Page 1 of 17 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 March 27, 1999 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 Identification No.) incorporation or organization) 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 [ ] 330,973,975 shares of common stock were outstanding as of April 23, 1999. 2 PART I. FINANCIAL INFORMATION --------------------------------------------------- Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company, without audit, with the exception of the June 27, 1998, consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1998 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. 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 1998 Annual Report on Form 10-K. A review of the financial information herein has been made by Arthur Andersen LLP, independent public accountants, in accordance with established professional standards and procedures for such a review. A letter from Arthur Andersen LLP concerning their review is included as Exhibit 15. 3 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) March 27, June 27, March 28, 1999 1998 1998 ---------- --------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- Current assets Cash $ 112,493 $ 110,288 $ 94,901 Accounts and notes receivable, less allowances of $45,315, $20,081 and $37,659 1,307,672 1,215,610 1,178,393 Inventories 859,473 790,501 777,723 Deferred taxes 35,066 37,073 28,560 Prepaid expenses 30,757 26,595 26,949 ---------- ---------- ---------- Total current assets 2,345,461 2,180,067 2,106,526 Plant and equipment at cost, less depreciation 1,207,955 1,151,054 1,113,362 Goodwill and intangibles, less amortization 304,516 307,959 241,533 Other assets 161,777 141,109 138,593 ---------- ---------- ---------- Total other assets 466,293 449,068 380,126 ---------- ---------- ---------- Total assets $4,019,709 $3,780,189 $3,600,014 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 14,196 $ 42,333 $ 73,102 Accounts payable 1,025,561 849,159 888,454 Accrued expenses 324,388 292,255 265,874 Accrued income taxes 7,793 25,523 27,465 Current maturities of long-term debt 111,551 114,920 14,686 ---------- --------- ---------- Total current liabilities 1,483,489 1,324,190 1,269,581 Long-term debt 913,632 867,017 747,803 Deferred taxes 224,511 232,193 210,772 Shareholders' equity Preferred stock, par value $1 per share: Authorized 1,500,000 shares; issued none --- --- --- Common stock, par value $1 per share: Authorized 500,000,000 shares; issued 382,587,450 shares 382,587 382,587 382,587 Paid-in capital 446 --- --- Retained earnings 1,948,327 1,796,488 1,729,446 ---------- ---------- ---------- 2,331,360 2,179,075 2,112,033 Less cost of treasury stock, 51,221,957, 47,578,288 and 44,297,815 shares 933,283 822,286 740,175 ---------- ---------- ---------- Total shareholders' equity 1,398,077 1,356,789 1,371,858 ---------- ---------- ---------- Total liabilities and shareholders' equity $4,019,709 $3,780,189 $3,600,014 ========== ========== ========== <FN> Note: The June 27, 1998 balance sheet has been taken from the audited financial statements at that date. 4 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) 39-Week Period Ended 13-Week Period Ended ---------------------------- ----------------------------- March 27, March 28, March 27, March 28, 1999 1998 1999 1998 ------------ ------------ ------------ -------------- Sales $ 12,604,182 $ 11,326,162 $ 4,164,877 $ 3,711,822 Costs and expenses Cost of sales 10,298,004 9,248,908 3,402,463 3,035,112 Operating expenses 1,849,822 1,662,057 625,111 557,136 Interest expense 53,742 42,810 18,414 15,170 Other, net 322 (246) (93) 179 ------------ ----------- ------------ ------------ Total costs and expenses 12,201,890 10,953,529 4,045,895 3,607,597 ------------ ----------- ------------ ------------ Earnings before income taxes 402,292 372,633 118,982 104,225 Income taxes 156,894 145,327 46,403 40,648 ------------ ------------ ------------ ------------ Earnings before cumulative effect of accounting change 245,398 227,306 72,579 63,577 Cumulative effect of accounting change --- (28,053) --- --- ____________ ____________ ____________ ____________ Net earnings $ 245,398 $ 199,253 $ 72,579 $ 63,577 ============ ============ ============ ============ Earnings before accounting change: Basic earnings per share $ 0.74 $ 0.67 $ 0.22 $ 0.19 ============ ============ ============ ============ Diluted earnings per share $ 0.73 $ 0.66 $ 0.22 $ 0.19 ============ ============ ============ ============ Cumulative effect of accounting change: Basic earnings per share $ --- $ (0.08) $ --- $ --- ============ ============ ============ ============ Diluted earnings per share $ --- $ (0.08) $ --- $ --- ============ ============ ============ ============ Net earnings: Basic earnings per share $ 0.74 $ 0.58 $ 0.22 $ 0.19 ============ ============ ============ ============ Diluted earnings per share $ 0.73 $ 0.58 $ 0.22 $ 0.19 ============ ============ ============ ============ Average shares outstanding 333,748,999 341,632,614 332,512,637 339,626,373 ============ ============ ============ ============ Diluted average shares outstanding 337,518,140 344,505,263 336,475,686 343,230,897 ============ ============ ============ ============ Dividends paid per common share $ 0.28 $ 0.24 $ 0.10 $ 0.09 ============ ============ ============ ============ 5 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) 39- Week Period Ended ------------------------ March 27, March 28, 1999 1998 --------- ---------- Cash flows from operating activities: Net earnings $ 245,398 $ 199,253 Add non-cash items: Cumulative effect of accounting change --- 28,053 Depreciation and amortization 150,963 133,510 Deferred tax (benefit) (5,675) (27,985) Provision for losses on accounts receivable 20,016 16,750 Additional investment in certain assets and liabilities: (Increase) in receivables (112,078) (130,141) (Increase) in inventories (68,972) (43,941) (Increase) in prepaid expenses (4,162) (5,520) Increase in accounts payable 176,402 60,861 Increase in accrued expenses 32,133 24,946 (Decrease) increase in accrued income taxes (17,730) 9,724 (Increase) in other assets (30,946) (8,626) -------- -------- Net cash provided by operating activities 385,349 256,884 -------- -------- Cash flows from investing activities: Additions to plant and equipment (211,154) (179,014) Sales and retirements of plant and equipment 17,012 4,783 -------- -------- Net cash used for investing activities (194,142) (174,231) -------- -------- Cash flows from financing activities: Bank and commercial paper (repayments) borrowings (192,964) 124,636 Other debt borrowings (repayments) 208,073 (2,217) Common stock reissued from treasury 29,978 28,107 Treasury stock purchases (140,530) (175,519) Dividends paid (93,559) (80,455) -------- -------- Net cash used for financing activities (189,002) (105,448) -------- -------- Net increase (decrease) in cash 2,205 (22,795) Cash at beginning of period 110,288 117,696 -------- -------- Cash at end of period $ 112,493 $ 94,901 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 40,568 $ 31,335 Income taxes 174,776 143,782 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The liquidity and capital resources discussion included on page 12 of the Company's Fiscal 1998 Annual Report on Form 10-K remains applicable, other than the common stock repurchase program described below. All share information has been adjusted for the 2-for-1 stock split on March 20, 1998. In Fiscal 1992, the Company began a common stock repurchase program which continued into the first quarter of Fiscal 1999, resulting in the repurchase of 72,000,000 shares of common stock. The Board of Directors authorized the repurchase of an additional 8,000,000 shares in September, 1998. Under this latest authorization, 5,115,000 shares were purchased through April 23, 1999. Results of Operations --------------------- Sales increased 11.3% during the 39 weeks and 12.2% in the third quarter of Fiscal 1999 over comparable periods of the prior year. Cost of sales also increased 11.3% during the 39 weeks and 12.1% in the third quarter of Fiscal 1999 which is in line with the sales increases. Real sales growth for the 39 weeks of Fiscal 1999 of about 8.4% resulted primarily from volume growth and was over three points higher than the same period last year, after adjusting for a 1.3% increase due to acquisitions and an increase due to food cost inflation of about 1.5%, due primarily to higher cost of dairy and poultry products. Real growth for the quarter was 10.6%, after adjusting 1.2% for acquisitions and 0.4% for food cost inflation. Operating expenses for the periods presented remained approximately the same as a percent of sales. Interest expense in the current period increased over the prior period due to increased borrowings. Income taxes for the periods presented reflect an effective rate of 39%. 7 Pretax earnings and net earnings increased about 8% for the 39 weeks before the accounting change in the same period of the previous year and 14% for the quarter. The increases were due to the factors discussed above as well as the Company's continued efforts to increase sales to the Company's higher margin territorial street customers. Basic and diluted earnings per share increased 10.4%and 10.6%, respectively, for the 39 weeks before the accounting change and 15.8%, for the quarter. The increases were caused by the factors discussed above, along with the decrease in average shares outstanding for the periods presented, reflecting purchases of shares made through the Company's share repurchase program. A reconciliation of basic and diluted earnings per share follows on the next page. For the period ended December 27, 1997, the Company recorded a one-time, after-tax, non-cash charge of $28 million to comply with a new consensus ruling by the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF Issue No. 97-13), requiring reengineering costs associated with computer system development to be expensed as they are incurred. Prior to this change, the Company had capitalized business process reengineering costs incurred in connection with its SYSCO Uniform Systems information systems redevelopment project in accordance with generally accepted accounting principles. 