10-Q 1 d294991d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544

 

 

 

LOGO

Sysco Corporation

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   74-1648137

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

1390 Enclave Parkway

Houston, Texas

  77077-2099
(Address of principal executive offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code:

(281) 584-1390

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   þ    Accelerated Filer   ¨
Non-accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

584,568,889 shares of common stock were outstanding as of January 28, 2012.

 

 

 


Table of Contents

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      22   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      39   

Item 4.

  Controls and Procedures      39   
  PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings      41   

Item 1A.

  Risk Factors      41   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

  Defaults Upon Senior Securities      41   

Item 5.

  Other Information      41   

Item 6.

  Exhibits      41   

Signatures

     43   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

 

     Dec. 31, 2011     Jul. 2, 2011     Jan. 1, 2011  
     (unaudited)           (unaudited)  

ASSETS

      

Current assets

      

Cash and cash equivalents

   $ 336,531      $ 639,765      $ 209,755   

Accounts and notes receivable, less allowances of $71,180, $42,436, and $67,237

     2,882,730        2,898,283        2,623,300   

Inventories

     2,213,153        2,073,766        1,963,397   

Deferred income taxes

     142,068        —          —     

Prepaid expenses and other current assets

     73,568        72,496        70,430   

Prepaid income taxes

     —          48,572        —     
  

 

 

   

 

 

   

 

 

 

Total current assets

     5,648,050        5,732,882        4,866,882   

Plant and equipment at cost, less depreciation

     3,736,137        3,512,389        3,370,553   

Other assets

      

Goodwill

     1,630,879        1,633,289        1,577,108   

Intangibles, less amortization

     102,594        109,938        104,511   

Restricted cash

     132,031        110,516        134,579   

Other assets

     204,336        286,541        274,650   
  

 

 

   

 

 

   

 

 

 

Total other assets

     2,069,840        2,140,284        2,090,848   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 11,454,027      $ 11,385,555      $ 10,328,283   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities

      

Notes payable

   $ 2,500      $ 181,975      $ —     

Accounts payable

     2,074,396        2,183,417        1,804,690   

Accrued expenses

     857,538        856,569        761,954   

Accrued income taxes

     123,420        —          47,738   

Deferred income taxes

     —          146,083        99,285   

Current maturities of long-term debt

     205,916        207,031        7,867   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,263,770        3,575,075        2,721,534   

Other liabilities

      

Long-term debt

     2,649,346        2,279,517        2,653,529   

Deferred income taxes

     218,314        204,223        185,239   

Other long-term liabilities

     634,982        621,498        773,490   
  

 

 

   

 

 

   

 

 

 

Total other liabilities

     3,502,642        3,105,238        3,612,258   

Commitments and 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 2,000,000,000 shares, issued 765,174,900 shares

     765,175        765,175        765,175   

Paid-in capital

     907,991        887,754        848,612   

Retained earnings

     7,923,413        7,681,669        7,392,996   

Accumulated other comprehensive loss

     (323,565     (259,958     (387,421

Treasury stock at cost, 181,352,211, 173,597,346 and 183,761,810 shares

     (4,585,399     (4,369,398     (4,624,871
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     4,687,615        4,705,242        3,994,491   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 11,454,027      $ 11,385,555      $ 10,328,283   
  

 

 

   

 

 

   

 

 

 

Note: The July 2, 2011 balance sheet has been derived from the audited financial statements at that date.

See Notes to Consolidated Financial Statements

 

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Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)

(In thousands, except for share and per share data)

 

     13-Week Period Ended     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  

Sales

   $ 10,244,421      $ 9,384,852      $ 20,830,811      $ 19,136,126   

Cost of sales

     8,398,771        7,623,185        17,037,561        15,528,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,845,650        1,761,667        3,793,250        3,607,771   

Operating expenses

     1,418,652        1,324,642        2,856,912        2,664,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     426,998        437,025        936,338        943,265   

Interest expense

     28,324        28,060        57,798        59,161   

Other expense (income), net

     (3,472     (1,300     (3,222     (2,984
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     402,146        410,265        881,762        887,088   

Income taxes

     152,033        152,092        328,996        329,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 250,113      $ 258,173      $ 552,766      $ 557,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings:

        

Basic earnings per share

   $ 0.43      $ 0.44      $ 0.94      $ 0.95   

Diluted earnings per share

     0.43        0.44        0.94        0.95   

Average shares outstanding

     586,188,302        584,943,749        589,095,964        586,827,575   

Diluted shares outstanding

     587,034,204        587,110,338        590,241,651        589,106,837   

Dividends declared per common share

   $ 0.27      $ 0.26      $ 0.53      $ 0.51   

See Notes to Consolidated Financial Statements

 

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Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

     13-Week Period Ended      26-Week Period Ended  
     Dec. 31, 2011      Jan. 1, 2011      Dec. 31, 2011     Jan. 1, 2011  

Net earnings

   $ 250,113       $ 258,173       $ 552,766      $ 557,242   

Other comprehensive income (loss):

          

Foreign currency translation adjustment

     18,423         15,322         (83,844     66,787   

Items presented net of tax:

          

Amortization of cash flow hedge

     107         107         214        214   

Amortization of unrecognized prior service cost

     773         638         1,546        1,276   

Amortization of unrecognized actuarial loss, net

     9,216         12,254         18,431        24,507   

Amortization of unrecognized transition obligation

     23         23         46        46   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     28,542         28,344         (63,607     92,830   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 278,655       $ 286,517       $ 489,159      $ 650,072   
  

 

 

    

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED CASH FLOWS (Unaudited)

(In thousands)

 

     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011  

Cash flows from operating activities:

    

Net earnings

   $ 552,766      $ 557,242   

Adjustments to reconcile net earnings to cash provided by operating activities:

    

Share-based compensation expense

     38,757        37,679   

Depreciation and amortization

     200,724        198,230   

Deferred income taxes

     (295,801     (181,295

Provision for losses on receivables

     21,133        19,522   

Other non-cash items

     (811     (1,550

Additional investment in certain assets and liabilities, net of effect of businesses acquired:

    

(Increase) decrease in receivables

     (23,326     4,887   

(Increase) in inventories

     (152,289     (167,912

(Increase) decrease in prepaid expenses and other current assets

     (2,051     1,183   

(Decrease) in accounts payable

     (94,236     (172,217

(Decrease) in accrued expenses

     (1,295     (125,849

Increase in accrued income taxes

     180,362        50,130   

Decrease (increase) in other assets

     72,310        (19,556

Increase in other long-term liabilities

     42,282        82,430   

Excess tax benefits from share-based compensation arrangements

     (10     (277
  

 

 

   

 

 

 

Net cash provided by operating activities

     538,515        282,647   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to plant and equipment

     (433,858     (317,421

Proceeds from sales of plant and equipment

     4,315        2,916   

Acquisition of businesses, net of cash acquired

     (36,765     (26,546

Maturities of short-term investments

     —          24,383   

(Increase) in restricted cash

     (21,515     (10,091
  

 

 

   

 

 

 

Net cash used for investing activities

     (487,823     (326,759
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Bank and commercial paper borrowings (repayments), net

     195,520        173,199   

Other debt borrowings

     2,181        2,441   

Other debt repayments

     (4,068     (4,521

Debt issuance costs

     (974     —     

Proceeds from common stock reissued from treasury for share-based compensation awards

     45,417        65,555   

Treasury stock purchases

     (272,299     (285,442

Dividends paid

     (307,141     (294,089

Excess tax benefits from share-based compensation arrangements

     10        277   
  

 

 

   

 

 

 

Net cash used for financing activities

     (341,354     (342,580
  

 

 

   

 

 

 

Effect of exchange rates on cash

     (12,572     11,004   
  

 

 

   

 

 

 

Net (decrease) in cash and cash equivalents

     (303,234     (375,688

Cash and cash equivalents at beginning of period

     639,765        585,443   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 336,531      $ 209,755   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 58,000      $ 59,140   

Income taxes

     443,044        467,788   

See Notes to Consolidated Financial Statements

 

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Table of Contents

Sysco Corporation and its Consolidated Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.

1. BASIS OF PRESENTATION

The consolidated financial statements have been prepared by the company, without audit, with the exception of the July 2, 2011 consolidated balance sheet which was taken from the audited financial statements included in the company’s Current Report on Form 8-K filed on November 8, 2011, which recasts the financial statements contained in the Company’s Fiscal 2011 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.

Prior year amounts within the consolidated results of operations have been reclassified to conform to the current year presentation as it relates to the classification of certain items in cost of sales and operating expenses within these statements.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company’s Current Report on Form 8-K filed November 8, 2011. As discussed in footnote 12, Sysco’s management changed the way it evaluates the performance of its operating segment results beginning in fiscal 2012. As a result, fiscal 2011 information within Note 12, Note 13 and Note 14 has been revised to show the new basis of operating segment results.

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 15.1 to this Form 10-Q.

2. NEW ACCOUNTING STANDARDS

Testing Goodwill for Impairment

In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment.” This update amends Accounting Standards Codification (ASC) 350, “Intangibles—Goodwill and Other” to allow entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Sysco is currently evaluating the impact this update may have on its goodwill impairment testing.

Disclosures About an Employer’s Participation in a Multiemployer Plan

In September 2011, the FASB issued ASU 2011-09, “Disclosures about an Employer’s Participation in a Multiemployer Plan.” This update amends ASC 715-80, “Compensation—Retirement Benefits—Multiemployer Plans” to require additional disclosures about an employer’s participation in a multiemployer pension plan including additional information about the plans, the level of an employer’s participation in the plans and the financial health of significant plans. This update does not change the accounting for multiemployer pension plans. The amendments in this update are effective for fiscal years ending after December 15, 2011. Sysco is currently evaluating the impact this update will have on its annual disclosures.

