UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2002
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
incorporation or organization) 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
----- -----
653,692,432 shares of common stock were outstanding as of January 24, 2003.
TABLE OF CONTENTS
<Table>
<Caption>
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 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 24
Certifications 25
</Table>
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)
<Table>
<Caption>
Dec. 28, 2002 June 29, 2002 Dec. 29, 2001
------------- ------------- -------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 128,574 $ 198,439 $ 115,843
Accounts and notes receivable, less
allowances of $54,748, $30,338 and $49,234 1,878,315 1,760,827 1,612,464
Inventories 1,270,604 1,117,869 1,076,884
Deferred taxes -- 34,188 95,654
Prepaid expenses 63,286 41,966 54,650
------------- ------------- -------------
Total current assets 3,340,779 3,153,289 2,955,495
Plant and equipment at cost, less depreciation 1,804,691 1,697,782 1,620,462
Goodwill and intangibles, less amortization 1,055,271 922,222 779,971
Restricted cash 84,056 32,000 --
Other assets 199,190 184,460 186,951
------------- ------------- -------------
Total other assets 1,338,517 1,138,682 966,922
------------- ------------- -------------
Total assets $ 6,483,987 $ 5,989,753 $ 5,542,879
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 64,612 $ 66,360 $ 27,653
Accounts payable 1,408,475 1,349,330 1,237,374
Accrued expenses 747,303 768,317 571,474
Accrued income taxes 25,462 41,596 94,199
Deferred taxes 158,719 -- --
Current maturities of long-term debt 22,341 13,754 12,564
------------- ------------- -------------
Total current liabilities 2,426,912 2,239,357 1,943,264
Long-term debt 1,394,647 1,176,307 1,078,573
Deferred taxes 461,312 441,570 335,867
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 1,000,000,000 shares, issued
765,174,900 shares 765,175 765,175 765,175
Paid-in capital 240,170 217,891 214,202
Retained earnings 3,105,487 2,869,417 2,644,005
Other comprehensive loss (65,435) (65,435) (5,624)
------------- ------------- -------------
4,045,397 3,787,048 3,617,758
Less cost of treasury stock, 115,951,100,
111,634,603 and 105,077,021 shares 1,844,281 1,654,529 1,432,583
------------- ------------- -------------
Total shareholders' equity 2,201,116 2,132,519 2,185,175
------------- ------------- -------------
Total liabilities and shareholders' equity $ 6,483,987 $ 5,989,753 $ 5,542,879
============= ============= =============
</Table>
Note: The June 29, 2002 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)
<Table>
<Caption>
26-Week Period Ended 13-Week Period Ended
-------------------------------- --------------------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 28, 2002 Dec 29, 2001
-------------- -------------- -------------- --------------
Sales $ 12,773,219 $ 11,419,644 $ 6,348,797 $ 5,590,966
Costs and expenses
Cost of sales 10,252,420 9,165,272 5,097,716 4,481,655
Operating expenses 1,897,925 1,700,811 937,290 836,355
Interest expense 34,331 32,377 17,503 16,513
Other, net (6,018) (1,059) (2,606) (290)
-------------- -------------- -------------- --------------
Total costs and expenses 12,178,658 10,897,401 6,049,903 5,334,233
-------------- -------------- -------------- --------------
Earnings before income taxes 594,561 522,243 298,894 256,733
Income taxes 227,420 199,758 114,327 98,200
-------------- -------------- -------------- --------------
Net earnings $ 367,141 $ 322,485 $ 184,567 $ 158,533
============== ============== ============== ==============
Net earnings:
Basic earnings per share $ 0.56 $ 0.49 $ 0.28 $ 0.24
============== ============== ============== ==============
Diluted earnings per share $ 0.55 $ 0.48 $ 0.28 $ 0.24
============== ============== ============== ==============
Average shares outstanding 653,240,266 664,361,281 652,030,164 661,959,339
============== ============== ============== ==============
Diluted shares outstanding 664,304,371 675,082,031 664,083,274 671,799,409
============== ============== ============== ==============
Dividends declared per common share $ 0.20 $ 0.16 $ 0.11 $ 0.09
============== ============== ============== ==============
</Table>
3
SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In Thousands)
<Table>
<Caption>
26 - Week Period Ended
--------------------------------
Dec. 28, 2002 Dec. 29, 2001
-------------- --------------
Operating activities:
Net earnings $ 367,141 $ 322,485
Add non-cash items:
Depreciation and amortization 133,437 135,239
Deferred tax provision 213,488 59,274
Provision for losses on accounts receivable 15,908 16,717
Additional investment in certain assets and liabilities, net of effect of
businesses acquired:
(Increase) decrease in receivables (98,222) 25,031
(Increase) in inventories (130,767) (31,241)
(Increase) in prepaid expenses (21,251) (14,163)
Increase (decrease) in accounts payable 38,411 (36,188)
(Decrease) in accrued expenses (42,346) (83,462)
(Decrease) in accrued income taxes (12,091) (29,133)
(Increase) in other assets (7,171) (2,956)
-------------- --------------
Net cash provided by operating activities 456,537 361,603
-------------- --------------
Investing activities:
Additions to plant and equipment (217,799) (215,181)
Proceeds from sales of plant and equipment 7,976 4,246
Acquisition of businesses, net of cash acquired (168,244) (12,197)
Increase in restricted cash (52,056) --
-------------- --------------
Net cash used for investing activities (430,123) (223,132)
-------------- --------------
Financing activities:
Bank and commercial paper borrowings 208,102 117,264
Other debt repayments (5,255) (13,802)
Common stock reissued from treasury 62,650 50,463
Treasury stock purchases (243,381) (218,656)
Dividends paid (118,395) (93,640)
-------------- --------------
Net cash used for financing activities (96,279) (158,371)
-------------- --------------
Net decrease in cash (69,865) (19,900)
Cash at beginning of period 198,439 135,743
-------------- --------------
Cash at end of period $ 128,574 $ 115,843
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 34,492 $ 32,621
Income taxes 29,120 168,504
</Table>
4
SYSCO CORPORATION and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The following consolidated financial statements have been prepared by
the Company, without audit, with the exception of the June 29, 2002
consolidated balance sheet which was taken from the audited financial
statements included in the Company's Fiscal 2002 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 2003 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 2002 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:
<Table>
<Caption>
26-Week Period Ended 13-Week Period Ended
------------------------------- -------------------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 28, 2002 Dec. 29, 2001
-------------- -------------- -------------- --------------
Numerator:
Numerator for basic earnings per share --
income available to common shareholders $ 367,141,000 $ 322,485,000 $ 184,567,000 $ 158,533,000
============== ============== ============== ==============
Denominator:
Denominator for basic earnings per share --
weighted-average shares 653,240,266 664,361,281 652,030,164 661,959,339
Effect of dilutive securities:
Employee and director stock options 11,064,105 10,720,750 12,053,110 9,840,070
-------------- -------------- -------------- --------------
Denominator for diluted earnings per share --
adjusted for weighted-average shares 664,304,371 675,082,031 664,083,274 671,799,409
============== ============== ============== ==============
Basic earnings per share $ 0.56 $ 0.49 $ 0.28 $ 0.24
============== ============== ============== ==============
Diluted earnings per share $ 0.55 $ 0.48 $ 0.28 $ 0.24
============== ============== ============== ==============
</Table>
5
3. RESTRICTED CASH
SYSCO is required by its insurers to collateralize the self-insured
portion of its workers' compensation and liability claims. Previously
the collateral requirements were met by issuing letters of credit.
