in accrued income taxes (17,174) (9,968) Decrease (increase) in other assets 955 (14,016) --------- --------- Net cash provided by operating activities 120,747 186,040 --------- --------- Investing activities: Additions to plant and equipment (99,905) (103,056) Proceeds from sales of plant and equipment 3,496 1,283 Acquisition of businesses, net of cash acquired (52) (31,640) Increase in restricted cash (113) (45,000) --------- --------- Net cash used for investing activities (96,574) (178,413) --------- --------- Financing activities: Bank and commercial paper repayments (19,705) (63,765) Other debt borrowings (repayments) 54,537 (3,150) Common stock reissued from treasury 65,474 55,428 Treasury stock purchases (48,912) (39,764) Dividends paid (83,062) (71,257) --------- --------- Net cash used for financing activities (31,668) (122,508) --------- --------- Effect of exchange rates on cash (2,608) (1,022) --------- --------- Net decrease in cash (10,103) (115,903) Cash at beginning of period 199,706 337,447 --------- --------- Cash at end of period $ 189,603 $ 221,544 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 13,522 $ 12,274 Income taxes 5,423 10,696
4 SYSCO CORPORATION and its Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements have been prepared by the company, without audit, with the exception of the July 3, 2004 consolidated balance sheet which was taken from the audited financial statements included in the company's Fiscal 2004 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. Certain amounts in the prior periods presented have been reclassified to conform to the fiscal 2005 presentation. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's Fiscal 2004 Annual Report on Form 10-K. A review of the financial information herein has been made by Ernst & Young LLP, independent auditors, in accordance with established professional standards and procedures for such a review. A report from Ernst & Young LLP concerning their review is included as Exhibit 15(a). 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
13-Week Period Ended ----------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Numerator: Income available to common shareholders $225,914,000 $208,811,000 ============ ============ Denominator: Weighted-average basic shares outstanding 638,167,698 645,862,376 Dilutive effect of employee and director stock options 12,611,636 11,412,606 ------------ ------------ Weighted-average diluted shares outstanding 650,779,334 657,274,982 ============ ============ Basic earnings per share $ 0.35 $ 0.32 ============ ============ Diluted earnings per share $ 0.35 $ 0.32 ============ ============
5 3. RESTRICTED CASH SYSCO is required by its insurers to collateralize a part of the self-insured portion of its workers' compensation and liability claims. SYSCO has chosen to satisfy these collateral requirements by depositing funds in insurance trusts. In October 2004, subsequent to the end of its first fiscal quarter, SYSCO deposited approximately $16,000,000 in additional funds in a trust to satisfy ongoing collateral requirements. In addition, for certain acquisitions, SYSCO has placed funds into escrow to be disbursed to the sellers in the event that specified operating results are attained or contingencies are resolved. 4. DEBT As of October 2, 2004, SYSCO had uncommitted bank lines of credit which provide for unsecured borrowings for working capital of up to $95,000,000, of which $2,000,000 was outstanding at October 2, 2004. As of October 2, 2004, SYSCO's outstanding borrowings under its commercial paper programs were $102,115,000. During the 13-week period ended October 2, 2004, commercial paper and short-term bank borrowings ranged from approximately $46,327,000 to $253,384,000. Included in current maturities of long-term debt at October 2, 2004 are the 6.5% Senior Notes due June 2005 and the 4.75% Senior Notes due July 2005. It is the company's intention to fund the repayment of these notes at maturity through issuances of commercial paper, senior notes or a combination thereof. 5. ACQUISITIONS During the first quarter of fiscal 2005, the company issued 178,625 shares with a value of $3,414,000 for contingent consideration related to operations acquired in previous fiscal years. Acquisitions of businesses are accounted for using the purchase method of accounting and the financial statements of SYSCO include the results of the acquired companies from the respective dates they joined SYSCO. The purchase price of the acquired operations is allocated to the net assets acquired and liabilities assumed based on the estimated fair value at the dates of acquisition with any excess of cost over the fair value of net assets acquired, including intangibles, recognized as goodwill. The balances included in the Consolidated Balance Sheets related to recent acquisitions are based upon preliminary information and are subject to change when final asset and liability valuations are obtained. Material changes to the preliminary allocations are not anticipated by management. Certain acquisitions involve contingent consideration typically payable only in the event that specified operating results are attained. Aggregate contingent consideration amounts outstanding as of October 2, 2004 included approximately 1,095,000 shares and $61,614,000 in cash, which, if distributed, could result in recording of up to $85,050,000 in additional goodwill. Such amounts typically are to be paid out over periods of up to five years from the date of acquisition. 6 6. DERIVATIVE FINANCIAL INSTRUMENTS As of October 2, 2004, SYSCO had interest rate swaps outstanding with a notional amount of $500,000,000. The fair value of the outstanding swaps was $3,173,000, which is reflected in Other Assets on the Consolidated Balance Sheet, and the carrying amount of the related debt has been increased by the same amount in accordance with the shortcut method provided by Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." 7. INCOME TAXES The changes in the net deferred tax liability and prepaid/accrued income tax balances from July 3, 2004 to October 2, 2004 were primarily due to the reclassification of deferred tax liabilities related to supply chain distributions to accrued income taxes. This reclassification reflects the tax payments to be made during the next twelve months related to previously deferred supply chain distributions. The effective tax rate in fiscal 2005 is 38.25%, a decrease of 0.25% from the effective tax rate of 38.50% in fiscal 2004. The determination of the company's overall effective tax rate requires the use of estimates. The effective tax rate reflects a combination of income earned and taxed in the various U.S. federal and state, as well as Canadian federal and provincial jurisdictions. Jurisdictional tax law changes, increases/decreases in permanent differences between book and tax items, tax credits and the company's change in earnings from these taxing jurisdictions all affect the overall effective tax rate. 8. STOCK BASED COMPENSATION SYSCO accounts for its stock option plans and the employee stock purchase plan using the intrinsic value method of accounting provided under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations under which no compensation expense has been recognized for stock option grants. The following table provides comparative pro forma net earnings and earnings per share had compensation expense for these plans been determined using the fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation," for all periods presented:
13-Week Period Ended ------------------------------------ Oct. 2, 2004 Sept. 27, 2003 --------------- --------------- Net earnings: Reported net earnings $ 225,914,000 $ 208,811,000 Stock based compensation expense, net of taxes (16,401,000) (14,185,000) --------------- --------------- Adjusted net earnings $ 209,513,000 $ 194,626,000 =============== =============== Basic earnings per share: Reported basic earnings per share $ 0.35 $ 0.32 Stock based compensation expense, net of taxes (0.03) (0.02) --------------- --------------- Adjusted basic earnings per share $ 0.32 $ 0.30 =============== =============== Diluted earnings per share: Reported diluted earnings per share $ 0.35 $ 0.32 Stock based compensation expense, net of taxes (0.03) (0.02) --------------- --------------- Adjusted diluted earnings per share $ 0.32 $ 0.30 =============== ===============
7 The weighted average fair value of options granted was $7.10 and $6.73 during the 13 weeks ended October 2, 2004 and September 27, 2003, respectively. The fair value was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for each period presented:
13-Week Period Ended ---------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Dividend yield 1.45% 1.49% Expected volatility 22% 22% Risk-free interest rate 3.4% 3.2% Expected life 5 years 5 years
The weighted average fair value of employee stock purchase rights issued was $5.38 and $4.51 during the 13 weeks ended October 2, 2004 and September 27, 2003, respectively. The fair value of the stock purchase rights was calculated as the difference between the stock price at date of issuance and the employee purchase price. The pro forma presentation includes only options granted after 1995. The pro forma effects for the periods presented are not necessarily indicative of the pro forma effects in future years. 9. COMPREHENSIVE INCOME Comprehensive income is net earnings plus other items that are recorded directly to shareholders' equity. The amounts recorded as other comprehensive income primarily related to foreign currency translation adjustments of $16,513,000 and $(1,138,000) for the 13 weeks ended October 2, 2004 and September 27, 2003, respectively. Comprehensive income was $242,427,000 and $208,422,000 for the 13 weeks ended October 2, 2004 and September 27, 2003, respectively. 10. CONTINGENCIES SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial statements of the company when ultimately concluded. 8 11. BUSINESS SEGMENT INFORMATION The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in SFAS No. 131. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both our traditional and chain restaurant customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to some of our chain restaurant customer locations. "Other" financial information is attributable to the company's other segments, including the company's specialty produce, custom-cut meat, Asian cuisine foodservice and lodging industry products segments. The company's Canadian operations are not significant for geographical disclosure purposes. Intersegment sales represent specialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include allocation of centrally incurred costs for shared services that eliminate upon consolidation. Centrally incurred costs are allocated based upon the relative level of service used by each operating company.