Disclosures About Offsetting Assets and Liabilities

In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This update creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements in this update are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013, which will be fiscal 2014 for Sysco. Sysco is currently evaluating the impact this update will have on its disclosures.

 

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Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of items Out of Accumulated Other Comprehensive Income

In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update indefinitely defers the provision of ASU 2011-05, “Presentation of Comprehensive Income,” that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in the statement of net income. The effective date for this update follows the ASU 2011-05, which is fiscal years, and interim periods within those years, beginning after December 15, 2011, which will be fiscal 2013 for Sysco. Sysco will consider the amendments of ASU 2011-12 when adopting ASU 2011-05.

3. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

 

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;

 

 

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and

 

 

Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

 

 

Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 2 measurement in the tables below.

 

 

Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents and restricted cash as Level 1 measurements in the tables below.

 

 

The interest rate swap agreements, discussed further in Note 4, “Derivative Financial Instruments,” are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. These are included as a Level 2 measurement in the tables below.

The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2011, July 2, 2011 and January 1, 2011:

 

     Assets Measured at Fair Value as of Dec. 31, 2011  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Cash and cash equivalents

           

Cash equivalents

   $ —         $ 136,814       $ —         $ 136,814   

Restricted cash

     132,031         —           —           132,031   

Other assets

           

Interest rate swap agreements

     —           10,671         —           10,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 132,031       $ 147,485       $ —         $ 279,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Assets Measured at Fair Value as of Jul. 2, 2011  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Cash and cash equivalents

           

Cash equivalents

   $ 141,350       $ 163,465       $ —         $ 304,815   

Restricted cash

     110,516         —           —           110,516   

Other assets

           

Interest rate swap agreements

     —           13,482         —           13,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 251,866       $ 176,947       $ —         $ 428,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Assets Measured at Fair Value as of Jan. 1, 2011  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Cash and cash equivalents

           

Cash equivalents

   $ —         $ 107,251       $ —         $ 107,251   

Restricted cash

     134,579         —           —           134,579   

Other assets

           

Interest rate swap agreements

     —           13,266         —           13,266   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 134,579       $ 120,517       $ —         $ 255,096   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short-term maturities of these instruments. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities. The fair value of total debt approximated $3,330.7 million, $2,919.4 million and $2,857.7 million as of December 31, 2011, July 2, 2011 and January 1, 2011, respectively. The carrying value of total debt was $2,857.8 million, $2,668.5 million and $2,661.4 million as of December 31, 2011, July 2, 2011 and January 1, 2011, respectively.

4. DERIVATIVE FINANCIAL INSTRUMENTS

Sysco manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this position. The company does not use derivative financial instruments for trading or speculative purposes.

In fiscal 2010, the company entered into two interest rate swap agreements that effectively converted $250.0 million of fixed rate debt maturing in fiscal 2013 and $200.0 million of fixed rate debt maturing in fiscal 2014 to floating rate debt. These transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure. These transactions were designated as fair value hedges since the swaps hedge against the changes in fair value of fixed rate debt resulting from changes in interest rates.

The location and the fair value of derivative instruments in the consolidated balance sheet as of December 31, 2011, July 2, 2011 and January 1, 2011 are as follows:

 

     Asset Derivatives      Liability Derivatives  
      Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  
     (In thousands)  
Fair Value Hedge Relationships:            

Interest rate swap agreements

           

Dec. 31, 2011

     Other assets       $ 10,671         N/A         N/A   

Jul. 2, 2011

     Other assets         13,482         N/A         N/A   

Jan. 1, 2011

     Other assets         13,266         N/A         N/A   

 

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The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended December 31, 2011 and January 1, 2011 presented on a pre-tax basis are as follows:

 

     Location of (Gain)
or  Loss Recognized
in Income
     Amount of (Gain) or Loss
Recognized in Income
 
            13-Week Period Ended  
            Dec. 31, 2011     Jan. 1, 2011  
            (In thousands)  
Fair Value Hedge Relationships:        

Interest rate swap agreements

     Interest expense       $ (3,342   $ (3,986

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 26-week periods ended December 31, 2011 and January 1, 2011 presented on a pre-tax basis are as follows:

 

     Location of (Gain)
or Loss Recognized
in Income
     Amount of (Gain) or Loss
Recognized in Income
 
            26-Week Period Ended  
            Dec. 31, 2011     Jan. 1, 2011  
            (In thousands)  
Fair Value Hedge Relationships:        

Interest rate swap agreements

     Interest expense       $ (3,829   $ (4,486

Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the 13-week periods and 26-week periods ended December 31, 2011 and January 1, 2011. The interest rate swaps do not contain credit-risk-related contingent features.

5. DEBT

As of December 31, 2011, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $95.0 million, of which $2.5 million was outstanding.

On June 30, 2011, a Canadian subsidiary of Sysco entered into a short-term demand loan facility for the purpose of facilitating a distribution from the Canadian subsidiary to Sysco, and Sysco concurrently entered into an agreement with the bank to guarantee the loan. As of July 2, 2011, the amount outstanding under the facility was $182.0 million. The interest rate under the facility was 2.0% and payable on the due date. The loan was repaid in full on July 4, 2011.

In December 2011, Sysco terminated its previously existing revolving credit facility that supported the company’s U.S. and Canadian commercial paper programs. At the same time, Sysco and one of its subsidiaries, Sysco International, ULC, entered into a new $1,000.0 million credit facility supporting the company’s U.S. and Canadian commercial paper programs. This facility provides for borrowings in both U.S. and Canadian dollars. Borrowings by Sysco International, ULC under the credit agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by all wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures. The facility expires on December 29, 2016, but is subject to extension.

As of December 31, 2011, commercial paper issuances outstanding were $375.0 million and were classified as long-term debt since the company’s commercial paper programs are supported by the long-term revolving credit facility described above. During the 26-week period ended December 31, 2011, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $481.4 million.

 

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6. EMPLOYEE BENEFIT PLANS

The components of net company-sponsored benefit cost for the 13-week periods presented are as follows:

 

     Pension Benefits     Other Postretirement Plans  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  
     (In thousands)  

Service cost

   $ 27,056      $ 24,860      $ 114      $ 99   

Interest cost

     36,878        33,743        158        131   

Expected return on plan assets

     (40,402     (32,980     —          —     

Amortization of prior service cost

     1,201        990        54        46   

Recognized net actuarial loss (gain)

     15,042        19,988        (83     (97

Amortization of transition obligation

     —          —          38        38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 39,775      $ 46,601      $ 281      $ 217   
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of net company-sponsored benefit cost for the 26-week periods presented are as follows:

 

     Pension Benefits     Other Postretirement Plans  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  
     (In thousands)  

Service cost

   $ 54,111      $ 49,721      $ 228      $ 198   

Interest cost

     73,757        67,487        316        262   

Expected return on plan assets

     (80,803     (65,960     —          —     

Amortization of prior service cost

     2,402        1,979        108        93   

Recognized net actuarial loss (gain)

     30,083        39,976        (166     (194

Amortization of transition obligation

     —          —          76        76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 79,550      $ 93,203      $ 562      $ 435   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sysco’s contributions to its company-sponsored defined benefit plans were $11.1 million and $9.7 million during the 26-week periods ended December 31, 2011 and January 1, 2011, respectively.

The company made contributions of $140.0 million to its company-sponsored qualified pension plan (Retirement Plan) in fiscal 2011 that would normally have been made in fiscal 2012. Additional contributions to the Retirement Plan are not currently anticipated in fiscal 2012; however, management will evaluate the funding position at the end of fiscal 2012 and select the timing for a contribution at that time. The company’s contributions to the Supplemental Executive Retirement Plan (SERP) and other post-retirement plans are made in the amounts needed to fund current year benefit payments. The estimated fiscal 2012 contributions to fund benefit payments for the SERP and other post-retirement plans are $23.1 million and $0.3 million, respectively.

In order to meet a portion of its obligations under the SERP, Sysco maintains corporate-owned life insurance policies (COLI) on the lives of the participants. In the second quarter of fiscal 2012, approximately $75.0 million of these policies were redeemed and corporate-owned real estate assets were substituted for these policies. None of the life insurance policies or this real estate are considered plan assets of the SERP; rather, the assets are held in a rabbi trust and are therefore available to satisfy the claims of the company’s creditors in the event of bankruptcy or insolvency of the company.

 

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7. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 

     13-Week Period Ended      26-Week Period Ended  
     Dec. 31, 2011      Jan. 1, 2011      Dec. 31, 2011      Jan. 1, 2011  
     (In thousands, except for share and per share data)  

Numerator:

           

Net earnings

   $ 250,113       $ 258,173       $ 552,766       $ 557,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average basic shares outstanding

     586,188,302         584,943,749         589,095,964         586,827,575   

Dilutive effect of share-based awards

     845,902         2,166,589         1,145,687         2,279,262   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares outstanding

     587,034,204         587,110,338         590,241,651         589,106,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share:

   $ 0.43       $ 0.44       $ 0.94       $ 0.95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

   $ 0.43       $ 0.44       $ 0.94       $ 0.95   
  

 

 

    

 

 

    

 

 

    

 

 

 

The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 49,000,000 and 51,500,000 for the second quarter of fiscal 2012 and 2011, respectively. The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 49,500,000 and 49,700,000 for the first 26 weeks of fiscal 2012 and 2011, respectively.