These letters of credit were replaced with funds deposited in an
insurance trust. In addition, in certain acquisitions, SYSCO has placed
funds into escrow to be dispersed to the sellers in the event that
certain operating results are attained or certain contingencies are
resolved. The increase in restricted cash from June 29, 2002 to
December 28, 2002 was due to the timing of depositing funds to replace
letters of credit as they expired and to the depositing of funds into
escrow relating to recent acquisitions.
4. DEBT
As of December 28, 2002, SYSCO had uncommitted bank lines of credit,
which provide for unsecured borrowings for working capital of up to
$95,000,000, of which none was outstanding at December 28, 2002.
As of December 28, 2002, SYSCO's outstanding borrowings under its
commercial paper programs were $274,429,000. During the twenty-six week
period ended December 28, 2002, commercial paper and short-term bank
borrowings ranged from approximately $55,813,000 to $495,703,000.
In December 2002, SYSCO International completed a registered exchange
offer for its $200,000,000 aggregate principal amount of 6.10% notes
due June 1, 2012. In the exchange offer, all of the outstanding
$200,000,000 aggregate principal amount of 6.10% notes due June 1, 2012
which had been issued in a private offering in June 2002 were exchanged
for new notes which were identical in all respects to the outstanding
notes except that the new notes were registered under the Securities
Act of 1933. The new notes are fully and unconditionally guaranteed by
Sysco Corporation.
5. ACQUISITIONS
In October 2002, SYSCO acquired Abbott Foods, Inc., an independently
owned broadline foodservice distributor located in Columbus, Ohio.
In October 2002, SYSCO acquired the net assets of Pronamics, the
quick-service distribution division of priszm brandz (priszm). Priszm
is the owner and operator of more than 750 quick-service restaurants in
Canada. As part of the transaction, priszm and SYSCO entered into a
distribution contract in which SYSCO will become priszm's national
Canadian distributor of all food products, paper and other merchandise.
Pronamics will be operated as a SYGMA distribution center.
In November 2002, SYSCO acquired Asian Foods, Inc., a specialty
distributor of products and services to the Asian foodservice market
located in St. Paul, Minnesota and Kansas City, Missouri.
In December 2002, SYSCO acquired certain assets of the Denver
operations of Marriott Distribution Services, Inc., a wholly owned
subsidiary of Marriott International, Inc. The acquired customer base
will be serviced by SYSCO's SYGMA subsidiary.
6
Certain acquisitions involve contingent consideration typically payable
only in the event that certain operating results are attained.
Aggregate contingent consideration amounts outstanding as of December
28, 2002 included approximately 3,981,000 shares and $27,057,000 in
cash, which, if distributed, could result in the Company recording up
to $104,286,000 in additional goodwill. Such amounts typically are to
be paid out over periods of up to five years from the date of
acquisition.
5. DERIVATIVE FINANCIAL INSTRUMENTS
SYSCO has outstanding one interest rate swap agreement with a notional
amount of $200,000,000 related to the $200,000,000 aggregate principal
amount of 4.75% notes due July 30, 2005. Under the interest rate swap
agreement, SYSCO receives a fixed rate equal to 4.75% per annum and
pays a variable interest rate equal to six-month LIBOR in arrears less
84.5 basis points. The recorded value of the swap agreement and the
related debt are carried at fair value. As a result, an asset of
$14,771,000 is reflected in Other Assets on the Consolidated Balance
Sheet as of December 28, 2002 and the carrying amount of the related
debt has been increased by the same amount.
6. INCOME TAXES
The increase in net deferred tax liability balances from June 29, 2002
to December 28, 2002 was primarily due to the deferral of federal and
state income tax payments resulting from the Company's reorganization
of its supply chain. The increase in deferred tax liability balances
related to this item was approximately $217,000,000 for the twenty-six
week period ended December 28, 2002. A portion of the deferral related
to this item was classified as a current deferred tax liability as of
December 28, 2002 due to the timing of when the related income tax
payments will become payable. This resulted in a net current deferred
tax liability of $158,719,000 as of December 28, 2002 as compared to a
net current deferred tax asset of $34,188,000 as of June 29, 2002.
7. NEW ACCOUNTING STANDARDS
SYSCO adopted the provisions of SFAS No. 142, "Accounting for Goodwill
and Other Intangible Assets" effective with the beginning of fiscal
year 2003. As a result, the amortization of goodwill was discontinued.
Management completed its assessment of the impact that the adoption of
SFAS No. 142 had on the Company's consolidated financial statements and
determined that there was no impairment to the carrying value of
goodwill.
