SYSCO CORP - 10-Q Quarterly Report

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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 December 27, 2003

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
----- -----

644,708,897 shares of common stock were outstanding as of January 30, 2004.

TABLE OF CONTENTS

1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)

Note: The June 28, 2003 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)

3

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In Thousands)

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 June 28, 2003
consolidated balance sheet which was taken from the audited financial
statements included in the company's Fiscal 2003 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 2004 presentation, including other long-term
liabilities related to pension and deferred compensation plans
previously classified as accrued expenses. 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 2003 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:

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. The increase in restricted cash
from June 28, 2003 to December 27, 2003 was primarily due to the
deposit of an additional $90,000,000 in insurance trusts due to a
change in underwriting requirements adopted by the insurers regarding
the percentage of the overall risks required to be collateralized and
to meet the collateral requirements of a new insurer.

In 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 resolved. Escrowed funds related to
certain acquisitions were released to the sellers during the
twenty-six weeks ended December 27, 2003.

4. DEBT

As of December 27, 2003, SYSCO had uncommitted bank lines of credit
which provided for unsecured borrowings for working capital of up to
$95,000,000, of which $30,000,000 was outstanding.

As of December 27, 2003, SYSCO's outstanding borrowings under its
commercial paper programs were $304,455,000. During the twenty-six
week period ended December 27, 2003, commercial paper and short-term
bank borrowings ranged from approximately $79,458,000 to $370,447,000.

5. ACQUISITIONS

In September 2003, SYSCO acquired certain assets of the Stockton,
California foodservice operations of Smart & Final, Inc.

In September 2003, a subsidiary of SYSCO acquired certain assets of
Luzo Foodservice Corporation, located in New Bedford, Massachusetts.

The balances included in the Consolidated Balance Sheets related to
acquisitions made in the last twelve months 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 payable in the
event that specified operating results are attained. Aggregate
contingent consideration amounts outstanding as of December 27, 2003
included approximately 1,902,000 shares of common stock and
$27,961,000 in cash, which, if distributed, could result in the
company recording up to $68,673,000 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

In October 2003, SYSCO entered into $500 million aggregate notional
amount of interest rate swaps as a fair value hedge against the 7.00%
Senior Notes due May 2006, 7.25% Senior Notes due April 2007 and 6.10%
Senior Notes due June 2012. The swaps effectively convert the fixed
interest rate on each of the three series of notes into a floating
rate of six-month LIBOR averaged over a six month period plus a margin
of 461, 430 and 171 basis points, respectively, which were designated
as the respective benchmark interest rates on each of the interest
payment dates until maturity of the respective notes.

The terms of the swap agreements and the hedged items are such that
the hedges are considered perfectly effective against changes in the
fair value of the debt due to changes in the benchmark interest rate
over their term. As a result, the shortcut method provided by
Statement of Financial Accounting Standards (SFAS) No. 133 is applied
and there is no need to periodically reassess the effectiveness of the
hedges during the terms of the swaps. Interest expense on the debt is
adjusted to include payments made or received under the hedge
agreements. The market value of the swaps is carried as an asset or a
liability on the consolidated balance sheet and the carrying value of
the hedged debt is adjusted accordingly. As of December 27, 2003, the
market value of the swaps was a loss of $6,080,000 which is reflected
in Other Long-term Liabilities on the Consolidated Balance Sheet and
the carrying amount of the related debt has been decreased by the same
amount.

7. INCOME TAXES

The changes in the net deferred tax liability and accrued income tax
balances from June 28, 2003 to December 27, 2003 were primarily due to
the reclassification of certain deferred tax liabilities related to a
portion of previously deferred supply chain distributions to accrued
income taxes and to the payment of taxes. The reclassification
reflects the inclusion in the company's taxable income for fiscal 2004
of these previously deferred supply chain distributions. Fiscal year
2004 is the first period that these supply chain distributions are
recognized in taxable income since the company began deferring these
items for tax purposes as a result of the reorganization of its supply
chain in fiscal year 2002. Taxes paid during the twenty-six week
period ended December 27, 2003 increased to $190,761,000 as compared
to $29,120,000 during the comparable period in the prior year,
primarily as a result of the factors described above.

The effective tax rate in fiscal 2004 is 38.50%, an increase of 0.25%
from the effective tax rate of 38.25% in fiscal 2003. The increase in
the effective tax rate is attributable to increased state income
taxes.

