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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 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
=========== =========== =========== =========== ===========
10
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
=========== =========== =========== =========== ===========
11
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.