The following table provides comparative net earnings and earnings per
share had the non-amortization provision been in effect for all periods
presented:
7
<Table>
<Caption>
26-Week Period Ended 13-Week Period Ended
------------------------------------- -------------------------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 28, 2002 Dec. 29, 2001
----------------- ----------------- ----------------- -----------------
Reported net earnings $ 367,141,000 $ 322,485,000 $ 184,567,000 $ 158,533,000
Goodwill amortization, net of taxes -- 10,213,000 -- 5,377,000
----------------- ----------------- ----------------- -----------------
Adjusted net earnings $ 367,141,000 $ 332,698,000 $ 184,567,000 $ 163,910,000
================= ================= ================= =================
Basic earnings per share:
Reported earnings per share $ 0.56 $ 0.49 $ 0.28 $ 0.24
Goodwill amortization, net of taxes -- 0.01 -- 0.01
----------------- ----------------- ----------------- -----------------
Adjusted earnings per share $ 0.56 $ 0.50 $ 0.28 $ 0.25
================= ================= ================= =================
Diluted earnings per share:
Reported earnings per share $ 0.55 $ 0.48 $ 0.28 $ 0.24
Goodwill amortization, net of taxes -- 0.01 -- --
----------------- ----------------- ----------------- -----------------
Adjusted earnings per share $ 0.55 $ 0.49 $ 0.28 $ 0.24
================= ================= ================= =================
</Table>
SYSCO adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective with the
beginning of fiscal year 2003. The adoption of SFAS No. 144 has not had
a material effect on the Company's consolidated financial statements.
SYSCO adopted the provisions of the Emerging Issues Task Force (EITF)
Issue 02-17 "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" effective October 2002. EITF No.
02-17 addresses the intangible asset recognition criteria of SFAS No.
141 "Business Combinations" and provides that an intangible asset
related to customer intangibles may exist even though the relationship
is not evidenced by a contract. This adoption of this consensus did not
have a material impact on SYSCO's consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 02-16
"Accounting by a Customer (including a Reseller) for Cash Consideration
Received from a Vendor." EITF No. 02-16 provides guidance as to the
recognition and classification of monies received from vendors. The
consensus will be effective for SYSCO's financial statements for fiscal
year 2004. Management believes that the classification provisions of
the consensus will have no material effect on SYSCO's consolidated
financial statements and is evaluating the impact (if any) of the
recognition provisions on SYSCO's consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21
"Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 addresses
how to account for revenue arrangements with multiple deliverables and
provides guidance relating to when such arrangements should be divided
into components for revenue recognition purposes. The consensus will be
effective for agreements entered into in fiscal year 2004 with early
adoption permitted. The adoption of this consensus will not have a
material impact on SYSCO's consolidated financial statements.
8
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation
requires certain guarantees to be recorded at fair value and also
requires a guarantor to make certain disclosures regarding guarantees.
The Interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements are
effective SYSCO's third quarter of fiscal 2003. Management does not
expect that the adoption of this Interpretation will have a material
impact on SYSCO's consolidated financial statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148
provides alternative methods of transition to SFAS No. 123, "Accounting
for Stock-Based Compensation" fair value method of accounting for
stock-based employee compensation if a Company elects to adopt these
provisions. SFAS No. 148 also specifies required disclosures of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual
and interim financial statements. These disclosure requirements will be
effective for SYSCO's financial statements for the third quarter of
fiscal 2003.
9. SUPPLEMENTAL GUARANTOR INFORMATION
In May 2002, SYSCO International, Co., a wholly owned subsidiary of
SYSCO, issued $200,000,000 of 6.10% notes due in 2012. The notes are
fully and unconditionally guaranteed by SYSCO.
The following condensed consolidating financial statements present
separately the financial position, results of operations and cash flows
of the parent guarantor (SYSCO), the subsidiary issuer (SYSCO
International) and all other non-guarantor subsidiaries of SYSCO (Other
Non-Guarantor Subsidiaries) on a combined basis and eliminating
entries. The financial information for SYSCO includes corporate
activities as well as certain operating companies which are operated as
divisions of SYSCO. Beginning with the third quarter of fiscal 2003,
these divisions are operated as subsidiaries and their results will be
included in the Other Non-Guarantor Subsidiaries column.
<Table>
<Caption>
CONDENSED CONSOLIDATING BALANCE SHEET -- DECEMBER 28, 2002
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Current assets ................... $ 490,169 $ 4 $ 2,850,606 $ -- $ 3,340,779
Investment in
subsidiaries ................... 5,748,761 207,535 212,044 (6,168,340) --
Plant and equipment, net ........ 292,741 -- 1,511,950 -- 1,804,691
Other assets ..................... 292,771 1,343 1,044,403 -- 1,338,517
--------------- --------------- --------------- --------------- ---------------
Total assets ..................... $ 6,824,442 $ 208,882 $ 5,619,003 $ (6,168,340) $ 6,483,987
=============== =============== =============== =============== ===============
Current liabilities .............. $ 828,797 $ 74,166 $ 1,523,949 $ -- $ 2,426,912
Intercompany payables
(receivables) .................. 2,538,596 (60,259) (2,478,337) -- --
Long-term debt ................... 1,155,902 199,399 39,346 -- 1,394,647
Other liabilities ................ 100,031 -- 361,281 -- 461,312
Shareholders' equity ............. 2,201,116 (4,424) 6,172,764 (6,168,340) 2,201,116
--------------- --------------- --------------- --------------- ---------------
Total liabilities and
shareholders' equity ........... $ 6,824,442 $ 208,882 $ 5,619,003 $ (6,168,340) $ 6,483,987
