10-Q 1 h03000e10vq.txt SYSCO CORPORATION - DATED DECEMBER 28, 2002 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
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
1 PART I - FINANCIAL INFORMATION Item 1. Financial Statements SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data)
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 ============= ============= =============
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)
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 ============== ============== ============== ==============
3 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS (Unaudited) (In Thousands)
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
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:
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 ============== ============== ============== ==============
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
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 ================= ================= ================= =================
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.
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 =============== =============== =============== =============== ===============
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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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
10
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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
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 =============== =============== =============== =============== ===============
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.
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 =============== =============== =============== ===============
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 =============== =============== =============== ===============
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 =============== =============== ===============
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:
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
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
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).
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.
---------- * Filed herewith. + Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.