8. SHARE-BASED COMPENSATION

Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employees’ Stock Purchase Plan, and various non-employee director plans.

Stock Incentive Plans

In the first 26 weeks of fiscal 2012, options to purchase 6,329,313 shares were granted to employees from the 2007 Stock Incentive Plan. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per share of options granted during the first 26 weeks of fiscal 2012 was $3.67.

In the first 26 weeks of fiscal 2012, 731,169 restricted stock units were granted to employees from the 2007 Stock Incentive Plan. The majority of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per share of restricted stock units granted during the first 26 weeks of fiscal 2012 was $27.52.

In the first 26 weeks of fiscal 2012, restricted awards in the amount of 63,657 shares were granted to non-employee directors from the 2009 Non-Employee Directors Stock Plan. The non-employee directors may elect to receive these awards in restricted stock shares that will vest at the end of the award’s stated vesting period or as deferred units which convert into shares of Sysco common stock upon a date selected by the non-employee director that is subsequent to the award’s stated vesting date. The fair value of the restricted awards is based on the company’s stock price as of the date of grant. The weighted average grant-date fair value per share of restricted awards granted during the first 26 weeks of fiscal 2012 was $27.65.

 

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Under the 2009 Non-Employee Directors Stock Plan, non-employee directors may elect to receive up to 100% of their annual directors’ fees in Sysco common stock on either an annual or deferred basis. Sysco provides a matching grant of 50% of the number of shares received for the stock election subject to certain limitations. In the first 26 weeks of fiscal 2012, 31,397 shares with a weighted average grant date fair value of $28.46 were issued for these elections in the form of fully vested common stock or deferred units.

Employees’ Stock Purchase Plan

Plan participants purchased 862,945 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first 26 weeks of fiscal 2012.

The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $4.23 during the first 26 weeks of fiscal 2012. The fair value of the stock purchase rights is estimated as the difference between the stock price and the employee purchase price.

All Share-Based Payment Arrangements

The total share-based compensation cost that has been recognized in results of operations was $38.8 million and $37.7 million for the first 26 weeks of fiscal 2012 and fiscal 2011, respectively.

As of December 31, 2011, there was $70.7 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.57 years.

9. INCOME TAXES

Internal Revenue Service Settlement

In the first quarter of fiscal 2010, Sysco reached a settlement with the Internal Revenue Service (IRS) in connection with its audits of the company’s 2003 through 2006 federal income tax returns. As a result of the settlement, Sysco agreed to cease paying U.S. federal taxes related to its affiliate Baugh Supply Chain Cooperative (BSCC) on a deferred basis and pay the amounts that were recorded within deferred taxes related to BSCC over a three-year period as follows:

 

     (In thousands)  

Fiscal 2010

   $ 528,000   

Fiscal 2011

     212,000   

Fiscal 2012

     212,000   

In the first 26 weeks of fiscal 2012, $106.0 million of payments were made related to the settlement. As noted in the table above, $212.0 million was paid related to the settlement in fiscal 2011, of which $106.0 million was paid in the first 26 weeks of fiscal 2011. Remaining amounts to be paid in fiscal 2012 will occur in connection with Sysco’s quarterly tax payments in the third quarter and the fourth quarter. The company believes it has access to sufficient cash on hand, cash flow from operations and current access to capital to make the remaining payments.

Sysco’s deferred taxes were impacted by the timing of these installment payments. Sysco reclassified amounts due within one year from deferred taxes to accrued income taxes at the beginning of each year in which settlement payments were to be made.

Uncertain Tax Positions

As of December 31, 2011, the gross amount of unrecognized tax benefits was $72.5 million and the gross amount of accrued interest liabilities was $35.2 million. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.

 

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Effective Tax Rates

The effective tax rate for the second quarter of fiscal 2012 was 37.81%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.07% for the second quarter of fiscal 2011 was favorably impacted by the gain of $10.3 million recorded to adjust the carrying value of the company’s COLI policies to their cash surrender values in the second quarter of fiscal 2011, which had the impact of decreasing income tax expense for the period by $4.0 million.

The effective tax rate for the first 26 weeks of fiscal 2012 was 37.31%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.18% for the first 26 weeks of fiscal 2011 was favorably impacted by the adjustment of the carrying values of COLI policies to their cash surrender values. The gain of $23.9 million recorded in the first 26 weeks of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $9.2 million.

Other

The determination of the company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

10. ACQUISITIONS

During the first 26 weeks of fiscal 2012, in the aggregate, the company paid cash of $36.8 million for acquisitions made during fiscal 2012. Acquisitions in the first 26 weeks of fiscal 2012 were immaterial to the consolidated financial statements.

Certain acquisitions involve contingent consideration typically payable over periods up to five years only in the event that certain operating results are attained or certain outstanding contingencies are resolved. As of December 31, 2011, aggregate contingent consideration amounts outstanding relating to acquisitions was $64.9 million, of which $46.0 million could result in the recording of additional goodwill.

11. COMMITMENTS AND CONTINGENCIES

Sysco is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible and to probable. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company. However, the final results of legal proceedings cannot be predicted with certainty and if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods.

Multiemployer Pension Plans

Sysco contributes to several multiemployer defined benefit pension plans based on obligations arising under collective bargaining agreements covering union-represented employees. Sysco does not directly manage these multiemployer plans, which are generally managed by boards of trustees, half of whom are appointed by the unions and the other half by other employers contributing to the plan. Based upon the information available from plan administrators, management believes that several of these multiemployer plans are underfunded. In addition, pension-related legislation requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, Sysco expects its contributions to these plans to increase in the future.

 

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Under current law regarding multiemployer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multiemployer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multiemployer plan’s unfunded vested liabilities. Generally, Sysco does not have the greatest share of liability among the participants in any of the plans in which it participates. Based on the information available from plan administrators, which has valuation dates ranging from June 30, 2009 to December 31, 2010, Sysco estimates its share of withdrawal liability on most of the multiemployer plans in which it participates could have been as much as $220.0 million as of December 31, 2011, based on a voluntary withdrawal. This estimate excludes plans for which Sysco has recorded withdrawal liabilities. The majority of the plans Sysco participates in have a valuation date of calendar year-end. As such, the majority of the estimated withdrawal liability results from plans for which the valuation date was December 31, 2010; therefore, the company’s estimated liability reflects the condition of the financial markets as of that date. Due to the lack of current information, management believes Sysco’s current share of the withdrawal liability could materially differ from this estimate. In addition, if a multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the IRS may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund.

As of December 31, 2011, Sysco had approximately $46.9 million in liabilities recorded related to certain multiemployer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred. Recorded withdrawal liabilities are estimated at the time of withdrawal based on the most recently available valuation and participant data for the respective plans; amounts are adjusted in the period of payment to reflect any changes to these estimates. If any of these plans were to undergo a mass withdrawal, as defined by the Pension Benefit Guaranty Corporation, within a two year time frame from the point of our withdrawal, Sysco could have additional liability. The company does not currently believe any mass withdrawals are probable to occur in the applicable two year time frame relating to the plans from which Sysco has voluntarily withdrawn.

Fuel Commitments

Sysco routinely enters into forward purchase commitments for a portion of its projected diesel fuel requirements. As of December 31, 2011, outstanding forward diesel fuel purchase commitments totaled approximately $95.9 million at a fixed price through December 2012.

12. BUSINESS SEGMENT INFORMATION

The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise. The Broadline reportable segment is an aggregation of the company’s United States, Canadian and European Broadline segments. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to their customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. “Other” financial information is attributable to the company’s other operating segments, including the company’s specialty produce and lodging industry segments and a company that distributes to international customers. The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Intersegment sales represent specialty produce products distributed by the Broadline and SYGMA operating companies.

Beginning in the first quarter of fiscal 2012, operating segment results no longer include certain centrally incurred costs for corporate overhead and shared services due to a change in how management evaluates the performance of each of the operating segments. Previously, these centrally incurred costs were charged to the segments based upon the relative level of service used by each operating segment. Management now evaluates the performance of each of our operating segments based on its respective operating income results, which excludes the allocation of certain centrally incurred costs. This results in higher operating income at an operating segment level and higher corporate expenses. Segment reporting for the comparable prior year period has been revised to conform to the new basis of determining segment operating income without the allocation of certain centrally incurred costs. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared service center. These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project.

 

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In addition, beginning in the third quarter of fiscal 2011, the company’s custom-cut meat operations were reorganized to function as part of the United States Broadline segment. As a result, the custom-cut meat operations are included in the Broadline reportable segment in the segment reporting presented below. Previously, these operations were an independent segment and were presented with the “Other” financial information relating to non-reportable segments. Segment reporting for the comparable prior year period has been revised to conform to the new classification of the custom-cut meat operations as part of the Broadline reportable segment.