=============== =============== =============== =============== ===============
</Table>
9
<Table>
<Caption>
CONDENSED CONSOLIDATING BALANCE SHEET -- JUNE 29, 2002
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Current assets ................... $ 526,259 $ 10,010 $ 2,617,020 $ -- $ 3,153,289
Investment in
subsidiaries ................... 5,279,299 204,064 194,854 (5,678,217) --
Plant and equipment, net ........ 271,971 -- 1,425,811 -- 1,697,782
Other assets ..................... 228,320 1,418 908,944 -- 1,138,682
--------------- --------------- --------------- --------------- ---------------
Total assets ..................... $ 6,305,849 $ 215,492 $ 5,146,629 $ (5,678,217) $ 5,989,753
=============== =============== =============== =============== ===============
Current liabilities .............. $ 790,631 $ 64,554 $ 1,384,172 $ -- $ 2,239,357
Intercompany payables
(receivables) .................. 2,353,921 (47,508) (2,306,413) -- --
Long-term debt ................... 933,028 199,366 43,913 -- 1,176,307
Other liabilities ................ 95,750 -- 345,820 -- 441,570
Shareholders' equity ............. 2,132,519 (920) 5,679,137 (5,678,217) 2,132,519
--------------- --------------- --------------- --------------- ---------------
Total liabilities and
shareholders' equity ........... $ 6,305,849 $ 215,492 $ 5,146,629 $ (5,678,217) $ 5,989,753
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING BALANCE SHEET --DECEMBER 29, 2001
-----------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Current assets ................... $ 494,950 $ -- $ 2,460,545 $ -- $ 2,955,495
Investment in subsidiaries ....... 4,872,279 -- -- (4,872,279) --
Plant and equipment, net ........ 262,192 -- 1,358,270 -- 1,620,462
Other assets ..................... 200,384 -- 766,538 -- 966,922
--------------- --------------- --------------- --------------- ---------------
Total assets ..................... $ 5,829,805 $ -- $ 4,585,353 $ (4,872,279) $ 5,542,879
=============== =============== =============== =============== ===============
Current liabilities .............. $ 770,278 $ -- $ 1,172,986 $ -- $ 1,943,264
Intercompany payables
(receivables) .................. 1,782,042 -- (1,782,042) -- --
Long-term debt ................... 1,031,383 -- 47,190 -- 1,078,573
Other liabilities ................ 60,927 -- 274,940 -- 335,867
Shareholders' equity ............. 2,185,175 -- 4,872,279 (4,872,279) 2,185,175
--------------- --------------- --------------- --------------- ---------------
Total liabilities and
shareholders' equity ........... $ 5,829,805 $ -- $ 4,585,353 $ (4,872,279) $ 5,542,879
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS
FOR THE 26-WEEK PERIOD ENDED DECEMBER 28, 2002
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Sales ............................ $ 1,651,729 $ -- $ 11,121,490 $ -- $ 12,773,219
Cost of sales .................... 1,278,537 -- 8,973,883 -- 10,252,420
Operating expenses ............... 313,327 606 1,583,992 -- 1,897,925
Interest expense (income) ........ 151,764 5,101 (122,534) -- 34,331
Other, net ....................... 127 0 (6,145) -- (6,018)
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses ......... 1,743,755 5,707 10,429,196 -- 12,178,658
--------------- --------------- --------------- --------------- ---------------
Earnings before income taxes ..... (92,026) (5,707) 692,294 -- 594,561
Income tax (benefit) provision ... (35,200) (2,183) 264,803 -- 227,420
Equity in earnings of
Subsidiaries ................... 423,967 -- -- (423,967) --
--------------- --------------- --------------- --------------- ---------------
Net earnings (loss) .............. $ 367,141 $ (3,524) $ 427,491 $ (423,967) $ 367,141
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS
FOR THE 26-WEEK PERIOD ENDED DECEMBER 29, 2001
-----------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Sales ........................... $ 1,587,992 $ -- $ 9,831,652 $ -- $ 11,419,644
Cost of sales ................... 1,239,063 -- 7,926,209 -- 9,165,272
Operating expenses .............. 274,836 -- 1,425,975 -- 1,700,811
Interest expense (income) ....... 130,663 -- (98,286) -- 32,377
Other, net ...................... (6) -- (1,053) -- (1,059)
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses ........ 1,644,556 -- 9,252,845 -- 10,897,401
--------------- --------------- --------------- --------------- ---------------
Earnings before income taxes .... (56,564) -- 578,807 -- 522,243
Income tax (benefit) provision .. (21,636) -- 221,394 -- 199,758
Equity in earnings of
subsidiaries .................. 357,413 -- -- (357,413) --
--------------- --------------- --------------- --------------- ---------------
Net earnings .................... $ 322,485 $ -- $ 357,413 $ (357,413) $ 322,485
=============== =============== =============== =============== ===============
</Table>
10
<Table>
<Caption>
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS
FOR THE 13-WEEK PERIOD ENDED DECEMBER 28, 2002
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Sales ............................ $ 803,835 $ -- $ 5,544,962 $ -- $ 6,348,797
Cost of sales .................... 622,904 -- 4,474,812 -- 5,097,716
Operating expenses ............... 147,064 290 789,936 -- 937,290
Interest expense (income) ........ 76,145 2,565 (61,207) -- 17,503
Other, net ....................... 164 (1) (2,769) -- (2,606)
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses ......... 846,277 2,854 5,200,772 -- 6,049,903
--------------- --------------- --------------- --------------- ---------------
Earnings before income taxes ..... (42,442) (2,854) 344,190 -- 298,894
Income tax (benefit) provision ... (16,234) (1,092) 131,653 -- 114,327
Equity in earnings of
Subsidiaries ................... 210,775 -- -- (210,775) --
--------------- --------------- --------------- --------------- ---------------
Net earnings (loss) .............. $ 184,567 $ (1,762) $ 212,537 $ (210,775) $ 184,567
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING RESULTS OF OPERATIONS
FOR THE 13-WEEK PERIOD ENDED DECEMBER 29, 2001
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Sales ............................ $ 761,810 $ -- $ 4,829,156 $ -- $ 5,590,966
Cost of sales .................... 596,009 -- 3,885,646 -- 4,481,655
Operating expenses ............... 132,626 -- 703,729 -- 836,355
Interest expense (income) ........ 67,170 -- (50,657) -- 16,513
Other, net ....................... (57) -- (233) -- (290)