13-Week Period Ended ---------------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Sales (in thousands): Broadline $ 6,095,362 $ 5,827,089 SYGMA 915,780 824,563 Other 598,666 561,460 Intersegment sales (77,883) (78,831) ----------- ----------- Total $ 7,531,925 $ 7,134,281 =========== ===========
13-Week Period Ended ------------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Earnings before income taxes (in thousands): Broadline $ 369,316 $ 339,104 SYGMA 3,763 5,274 Other 17,097 14,976 --------- --------- Total segments 390,176 359,354 Unallocated corporate expenses (24,324) (19,824) --------- --------- Total $ 365,852 $ 339,530 ========= =========
Oct. 2, 2004 July 3, 2004 Sept. 27, 2003 ------------ ------------ -------------- Assets (in thousands): Broadline $4,919,553 $4,792,595 $4,709,015 SYGMA 229,268 240,418 197,155 Other 628,529 588,275 503,578 ---------- ---------- ---------- Total segments 5,777,350 5,621,288 5,409,748 Corporate 2,328,456 2,226,344 1,804,446 ---------- ---------- ---------- Total $8,105,806 $7,847,632 $7,214,194 ========== ========== ==========
9 12. SUPPLEMENTAL GUARANTOR INFORMATION SYSCO International, Co. is an unlimited liability company organized under the laws of the Province of Nova Scotia, Canada and is a wholly-owned subsidiary of SYSCO. In May 2002, SYSCO International, Co. issued, in a private offering, $200,000,000 of 6.10% notes due in 2012. These notes are fully and unconditionally guaranteed by SYSCO. The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the parent guarantor (SYSCO), the subsidiary issuer (SYSCO International) and all other non-guarantor subsidiaries of SYSCO (Other Non-Guarantor Subsidiaries) on a combined basis and eliminating entries.
CONDENSED CONSOLIDATING BALANCE SHEET -- OCTOBER 2, 2004 ----------------------------------------------------------------------------------------- SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS ----------- ------------- ------------------- ------------ ------------ (IN THOUSANDS) Current assets ......... $ 135,485 $ 24 $ 3,877,272 $ -- $ 4,012,781 Investment in subsidiaries ......... 8,964,950 274,868 162,147 (9,401,965) -- Plant and equipment, net 123,734 -- 2,072,816 -- 2,196,550 Other assets ........... 658,552 -- 1,237,923 -- 1,896,475 ----------- ----------- ----------- ----------- ----------- Total assets ........... $ 9,882,721 $ 274,892 $ 7,350,158 $(9,401,965) $ 8,105,806 =========== =========== =========== =========== =========== Current liabilities .... $ 624,856 $ 56,620 $ 2,488,867 $ -- $ 3,170,343 Intercompany payables (receivables) ........ 5,349,593 15,901 (5,365,494) -- -- Long-term debt ......... 831,006 199,512 51,827 -- 1,082,345 Other liabilities ...... 370,246 -- 720,966 -- 1,091,212 Shareholders' equity ... 2,707,020 2,859 9,453,992 (9,401,965) 2,761,906 ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity . $ 9,882,721 $ 274,892 $ 7,350,158 $(9,401,965) $ 8,105,806 =========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING BALANCE SHEET -- JULY 3, 2004 ------------------------------------------------------------------------------------------ SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS ----------- ------------- ------------------- ------------ ------------ (IN THOUSANDS) Current assets .......... $ 119,526 $ 34 $ 3,731,851 $ -- $ 3,851,411 Investment in subsidiaries .......... 8,678,729 260,501 173,986 (9,113,216) -- Plant and equipment, net 114,385 -- 2,052,424 -- 2,166,809 Other assets ............ 594,811 -- 1,234,601 -- 1,829,412 ----------- ----------- ----------- ----------- ----------- Total assets ............ $ 9,507,451 $ 260,535 $ 7,192,862 $(9,113,216) $ 7,847,632 =========== =========== =========== =========== =========== Current liabilities ..... $ 374,144 $ 74,948 $ 2,677,542 $ -- $ 3,126,634 Intercompany payables (receivables) ......... 5,298,927 (14,924) (5,284,003) -- -- Long-term debt .......... 981,476 199,496 50,521 -- 1,231,493 Other liabilities ....... 326,771 -- 598,228 -- 924,999 Shareholders' equity .... 2,526,133 1,015 9,150,574 (9,113,216) 2,564,506 ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity .. $ 9,507,451 $ 260,535 $ 7,192,862 $(9,113,216) $ 7,847,632 =========== =========== =========== =========== ===========
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CONDENSED CONSOLIDATING BALANCE SHEET -- SEPTEMBER 27, 2003 ------------------------------------------------------------------------------------------ SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS ----------- ------------- ------------------- ------------ ------------ (IN THOUSANDS) Current assets .......... $ 163,852 $ 24 $ 3,612,297 $ -- $ 3,776,173 Investment in subsidiaries .......... 7,813,065 248,713 173,071 (8,234,849) -- Plant and equipment, net 90,797 -- 1,867,270 -- 1,958,067 Other assets ............ 306,834 2,064 1,171,056 -- 1,479,954 ----------- ----------- ----------- ----------- ----------- Total assets ............ $ 8,374,548 $ 250,801 $ 6,823,694 $(8,234,849) $ 7,214,194 =========== =========== =========== =========== =========== Current liabilities ..... $ 123,166 $ 99,243 $ 2,542,545 $ -- $ 2,764,954 Intercompany payables (receivables) ......... 4,794,622 (49,903) (4,744,719) -- -- Long-term debt .......... 938,168 199,447 57,667 -- 1,195,282 Other liabilities ....... 225,597 -- 703,767 -- 929,364 Shareholders' equity .... 2,292,995 2,014 8,264,434 (8,234,849) 2,324,594 ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity .. $ 8,374,548 $ 250,801 $ 6,823,694 $(8,234,849) $ 7,214,194 =========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS FOR THE 13-WEEK PERIOD ENDED OCTOBER 2, 2004 ------------------------------------------------------------------------------------------- SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS ----------- ------------- ------------------- ------------ ------------ (IN THOUSANDS) Sales ................... $ -- $ -- $ 7,531,925 $ -- $ 7,531,925 Cost of sales ........... -- -- 6,094,931 -- 6,094,931 Operating expenses ...... 23,709 29 1,031,674 -- 1,055,412 Interest expense (income) 74,126 3,064 (59,491) -- 17,699 Other, net .............. (165) -- (1,804) -- (1,969) ----------- ----------- ----------- ----------- ----------- Total costs and expenses 97,670 3,093 7,065,310 -- 7,166,073 ----------- ----------- ----------- ----------- ----------- Earnings (losses) before income taxes ............ (97,670) (3,093) 466,615 -- 365,852 Income tax (benefit) provision................ (37,359) (1,183) 178,480 -- 139,938 Equity in earnings of Subsidiaries .......... 286,225 2,528 -- (288,753) -- ----------- ----------- ----------- ----------- ----------- Net earnings ............ $ 225,914 $ 618 $ 288,135 $ (288,753) $ 225,914 =========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS FOR THE 13-WEEK PERIOD ENDED SEPTEMBER 27, 2003 ------------------------------------------------------------------------------------------- SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS ----------- ------------- ------------------- ------------ ------------ (IN THOUSANDS) Sales ................... $ -- $ -- $ 7,134,281 $ -- $ 7,134,281 Cost of sales ........... -- -- 5,753,767 -- 5,753,767 Operating expenses ...... 37,555 36 986,745 -- 1,024,336 Interest expense (income) 61,055 3,710 (46,134) -- 18,631 Other, net .............. (283) -- (1,700) -- (1,983) ----------- ----------- ----------- ----------- ----------- Total costs and expenses 98,327 3,746 6,692,678 -- 6,794,751 ----------- ----------- ----------- ----------- ----------- Earnings (losses) before income taxes ............ (98,327) (3,746) 441,603 -- 339,530 Income tax (benefit) provision ............... (37,856) (1,442) 170,017 -- 130,719 Equity in earnings of Subsidiaries .......... 269,282 2,826 -- (272,108) -- ----------- ----------- ----------- ----------- ----------- Net earnings ............ $ 208,811 $ 522 $ 271,586 $ (272,108) $ 208,811 =========== =========== =========== =========== ===========