The following tables set forth certain financial information for Sysco’s business segments:

 

     13-Week Period Ended     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  
     (In thousands)  

Sales:

        

Broadline

   $ 8,320,996      $ 7,594,497      $ 16,979,517      $ 15,542,170   

SYGMA

     1,403,555        1,312,770        2,788,024        2,632,266   

Other

     559,122        515,671        1,147,683        1,041,538   

Intersegment sales

     (39,252     (38,086     (84,413     (79,848
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10,244,421      $ 9,384,852      $ 20,830,811      $ 19,136,126   
  

 

 

   

 

 

   

 

 

   

 

 

 
     13-Week Period Ended     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  
     (In thousands)  

Operating income:

        

Broadline

   $ 564,881      $ 540,397      $ 1,188,996      $ 1,132,941   

SYGMA

     13,296        14,355        28,987        29,343   

Other

     20,253        19,935        44,738        40,923   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     598,430        574,687        1,262,721        1,203,207   

Corporate expenses

     (171,432     (137,662     (326,383     (259,942
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     426,998        437,025        936,338        943,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     28,324        28,060        57,798        59,161   

Other expense (income), net

     (3,472     (1,300     (3,222     (2,984
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   $ 402,146      $ 410,265      $ 881,762      $ 887,088   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Dec. 31, 2011      Jul. 2, 2011      Jan. 1, 2011  
     (In thousands)  

Assets:

        

Broadline

   $ 7,536,722       $ 7,220,046       $ 6,648,750   

SYGMA

     479,962         456,204         417,692   

Other

     822,659         814,174         777,013   
  

 

 

    

 

 

    

 

 

 

Total segments

     8,839,343         8,490,424         7,843,455   

Corporate

     2,614,684         2,895,131         2,484,828   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,454,027       $ 11,385,555       $ 10,328,283   
  

 

 

    

 

 

    

 

 

 

 

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13. SUPPLEMENTAL GUARANTOR INFORMATION – PARENT GUARANTEE

Sysco International, ULC is an unlimited liability company organized under the laws of the Province of British Columbia, Canada and is a wholly-owned subsidiary of Sysco. In May 2002, Sysco International, Co. issued, in a private offering, $200.0 million of 6.10% notes due in 2012. These notes are fully and unconditionally guaranteed by Sysco.

The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the parent guarantor (Sysco), the subsidiary issuer (Sysco International) and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.

 

     Condensed Consolidating Balance Sheet
Dec. 31, 2011
 
     Sysco      Sysco
International
            Other        
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 202,267       $ 8      $ 5,445,775      $ —        $ 5,648,050   

Investment in subsidiaries

     14,859,149         400,840        34,271        (15,294,260     —     

Plant and equipment, net

     647,217         —          3,088,920        —          3,736,137   

Other assets

     321,460         153        1,748,227        —          2,069,840   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 16,030,093       $ 401,001      $ 10,317,193      $ (15,294,260   $ 11,454,027   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 423,796       $ 201,029      $ 2,638,945      $ —        $ 3,263,770   

Intercompany payables (receivables)

     7,984,530         (2,641     (7,981,889     —          —     

Long-term debt

     2,599,524         —          49,822        —          2,649,346   

Other liabilities

     502,536         —          350,760        —          853,296   

Shareholders’ equity

     4,519,707         202,613        15,259,555        (15,294,260     4,687,615   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,030,093       $ 401,001      $ 10,317,193      $ (15,294,260   $ 11,454,027   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Balance Sheet
Jul. 2, 2011
 
     Sysco      Sysco
International
             Other        
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 354,450       $ 34       $ 5,378,398      $ —        $ 5,732,882   

Investment in subsidiaries

     14,014,569         371,866         128,461        (14,514,896     —     

Plant and equipment, net

     569,567         —           2,942,822        —          3,512,389   

Other assets

     378,317         329         1,761,638        —          2,140,284   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 15,316,903       $ 372,229       $ 10,211,319      $ 14,514,896   $ 11,385,555   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 430,300       $ 201,016       $ 2,943,759      $ —        $ 3,575,075   

Intercompany payables (receivables)

     7,800,254         9,301         (7,809,555     —          —     

Long-term debt

     2,227,483         —           52,034        —          2,279,517   

Other liabilities

     405,376         —           420,345        —          825,721   

Shareholders’ equity

     4,453,490         161,912         14,604,736        (14,514,896     4,705,242   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 15,316,903       $ 372,229       $ 10,211,319      $ (14,514,896   $ 11,385,555   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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     Condensed Consolidating Balance Sheet  
     Jan. 1, 2011  
     Sysco      Sysco
International
     Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 132,672       $ 7       $ 4,734,203      $ —        $ 4,866,882   

Investment in subsidiaries

     16,110,660         516,940         125,075        (16,752,675     —     

Plant and equipment, net

     540,534         —           2,830,019        —          3,370,553   

Other assets

     394,587         476         1,695,785        —          2,090,848   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 17,178,453       $ 517,423       $ 9,385,082      $ (16,752,675   $ 10,328,283   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 417,368       $ 1,342       $ 2,302,824      $ —        $ 2,721,534   

Intercompany payables (receivables)

     10,049,861         89,776         (10,139,637     —          —     

Long-term debt

     2,400,988         199,913         52,628        —          2,653,529   

Other liabilities

     512,065         —           446,664        —          958,729   

Shareholders’ equity

     3,798,171         226,392         16,722,603        (16,752,675     3,994,491   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 17,178,453       $ 517,423       $ 9,385,082      $ (16,752,675   $ 10,328,283   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Results of Operations
For the 13-Week Period Ended Dec. 31, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 10,244,421      $ —        $ 10,244,421   

Cost of sales

     —          —          8,398,771        —          8,398,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          1,845,650        —          1,845,650   

Operating expenses

     135,560        32        1,283,060        —          1,418,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (135,560     (32     562,590        —          426,998   

Interest expense (income)

     96,985        2,409        (71,070     —          28,324   

Other expense (income), net

     (2,197     123        (1,398     —          (3,472
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (230,348     (2,564     635,058        —          402,146   

Income tax (benefit) provision

     (86,825     (968     239,826        —          152,033   

Equity in earnings of subsidiaries

     393,636        11,610        —          (405,246     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 250,113      $ 10,014      $ 395,232      $ (405,246   $ 250,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Results of Operations
For the 13-Week Period Ended Jan. 1, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 9,384,852      $ —        $ 9,384,852   

Cost of sales

     —          —          7,623,185        —          7,623,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          1,761,667        —          1,761,667   

Operating expenses

     143,135        32        1,181,475        —          1,324,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (143,135     (32     580,192        —          437,025   

Interest expense (income)

     130,867        3,101        (105,908     —          28,060   

Other expense (income), net

     (9     —          (1,291     —          (1,300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (273,993     (3,133     687,391        —          410,265   

Income tax (benefit) provision

     (101,635     (1,162     254,889        —          152,092   

Equity in earnings of subsidiaries

     430,531        16,273        —          (446,804     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 258,173      $ 14,302      $ 432,502      $ (446,804   $ 258,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

 

     Condensed Consolidating Results of Operations
For the 26-Week Period Ended Dec. 31, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 20,830,811      $ —        $ 20,830,811   

Cost of sales

     —          —          17,037,561        —          17,037,561   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          3,793,250        —          3,793,250   

Operating expenses

     252,523        66        2,604,323        —          2,856,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (252,523     (66     1,188,927        —          936,338   

Interest expense (income)

     193,263        5,145        (140,610     —          57,798   

Other expense (income), net

     (3,512     123        167        —          (3,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (442,274     (5,334     1,329,370        —          881,762   

Income tax (benefit) provision

     (165,018     (1,990     496,004        —          328,996   

Equity in earnings of subsidiaries

     830,022        37,945        —          (867,967     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 552,766      $ 34,601      $ 833,366      $ (867,967   $ 552,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Results of Operations
For the 26-Week Period Ended Jan. 1, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 19,136,126      $ —        $ 19,136,126   

Cost of sales

     —          —          15,528,355        —          15,528,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          3,607,771        —          3,607,771   

Operating expenses

     262,125        65        2,402,316        —          2,664,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (262,125     (65     1,205,455        —          943,265   

Interest expense (income)

     261,856        5,677        (208,372     —          59,161   

Other expense (income), net

     (92     —          (2,892     —          (2,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (523,889     (5,742     1,416,719        —          887,088   

Income tax (benefit) provision

     (194,794     (2,135     526,775        —          329,846   

Equity in earnings of subsidiaries

     886,337        31,747        —          (918,084     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 557,242      $ 28,140      $ 889,944      $ (918,084   $ 557,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Cash Flows
For the 26-Week Period Ended Dec. 31, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (69,367   $ 34,816      $ 573,066      $ 538,515   

Investing activities

     (140,083     —          (347,740     (487,823

Financing activities

     (157,055     —          (184,299     (341,354

Effect of exchange rates on cash

     —          —          (12,572     (12,572

Intercompany activity

     200,109        (34,816     (165,293     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (166,396     —          (136,838     (303,234

Cash and cash equivalents at the beginning of period

     305,513        —          334,252        639,765   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 139,117      $ —        $ 197,414      $ 336,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

 

     Condensed Consolidating Cash Flows
For the 26-Week Period Ended Jan. 1, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (200,386   $ 28,547      $ 454,486      $ 282,647   

Investing activities

     (140,272     —          (186,487     (326,759

Financing activities

     (340,071     —          (2,509     (342,580

Effect of exchange rates on cash

     —          —          11,004        11,004   

Intercompany activity

     403,841        (28,547     (375,294     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (276,888     —          (98,800     (375,688

Cash and cash equivalents at the beginning of period

     373,523        —          211,920        585,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 96,635      $ —        $ 113,120      $ 209,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

14. SUPPLEMENTAL GUARANTOR INFORMATION – SUBSIDIARY GUARANTEES

On January 19, 2011, the wholly-owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. As of December 31, 2011, Sysco had a total of $2,225.0 million in senior notes and debentures outstanding.