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses ......... 795,748 -- 4,538,485 -- 5,334,233
--------------- --------------- --------------- --------------- ---------------
Earnings before income taxes ..... (33,938) -- 290,671 -- 256,733
Income tax (benefit) provision ... (12,982) -- 111,182 -- 98,200
Equity in earnings of
Subsidiaries ................... 179,489 -- -- (179,489) --
--------------- --------------- --------------- --------------- ---------------
Net earnings ..................... $ 158,533 $ -- $ 179,489 $ (179,489) $ 158,533
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING CASH FLOWS
FOR THE 26-WEEK PERIOD ENDED DECEMBER 28, 2002
------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Net cash provided by (used for):
Operating activities ............. $ (13,602) $ 4,844 $ 465,295 $ -- $ 456,537
Investing activities ............. (253,213) -- (176,910) -- (430,123)
Financing activities ............. (90,674) 1,352 (6,957) -- (96,279)
Intercompany activity ............ 308,995 (16,202) (292,793) -- --
--------------- --------------- --------------- --------------- ---------------
Net (decrease) increase in cash .. (48,494) (10,006) (11,365) -- (69,865)
Cash at the beginning of the
period ......................... 92,448 10,006 95,985 -- 198,439
--------------- --------------- --------------- --------------- ---------------
Cash at the end of the
period ......................... $ 43,954 $ -- $ 84,620 $ -- $ 128,574
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
CONDENSED CONSOLIDATING CASH FLOWS
FOR THE 26-WEEK PERIOD ENDED DECEMBER 29, 2001
-------------------------------------------------------------------------------------------
SYSCO OTHER NON-GUARANTOR CONSOLIDATED
SYSCO INTERNATIONAL SUBSIDIARIES ELIMINATIONS TOTALS
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
Net cash provided by (used for):
Operating activities ............. $ 65,827 $ -- $ 295,776 $ -- $ 361,603
Investing activities ............. (39,918) -- (183,214) -- (223,132)
Financing activities ............. (140,388) -- (17,983) -- (158,371)
Intercompany activity ............ 119,325 -- (119,325) -- --
--------------- --------------- --------------- --------------- ---------------
Net increase (decrease) in cash .. 4,846 (24,746) -- (19,900)
Cash at the beginning of the
period ......................... 39,832 -- 95,911 -- 135,743
--------------- --------------- --------------- --------------- ---------------
Cash at the end of the
period ......................... $ 44,678 $ -- $ 71,165 $ -- $ 115,843
=============== =============== =============== =============== ===============
</Table>
11
10. BUSINESS SEGMENT INFORMATION
The accounting policies for the segments are the same as those
disclosed in the Company's Fiscal 2002 Annual Report on Form 10-K. The
Company has aggregated its operating companies into five 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 three other
segments, including the Company's specialty produce, meat 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.
<Table>
<Caption>
26-Weeks Ended 13-Weeks Ended
---------------------------------- ----------------------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 28, 2002 Dec. 29, 2001
--------------- --------------- --------------- ---------------
Sales (in thousands):
Broadline $ 10,548,934 $ 9,378,633 $ 5,227,677 $ 4,575,700
SYGMA 1,419,918 1,307,725 710,334 657,427
Other 927,004 820,473 475,654 403,075
Intersegment sales (122,637) (87,187) (64,868) (45,236)
--------------- --------------- --------------- ---------------
Total $ 12,773,219 $ 11,419,644 $ 6,348,797 $ 5,590,966
=============== =============== =============== ===============
</Table>
<Table>
<Caption>
26-Weeks Ended 13-Weeks Ended
---------------------------------- ----------------------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 28, 2002 Dec. 29, 2001
--------------- --------------- --------------- ---------------
Earnings before income taxes (in thousands):
Broadline $ 603,632 $ 539,859 $ 303,401 $ 265,572
SYGMA 10,616 9,765 5,380 5,287
Other 24,278 21,400 12,302 10,749
--------------- --------------- --------------- ---------------
Total segments 638,526 571,024 321,083 281,608
Unallocated corporate expenses (43,965) (48,781) (22,189) (24,875)
--------------- --------------- --------------- ---------------
Total $ 594,561 $ 522,243 $ 298,894 $ 256,733
=============== =============== =============== ===============
</Table>
<Table>
<Caption>
Dec. 28, 2002 June 29, 2002 Dec. 29, 2001
--------------- --------------- ---------------
Assets (in thousands):
Broadline $ 4,269,652 $ 3,983,216 $ 3,530,859
SYGMA 187,993 176,093 169,785
Other 470,970 424,982 417,345
--------------- --------------- ---------------
Total segments 4,928,615 4,584,291 4,117,989
Corporate 1,555,372 1,405,462 1,424,890
--------------- --------------- ---------------
Total $ 6,483,987 $ 5,989,753 $ 5,542,879
=============== =============== ===============
</Table>
12
11. 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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
SYSCO provides marketing and distribution services to foodservice
customers and suppliers throughout the United States and Canada. The
Company intends to continue to expand its market share through
profitable sales growth, foldouts, acquisitions, and constant emphasis
on the development of its consolidated buying programs. The Company
also strives to increase the effectiveness of its marketing associates
and the productivity of its warehousing and distribution activities.
These objectives require continuing investment. SYSCO's resources
include cash provided by operations and access to capital from
financial markets.
The Company generated $456,537,000 in net cash from operations for the
twenty-six week period ended December 28, 2002, compared with
$361,603,000 for the comparable period in fiscal 2002. The increase in
deferred tax balances was due to the deferral of federal and state
income tax payments resulting from the Company's reorganization of its
supply chain and amounted to approximately $217,000,000 for the
twenty-six week period ended December 28, 2002 compared to $68,000,000
for the comparable period in fiscal 2002.
A federal tax payment of $75,000,000 normally due in the fourth quarter
of fiscal 2001 was deferred until the first quarter of fiscal 2002 as
allowed by the Internal Revenue Service due to the Texas tropical storm
Allison disaster.