8 The following table sets forth the computation of basic and diluted earnings per share: 39-Week Period Ended 13-Week Period Ended ============================== =============================== March 27, March 27, March 27, March 28, 1999 1998 1999 1998 ============= ============= ============= ============== Numerator: Numerator for basic earnings per share--income available to common shareholders $ 245,398,000 $ 199,253,000 $ 72,579,000 $ 63,577,000 Effect of dilutive securities - - - - - - - - - - - - ------------- ------------- ------------- -------------- Numerator for diluted earnings per share -- income available to common shareholders $ 245,398,000 $ 199,253,000 $ 72,579,000 $ 63,577,000 ============= ============= ============= ============== Denominator: Denominator for basic earnings per share -- weighted-average shares 333,748,999 341,632,614 332,512,637 339,626,373 Effect of dilutive securities: Employee and director stock options 3,769,141 2,872,649 3,963,049 3,604,524 ------------- ------------- ------------- -------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 337,518,140 344,505,263 336,475,686 343,230,897 ============= ============= ============= ============== Basic earnings per share $ 0.74 $ 0.58 $ 0.22 $ 0.19 ============= ============= ============= ============== Diluted earnings per share $ 0.73 $ 0.58 $ 0.22 $ 0.19 ============= ============= ============= ============== 9 Year 2000 --------- In recent years, SYSCO has been replacing and enhancing its information systems to gain operational efficiencies. In addition, a company-wide program has been underway to prepare its information systems and applications for the year 2000. SYSCO has completed a comprehensive assessment of the impact of the year 2000 on all of its information systems and applications. SYSCO expects to make the necessary revisions or upgrades to its systems to render them year 2000 compliant. Attention is also being focused on compliance attainment efforts of, and key interfaces with, suppliers and customers. SYSCO could potentially experience disruptions to some aspects of its various activities and operations as a result of non-compliant systems utilized by SYSCO or unrelated third parties. Contingency plans are therefore under development to mitigate the extent of any such potential disruption to business operations. Based on preliminary information, the costs to the Company of addressing potential year 2000 issues are not expected to have a material adverse impact on SYSCO's consolidated results of operations or financial position. There can be no assurance that the efforts or the contingency plans related to the Company's systems, or those of other entities relied upon, will be successful or that any failure to convert, upgrade or appropriately plan for contingencies would not have a material adverse effect on SYSCO. -------------- Statements made herein regarding continuation of the share repurchase program and year 2000 compliance and potential costs are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They are based on current expectations and actual results may differ materially. Share repurchases could be affected by market prices of the Company's stock as well as management's decision to utilize its capital for other purposes. Potential year 2000 costs could be affected by conditions in the economy, the industry and internal factors that may alter planned results. Futhermore, potential year 2000 costs and compliance efforts could be affected by the ability of SYSCO's suppliers and customers to effectively address year 2000 issues. 10 PART II. OTHER INFORMATION --------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risks SYSCO does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the company to significant market risk. SYSCO's exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations. At March 27, 1999 the Company had outstanding $129,971,000 of commercial paper with maturities through March 29, 1999. The Company's remaining long-term debt obligations of $783,661,000 were primarily at fixed rates of interest. SYSCO has no significant cash flow exposure due to interest rate changes for long-term debt obligations. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 11 PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 3(a) Restated Certificate of Incorporation incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(f) 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 Form 10-K for the year ended June 28, 1997. 12 4(g) 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 Form 10-K for the year ended June 28, 1997. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 15 Letter from Arthur Andersen LLP dated May 5, 1999, re unaudited financial statements. 27 Financial Data Schedule (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 13 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/ JOHN K. STUBBLEFIELD, JR. ----------------------------- John K. Stubblefield, Jr. Senior Vice President, Finance and Administration Date: May 5, 1999 14 EXHIBIT INDEX ---------------------- SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- 3(a) Restated Certificate of Incorporation incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989 incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 15 4(f) 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 Form 10-K for the year ended June 28, 1997. 4(g) 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 Form 10-K for the year ended June 28, 1997. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 15 Letter from Arthur Andersen LLP dated May 5, 1999, re unaudited financial statements. 16 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule 17