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CONDENSED CONSOLIDATING CASH FLOWS FOR THE 13-WEEK PERIOD ENDED OCTOBER 2, 2004 ---------------------------------------------------------------- SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES TOTALS --------- ------------- ------------------- ------------ (IN THOUSANDS) Net cash provided by (used for): Operating activities ............... $ (40,539) $ 1,477 $ 159,809 $ 120,747 Investing activities ............... (14,365) -- (82,209) (96,574) Financing activities ............... (10,790) (21,689) 811 (31,668) Effect of exchange rate on cash..... -- -- (2,608) (2,608) Intercompany activity .............. 54,084 20,212 (74,296) -- --------- --------- --------- --------- Net (decrease) increase in cash.... (11,610) -- 1,507 (10,103) Cash at the beginning of the period ........................... 87,507 -- 112,199 199,706 --------- --------- --------- --------- Cash at the end of the period ........................... $ 75,897 $ -- $ 113,706 $ 189,603 ========= ========= ========= =========
CONDENSED CONSOLIDATING CASH FLOWS FOR THE 13-WEEK PERIOD ENDED SEPTEMBER 27, 2003 ----------------------------------------------------------------- SYSCO OTHER NON-GUARANTOR CONSOLIDATED SYSCO INTERNATIONAL SUBSIDIARIES TOTALS --------- ------------- ------------------- ------------ (IN THOUSANDS) Net cash provided by (used for): Operating activities ........... $ (31,972) $ 41,303 $ 176,709 $ 186,040 Investing activities ........... (55,250) -- (123,163) (178,413) Financing activities ........... (108,295) (13,839) (374) (122,508) Effect of exchange rate on cash ......................... -- -- (1,022) (1,022) Intercompany activity .......... 114,228 (39,269) (74,959) -- --------- --------- --------- --------- Net (decrease) in cash ......... (81,289) (11,805) (22,809) (115,903) Cash at the beginning of the period ....................... 206,043 514 130,890 337,447 --------- --------- --------- --------- Cash at the end of the period ....................... $ 124,754 $ (11,291) $ 108,081 $ 221,544 ========= ========= ========= =========
13. EMPLOYEE BENEFIT PLANS The components of net benefit cost for the 13-week periods presented are as follows:
Pension Benefits Other Postretirement Plans -------------------------------- ------------------------------- Oct. 2, 2004 Sept. 27, 2003 Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- ------------ -------------- Service cost $ 20,322,000 $ 18,733,000 $ 120,000 $ 105,000 Interest cost 18,456,000 15,291,000 122,000 101,000 Expected return on plan assets (20,653,000) (15,287,000) -- -- Amortization of prior service cost 440,000 328,000 50,000 50,000 Recognized net actuarial loss (gain) 8,151,000 9,424,000 -- (10,000) Amortization of net transition obligation -- 69,000 39,000 39,000 ------------ ------------ ------------ ------------ Net periodic benefit cost $ 26,716,000 $ 28,558,000 $ 331,000 $ 285,000 ============ ============ ============ ============
SYSCO's contributions to its defined benefit plans were $81,485,000 and $41,293,000 during the 13-week periods ended October 2, 2004 and September 27, 2003, respectively. 12 14. MANAGEMENT INCENTIVE COMPENSATION In September 2004, SYSCO adopted the 2004 Long-Term Incentive Cash Plan (the Cash Plan) under which key employees have the opportunity to earn cash incentive payments based on a performance period of at least three years. In September 2004, performance units were awarded under the Cash Plan which could result in a maximum aggregate payout after the three-year performance period which includes fiscal years 2005 through 2007 of $23,454,000. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with our financial statements as of July 3, 2004, 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 3, 2004. HIGHLIGHTS The company faced a number of challenges in the first quarter of fiscal 2005, including hurricanes and the related severe weather and rising fuel costs. Sales increased 5.6% in the first quarter of fiscal 2005 over the comparable prior year period. Gross margins as a percent of sales for the first quarter of fiscal 2005 decreased from the comparable prior year period due to the impact of product cost increases and changes in customer mix and segment mix. Operating expenses as a percent of sales for the first quarter of fiscal 2005 decreased from the comparable prior year period due to operating efficiencies and operating costs increasing at lower rates than the sales price increases driven by product cost increases. Primarily as a result of these factors, net earnings increased 8.2% in the first quarter of fiscal 2005 over the comparable prior year period. Management believes that prolonged periods of rising product costs together with general economic conditions, including increased fuel costs, contributed to the softness in the foodservice market and thus a slowing of SYSCO's sales growth beginning in the latter half of the fourth quarter of fiscal 2004 and continuing in fiscal 2005. The company continues to focus on customer account penetration and expense controls, including managing labor costs, productivity and ongoing benchmarking and sharing of best practices at the operating companies. OVERVIEW SYSCO distributes food and food related products to the foodservice industry including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. SYSCO's operations are located throughout the United States and Canada and include broadline companies, specialty produce companies, custom-cut meat operations, Asian cuisine foodservice, hotel supply operations, SYGMA, the company's chain restaurant distribution subsidiary, and a company that distributes to internationally-located chain restaurants. The company estimates that it serves more than 14% of an approximately $207 billion annual foodservice market that includes the North American foodservice, non-food and hotel amenity, furniture and textile markets. The foodservice, or food-prepared-away-from-home, market represents approximately one-half of the total food purchases made at the consumer level. This share has grown from about 37% in 1972, since food purchases in the foodservice industry have grown more rapidly than food purchases in the retail grocery industry over most of that time period. Factors influencing this trend, and therefore SYSCO's growth, include increases in dual-worker and single-parent families; busier lifestyles; the general aging of the population; growing affluence; and the increasing demand for the variety, convenience and entertainment afforded by the proliferation of restaurants and other foodservice operations. Industry statisticians and demographers expect most of these general trends to continue, although they may not continue at the same pace. 14 General economic conditions and consumer confidence can affect the frequency and amount spent by consumers for food prepared away from home and in turn can impact SYSCO's sales. However, we have consistently grown at a faster rate than the overall industry and have grown our market share in this fragmented industry. The company intends to continue to expand its market share and grow earnings through strategies which include: - Profitable sales growth: In addition to expansion through foldouts (new operating companies created in established markets previously served by other SYSCO operating companies) and a disciplined