Cash flow from operations for the twenty-six week period ended December
28, 2002 was negatively impacted by increases in accounts receivables
balances of $98,222,000 and inventory balances of $130,767,000 offset
by increases in accounts payable balances of $38,411,000. The first and
second quarter of fiscal 2003 had increased sales over the fourth
quarter of fiscal 2002 to schools and universities and the operators
who service them, all of which generally have payment terms longer than
the SYSCO average. In addition, an increase in payment terms was
granted to a large customer as part of a contract renewal. SYSCO also
experienced increased volumes in sales to another large customer with
payment terms greater than the SYSCO average. The fiscal second quarter
also ends in a holiday period which typically slows down customer
payment cycles. These factors all contributed to the increase in
receivable balances at the end of the second quarter. The increased
sales volumes in the first and second quarter of fiscal 2003 over the
fourth quarter of fiscal 2002 also contributed to the increase in
inventory balances. The fiscal second quarter also ends in a holiday
period which at December normally results in higher inventory levels.
The increased inventory balances also contributed to the increased
accounts payable balances.
The working capital effects on the first twenty-six weeks of fiscal
2002 are not comparable to fiscal 2003. The events of September 11,
2001 resulted in sequentially lower sales for the second quarter of
fiscal 2002 which in turn resulted in decreased receivables, payables
and a lower increase in inventory balances.
14
Cash used for investing activities was $430,123,000 for the twenty-six
week period ended December 28, 2002, compared with $223,132,000 used in
the comparable period in fiscal 2002. Expenditures for facilities,
fleet and other equipment were $217,799,000 for the twenty-six week
period ended December 28, 2002, compared with $215,181,000 for the
comparable period in fiscal 2002. Total capital expenditures in fiscal
2003 are expected to be in the range of $425,000,000 to $475,000,000
down from the Company's previous estimate of $450,000,000 to
$500,000,000. The decrease in the estimate reflects the timing of
capital projects and not a reduction in the number or scope of
projects. Projected capital expenditures include the continuation of
the fold-out program; facility, fleet and other equipment replacements
and expansions; and the Company's supply chain initiatives.
In October 2002, SYSCO acquired Abbott Foods, Inc., an independently
owned broadline foodservice distributor located in Columbus, Ohio, and
the net assets of Pronamics, the quick-service distribution division of
prizm brandz located in Canada. In November 2002, SYSCO acquired Asian
Foods, Inc., a specialty distributor of products and services to the
Asian foodservice market located in St. Paul, Minnesota and Kansas
City, Missouri and certain assets of the Denver operations of Marriott
Distribution Services, Inc., a wholly owned subsidiary of Marriott
International, Inc. SYSCO expended approximately $168,244,000 in cash
related to acquisitions during the first twenty-six weeks of fiscal
2003.
Cash used for financing activities was $96,279,000 for the twenty-six
week period ended December 28, 2002, compared with $158,371,000 for the
comparable period in fiscal 2002. Stock repurchases in the twenty-six
week period ended December 28, 2002 totaled 8,199,700 shares at a cost
of $243,381,000 as compared to 8,946,500 shares at a cost of
$218,656,000 for the comparable period in fiscal 2002. The remaining
number of shares available for repurchase as of December 28, 2002 as
authorized by the Board was 17,363,500.
Dividends paid in the twenty-six week period ended December 28, 2002
were $118,395,000, or $0.18 per share, as compared to $93,640,000, or
$0.14 per share, in the comparable period of fiscal 2002. In November
2002, SYSCO declared its regular quarterly dividend for the third
quarter of fiscal 2003, increasing it to $0.11 per share, payable in
January 2003.
As of December 28, 2002, SYSCO had uncommitted bank lines of credit,
which provide for unsecured borrowings for working capital of up to
$95,000,000, of which none was outstanding at December 28, 2002.
As of December 28, 2002, SYSCO's borrowings under its commercial paper
programs were $274,429,000. Such borrowings were $344,790,000 as of
February 3, 2003. During the twenty-six week period ended December 28,
2002, commercial paper and short-term bank borrowings ranged from
approximately $55,813,000 to $495,703,000.
Long-term debt to capitalization ratio was 38.8% at December 28, 2002,
within the 35% to 40% target ratio.
15
Cash generated from operations is first allocated to working capital
requirements. Any remaining cash generated from operations, as
supplemented by commercial paper and other bank borrowings, may, in 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, 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.
Results of Operations
Sales increased 11.9% during the twenty-six weeks and 13.6% in the
second quarter of fiscal 2003 over the comparable periods of the prior
year. After adjusting for internally estimated product cost decreases
(deflation) and acquisitions, real sales growth was approximately 7.3%
for the first twenty-six weeks of fiscal 2003. Acquisitions represented
6.2% of sales increases and deflation was 1.6%. This compared to real
sales growth of 1.3% for the first twenty-six weeks of fiscal 2002,
after adjusting the 7.2% in overall sales growth by 3.2% for
acquisitions and 2.7% for inflation. After adjusting for internally
estimated product cost decreases and acquisitions, real sales growth
was approximately 7.6% for the second quarter of fiscal 2003.
Acquisitions represented 6.9% of sales increases and deflation was
0.9%. This compared to real sales growth of 0.7% for the second quarter
of fiscal 2002, after adjusting the 5.7% in overall sales growth by
3.0% for acquisitions and 2.0% for inflation.
Cost of sales was 80.3% for the first twenty-six weeks and second
quarter of fiscal 2003, respectively, as compared to 80.3% and 80.2%,
respectively, for the comparable periods in the prior year. The
increase in cost of sales for the second quarter of fiscal 2003 was
mainly attributed to the higher cost of sales at SERCA whose results
are not reflected in the prior period as it was acquired in March 2002.
Operating expenses were 14.9% of sales for the first twenty-six weeks
of fiscal 2003 and 14.8% for the second quarter of fiscal 2003, as
compared to 14.9% and 15.0%, respectively, for the comparable periods
in prior year. The reduction in operating expenses as a percentage to
sales in the second quarter is primarily attributed to increases in
operating efficiencies in an increased sales period. In addition,
amortization of goodwill was discontinued in fiscal 2003 with the
adoption of SFAS No. 142, "Accounting for Goodwill and Other Intangible
Assets." Goodwill amortization for the twenty-six weeks and the second
quarter of fiscal 2002 was $12,223,000 and $6,435,000, respectively.
Management expects that its net pension cost related to its defined
benefit obligations for fiscal 2003 will be approximately $20,000,000
higher than fiscal 2002, or approximately $5,000,000 higher per quarter
primarily due to previous changes in management's assumptions including
those related to the discount rate and expected return on plan assets.