The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the parent issuer (Sysco Corporation), the guarantors (U.S. Broadline subsidiaries), and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.

 

     Condensed Consolidating Balance Sheet
Dec. 31, 2011
 
     Sysco      U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 202,267       $ 3,660,988      $ 1,784,795       $ —        $ 5,648,050   

Investment in subsidiaries

     14,859,149         —          —           (14,859,149     —     

Plant and equipment, net

     647,217         1,895,977        1,192,943         —          3,736,137   

Other assets

     321,460         518,934        1,229,446         —          2,069,840   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 16,030,093       $ 6,075,899      $ 4,207,184       $ (14,859,149   $ 11,454,027   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 423,796       $ 872,205      $ 1,967,769       $ —        $ 3,263,770   

Intercompany payables (receivables)

     7,984,530         (8,086,079     101,549         —          —     

Long-term debt

     2,599,524         26,871        22,951         —          2,649,346   

Other liabilities

     502,536         275,475        75,285         —          853,296   

Shareholders’ equity

     4,519,707         12,987,427        2,039,630         (14,859,149     4,687,615   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,030,093       $ 6,075,899      $ 4,207,184       $ (14,859,149   $ 11,454,027   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

18


Table of Contents
     Condensed Consolidating Balance Sheet
Jul. 2, 2011
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 354,450      $ 3,476,921      $ 1,901,511      $ —        $ 5,732,882   

Investment in subsidiaries

     14,014,569        —          —          (14,014,569     —     

Plant and equipment, net

     569,567        1,794,473        1,148,349        —          3,512,389   

Other assets

     378,317        519,664        1,242,303        —          2,140,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 15,316,903      $ 5,791,058      $ 4,292,163      $ (14,014,569   $ 11,385,555   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 430,300      $ 840,586      $ 2,304,189      $ —        $ 3,575,075   

Intercompany payables (receivables)

     7,800,254        (7,701,021     (99,233     —          —     

Long-term debt

     2,227,483        26,542        25,492        —          2,279,517   

Other liabilities

     405,376        343,427        76,918        —          825,721   

Shareholders’ equity

     4,453,490        12,281,524        1,984,797        (14,014,569     4,705,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 15,316,903      $ 5,791,058      $ 4,292,163      $ (14,014,569   $ 11,385,555   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Condensed Consolidating Balance Sheet
Jan. 1, 2011
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 132,672      $ 3,248,279      $ 1,485,931      $ —        $ 4,866,882   

Investment in subsidiaries

     16,110,660        —          —          (16,110,660     —     

Plant and equipment, net

     540,534        1,784,365        1,045,654        —          3,370,553   

Other assets

     394,587        495,369        1,200,892        —          2,090,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 17,178,453      $ 5,528,013      $ 3,732,477      $ (16,110,660   $ 10,328,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 417,368      $ 813,532      $ 1,490,634      $ —        $ 2,721,534   

Intercompany payables (receivables)

     10,049,861        (10,026,079     (23,782     —          —     

Long-term debt

     2,400,988        24,561        227,980        —          2,653,529   

Other liabilities

     512,065        336,429        110,235        —          958,729   

Shareholders’ equity

     3,798,171        14,379,570        1,927,410        (16,110,660     3,994,491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 17,178,453      $ 5,528,013      $ 3,732,477      $ (16,110,660   $ 10,328,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Condensed Consolidating Results of Operations
For the 13-Week Period Ended Dec. 31, 2011
 
     Sysco     U.S. Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ 7,056,282      $ 3,393,450      $ (205,311   $ 10,244,421   

Cost of sales

     —          5,674,008        2,907,268        (182,505     8,398,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          1,382,274        486,182        (22,806     1,845,650   

Operating expenses

     135,560        872,619        433,279        (22,806     1,418,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (135,560     509,655        52,903        —          426,998   

Interest expense (income)

     96,985        (67,483     (1,178     —          28,324   

Other expense (income), net

     (2,197     (701     (574     —          (3,472
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (230,348     577,839        54,655        —          402,146   

Income tax (benefit) provision

     (86,825     218,177        20,681        —          152,033   

Equity in earnings of subsidiaries

     393,636        —          —          (393,636     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 250,113      $ 359,662      $ 33,974      $ (393,636   $ 250,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

 

     Condensed Consolidating Results of Operations
For the 13-Week Period Ended Jan. 1, 2011
 
     Sysco     U.S. Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ 6,446,806      $ 3,090,406      $ (152,360   $ 9,384,852   

Cost of sales

     —          5,124,946        2,629,019        (130,780     7,623,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          1,321,860        461,387        (21,580     1,761,667   

Operating expenses

     143,135        832,111        370,976        (21,580     1,324,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (143,135     489,749        90,411        —          437,025   

Interest expense (income)

     130,867        (101,664     (1,143     —          28,060   

Other expense (income), net

     (9     (444     (847     —          (1,300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (273,993     591,857        92,401        —          410,265   

Income tax (benefit) provision

     (101,635     219,462        34,265        —          152,092   

Equity in earnings of subsidiaries

     430,531        —          —          (430,531     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 258,173      $ 372,395      $ 58,136      $ (430,531   $ 258,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Condensed Consolidating Results of Operations
For the 26-Week Period Ended Dec. 31, 2011
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ 14,376,568      $ 6,850,508      $ (396,265   $ 20,830,811   

Cost of sales

     —          11,538,714        5,850,452        (351,605     17,037,561   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          2,837,854        1,000,056        (44,660     3,793,250   

Operating expenses

     252,523        1,770,650        878,399        (44,660     2,856,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (252,523     1,067,204        121,657        —          936,338   

Interest expense (income)

     193,263        (131,386     (4,079     —          57,798   

Other expense (income), net

     (3,512     (1,264     1,554        —          (3,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (442,274     1,199,854        124,182        —          881,762   

Income tax (benefit) provision

     (165,018     447,680        46,334        —          328,996   

Equity in earnings of subsidiaries

     830,022        —          —          (830,022     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 552,766      $ 752,174      $ 77,848      $ (830,022   $ 552,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Condensed Consolidating Results of Operations
For the 26-Week Period Ended Jan. 1, 2011
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ 13,233,437      $ 6,201,470      $ (298,781   $ 19,136,126   

Cost of sales

     —          10,514,650        5,269,208        (255,503     15,528,355   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          2,718,787        932,262        (43,278     3,607,771   

Operating expenses

     262,125        1,697,388        748,271        (43,278     2,664,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (262,125     1,021,399        183,991        —          943,265   

Interest expense (income)

     261,856        (201,197     (1,498     —          59,161   

Other expense (income), net

     (92     (922     (1,970     —          (2,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (523,889     1,223,518        187,459        —          887,088   

Income tax (benefit) provision

     (194,794     454,937        69,703        —          329,846   

Equity in earnings of subsidiaries

     886,337        —          —          (886,337     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 557,242      $ 768,581      $ 117,756      $ (886,337   $ 557,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

 

     Condensed Consolidating Cash Flows  
     For the 26-Week Period Ended Dec. 31, 2011  
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (69,367   $ 636,579      $ (28,697   $ 538,515   

Investing activities

     (140,083     (211,491     (136,249     (487,823

Financing activities

     (157,055     168        (184,467     (341,354

Effect of exchange rates on cash

     —          —          (12,572     (12,572

Intercompany activity

     200,109        (431,560     231,451        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (166,396     (6,304     (130,534     (303,234

Cash and cash equivalents at the beginning of period

     305,513        32,154        302,098        639,765   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 139,117      $ 25,850      $ 171,564      $ 336,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Cash Flows  
     For the 26-Week Period Ended Jan. 1, 2011  
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (200,386   $ 538,404      $ (55,371   $ 282,647   

Investing activities

     (140,272     (147,795     (38,692     (326,759

Financing activities

     (340,071     (1,321     (1,188     (342,580

Effect of exchange rates on cash

     —          —          11,004        11,004   

Intercompany activity

     403,841        (401,746     (2,095     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (276,888     (12,458     (86,342     (375,688

Cash and cash equivalents at the beginning of period

     373,523        31,935        179,985        585,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 96,635      $ 19,477      $ 93,643      $ 209,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

This discussion should be read in conjunction with our consolidated financial statements as of July 2, 2011, and the fiscal year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Current Report on Form 8-K filed November 8, 2011, which recasts the financial statements and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended July 2, 2011.

Our discussion below of our results includes certain non-GAAP financial measures that we believe better represent our underlying operating performance. Any non-GAAP financial measure will be denoted as an adjusted measure and excludes the impact of our Business Transformation Project and corporate-owned life insurance policies (COLI) policies. More information on the rationale of the use of these measures and reconciliations to GAAP numbers can be found in Non-GAAP Reconciliations.

Overview

Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located throughout the United States, Canada and Ireland and include broadline companies (which include our custom-cut meat operations), specialty produce companies, hotel supply operations, SYGMA (our chain restaurant distribution subsidiary) and a company that distributes to international customers.

We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 17.5% of this approximately $225 billion annual market. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 47% of the total dollars spent on food purchases made at the consumer level in the United States.

General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, have contributed to a decline in the foodservice market. Historically, we have grown at a faster rate than the overall industry and believe we have continued to grow our market share in this fragmented industry. Based on recent industry data, we believe we grew our market share approximately half a point during calendar year 2011 to approximately 17.5%.

Highlights

High levels of product cost inflation and uneven consumer sentiment contributed to a challenging business environment in the first 26 weeks of fiscal 2012. Our case volume growth trends improved in the latter part of the second quarter due to favorable market conditions our customers experienced during the holiday season. Our earnings growth in our underlying business was moderate however due to high levels of inflation and rising operating expenses.