acquisition program, refining the use of customer purchasing potential and profitability data in targeting new customers, deepening relationships with existing customers, tailoring products and services and allocating associated resources by customer, and managing the profitability of, or exiting, low profit or unprofitable customers. - Brand management: Leveraging brand strength to grow sales and profitability while ensuring strict quality control processes and providing greater value to customers. - Productivity: Deploying the latest technology and implementing best business practices to improve operating efficiencies and leverage expenses to sales growth. - Sales force effectiveness: Targeted recruiting, training and compensation of marketing associates. Expanding the business development and business review functions to further strengthen our customer relationships. - Supply chain optimization: Creating a more efficient and effective supply chain infrastructure through the National Supply Chain project. The company's National Supply Chain project is intended to optimize the supply chain activities for products from SYSCO's operating companies in each respective region and as a result, lower inventory and operating costs, working capital requirements and future facility expansion needs at SYSCO's operating companies while providing greater value to our suppliers and customers. The company expects to build from seven to nine regional distribution centers over a period of ten years. The first of which, the Northeast Redistribution Center located in Front Royal, Virginia, is expected to be operational in February 2005. The company expects to begin construction of its second regional redistribution facility, to be located in the Southeast, in the next six months. Management estimates that additional expenses related to the Northeast Redistribution Center over what was incurred in fiscal 2004 will have a negative impact of $0.04 to $0.05 on earnings per share during fiscal 2005. In fiscal 2006, the incremental benefits of the project are expected to offset any further incremental costs, and management estimates that there could be a slight, perhaps a one-half cent, contribution to earnings per share in fiscal 2006. 15 RESULTS OF OPERATIONS The following table sets forth the components of the Results of Operations expressed as a percentage of sales for the periods indicated:
13-Week Period Ended ---------------------------- Oct. 2, 2004 Sept. 27, 2003 ------------ -------------- Sales 100.0% 100.0% Costs and Expenses Cost of sales 80.9 80.6 Operating expenses 14.0 14.4 Interest expense 0.2 0.3 Other, net 0.0 0.0 ----- ----- Total costs and expenses 95.1 95.3 ----- ----- Earnings before income taxes 4.9 4.7 Income taxes 1.9 1.8 ----- ----- Net earnings 3.0% 2.9% ===== =====
The following table sets forth the change in the components of the Results of Operations expressed as a percentage increase or decrease over the comparable period in the prior year:
13-Week Period -------------- Sales 5.6% Costs and Expenses Cost of sales 5.9 Operating expenses 3.0 Interest expense (5.0) Other, net (0.7) ---- Total costs and expenses 5.5 ---- Earnings before income taxes 7.8 Income taxes 7.1 ---- Net earnings 8.2% ==== Basic earnings per share 9.4% Diluted earnings per share 9.4 Average shares outstanding (1.2) Diluted shares outstanding (1.0)
16 SALES Sales increased 5.6% in the first quarter of fiscal 2005 over the comparable period of the prior year. Acquisitions contributed 0.5% to the overall sales growth rate for the first quarter of fiscal 2005. Estimated product cost increases, an internal measure of inflation, were 5.9% during the first quarter of fiscal 2005. SYSCO generally expects to pass product cost increases to its customers; however, the actual amount of inflation reflected as increases in sales price is difficult to quantify. Management believes that prolonged periods of rising product costs together with general economic conditions, including increased fuel costs, contributed to the softness in the foodservice market and thus a slowing of SYSCO's sales growth beginning in the latter half of the fourth quarter of fiscal 2004 and continuing in fiscal 2005. Additionally, the company continues its focus on profitable sales growth. One part of this strategy involves being more selective with respect to which customers we serve, including managing the profitability of, or exiting, unprofitable customers and refining the use of customer purchasing potential and profitability data in targeting new customers. The company reduced sales to unprofitable customers an estimated one-half of one percent of sales in the first quarter of fiscal 2005 over the comparable prior year period. COST OF SALES Cost of sales as a percentage of sales was 80.9% for the first quarter of fiscal 2005, as compared to 80.6% for the comparable period in the prior year. This 0.3% decline in gross margins as a percent of sales represents an improvement from the 0.5% decline experienced in the fourth quarter of fiscal 2004 over the comparable prior year period. Management believes that the decline in gross margins as a percentage of sales in the first quarter of fiscal 2005, as compared to the first quarter of fiscal 2004, was caused by several factors, including product cost increases and changes in customer mix and segment mix; however, the specific impact of each factor is difficult to quantify. Product cost increases in substantially all product categories also had the impact of reducing gross margins as a percentage of sales, as gross profit dollars are earned on a higher sales dollar base. Dairy, meat and poultry products, which are especially affected by product cost increases since they are often sold on a cost-per-pound plus a fee basis rather than a percentage markup, experienced the highest rates of inflation. The result was a higher sales price but a lower gross margin as a percentage of sales even as gross margin dollars were maintained or even increased. Multi-unit customer sales in the Broadline segment, which traditionally yield lower gross margins and lower expenses than marketing associate-served customer sales, grew faster than sales to marketing associate-served customer sales. Sales at the SYGMA segment, which traditionally have lower margins than Broadline segment sales, grew faster than sales at the Broadline segment. OPERATING EXPENSES Operating expenses were 14.0% of sales for the first quarter of fiscal 2005, as compared to 14.4% for the comparable period in the prior year. The decrease in operating expenses as a percentage of sales was primarily attributable to improved operating efficiencies as demonstrated by improving trends in key expense metrics, including number of stops, total miles driven, pieces sold per delivery, product line items sold per delivery, pieces per trip and pieces per error. Increases in product costs and the resulting increased average sales price per item also favorably impacted expenses as a percentage of sales as operating costs increased at a lower rate. Operating expenses were negatively impacted by the recognition of $86,000 in expense in the first quarter of fiscal 2005 to adjust the carrying value of life insurance assets to their cash surrender value as compared to the recognition of $4,566,000 in income in the first quarter of fiscal 2004. Operating expenses were also negatively impacted by increased costs to deliver product to customers due to increased fuel costs of approximately $5,000,000 in the first quarter of fiscal 2005 over the first quarter of fiscal 2004. The impact of increasing fuel costs 17 was partially offset by a reduction in total miles driven. In