Interest expense increased 6.0% during the first twenty-six weeks and
the second quarter of fiscal 2003, respectively, over the comparable
periods of the prior year, primarily due to increased borrowing levels.
16
Other net income increased to $6,018,000 in the first twenty-six weeks
of fiscal 2003. The increase includes a gain on the sale of a facility
and other miscellaneous items.
Income taxes for the periods presented reflect an effective rate of
38.25%.
Pretax earnings and net earnings increased 13.8% for the first
twenty-six weeks and 16.4% for the second quarter of fiscal 2003 over
the comparable periods of the prior year. The increases were due to the
factors discussed above.
Basic earnings per share increased 14.3% for the first twenty-six weeks
and 16.7% for the second quarter of fiscal 2003 over the comparable
periods of the prior year. Diluted earnings per share increased 14.6%
for the first twenty-six weeks and 16.7% for the second quarter of
fiscal 2003 over the comparable periods of the prior year. The
increases were the result of factors discussed above as well as a
reduction of shares outstanding due to share repurchases.
Broadline Segment
The Broadline segment had sales increases of 12.5% and 14.2% for the
twenty-six weeks and thirteen weeks ended December 28, 2002,
respectively, as compared to the comparable prior year periods. This
increase was due primarily to the acquisition of SERCA, increased sales
to marketing associate-served customers including increased sales of
SYSCO Brand products and increased sales to multi-unit customers. These
increases were reflected in increased sales to the Company's existing
customer base and to new customers. Excluding SERCA, marketing
associate-served sales as a percentage of broadline sales increased to
55.9% and 54.7%, respectively, for the twenty-six weeks and thirteen
weeks ended December 28, 2002, respectively, as compared to 55.2% and
54.1%, respectively, for the comparable prior year periods. Excluding
SERCA, SYSCO Brand sales as a percentage of broadline sales, increased
to 54.9% and 54.7%, respectively, for the twenty-six weeks and thirteen
weeks ended December 28, 2002 as compared to 53.2% and 53.7%,
respectively, for the comparable prior year periods.
Pretax earnings for the Broadline segment increased by 11.8% and 14.2%
for the twenty-six weeks and thirteen weeks ended December 28, 2002,
respectively, over the comparable prior year periods. The increases in
pretax earnings were primarily due to increases in sales to marketing
associate served customers and in sales of SYSCO Brand products, both
of which generate higher margins, increased operating efficiencies
resulting in lower expenses as a percentage to sales and the
acquisition of SERCA.
SYGMA Segment
SYGMA segment sales increased by 8.6% and 8.0% for the twenty-six weeks
and thirteen weeks ended December 28, 2002, respectively, over the
comparable prior year periods. The increases were due primarily to
sales growth in SYGMA's existing customer base and the acquisition of
Pronamics.
17
Pretax earnings for the SYGMA segment increased by 8.7% and 1.8% for
the twenty-six weeks and thirteen weeks ended December 28, 2002,
respectively, over the comparable prior year periods. The increases
were primarily a result of increased sales and operating efficiencies.
Other Segment
Other segment sales increased by 13.0% and 18.0% for the twenty-six
weeks and thirteen weeks ended December 28, 2002, respectively, over
the comparable prior year periods. The increases were due to increased
sales to the existing customer base, sales to new customers, the
acquisition of Asian Foods, Inc. and increased sales to SYSCO broadline
companies.
Pretax earnings for the Other segment increased by 13.4% and 14.4% for
the twenty-six weeks and thirteen weeks ended December 28, 2002,
respectively, over the comparable prior year periods. The increases
were primarily a result of increased sales and operating efficiencies.
Critical Accounting Policies
A discussion of critical accounting policies is included in the
Company's Fiscal 2002 Annual Report on Form 10-K. There have been no
material changes in critical accounting policies since the date of that
filing.
New Accounting Standards
SYSCO adopted the provisions of SFAS No. 142, "Accounting for Goodwill
and Other Intangible Assets" effective with the beginning of fiscal
year 2003. As a result, the amortization of goodwill was discontinued.
Management has completed its preliminary assessment of the impact that
the adoption of SFAS No. 142 had on the Company's consolidated
financial statements and has concluded that there was no impairment to
the carrying value of goodwill. Goodwill amortization, net of tax, for
the first twenty-six weeks of fiscal 2002 was $10,213,000, or $.01
earnings per share on a basic and diluted basis.
SYSCO adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective with the
beginning of fiscal year 2003. The adoption of SFAS No. 144 has not had
a material effect on the Company's consolidated financial statements.
SYSCO adopted the provisions of the Emerging Issues Task Force (EITF)
Issue 02-17 "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" effective October 2002. EITF No.
02-17 addresses the intangible asset recognition criteria of SFAS No.
141 "Business Combinations" and provides that an intangible asset
related to customer intangibles may exist even though the relationship
is not evidenced by a contract. This adoption of this consensus did not
have a material impact on SYSCO's consolidated financial statements.
18
In November 2002, the EITF reached a consensus on Issue No. 02-16
"Accounting by a Customer (including a Reseller) for Cash Consideration
Received from a Vendor." EITF No. 02-16 provides guidance as to the
recognition and classification of monies received from vendors. The
consensus will be effective for SYSCO's financial statements for fiscal
year 2004. Management believes that the classification provisions of
the consensus will have no material effect on SYSCO's consolidated
financial statements and is evaluating the impact (if any) of the
recognition provisions on SYSCO's consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21
"Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 addresses
how to account for revenue arrangements with multiple deliverables and
provides guidance relating to when such arrangements should be divided
into components for revenue recognition purposes. The consensus will be
effective for agreements entered into in fiscal year 2004 with early
adoption permitted. The adoption of this consensus will not have a
material impact on SYSCO's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation
requires certain guarantees to be recorded at fair value and also
requires a guarantor to make certain disclosures regarding guarantees.
The Interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements are
effective SYSCO's third quarter of fiscal 2003. Management does not
expect that the adoption of this Interpretation will have a material
impact on SYSCO's consolidated financial statements or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148
provides alternative methods of transition to SFAS No. 123, "Accounting
for Stock-Based Compensation" fair value method of accounting for
stock-based employee compensation if a Company elects to adopt these
provisions. SFAS No. 148 also specifies required disclosures of an
entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual
and interim financial statements. These disclosure requirements will be
effective for SYSCO's financial statements for the third quarter of
fiscal 2003.
19
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 December 28, 2002, the
Company had outstanding one interest rate swap agreement whereby SYSCO
exchanged the fixed interest payments on the $200,000,000 principal
amount of 4.75% notes for floating interest rates. At December 28, 2002
the Company had outstanding $274,429,000 of commercial paper at
variable rates of interest with maturities through February 3, 2003.
The Company's remaining debt obligations of $1,207,171,000 were
primarily at fixed rates of interest except for $200,000,000 in fixed
rate debt swapped to a floating rate of interest as discussed above.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, 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 the
evaluation date. There have been no significant changes in the
Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
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, the impact of ongoing legal
proceedings, anticipated capital expenditures, the ability to increase
market share, sales growth, and SYSCO's ability to meet cash
requirements while maintaining proper liquidity. These statements
involve risks and uncertainties and are based on management's current
expectations and estimates; actual results may differ materially. Those
risks and uncertainties that could impact these statements include the
risks relating to the foodservice distribution industry's relatively
low profit margins and sensitivity to general economic conditions,
including the current economic environment; SYSCO's leverage and debt
risks; the ultimate outcome of litigation; and internal factors such as
the ability to control expenses.
20
In addition, share repurchases could be affected by market prices for
the Company's securities as well as management's decision to utilize
its capital for other purposes. The effect of market risks could be
impacted by future borrowing levels and certain economic factors such
as interest rates. For a more detailed discussion of these and other
factors that could cause actual results to differ from those contained
in the forward-looking statements, see the Company's Annual Report on
Form 10-K for the fiscal year ended June 29, 2002.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
SYSCO is engaged in various legal proceedings which have
arisen but have not been fully adjudicated. These proceedings,
in the opinion of management, will not have a material adverse
effect upon the consolidated financial statements of the
Company when ultimately concluded.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
SYSCO held its 2002 Annual Meeting of Stockholders on November
8, 2002. Four directors, Judith B. Craven, Richard G. Merrill,
Phyllis S. Sewell and Richard G. Tilghman, were elected for a
three-year term. Directors whose terms continued after the
meeting included Colin G. Campbell, Charles H. Cotros,
Jonathan Golden, Thomas E. Lankford, Frank H. Richardson,
Richard J. Schnieders and Jackie M. Ward. Mr. Cotros retired
from the Board on December 31, 2002 and John K. Stubblefield,
Jr. was appointed to fill the vacancy and serve the remainder
of his term.
Other matters voted on included a shareholder proposal
regarding declassification of the Board and a shareholder
proposal regarding genetically engineered food products.
The voting results were as follows:
<Table>
<Caption>
NUMBER OF VOTES CAST
----------------------------------------------------------
Against/ Broker
Matter Voted Upon For Withheld Abstained Non-Votes
- --------------------------------------- ----------------- ---------------- ---------------- ----------------
Election as Director:
Judith B. Craven 538,343,333 12,964,674 N/A N/A
Richard G. Merrill 537,639,860 13,668,147 N/A N/A
Phyllis S. Sewell 538,132,110 13,175,897 N/A N/A
Richard G. Tilghman 545,929,956 5,378,051
Shareholder Proposal on Declassified
Board 277,523,221 184,680,352 4,981,095 84,123,339
Shareholder Proposal on Genetically
Engineered 27,884,888 418,257,888 21,041,892 84,123,339
Food Products
</Table>
22
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(a) Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3(a) to Form 10-K for the year ended June
28, 1997 (File No. 1-6544).
3(b) Bylaws, as amended and restated February 8, 2002, incorporated
by reference to 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 Form10-Q for the quarter ended January 1, 2000
(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).
23
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).
+*10(a) Retiree Equity Deferral Plan Effective November 22, 2002.
*15(a) Report from Ernst & Young LLP dated February 10, 2003, re:
unaudited financial statements.
*15(b) Acknowledgment letter from Ernst & Young LLP.
*99(a) CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99(b) CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
* Filed herewith.
+ Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K.
(b) Reports on Form 8-K:
On October 28, 2002, the Company filed a current report on Form 8-K
announcing the results of its first quarter ended September 28, 2002 .
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSCO CORPORATION
(Registrant)
By /s/ RICHARD J. SCHNIEDERS
------------------------------------
Richard J. Schnieders
Chairman and Chief Executive Officer
Date: February 10, 2003
By /s/ JOHN K. STUBBLEFIELD, JR.
------------------------------------
John K. Stubblefield, Jr.
Executive Vice President,
Finance & Administration
Date: February 10, 2003
25
CERTIFICATION
I, Richard J. Schnieders, Chairman and Chief Executive Officer of Sysco
Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sysco Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
26
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
-----------------------------------------
/s/ RICHARD J. SCHNIEDERS
-----------------------------------------
Richard J. Schnieders
Chairman and Chief Executive Officer
Date: February 10, 2003
- -----------------------
27
CERTIFICATION
I, John K. Stubblefield Jr., Executive Vice President, Finance and
Administration of Sysco Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sysco Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls;
28
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
--------------------------------------
/s/ JOHN K. STUBBLEFIELD, JR.
--------------------------------------
John K. Stubblefield, Jr.
Executive Vice President,
Finance and Administration
Date: February 10, 2003
- ------------------------
EXHIBIT INDEX
<Table>
<Caption>
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 Form10-Q
for the quarter ended January 1, 2000 (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).
</Table>
<Table>
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).
+*10(a) Retiree Equity Deferral Plan Effective November 22,
2002.
*15(a) Report from Ernst & Young LLP dated February 10,
2002, re: unaudited financial statements.
*15(b) Acknowledgment letter from Ernst & Young LLP.
*99(a) CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*99(b) CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
- ----------
* Filed herewith.
+ Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K.