7

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 and related interpretations under which no
compensation cost has been recognized.

The following table provides comparative pro forma net earnings and
earnings per share had compensation cost for these plans been
determined using the fair value method as set forth in SFAS No. 123
for all periods presented:

The weighted average fair value of options granted was $6.74 and $6.88
during the twenty-six weeks ended December 27, 2003 and December 28,
2002, respectively. The fair value was estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in the twenty-six weeks
ended December 27, 2003 and December 28, 2002, respectively: dividend
yield of 1.49% and 1.45%; expected volatility of 22% and 25%; average
risk-free interest rates of 3.2% and 2.7%; and expected lives of 5
years.

The weighted average fair value of employee stock purchase rights
issued was $4.70 and $4.17 during the twenty-six weeks ended December
27, 2003 and December 28, 2002, 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 applies the fair value method to options
and stock purchase rights granted after 1995. The pro forma effects
for the periods presented are not necessarily indicative of the pro
forma effects in future years.

8

9. COMPREHENSIVE INCOME

Comprehensive income is net earnings plus certain other items that are
recorded directly to shareholders' equity. The amounts recorded as
other comprehensive income primarily related to foreign currency
translation adjustments of $10,743,000 and $9,605,000 for the thirteen
weeks and twenty-six weeks ended December 27, 2003, respectively.
Comprehensive income was $232,724,000 and $184,567,000 for the
thirteen weeks ended December 27, 2003 and December 28, 2002,
respectively, and $441,146,000 and $367,141,000 for the twenty-six
weeks ended December 27, 2003 and December 28, 2002, 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.

11. NEW ACCOUNTING STANDARDS

SYSCO adopted the provisions of SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity," effective at the beginning of fiscal 2004. The adoption of
SFAS No. 150 has not had a material effect on the company's
consolidated financial statements.

The Financial Accounting Standards Board issued SFAS No. 132 (revised
2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The standard requires that companies provide additional
financial statement disclosures for defined benefit plans. These
disclosure requirements become effective for SYSCO's financial
statements for the third quarter of fiscal 2004.

12. SHAREHOLDERS' EQUITY

On November 7, 2003, SYSCO's shareholders approved the adoption of an
amendment to SYSCO's Restated Certificate of Incorporation to increase
the number of shares of common stock that SYSCO will have the
authority to issue to two billion shares, an increase from the
previous authorization of one billion shares.

9

13. 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 foodservice and hotel supply 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.

10

14. 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. SYSCO International, Co. issued
$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. The financial information for SYSCO includes corporate
activities as well as certain operating companies which were operated
as divisions of SYSCO prior to the third quarter of fiscal 2003.
Beginning with the third quarter of fiscal 2003, these divisions have
been operated as subsidiaries and their results from that point in
time are included in the Other Non-Guarantor Subsidiaries column. The
accompanying financial information includes the balances and results
of SYSCO International, Co. from the date of its inception in February
2002.

13

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

HIGHLIGHTS

Sales increased 10.9% for the twenty-six weeks and 10.8% for the
second quarter of fiscal 2004 over the comparable prior year periods.
Gross margins as a percent to sales for both the twenty-six weeks and
second quarter of fiscal 2004 decreased as compared to last year due
to the changes in customer mix, segment mix, product mix and
inflation. Expenses as a percent to sales for both the twenty-six
weeks and second quarter of fiscal 2004 decreased as compared to last
year due to operating efficiencies and operating costs increasing at
lower rates than product cost inflation. As a result of these factors,
net earnings increased 17.3% for the twenty-six weeks and 20.3% for
the second fiscal quarter of fiscal 2004 over the comparable prior
year periods. Expenses were negatively impacted by increased pension
costs and expenses incurred in connection with the National Supply
Chain initiative. During the twenty-six week period, the company also
recorded a gain related to the cash surrender value of life insurance
assets.

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 foodservice, hotel supply operations and SYGMA,
the company's chain restaurant distribution subsidiary.

The company estimates that the North American foodservice market
together with the non-food and hotel amenity markets available to
SYSCO is approximately $200 billion annually and that SYSCO serves
about 13% of this available market. The foodservice or
food-prepared-away-from-home market represents approximately one-half
of the total retail food purchases in the United States. This share
has grown from about 37% thirty years ago as food purchases in the
foodservice industry have grown more rapidly than food purchased 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; 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 these general trends to
continue, although they may not continue at the same pace.