addition, operating expenses related to the National Supply Chain project were $6,513,000 in the first quarter of fiscal 2005, as compared to $8,165,000 in the first quarter of fiscal 2004. The company's focus on managing labor costs, including instituting a temporary hiring freeze, allowing attrition to naturally reduce the level of associates and selectively eliminating certain positions has resulted in a reduction of the number of associates by approximately 1,500 from July 3, 2004 to October 2, 2004. The impact on expenses for the first quarter of fiscal 2005 related to the reduction in the number of associates was not material. EARNINGS BEFORE TAXES AND NET EARNINGS Earnings before income taxes increased 7.8% and net earnings increased 8.2% in the first quarter of fiscal 2005 over the comparable period of the prior year. These increases were due primarily to the factors discussed above. EARNINGS PER SHARE Basic earnings per share and diluted earnings per share increased 9.4% in the first quarter of fiscal 2005 over the comparable period of the prior year. These increases were due primarily to the result of factors discussed above, as well as a net reduction of shares outstanding primarily due to share repurchases. SEGMENT RESULTS The following table sets forth the change in the selected financial data of each of the company's reportable segments expressed as a percentage increase over the comparable period in the prior year and should be read in conjunction with Business Segment Information (Footnote No. 11) in the Notes to Consolidated Financial Statements:
13-Week Period ---------------------- Earnings Sales before taxes ----- ------------ Broadline 4.6% 8.9% SYGMA 11.1 (28.6) Other 6.6 14.2
The following table sets forth sales and earnings before income taxes of each of the company's reportable segments expressed as a percentage of the respective consolidated total and should be read in conjunction with Business Segment Information (Footnote No. 11) in the Notes to Consolidated Financial Statements:
13-Week Period Ended ----------------------------------------------- October 2, 2004 September 27, 2003 ---------------------- --------------------- Earnings Earnings Sales before taxes Sales before taxes ----- ------------ ----- ------------ Broadline 80.9% 100.9% 81.7% 99.9% SYGMA 12.2 1.0 11.5 1.5 Other 7.9 4.7 7.9 4.4 Intersegment sales (1.0) -- (1.1) -- Unallocated corporate expenses -- (6.6) -- (5.8) ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
18 BROADLINE SEGMENT The Broadline segment sales increased 4.6% in the first quarter of fiscal 2005 as compared to the comparable period of the prior year. Acquisitions did not have a material impact on sales growth for the first quarter of fiscal 2005. The sales increases were primarily due to increased sales to marketing associate-served customers and multi-unit customers, including increased sales of SYSCO Brand products and price increases primarily resulting from higher product costs. Marketing associate-served sales as a percentage of broadline sales in the U.S. decreased to 54.5% for the first quarter of fiscal 2005 as compared to 54.9% for the comparable prior year period. This decrease was due to the increase in sales to multi-unit customers exceeding the increase in sales to marketing associate-served customers. SYSCO Brand sales as a percentage of broadline sales in the U.S. increased to 49.6% for the first quarter of fiscal 2005 as compared to 49.1% for the comparable prior year period. Earnings before income taxes for the Broadline segment increased 8.9% in the first quarter of fiscal 2005 over the comparable prior year period. The increase in earnings before income taxes was primarily due to increases in sales and increased operating efficiencies resulting in lower expenses as a percentage of sales. SYGMA SEGMENT SYGMA segment sales increased 11.1% in the first quarter of fiscal 2005 over the comparable prior year period. Acquisitions contributed 2.7% to the overall sales growth rate for the first quarter of fiscal 2005. The remaining increase was due primarily to sales to new customers, sales growth in SYGMA's existing customer base related to new locations added by those customers, as well as increases in sales to existing locations, and price increases resulting primarily from higher product costs. Earnings before income taxes for the SYGMA segment decreased 28.6% in the first quarter of fiscal 2005 over the comparable prior year period. The decrease was due primarily to the factors discussed below. During the third and fourth quarters of fiscal 2004 and the first quarter of fiscal 2005, SYGMA discontinued servicing a portion of its largest customer's locations due to that customer's geographic supply chain realignment. SYGMA expects to offset these lost sales by obtaining sales from additional locations from this customer and obtaining new business from other customers. In many cases, this new business is being served out of different SYGMA locations than those that originally served the discontinued business. As a result, during fiscal 2004 through the first quarter of fiscal 2005, SYGMA incurred additional expenses, including severance payments and equipment moving costs, as it transitioned its operations to serve these new customers. In addition, the new business acquired is at lower gross margins than SYGMA's overall gross margins. Any net lost sales and the related additional expenses are not expected to be material to SYSCO overall. OTHER SEGMENTS Other segments sales increased 6.6% in the first quarter of fiscal 2005 over the comparable prior year period. Acquisitions contributed 2.6% to the overall sales growth rate for the first quarter of fiscal 2005. The remaining increase was due to increased sales to the existing customer base, sales to new customers and price increases primarily resulting from higher product costs. Earnings before income taxes for the Other segments increased 14.2% in the first quarter of fiscal 2005 over the comparable prior year period. The increase was primarily due to increases in sales, acquisitions and increased gross margins as a percentage of sales. 19 LIQUIDITY AND CAPITAL RESOURCES The company generated $120,747,000 in net cash from operations for the first quarter of fiscal 2005, compared with $186,040,000 for the comparable period in fiscal 2004. Cash flow from operations for the first quarter of fiscal 2005 was negatively impacted by the decrease in accrued expenses, other long-term liabilities and prepaid pension cost of $163,578,000 for the first quarter of fiscal 2005. This decrease was primarily due to three factors. First, the company contributed $81,485,000 to its pension plans during the first quarter of fiscal 2005, as compared to $41,293,000 during the first quarter of fiscal 2004. SYSCO does not expect to make significant additional contributions during the remainder of fiscal 2005. Total contributions in fiscal 2004 were $165,512,000. Second, the company made its annual matching contribution of $28,106,000 to its 401(k) plan during the first quarter of fiscal 2005 whereas it made its fiscal 2004 annual matching contribution of $27,390,000 in the second quarter of fiscal 2004. Finally, accrued amounts related to bonus and incentive payments to employees decreased approximately $120,000,000 during the first quarter of fiscal 2005 as compared to a decrease of approximately $95,000,000 during the first quarter of fiscal 2004. Annual incentive based bonuses for each fiscal year are generally paid in the first quarter of the following fiscal year. In addition, cash flow from operations in the first quarter of fiscal 2005 was negatively impacted by increases in accounts