Comparisons of results from the second quarter of fiscal 2012 to the second quarter of fiscal 2011:

 

Sales increased 9.2% to $10.2 billion primarily due to increased prices due to inflation and secondarily from case volume growth.

 

Operating income decreased 2.3%, or $10.0 million, to $427.0 million, primarily driven by rising operating expenses. Gross profit dollars increased 4.8%, or $84.0 million, but declined as a percentage of sales primarily due to the impact of significant inflation in certain product categories. Operating expenses increased 7.1%, or $94.0 million, primarily due to increased pay-related expense, an increase in expenses related to our Business Transformation Project, an increase in fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values. Adjusted operating expenses increased 5.5%, or $72.5 million from the second quarter of fiscal 2011. Adjusted operating income increased 2.5%, or $11.5 million.

 

Net earnings decreased 3.1% to $250.1 million primarily due to the decrease in operating income and also to an increase in the effective tax rate. Adjusted net earnings increased 3.3%.

 

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Basic and diluted earnings per share in the second quarter of fiscal 2012 were $0.43, a 2.3% decrease from the comparable prior year period amount of $0.44 per share. Adjusted diluted earnings per share were $0.46 in the second quarter of fiscal 2012 and $0.45 in the second quarter of fiscal 2011, or an increase of 2.2%.

Comparisons of results from the first 26 weeks of fiscal 2012 to the first 26 weeks of fiscal 2011:

 

Sales increased 8.9% to $20.8 billion primarily due to increased prices resulting from inflation.

 

Operating income decreased 0.7%, or $6.9 million, to $936.3 million, primarily driven by the increased operating expenses. Gross profit dollars increased 5.1%, or $185.5 million, but declined as a percentage of sales primarily due to the impact of significant inflation in certain product categories. Operating expenses increased 7.2%, or $192.4 million, primarily due to increased pay-related expense, an increase in expenses related to our Business Transformation Project, an increase in fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values. Adjusted operating expenses increased 5.4%, or $142.9 million from the first 26 weeks of fiscal 2011. Adjusted operating income increased 4.4%, or $42.5 million.

 

Net earnings decreased 0.8% to $552.8 million primarily due to the decrease in operating income. Adjusted net earnings increased 6.2%.

 

Basic and diluted earnings per share in the first 26 weeks of fiscal 2012 were $0.94, a 1.1% decrease from the comparable prior year period amount of $0.95 per share. Adjusted diluted earnings per share were $1.02 in the first 26 weeks of fiscal 2012 and $0.95 in the first 26 weeks of fiscal 2011, or an increase of 7.4%.

See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.

Trends and Strategy

Trends

General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, have contributed to a slow rate of recovery in the foodservice market.

In addition, we have experienced prolonged levels of high product cost inflation this fiscal year as compared to fiscal 2011. While we are generally able to pass on modest levels of inflation to our customers, we were unable to fully pass through these higher levels of product cost inflation with the same gross margin percentage without negatively impacting our customers’ business and therefore our business. While we cannot predict whether inflation will continue at current levels, periods of high inflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit, operating income and earnings.

We have experienced higher operating costs this fiscal year. Some of the increase has resulted from increased pay-related expenses. Sales compensation includes commissions which are driven by gross profit dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumes. . Since these drivers are variable in nature, increased gross profit dollars and case volumes have increased sales and delivery compensation. We believe pay-related expense could continue to increase if gross profit dollars and case volumes increase. Fuel costs have increased and are expected to continue to increase in fiscal 2012 as a result of anticipated higher fuel prices. Our Business Transformation Project is a key part of our strategy to control costs and grow our market share over the long-term. We believe expenses related to the project will increase in fiscal 2012 as compared to fiscal 2011 as we prepare for the deployment of the project to our operating companies and increase our headcount in our shared services center. Pension costs will decrease in fiscal 2012 primarily due to higher returns on assets of Sysco’s company-sponsored qualified pension plan (Retirement Plan) obtained in fiscal 2011.

 

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Table of Contents

Strategy

We are focused on optimizing our core broadline business in the U.S. and Canada, while continuing to explore appropriate opportunities to profitably grow our market share and create shareholder value through adjacent and international businesses. Day-to-day, our business decisions are driven by our mission to market and deliver great products to our customers with exceptional service, with the aspirational vision of becoming each of our customers’ most valued and trusted business partner. We have identified five strategies to help us achieve our mission and vision:

 

   

Profoundly enrich the experience of doing business with Sysco

 

   

Continuously improve productivity in all areas of our business

 

   

Expand our portfolio of products and services by initiating a customer-centric innovation program

 

   

Explore, assess and pursue new businesses and markets, and

 

   

Develop and effectively integrate a comprehensive, enterprise-wide talent management process.

Business Transformation Project

In fiscal 2011, we began testing our underlying systems and processes of our Business Transformation Project through a pilot implementation. In the first 26 weeks of fiscal 2012, we took additional time to improve the underlying information technology systems’ processes with our pilot company prior to larger scale deployment. These improvements were completed and a second pilot implementation was launched in the early part of the third quarter of fiscal 2012. Once the results from this second pilot implementation have been assessed and we determine that we have reached the point where the underlying system functions as intended, our deployment timeline will be updated. If this assessment is favorable, it is possible that our first wave of multi-location deployment could commence before the end of the fiscal year. Although we expect the investment in the Business Transformation Project to provide meaningful benefits to the company over the long-term, the costs will exceed the benefits during the testing and deployment stages of implementation, including fiscal 2012.

Expenses related to the Business Transformation Project were $36.4 million in second quarter of fiscal 2012 or $0.03 per share and $24.2 million in the second quarter of fiscal 2011 or $0.03 per share. Expenses related to the Business Transformation Project were $73.4 million in the first 26 weeks of fiscal 2012 or $0.08 per share and $46.0 million in the first 26 weeks of fiscal 2011 or $0.04 per share. Based on the improvements in the underlying systems obtained in the first half of fiscal 2012 and while dependent upon the results of our second pilot implementation, we anticipate the software will be ready for its intended use in the second half of fiscal 2012, which will result in reduced capitalization as compared to fiscal 2011 and significantly increased expense from both software amortization and deployment costs. This could occur in the latter part of the third quarter of fiscal 2012. We will also incur increased costs from the ramp up of our shared services center, continuing costs for additional phases of our Business Transformation Project and information technology support costs. Some of these increased costs will be partially offset by benefits obtained from the project, primarily in reduced headcount; however the costs will exceed the benefits in fiscal 2012. We expect our project expenses related to the Business Transformation Project for fiscal 2012 to be approximately $230 million to $250 million and capital expenditures to be approximately $125 million to $145 million.

 

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Results of Operations

The following table sets forth the components of the Results of Operations expressed as a percentage of sales for the periods indicated:

 

     13-Week Period Ended     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  

Sales

     100.0     100.0     100.0     100.0

Cost of sales

     82.0        81.2        81.8        81.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     18.0        18.8        18.2        18.9   

Operating expenses

     13.8        14.1        13.7        13.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4.2        4.7        4.5        4.9   

Interest expense

     0.3        0.3        0.3        0.3   

Other expense (income), net

     (0.0     (0.0     (0.0     (0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     3.9        4.4        4.2        4.6   

Income taxes

     1.5        1.6        1.5        1.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     2.4     2.8     2.7     2.9
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth the change in the components of the Results of Operations expressed as a percentage increase or decrease over the comparable period in the prior year:

 

     13-Week Period     26-Week Period  

Sales

     9.2     8.9

Cost of sales

     10.2        9.7   
  

 

 

   

 

 

 

Gross margin

     4.8        5.1   

Operating expenses

     7.1        7.2   
  

 

 

   

 

 

 

Operating income

     (2.3     (0.7

Interest expense

     0.9        (2.3

Other expense (income), net

     167.1        8.0   
  

 

 

   

 

 

 

Earnings before income taxes

     (2.0     (0.6

Income taxes

     (0.0     (0.3
  

 

 

   

 

 

 

Net earnings

     (3.1 )%      (0.8 )% 
  

 

 

   

 

 

 

Basic earnings per share

     (2.3 )%      (1.1 )% 

Diluted earnings per share

     (2.3     (1.1

Average shares outstanding

     0.2        0.4   

Diluted shares outstanding

     (0.0     0.2   

Sales

Sales were 9.2% higher in the second quarter and 8.9% higher in the first 26 weeks of fiscal 2012 than in the comparable periods of the prior year. Product cost inflation, and the resulting increase in selling prices, impacted sales in the second quarter and first 26 weeks of fiscal 2012. Changes in product costs, an internal measure of inflation or deflation, were estimated as inflation of 6.3% during the second quarter and 6.8% during the first 26 weeks of fiscal 2012, as compared to inflation of 4.5% during the second quarter and 3.9% during the first 26 weeks of fiscal 2011. Case volumes including acquisitions within the last 12 months improved approximately 3.6% in the second quarter and 2.6% during the first 26 weeks of fiscal 2012. Case volumes excluding acquisitions within the last 12 months improved approximately 2.8% in the second quarter and 2.0% during the first 26 weeks of fiscal 2012. Our case volume growth trends improved in the latter part of the second quarter due to favorable market conditions our customers experienced during the holiday season. Our case volumes represent our results from our Broadline and SYGMA segments only. Sales from acquisitions within the last 12 months

 

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Table of Contents

favorably impacted sales by 0.7% for both the second quarter and the first 26 weeks of fiscal 2012. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.1% in the second quarter and positively impacted sales by 0.3% in the first 26 weeks of fiscal 2012 compared to the second quarter and first 26 weeks of fiscal 2011, respectively.