General economic conditions and consumer confidence can have an effect
on the frequency and amount spent by consumers for food prepared away
from home and therefore on SYSCO. 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:

o Sales strategy: Increasing sales through new customer sales
and additional penetration of existing customers, customer
retention, expansion through foldouts (new operating
companies created in established markets previously served
by other SYSCO operating companies) and a disciplined
acquisition program.

o Profitable sales growth: Stratification of customers based
on profitability and potential and managing the
profitability of or exiting, low profit or unprofitable

14

customers. More stringent analysis of customers' purchasing
potential before opening new accounts.

o Brand management: Leveraging brand strength to grow sales
and profitability while ensuring strict quality control
processes and providing greater value to customers.

o Productivity: Deploying the latest technology and leveraging
best business practices to improve operating efficiencies
and leverage expenses to sales growth.

o Sales force effectiveness: Selective recruiting and training
of marketing associates. Introduction of a business
development and review functions as we proceed with our
sales force transformation of providing greater value to our
customers.

o Supply chain optimization: Creating a more efficient and
effective supply chain infrastructure through the National
Supply Chain initiative.

The company's National Supply Chain initiative is intended to optimize
the supply chain activities for certain products from SYSCO's
operating companies in each respective region and as a result, lower
inventory and operating costs, reduce working capital requirements and
reduce future facility expansion needs at SYSCO's operating companies
while providing greater value to our suppliers and customers. The
company expects to build from five to ten regional distribution
centers over a period of ten years. The first regional distribution
center in the Northeast is expected to be operational during fiscal
2005.

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:

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:

16

SALES Sales increased 10.9% during the twenty-six weeks and 10.8% in
the second quarter of fiscal 2004 over the comparable periods of the
prior year. This compares to sales increases of 11.9% during the
twenty-six weeks and 13.6% in the second quarter of fiscal 2003 over
the comparable prior year periods. Acquisitions represented 1.3% of
the sales growth for the first twenty-six weeks of fiscal 2004 and
0.8% for the second quarter of fiscal 2004, as compared to 6.2% and
3.2%, respectively, for the comparable periods in the prior year. Also
contributing to sales growth was estimated product cost increases, an
internal measure of inflation, of 6.0% during the first twenty-six
weeks of fiscal 2004 and 7.3% during the second quarter of fiscal 2004
over the comparable periods in the prior year. The company estimated
its product costs decreased by 1.6% during the first twenty-six weeks
of fiscal 2003 and 0.9% during the second quarter of fiscal 2003 from
the comparable periods in the prior year. SYSCO generally expects to
pass product cost increases to its customers; however, the actual
amount of inflation reflected as sales price increases is difficult to
quantify.

COST OF SALES Cost of sales increased 11.4% in the first twenty-six
weeks and 11.2% in the second quarter of fiscal 2004 over the
comparable periods of the prior year. Management believes that cost of
sales as a percentage to sales was impacted by several factors
including change in customer mix, segment mix, product mix and
inflation; the specific impact of each is difficult to quantify.
Contract customer sales in the Broadline segment, which traditionally
yield lower gross margins, coupled with lower expenses, than marketing
associate-served sales, grew faster than sales to marketing
associate-served sales over the comparable period in the prior year.
Sales at the SYGMA and the Other segments, which traditionally have
lower margins than the Broadline segment, grew faster than sales at
the Broadline segment. In the area of product mix, meat sales,
continued to grow as a percentage of overall sales and also
experienced a high rate of cost increases. Meat products typically
generate higher prices and higher gross margin dollars per case.
However, meat products result in lower gross margins as a percentage
of sales. Therefore, increased sales of these products had the effect
of decreasing overall gross margins as a percentage of sales even as
gross margin dollars were maintained or increased. Product cost
increases at rates higher than historic trends 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.

OPERATING EXPENSES Operating expenses increased 6.5% in the first
twenty-six weeks and 6.4% in the second quarter of fiscal 2004 over
the comparable periods of the prior year. Improved operating
efficiencies as demonstrated by improving trends in key expense
metrics tracked at the broadline operating companies including pieces
sold per delivery, product line items sold per delivery, pieces per
trip and pieces per error contributed to the decreases in operating
expenses as a percentage to sales. Short-term increases in product
costs and the resulting increased sales price per item also impacted
expenses as a percentage to sales favorably as operating costs
increased at a lower rate.