receivable balances of $57,114,000 and inventory balances of $47,435,000 and decreases in accounts payable balances of $39,571,000. The increase in accounts receivable balances was primarily in the area of multi-unit customer receivables. Due to normal seasonal patterns and sales growth in this customer category, sales to multi-unit customers represented a larger percentage of total SYSCO sales in September 2004 as compared to June 2004. Payment terms for multi-unit customers are traditionally longer than the overall SYSCO average. Inventory balances are impacted by many factors including current and anticipated sales volumes and changes in product mix, and purchases in anticipation of product availability and product cost increases. Accounts payable balances were impacted by many factors including changes in product mix and changes in payment terms with vendors due to conversion to more efficient electronic payment methods and to cash discount terms. Total capital expenditures in fiscal 2005 are expected to be in the range of $400,000,000 to $450,000,000, which is a reduction of the previously announced range of $475,000,000 to $500,000,000. The revision of the estimate primarily results from fleet utilization efficiencies achieved at the operating companies, as well as the projected timing of facility expansions. Projected capital expenditures include the continuation of the fold-out program; facility, fleet and other equipment replacements and expansions; the company's National Supply Chain project; and investments in technology. Expenditures in the first quarter of fiscal 2005 related to the company's National Supply Chain project totaled $19,749,000 of which $13,236,000 was capitalized. Total expenditures on the project since inception are $235,749,000, of which $165,490,000 have been capitalized. The Northeast Redistribution Center is expected to be operational in February 2005. During the first quarter of fiscal 2005, a total of 1,480,200 shares were purchased at a cost of $48,912,000 as compared to 1,214,800 shares at a cost of $39,764,000 for the comparable period in fiscal 2004. There were no additional shares purchased through October 29, 2004, resulting in 11,128,700 shares remaining available for repurchase as authorized by the Board. 20 Dividends paid in the first quarter of fiscal 2005 were $83,062,000, or $0.13 per share, as compared to $71,257,000, or $0.11 per share, in the comparable period of fiscal 2004. In September 2004, SYSCO declared its regular quarterly dividend for the second quarter of fiscal 2005, at $0.13 per share, which was paid in October 2004. As of October 2, 2004, SYSCO had uncommitted bank lines of credit, which provide for unsecured borrowings for working capital of up to $95,000,000, of which $2,000,000 was outstanding at October 2, 2004. Such borrowings were $9,500,000 as of October 29, 2004. As of October 2, 2004, SYSCO's borrowings under its commercial paper programs were $102,115,000. Such borrowings were $201,150,000 as of October 29, 2004. During the 13-week period ended October 2, 2004, commercial paper and short-term bank borrowings ranged from approximately $46,327,000 to $253,384,000. Included in current maturities of long-term debt are the 6.5% Senior Notes due June 2005 and the 4.75% Senior Notes due July 2005. It is the company's intention to fund the repayment of these notes at maturity through issuances of commercial paper, senior notes or a combination thereof. The long-term debt to capitalization ratio was 34.4% at October 2, 2004. For purposes of calculating this ratio, long-term debt includes both the current maturities and long-term portions. Cash provided by operating activities, as supplemented by commercial paper and other bank borrowings, may, at the discretion of management, be applied towards investments in facilities, fleet and other equipment; cash dividends; acquisitions fitting within the company's overall growth strategy; and the share repurchase program. Management believes that the company's cash flows from operations, as well as the availability of additional capital under its existing commercial paper programs, bank lines of credit, debt shelf registration and its ability to access capital from financial markets in the future, will be sufficient to meet its cash requirements while maintaining proper liquidity for normal operating purposes. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most important to the portrayal of the company's financial position and results of operations. These policies require management's most subjective judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. SYSCO's most critical accounting policies pertain to the allowance for doubtful accounts, self-insurance programs, pension plans and accounting for business combinations, and are described in Item 7 of the company's Annual Report on Form 10-K for the year ended July 3, 2004. There were no changes in critical accounting policies during the first quarter of fiscal 2005. FORWARD-LOOKING STATEMENTS Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements regarding potential future repurchases under the share repurchase program; market risks; industry growth; the impact of ongoing legal proceedings; the timing, expected cost savings and other benefits, including the expected impact on earnings per share of the National Supply Chain project, including the Northeast Redistribution Center; anticipated capital expenditures; the ability to increase market share and grow earnings; sales growth; growth strategies; the impact of discontinued business at the SYGMA segment and SYGMA's ability to offset such impact with additional 21 business; SYSCO's ability to refinance current maturities of long-term debt; and SYSCO's ability to meet its cash requirements while maintaining proper liquidity. These statements involve risks and uncertainties and are based on management's current expectations and estimates; actual results may differ materially. Those risks and uncertainties that could impact these statements include the risks relating to the foodservice distribution industry's relatively low profit margins and sensitivity to general economic conditions, including the current economic environment; changing customer needs; SYSCO's leverage and debt risks; the successful completion of acquisitions and integration of acquired companies; the effect of competition on SYSCO and its customers; the ultimate outcome of litigation; potential impact of product liability claims; the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise; labor issues; construction schedules; management's allocation of capital and the timing of capital purchases; risks relating to the successful completion and operation of the national supply chain project including the Northeast Redistribution Center; and internal factors such as the ability to increase efficiencies, control expenses and successfully execute growth strategies. In addition, share repurchases could be affected by market prices for the company's securities as well as management's decision to utilize its capital for other purposes. The effect of market risks could be impacted by future borrowing levels and economic factors such as interest rates. For a more detailed discussion of these and other factors that could cause actual results to differ from those contained in the forward-looking statements, see the company's Annual Report on Form 10-K for the fiscal year ended July 3, 2004. 