Operating Income

Cost of sales primarily includes our product costs, net of vendor consideration, and includes in-bound freight. Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities. Fuel surcharges are reflected within sales and gross profit; fuel costs are reflected within operating expenses.

Operating income decreased 2.3%, or $10.0 million, in the second quarter of fiscal 2012 from the second quarter of fiscal 2011 to $427.0 million. Operating income decreased 0.7%, or $6.9 million, in the first 26 weeks of fiscal 2012 from the first 26 weeks of fiscal 2011 to $936.3 million. This decrease in operating income for both periods was primarily driven by rising operating expenses. Gross profit dollars increased 4.8%, or $84.0 million, in the second quarter of fiscal 2012 from the second quarter of fiscal 2011, while operating expenses increased 7.1%, or $94.0 million, in the second quarter of fiscal 2012. Gross profit dollars increased 5.1%, or $185.5 million, in the first 26 weeks of fiscal 2012 from the first 26 weeks of fiscal 2011, while operating expenses increased 7.2%, or $192.4 million, in the first 26 weeks of fiscal 2012. Contributing to the increase in operating expenses were increased pay-related expenses, increased expenses related to our Business Transformation Project, increased fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values. Adjusted operating expenses increased 5.5%, or $72.5 million, from the second quarter of fiscal 2011. Adjusted operating income increased 2.5%, or $11.5 million, during the same period. Adjusted operating expenses increased 5.4%, or $142.9 million, from the first 26 weeks of fiscal 2011. Adjusted operating income increased 4.4%, or $42.5 million, during the same period.

Gross profit dollars increased in the second quarter and first 26 weeks of fiscal 2012 as compared to the second quarter and first 26 weeks of fiscal 2011 primarily due to increased sales. Gross margin, which is gross profit as a percentage of sales, was 18.02% in the second quarter of fiscal 2012, a decline of 75 basis points from the gross margin of 18.77% in the second quarter of fiscal 2011. Gross margin was 18.21% in the first 26 weeks of fiscal 2012, a decline of 64 basis points from the gross margin of 18.85% in the first 26 weeks of fiscal 2011. This decline in gross margin was primarily the result of product cost inflation. Sysco’s product cost inflation was estimated to be 6.3% during the second quarter and 6.8% during the first 26 weeks of fiscal 2012. Based on our product sales mix for the second quarter and first 26 weeks of fiscal 2012, we were most impacted by higher levels of inflation in the dairy, meat, frozen and canned and dry product categories. While we are generally able to pass through modest levels of inflation to our customers, we were unable to fully pass through these higher levels of product cost inflation with the same gross margin in these product categories without negatively impacting our customers’ business and therefore our business. While we cannot predict whether inflation will continue at these levels, prolonged periods of high inflation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profit and earnings.

Gross profit dollars for the second quarter and first 26 weeks of fiscal 2012 also increased as a result of higher fuel surcharges. Fuel surcharges were approximately $16.2 million higher in the second quarter and $34.2 million higher in the first 26 weeks of fiscal 2012 than in the comparable prior year periods due to higher fuel prices incurred during the second quarter and first 26 weeks of fiscal 2012 and the application of fuel surcharges to a broader customer base in the second quarter and first 26 weeks of fiscal 2012 as compared to the second quarter and first 26 weeks of fiscal 2011.

Operating expenses for the second quarter and first 26 weeks fiscal 2012 were higher than in the comparable prior year periods primarily due to increased pay-related expenses, increased expenses related to our Business Transformation Project, increased fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values.

Pay-related expenses, excluding labor costs associated with our Business Transformation Project, increased by $58.3 million in the second quarter and $107.7 million in the first 26 weeks of fiscal 2012 over the comparable prior year periods. The increase was primarily due to greater provisions for management incentive accruals, increased sales and delivery compensation and added costs from companies acquired in the last 12 months. Our management incentives are tied to company performance and our estimates for these annual incentives required greater accruals in the second quarter and first 26 weeks of fiscal 2012 as compared to the comparable prior year period. Sales compensation includes commissions which are driven by gross profit dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumes. Since these drivers are variable in nature, increased gross profit dollars and case volumes will increase sales and delivery compensation.

 

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Table of Contents

Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $36.4 million in the second quarter of fiscal 2012 and $24.2 million in the second quarter of fiscal 2011, representing an increase of $12.1 million. Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $73.4 million in the first 26 weeks of fiscal 2012 and $46.0 million in the first 26 weeks of fiscal 2011, representing an increase of $27.4 million. The increase in the second quarter and the first 26 weeks of fiscal 2012 resulted from increased project spending including the increased pay-related expenses and facility-related expenses due to the ramp up of our shared services center. Based on the improvements in the underlying systems obtained in the first half of fiscal 2012 from our first pilot implementation and while dependent upon the results of our second pilot implementation, we anticipate the software will be ready for its intended use in the second half of fiscal 2012, which will result in reduced capitalization as compared to fiscal 2011 and increased expense from both software amortization and deployment costs. This could occur in the latter part of the third quarter of fiscal 2012. We will also incur increased costs from the ramp up of our shared services center, continuing costs for additional phases of our Business Transformation Project and information technology support costs. We believe our expenses related to the Business Transformation Project in fiscal 2012 will be approximately $125 million to $145 million greater than the expense incurred in fiscal 2011.

Sysco’s fuel costs increased by $9.8 million in the second quarter and $23.7 in the first 26 weeks of fiscal 2012 over the comparable prior year periods primarily due to increased contracted and market diesel prices. Our costs per gallon increased 16.2% in the second quarter and 19.2% in the first 26 weeks of fiscal 2012 over the second quarter and the first 26 weeks of fiscal 2011. Our activities to mitigate fuel costs include reducing miles driven by our trucks through improved routing techniques, improving fleet utilization by adjusting idling time and maximum speeds and using fuel surcharges. We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements with a goal of mitigating a portion of the volatility in fuel prices.

Our fuel commitments will result in either additional fuel costs or avoided fuel costs based on the comparison of the prices on the fixed price contracts and market prices for the respective periods. In the second quarter and first 26 weeks of fiscal 2012, the forward purchase commitments resulted in an estimated $5.9 million and $13.6 million, respectively, of avoided fuel costs as the fixed price contracts were generally lower than market prices for the contracted volumes. In the second quarter and first 26 weeks of fiscal 2011, the forward purchase commitments resulted in an estimated $2.0 million and $4.7 million of avoided fuel costs, respectively, as the fixed price contracts were generally lower than market prices for the contracted volumes.

As of December 31, 2011, we had forward diesel fuel commitments totaling approximately $96 million through December 2012. These contracts will lock in the price of approximately 30% to 35% of our fuel purchase needs for the contracted periods at prices near the current market price for diesel for the second half of the fiscal year. Assuming that fuel prices do not rise significantly over recent levels during fiscal 2012, fuel costs exclusive of any amounts recovered through fuel surcharges are expected to increase by approximately $30 million to $40 million as compared to fiscal 2011. Our estimate is based upon current, published quarterly market price projections for diesel, the cost committed to in our forward fuel purchase agreements currently in place for fiscal 2012 and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these assumptions change, in particular if future fuel prices vary significantly from our current estimates. We continue to evaluate all opportunities to offset potential increases in fuel expense, including the use of fuel surcharges and overall expense management. Based on our current projections, we anticipate that the increase in fuel surcharges will offset the majority of our projected fuel cost increase in fiscal 2012 as compared to fiscal 2011.

We adjust the carrying values of our COLI policies to their cash surrender values on an ongoing basis. The cash surrender values of these policies are largely based on the values of underlying investments, which through fiscal 2011 included publicly traded securities. As a result, the cash surrender values of these policies fluctuated with changes in the market value of such securities. The changes in the financial markets resulted in gains for these policies of $10.3 million in the second quarter and $23.9 million in the first 26 weeks of fiscal 2011. Near the end of fiscal 2011, we reallocated all of our policies into low-risk, fixed-income securities to reduce earnings volatility and therefore our adjustments for the first 26 weeks of fiscal 2012 were not significant. While we expect a year over year impact from COLI adjustments during the remaining quarters of fiscal 2012 as compared to the comparable periods of fiscal 2011, we should not incur significant gains or losses in fiscal 2012’s operating income, net earnings and earnings per share from these policies.

 

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Net company-sponsored pension costs in second quarter and first 26 weeks of fiscal 2012 were $6.8 million and $13.7 million lower, respectively, than the comparable prior year periods. The decreases in fiscal 2012 were due primarily to higher returns on assets of Sysco’s Retirement Plan obtained in fiscal 2011.

Net Earnings

Net earnings decreased 3.1% in the second quarter and 0.8% in the first 26 weeks of fiscal 2012 from the comparable periods of the prior year due primarily to declines in operating income. The second quarter was also impacted by an increase in the effective tax rate. Adjusted net earnings increased 3.3% and 6.2% during the same periods.

The effective tax rate for the second quarter of fiscal 2012 was 37.81%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.07% for the second quarter of fiscal 2011 was favorably impacted by the adjustment of the carrying values of our COLI policies to their cash surrender values. The gain of $10.3 million recorded in the second quarter of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $4.0 million.

The effective tax rate for the first 26 weeks of fiscal 2012 was 37.31%. Earnings taxed at lower foreign statutory tax rates had the impact of reducing the effective tax rate.