Operating expenses were also favorably impacted by the recognition in
income of $16,784,000 in the first twenty-six weeks and $12,218,000 in
the second quarter of fiscal 2004 to adjust the carrying value of life
insurance assets to their cash surrender value as compared to the
recognition of a loss of $9,885,000 and a gain of $5,584,000 in the
comparable periods in fiscal 2003, respectively. Operating expenses
were negatively impacted by increases in net periodic pension cost of
$18,045,000 in the first twenty-six weeks and $8,772,000 in the second
quarter of fiscal 2004 as compared to the comparable periods in fiscal
2003. Operating expenses related to the National Supply Chain
initiative increased $7,494,000 in the first twenty-six weeks and
$4,782,000 in the second quarter of fiscal 2004 as compared to the
comparable periods in the prior year.

17

OTHER, NET Other net income increased to $9,035,000 in the first
twenty-six weeks of fiscal 2004 and $6,018,000 in the second quarter
of fiscal 2004. The company recognized a gain on the sale of a
facility of approximately $5,700,000 in the second quarter of fiscal
2004.

PRETAX AND NET EARNINGS Pretax earnings increased 17.8% for the first
twenty-six weeks and 20.8% for the second quarter of fiscal 2004 over
the comparable periods of the prior year. Net earnings increased 17.3%
for the first twenty-six weeks and 20.3% for the second quarter of
fiscal 2004 over the comparable periods of the prior year. These
increases were due to the factors discussed above.

EARNINGS PER SHARE Basic earnings per share increased 19.6% for the
first twenty-six weeks and 21.4% for the second quarter of fiscal 2004
over the comparable periods of the prior year. Diluted earnings per
share increased 18.2% for the first twenty-six weeks and 21.4% for the
second quarter of fiscal 2004 over the comparable periods of the prior
year. These increases were the result of factors discussed above as
well as a net reduction of shares outstanding due to share
repurchases, offset by an increase in the dilutive effect of employee
and director stock options.

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. 13) in the Notes to Consolidated Financial Statements:

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. 13) in the Notes to
Consolidated Financial Statements:

18

BROADLINE SEGMENT The Broadline segment sales increased 9.1% for the
twenty-six weeks and 8.7% for the second quarter of fiscal 2004 over
the comparable periods of the prior year. Acquisitions represented
0.4% of the sales growth for the first twenty-six weeks and zero
percent for the second quarter of fiscal 2004. These increases were
due to increased sales to marketing associate-served customers and
multi-unit customers, including increased sales of SYSCO Brand
products. These increases were reflected in increased sales to the
company's existing customer base and to new customers. Marketing
associate-served sales as a percentage of broadline sales in the U.S.
decreased to 53.6% and 54.8% for the twenty-six weeks and thirteen
weeks ended December 27, 2003, respectively, as compared to 53.8% and
55.1%, respectively for the comparable prior year periods. This
decrease was due to the increase in sales to national contract
customers exceeding the increase in sales to marketing
associate-served customers. SYSCO Brand sales as a percentage of
broadline sales in the U.S. remained consistent with comparable prior
year periods at 49.0% for both the twenty-six weeks and thirteen weeks
ended December 27, 2003.

Pretax earnings for the Broadline segment increased 16.0% for the
twenty-six weeks and 17.7% for second quarter of fiscal 2004 over the
comparable periods of the prior year. These increases were primarily
due to increases in sales and expense controls resulting in lower
expenses as a percentage to sales.

SYGMA SEGMENT SYGMA segment sales increased 18.9% for the twenty-six
weeks and 21.6% for the second quarter of fiscal 2004 over the
comparable periods of the prior year. Acquisitions represented 3.3% of
the sales growth for the first twenty-six weeks and 1.9% for the
second quarter of fiscal 2004. These increases were primarily due to
sales to new customers, sales growth in SYGMA's existing customer base
and the acquisitions of Pronamic and the Denver operations of Marriott
Distribution Services, Inc.