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk SYSCO does not utilize financial instruments for trading purposes. SYSCO's use of debt directly exposes the company to interest rate risk. Floating rate debt, where the interest rate fluctuates periodically, exposes the company to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the company to changes in market interest rates reflected in the fair value of the debt and to the risk the company may need to refinance maturing debt with new debt at a higher rate. SYSCO manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that goal. The major risks from interest rate derivatives include changes in interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties in such transactions. At October 2, 2004, the company had outstanding $102,115,000 of commercial paper at variable rates of interest with maturities through January 12, 2005. The company's long-term debt obligations of $1,451,125,000 were primarily at fixed rates of interest. In addition, the company has interest rate swap agreements outstanding totaling $500,000,000 in notional amount whereby the company receives interest payments at fixed rates of interest and pays interest at variable rates. Item 4. Controls and Procedures As of October 2, 2004, an evaluation was performed under the supervision and with the participation of the company's management, including the CEO and CFO, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based on that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of October 2, 2004 in providing reasonable assurances that material information required to be disclosed is included on a timely basis in the reports it files with the Securities and Exchange Commission. Furthermore, the company's management noted that no changes occurred during the first quarter of fiscal 2005 that materially affected, or would be reasonably likely to materially affect, the company's internal controls over financial reporting. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial statements of the company when ultimately concluded. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds SYSCO made the following share repurchases during the first quarter of fiscal 2005: ISSUER PURCHASES OF EQUITY SECURITIES
(c) TOTAL NUMBER OF SHARES (d) MAXIMUM NUMBER PURCHASED AS PART OF SHARES THAT MAY (b) AVERAGE OF PUBLICLY YET BE PURCHASED (a) TOTAL NUMBER PRICE PAID ANNOUNCED PLANS OR UNDER THE PLANS OR PERIOD OF SHARES PURCHASED PER SHARE PROGRAMS PROGRAMS --------------------- ------------------- ----------- ------------------- ------------------- Month #1 July 4 - July 31 445,345 $35.22 430,000 12,178,900 Month #2 August 1 - August 28 417,630 31.84 400,000 11,778,900 Month #3 August 29 - October 2 655,450 32.36 650,200 11,128,700 --------- ----- --------- ---------- Total 1,518,425 33.06 1,480,200 11,128,700 --------- ----- --------- ----------
In the above table, the total number of shares purchased includes shares purchased as part of a publicly announced share repurchase program, as well as shares tendered by individuals in connection with stock option exercises. On September 12, 2003, the company announced that the Board of Directors approved the repurchase of 20,000,000 shares. In July 2004, the Board of Directors authorized the company to enter into agreements from time to time to extend its ongoing repurchase program to include repurchases during company announced "blackout periods" of such securities in compliance with Rule 10b5-1 promulgated under the Exchange Act. The company has not yet entered into such an agreement. In September 2004, a total of 26,036 Dividend Access Shares, convertible on a one-for-one basis into SYSCO shares, were released to the former owners of HRI Supply, Ltd. ("HRI") pursuant to the terms of an escrow agreement executed in connection with SYSCO's acquisition of HRI in May 2001. In September 2004, a total of 128,062 shares of Common Stock were issued to the former shareholders of Newport Meat Company ("Newport") pursuant to the terms of an escrow agreement executed in connection with SYSCO's acquisition of Newport in July 1999. All of the above issuances were made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. 24 Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits (a) Exhibits. 3(a) 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(b) Bylaws, as amended and restated February 8, 2002, incorporated by reference to Exhibit 3(b) to Form 10-Q for the quarter ended December 29, 2001 (File No. 1-6544). 3(c) 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(d) Certificate of Amendment of Certificate of Incorporation increasing authorized shares, incorporated by reference to Exhibit 3(d) to Form 10-Q for the quarter ended January 1, 2000 (File No. 1-6544). 3(e) 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). 4(a) Senior Debt Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3 filed June 6, 1995 (File No. 33-60023). 4(b) First Supplemental Indenture, dated June 27, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, as amended, incorporated by reference to Exhibit 4(e) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(c) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, as amended, incorporated by reference to Exhibit 4(f) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(d) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco 25 Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(g) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(e) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(h) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(f) Fifth Supplemental Indenture, dated as of July 27, 1998, between Sysco Corporation and First Union National Bank, Trustee, incorporated by reference to Exhibit 4 (h) to Form 10-K for the year ended June 27, 1998 (File No. 1-6554). 4(g) Sixth Supplemental Indenture, including form of Note, dated April 5, 2002 between SYSCO Corporation, as Issuer, and Wachovia Bank, National Association (formerly First Union National Bank of North Carolina), as Trustee, incorporated by reference to Exhibit 4.1 to Form 8-K dated April 5, 2002 (File No. 1-6544). 4(h) Indenture dated May 23, 2002 between SYSCO International, Co., SYSCO Corporation and Wachovia Bank, National Association, incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4 filed August 21, 2002 (File No. 333-98489). 4(i) Credit Agreement dated September 13, 2002 by and among SYSCO Corporation, JPMorgan Chase Bank, individually and as Administrative Agent, the Co-Syndication Agents named therein and the other financial institutions party thereto, incorporated by reference to Exhibit 4(i) to Form 10-Q for the quarter ended September 28, 2002 (File No. 1-6544). 4(j) Seventh Supplemental Indenture, including form of Note, dated March 5, 2004 between SYSCO Corporation, as Issuer, and Wachovia Bank, National Association (formerly First Union National Bank of North Carolina), as Trustee, incorporated by reference to Exhibit 4(j) to Form 10-Q for the quarter ended March 27, 2004 (File No. 1-6544). 10(a)+ Second Amendment to Second Amended and Restated Executive Deferred Compensation Agreement effective July 9, 2004, incorporated by reference to Exhibit 10(gg) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(b)+ Fourth Amendment to Fifth Amended and Restated Supplemental Executive Retirement Plan effective July 9, 2004, incorporated by reference to Exhibit 10(hh) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(c)+ Executive Severance Agreement dated July 6, 2004 between SYSCO Corporation and Richard J. Schnieders, incorporated by reference to Exhibit 10(ii) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(d)+ Form of Executive Severance Agreement between SYSCO Corporation and each of Thomas E. Lankford (dated July 12, 2004), John K. Stubblefield, Jr. (dated July 6, 2004), Kenneth F. Spitler (dated July 14, 2004) and Larry J. Accardi (dated August 18, 2004), incorporated by reference to Exhibit 10(jj) to 26 Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(e)+ Form of First Amendment dated September 3, 2004 to Executive Severance Agreement between SYSCO Corporation and each of Richard J. Schnieders, Thomas E. Lankford, John K. Stubblefield, Jr., Kenneth F. Spitler and Larry J. Accardi, incorporated by reference to Exhibit 10(kk) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(f)+ 2004 Long-Term Incentive Cash Plan effective September 3, 2004, incorporated by reference to Exhibit 10(a) to Form 8-K filed on September 10, 2004 (File No. 1-6544). 