Pretax earnings for the SYGMA segment increased 6.1% for the
twenty-six weeks and 10.2% for the second quarter of fiscal 2004 over
the comparable periods of the prior year. This increase was primarily
due to increases in sales and expense controls resulting in lower
expenses as a percentage to sales.

OTHER SEGMENTS Sales for the Other segments, which include the
company's specialty businesses, increased 22.3% for the twenty-six
weeks and 20.2% for the second quarter of fiscal 2004 over the
comparable periods of the prior year. Acquisitions represented 8.7% of
the sales growth for the first twenty-six weeks and 7.4% for the
second quarter of fiscal 2004. These increases were due to increased
sales to the existing customer base, sales to new customers, the
acquisition of Asian Foods, Inc. and increased intersegment sales to
SYSCO Broadline companies.

Pretax earnings for the Other segments increased 46.3% for the
twenty-six weeks and 65.6% for the second quarter of fiscal 2004 over
the comparable periods of the prior year. These increases were
primarily due to increases in sales and expense controls resulting in
lower expenses as a percentage to sales.

LIQUIDITY AND CAPITAL RESOURCES

The company generated $364,779,000 in net cash from operations for the
twenty-six week period ended December 27, 2003, compared with
$456,537,000 for the comparable period in fiscal 2003. Cash flow from
operations for the twenty-six week period ended December 27, 2003 was
negatively impacted by increases in accounts receivable balances of
$73,428,000 and inventory balances of $120,215,000. A contributor to
the increase in accounts receivable balances was sales to national
contract customers which represented a larger percentage of

19

total SYSCO sales for December 2003 as compared to June 2003. This is
due to normal sales patterns where sales to national contract
customers as a group are traditionally higher in December as compared
to June due to openings of educational facilities. In addition, the
growth in sales to national contract customers outpaced the growth in
SYSCO's overall sales. National contract customer payment terms are
traditionally longer than the overall SYSCO average; thus, the
increased sales to this group of customers caused the accounts
receivable balances at December 2003 to increase. In addition, the
fiscal second quarter ends in a holiday period which typically slows
down customer payment cycles. The company has also historically
experienced elevated inventory levels during this holiday period. The
company showed improvements in working capital metrics for the fiscal
quarter ended December 27, 2003 as accounts receivable, inventory and
accounts payable days sales outstanding and accounts payable leverage
ratios all showed improvement as compared to the same period last
year.

The decrease in accrued expenses and other long-term liabilities of
$75,854,000 for the twenty-six weeks was primarily due to an increase
in pension contributions of $40,000,000 during the twenty-six week
period ended December 27, 2003. In addition, the company's 401K
contributions of approximately $28,800,000 were made in the second
quarter in fiscal 2004 as compared to contributions of $24,100,000
made in the first quarter of fiscal 2003.

Taxes paid during the twenty-six week period ended December 27, 2003
were $190,761,000 as compared to $29,120,000 during the comparable
period in the prior year. The increase in taxes paid was due to the
company's inclusion in taxable income for fiscal 2004 of supply chain
distributions deferred in prior years. Fiscal year 2004 is the first
period that these supply chain distributions are recognized in taxable
income since the company began deferring these items for tax purposes
as a result of the reorganization of its supply chain in fiscal year
2002.

The company expects the net cash flow impact of the deferral of supply
chain distributions in fiscal 2004 and beyond to be incrementally
positive when compared to what would have been paid in taxes on an
annual basis without the deferral. This is due to the company's
expectations that its volume of purchases through this structure will
continue to grow.

Total capital expenditures in fiscal 2004 are expected to be
approximately $490,000,000. Projected capital expenditures include the
continuation of the fold-out program; facility, fleet and other
equipment replacements and expansions; and the National Supply Chain
project. Expenditures in the twenty-six week period ended December 27,
2003 related to the company's National Supply Chain project totaled
$73,075,000 of which $55,782,000 was capitalized. Total expenditures
on the project since inception are $154,285,000 of which $100,214,000
have been capitalized. The Northeast Redistribution Center is expected
to be operational during fiscal 2005.

During the twenty-six week period ended December 27, 2003 a total of
6,293,700 shares were repurchased at a cost of $218,149,000 as
compared to 8,199,700 shares at a cost of $243,381,000 for the
comparable period in fiscal 2003. An additional 979,900 shares at a
cost of $36,407,000 have been purchased through January 30, 2004
resulting in 21,789,600 shares remaining available for repurchase as
authorized by the Board as of that date.