10(g)+ Form of Performance Unit Grant Agreement for issuance to executive officers under the 2004 Long-Term Incentive Cash Plan, incorporated by reference to Exhibit 10(b) to Form 8-K filed on September 10, 2004 (File No. 1-6544). 10(h)+ Form of Stock Option Grant Agreement for issuance to executive officers under the 2000 Stock Incentive Plan, incorporated by reference to Exhibit 10(a) to Form 8-K filed on September 9, 2004 (File No. 1-6544). 10(i)+ Form of Stock Option Grant Agreement for issuance to non-employee directors under the Non-Employee Directors Stock Plan, incorporated by reference to Exhibit 10(b) to Form 8-K filed on September 9, 2004 (File No. 1-6544). *15(a) Report from Ernst & Young LLP dated November 10, 2004, re: unaudited financial statements. *15(b) Acknowledgment letter from Ernst & Young LLP. *31(a) CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31(b) CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32(a) CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32(b) CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------- + Executive Compensation Arrangement pursuant to 601(b)(10)(iii)(A) of Regulation S-K * Filed herewith 27 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/ RICHARD J. SCHNIEDERS -------------------------------------- Richard J. Schnieders Chairman and Chief Executive Officer Date: November 10, 2004 By /s/ JOHN K. STUBBLEFIELD, JR. -------------------------------------- John K. Stubblefield, Jr. Executive Vice President, Finance & Administration Date: November 10, 2004 EXHIBIT INDEX
NO. DESCRIPTION ------- ----------------------------------------------------------------------- 3(a) 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(b) Bylaws, as amended and restated February 8, 2002, incorporated by reference to Exhibit 3(b) to Form 10-Q for the quarter ended December 29, 2001 (File No. 1-6544). 3(c) 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(d) Certificate of Amendment of Certificate of Incorporation increasing authorized shares, incorporated by reference to Exhibit 3(d) to Form 10-Q for the quarter ended January 1, 2000 (File No. 1-6544). 3(e) 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). 4(a) Senior Debt Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-3 filed June 6, 1995 (File No. 33-60023). 4(b) First Supplemental Indenture, dated June 27, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, as amended, incorporated by reference to Exhibit 4(e) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(c) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, as amended, incorporated by reference to Exhibit 4(f) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544). 4(d) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(g) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(e) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Exhibit 4(h)
to Form 10-K for the year ended June 28, 1997 (File No. 1-6544). 4(f) Fifth Supplemental Indenture, dated as of July 27, 1998, between Sysco Corporation and First Union National Bank, Trustee, incorporated by reference to Exhibit 4 (h) to Form 10-K for the year ended June 27, 1998 (File No. 1-6554). 4(g) Sixth Supplemental Indenture, including form of Note, dated April 5, 2002 between SYSCO Corporation, as Issuer, and Wachovia Bank, National Association (formerly First Union National Bank of North Carolina), as Trustee, incorporated by reference to Exhibit 4.1 to Form 8-K dated April 5, 2002 (File No. 1-6544). 4(h) Indenture dated May 23, 2002 between SYSCO International, Co., SYSCO Corporation and Wachovia Bank, National Association, incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-4 filed August 21, 2002 (File No. 333-98489). 4(i) Credit Agreement dated September 13, 2002 by and among SYSCO Corporation, JPMorgan Chase Bank, individually and as Administrative Agent, the Co-Syndication Agents named therein and the other financial institutions party thereto, incorporated by reference to Exhibit 4(i) to Form 10-Q for the quarter ended September 28, 2002 (File No. 1-6544). 4(j) Seventh Supplemental Indenture, including form of Note, dated March 5, 2004 between SYSCO Corporation, as Issuer, and Wachovia Bank, National Association (formerly First Union National Bank of North Carolina), as Trustee, incorporated by reference to Exhibit 4(j) to Form 10-Q for the quarter ended March 27, 2004 (File No. 1-6544). 10(a)+ Second Amendment to Second Amended and Restated Executive Deferred Compensation Agreement effective July 9, 2004, incorporated by reference to Exhibit 10(gg) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(b)+ Fourth Amendment to Fifth Amended and Restated Supplemental Executive Retirement Plan effective July 9, 2004, incorporated by reference to Exhibit 10(hh) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(c)+ Executive Severance Agreement dated July 6, 2004 between SYSCO Corporation and Richard J. Schnieders, incorporated by reference to Exhibit 10(ii) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(d)+ Form of Executive Severance Agreement between SYSCO Corporation and each of Thomas E. Lankford (dated July 12, 2004), John K. Stubblefield, Jr. (dated July 6, 2004), Kenneth F. Spitler (dated July 14, 2004) and Larry J. Accardi (dated August 18, 2004), incorporated by reference to Exhibit 10(jj) to Form 10-
K filed on September 16, 2004 (File No. 1-6544). 10(e)+ Form of First Amendment dated September 3, 2004 to Executive Severance Agreement between SYSCO Corporation and each of Richard J. Schnieders, Thomas E. Lankford, John K. Stubblefield, Jr., Kenneth F. Spitler and Larry J. Accardi, incorporated by reference to Exhibit 10(kk) to Form 10-K filed on September 16, 2004 (File No. 1-6544). 10(f)+ 2004 Long-Term Incentive Cash Plan effective September 3, 2004, incorporated by reference to Exhibit 10(a) to Form 8-K filed on September 10, 2004 (File No. 1-6544). 10(g)+ Form of Performance Unit Grant Agreement for issuance to executive officers under the 2004 Long-Term Incentive Cash Plan, incorporated by reference to Exhibit 10(b) to Form 8-K filed on September 10, 2004 (File No. 1-6544). 10(h)+ Form of Stock Option Grant Agreement for issuance to executive officersunder the 2000 Stock Incentive Plan, incorporated by reference to Exhibit 10(a) to Form 8-K filed on September 9, 2004 (File No. 1-6544). 10(i)+ Form of Stock Option Grant Agreement for issuance to non-employee directors under the Non-Employee Directors Stock Plan, incorporated by reference to Exhibit 10(b) to Form 8-K filed on September 9, 2004 (File No. 1-6544). *15(a) Report from Ernst & Young LLP dated November 10, 2004, re: unaudited financial statements. *15(b) Acknowledgment letter from Ernst & Young LLP. *31(a) CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31(b) CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32(a) CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32(b) CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------- + Executive Compensation Arrangement pursuant to 601(b)(10)(iii)(A) of Regulation S-K * Filed herewith.