Dividends paid in the twenty-six week period ended December 27, 2003
were $142,501,000, or $0.22 per share, as compared to $118,395,000, or
$0.18 per share, in the comparable period of fiscal 2003. In November
2003, SYSCO declared its regular quarterly dividend for the third
quarter of fiscal 2004, increasing it to $0.13 per share, which was
paid in January 2004.

20

Long-term debt to capitalization ratio was 37.1% at December 27, 2003,
within the company's long-term 35% to 40% target range.

As of December 27, 2003, SYSCO's borrowings under its commercial paper
programs were $304,455,000. Such borrowings were $317,089,000 as of
January 30, 2004. During the twenty-six week period ended December 27,
2003, commercial paper and short-term bank borrowings ranged from
approximately $79,458,000 to $370,447,000.

Cash generated from operations is first allocated to working capital
requirements. Any remaining cash generated from operations, 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.

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 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 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; SYSCO's leverage and debt
risks; the successful completion of acquisitions and integration of
acquired companies; competitive price pressures; 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
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 certain 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 June 28, 2003.

21

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. In
October 2003, SYSCO entered into $500 million aggregate notional
amount of interest rate swaps as a fair value hedge against the 7.00%
Senior Notes due May 2006, 7.25% Senior Notes due April 2007 and 6.10%
Senior Notes due June 2012. The swaps effectively convert the fixed
interest rate on each of the three series of notes into a floating
rate of six-month LIBOR averaged over a six month period plus a margin
of 461, 430 and 171 basis points, respectively.

At December 27, 2003, the company had a total of $834,455,000 in debt
at variable rates of interest including commercial paper with
maturities through April 22, 2004 and $500,000,000 in fixed rate debt
swapped to floating rate as discussed above. The company's remaining
debt obligations of $698,457,000 were at fixed rates of interest.

Item 4. Controls and Procedures

As of December 27, 2003, 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 December 27, 2003 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 second quarter of fiscal 2004 that
materially affected, or would be reasonably likely to materially
affect, the company's internal controls over financial reporting.

22

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. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities

In December 2003, a total of 65,123 Dividend Access Shares,
convertible on a one-for-one basis into SYSCO shares, were
issued to the former shareholders of North Douglas
Distributors ("North Douglas") pursuant to the terms of an
escrow agreement executed in connection with SYSCO's
acquisition of North Douglas in December 2000.

In October 2003, a total of 64,024 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.

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

SYSCO held its 2003 Annual Meeting of Stockholders on November
7, 2003. Four directors, Jonathan Golden, Joseph A. Hafner,
Jr., Thomas E. Lankford and Richard J. Schnieders, were
elected for a three-year term, and one director, John K.
Stubblefield, Jr. was elected for a one-year term. Directors
whose terms continued after the meeting included Colin G.
Campbell, Judith B. Craven, Richard G. Merrill, Frank H.
Richardson, Phyllis S. Sewell, Richard G. Tilghman and Jackie
M. Ward.

Other matters voted on included:

o The Board's proposal to approve the adoption of an
amendment to SYSCO's Restated Certificate of
Incorporation to increase the number of shares of
Common Stock that SYSCO will have the authority to
issue to two billion (2,000,000,000);

o The Board's proposal to approve the 2003 Stock
Incentive Plan; and

o A shareholder proposal requesting that the Board review
the Company's policies for food products containing
genetically engineered ingredients and report to
shareholders by March 2004.

23

The voting results were as follows:

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(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 3(b) 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.

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).

24

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).

*15(a) Report from Ernst & Young LLP dated February 9, 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.

25

*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.

- ----------

* Filed herewith.

(b) Reports on Form 8-K:

1. On October 27, 2003, the company filed a current report on Form 8-K
announcing under Items 7 and 12 thereof the results of its first
quarter ended September 27, 2003.

26

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: February 9, 2004

By /s/ JOHN K. STUBBLEFIELD, JR.
--------------------------------------
John K. Stubblefield, Jr.
Executive Vice President,
Finance & Administration

Date: February 9, 2004

EXHIBIT INDEX

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).

*15(a) Report from Ernst & Young LLP dated February 9, 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.

- ----------

* Filed herewith.