The effective tax rate of 37.18% for the first 26 weeks of fiscal 2011 was favorably impacted by the adjustment of the carrying values of our COLI policies to their cash surrender values. The gain of $23.9 million recorded in the first 26 weeks of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $9.2 million.

Earnings Per Share

Basic and diluted earnings per share in the second quarter of fiscal 2012 were $0.43, a 2.3% decrease from the comparable prior year period amount of $0.44 per share which was primarily attributable to the decline in net earnings. Adjusted diluted earnings per share were $0.46 in the second quarter of fiscal 2012 and $0.45 in the second quarter of fiscal 2011, or an increase of 2.2%.

Basic and diluted earnings per share in the first 26 weeks of fiscal 2012 were $0.94, a 1.1% decrease from the comparable prior year period amount of $0.95 per share which was primarily attributable to the decline in net earnings. Adjusted diluted earnings per share were $1.02 in the first 26 weeks of fiscal 2012 and $0.95 in the first 26 weeks of fiscal 2011, or an increase of 7.4%.

Non-GAAP Reconciliations

Sysco’s results of operations are impacted by costs from our multi-year Business Transformation Project. Additionally, near the end of fiscal 2011, we reallocated all of our investments in our COLI policies into low-risk, fixed-income securities and therefore we do not expect significant volatility in operating expenses, operating income, net earnings and diluted earnings per share in future periods related to these policies. We experienced significant gains in these policies during fiscal 2011. We do not expect a significant impact on fiscal 2012’s operating income, net earnings and diluted earnings per share in future periods from these policies. Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove the impact of the Business Transformation Project expenses and COLI gains provides an important perspective of underlying business trends and results and provides meaningful supplemental information to both management and investors that is indicative of the performance of the company’s underlying operations and facilitates comparison on a year-over year basis. The company uses these non-GAAP measures when evaluating its financial results as well as for internal planning and forecasting purposes. These financial measures should not be used as a substitute in assessing the company’s results of operations for the 13-week and 26-week periods ending December 31, 2011 and January 1, 2011. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. As a result, in the table below, the results for the second quarter of fiscal 2012 and the second quarter of fiscal 2011 and the first 26 weeks of fiscal 2012 and the first 26 weeks of fiscal 2011 are adjusted to remove expenses related to the Business Transformation Project and gains recorded on the adjustments to the carrying value of COLI policies. Set forth below is a reconciliation of actual operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented:

 

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     13-Week Period Ended Dec. 31, 2011  
     GAAP     Business
Transformation
    COLI     Non-GAAP  
     (In thousands, except for per share data)  

Operating expenses

   $ 1,418,652      $ (36,356   $ 985      $ 1,383,281   

Operating income

     426,998        36,356        (985     462,369   

Net earnings (1)

     250,113        22,610        (985     271,738   

Diluted earnings per share

   $ 0.43      $ 0.03      $ —        $ 0.46   
     13-Week Period Ended Jan. 1, 2011  
     GAAP     Business
Transformation
    COLI     Non-GAAP  
     (In thousands, except for per share data)  

Operating expenses

   $ 1,324,642      $ (24,224   $ 10,335      $ 1,310,753   

Operating income

     437,025        24,224        (10,335     450,914   

Net earnings (1)

     258,173        15,244        (10,335     263,082   

Diluted earnings per share

   $ 0.44      $ 0.03      $ (0.02   $ 0.45   
     13-Week Period Change in Dollars     13-Week Period % Change  
     GAAP     Non-GAAP     GAAP     Non-GAAP  
     (In thousands, except for per share data)              

Operating expenses

   $ 94,010      $ 72,528        7.1     5.5

Operating income

     (10,027     11,455        -2.3     2.5

Net earnings

     (8,060     8,656        -3.1     3.3

Diluted earnings per share

   $ (0.01   $ 0.01        -2.3     2.2

 

(1) 

Tax impact of adjustments was $13,746 and $8,980 for the 13-week periods ended December 31, 2011 and January 1, 2011, respectively.

 

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     26-Week Period Ended Dec. 31, 2011  
     GAAP     Business
Transformation
    COLI     Non-GAAP  
     (In thousands, except for per share data)  

Operating expenses

   $ 2,856,912      $ (73,361   $ 1,779      $ 2,785,330   

Operating income

     936,338        73,361        (1,779     1,007,920   

Net earnings (2)

     552,766        45,990        (1,779     596,977   

Diluted earnings per share

   $ 0.94      $ 0.08      $ —        $ 1.02   
     26-Week Period Ended Jan. 1, 2011  
     GAAP     Business
Transformation
    COLI     Non-GAAP  
     (In thousands, except for per share data)  

Operating expenses

   $ 2,664,506      $ (45,971   $ 23,853      $ 2,642,388   

Operating income

     943,265        45,971        (23,853     965,383   

Net earnings (2)

     557,242        28,879        (23,853     562,268   

Diluted earnings per share

   $ 0.95      $ 0.04      $ (0.04   $ 0.95   
     26-Week Period Change in Dollars     26-Week Period % Change  
     GAAP     Non-GAAP     GAAP     Non-GAAP  
     (In thousands, except for per share data)              

Operating expenses

   $ 192,406      $ 142,942        7.2     5.4

Operating income

     (6,927     42,537        -0.7     4.4

Net earnings

     (4,476     34,709        -0.8     6.2

Diluted earnings per share

   $ (0.01   $ 0.07        -1.1     7.4

 

(2)

Tax impact of adjustments was $27,371 and $17,092 for the 26-week periods ended December 31, 2011 and January 1, 2011, respectively.

Segment Results

We have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise. The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Intersegment sales represent specialty produce products distributed by the Broadline and SYGMA operating companies.

Beginning in the first quarter of fiscal 2012, operating segment results no longer include certain centrally incurred costs for corporate overhead and shared services due to a change in how management evaluates the performance of each of the operating segments. Previously, these centrally incurred costs were charged to the segments based upon the relative level of service used by each operating segment. Management now evaluates the performance of each of our operating segments based on its respective operating income results, which excludes the allocation of certain centrally incurred costs. This results in higher operating income at an operating segment level and higher corporate expenses. Segment reporting for the comparable prior year period has been revised to conform to the new basis of determining segment operating income without the allocation of certain centrally incurred costs. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared service center. These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project.

In addition, beginning in the third quarter of fiscal 2011, the company’s custom-cut meat operations were reorganized to function as part of the United States Broadline segment. As a result, the custom-cut meat operations are included in the Broadline reportable segment in the segment reporting presented below. Previously, these operations were an independent segment and were presented with the “Other” financial information relating to non-reportable segments. Segment reporting for the comparable prior year period has been revised to conform to the new classification of the custom-cut meat operations as part of the Broadline reportable segment.

 

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The following table sets forth the operating income of each of our reportable segments and the other segment expressed as a percentage of each segment’s sales for each period reported and should be read in conjunction with Note 12, “Business Segment Information”:

 

     Operating Income as a
Percentage of Sales
    Operating Income as a
Percentage of Sales
 
     13-Week Period     26-Week Period  
     Dec. 31, 2011     Jan. 1, 2011     Dec. 31, 2011     Jan. 1, 2011  

Broadline

     6.8     7.1     7.0     7.3

SYGMA

     0.9        1.1        1.0        1.1   

Other

     3.6        3.9        3.9        3.9   

The following table sets forth the change in the selected financial data of each of our reportable segments and the other segment expressed as a percentage increase or decrease over the comparable period in the prior year and should be read in conjunction with Note 12, “Business Segment Information”:

 

     13-Week Period     26-Week Period  
     Sales     Operating
Income
    Sales     Operating
Income
 

Broadline

     9.6     4.5     9.2     4.9

SYGMA

     6.9        (7.4     5.9        (1.2

Other

     8.4        1.6        10.2        9.3   

The following table sets forth sales and operating income of each of our reportable segments, the other segment, and intersegment sales, expressed as a percentage of aggregate segment sales, including intersegment sales, and operating income, respectively. For purposes of these statistical tables, operating income of our segments excludes corporate expenses of $171.4 million and $326.4 in the second quarter and the first 26 weeks of fiscal 2012, as compared to $137.7 million and $259.9 in the second quarter and the first 26 weeks of fiscal 2011, that is not charged to our segments. This information should be read in conjunction with Note 12, “Business Segment Information”:

 

     13-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011  
     Sales     Segment Operating
Income
    Sales     Segment Operating
Income
 

Broadline

     81.2     94.4     80.9     94.0

SYGMA

     13.7        2.2        14.0        2.5   

Other

     5.5        3.4        5.5        3.5   

Intersegment sales

     (0.4     —          (0.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 
     26-Week Period Ended  
     Dec. 31, 2011     Jan. 1, 2011  
     Sales     Segment Operating
Income
    Sales     Segment Operating
Income
 

Broadline

     81.5     94.2     81.2     94.2

SYGMA

     13.4        2.3        13.8        2.4   

Other

     5.5        3.5        5.4        3.4   

Intersegment sales

     (0.4     —          (0.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Broadline Segment

Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers and also provides custom-cut meat operations. In the first 26 weeks of fiscal 2012, the Broadline operating results represented approximately 81.5% of Sysco’s overall sales and 94.2% of the aggregated operating income of Sysco’s segments, which excludes corporate expenses and consolidated adjustments.

Sales

Sales were 9.6% greater in the second quarter and 9.2% greater in the first 26 weeks of fiscal 2012 than the comparable prior year periods. Product cost inflation and the resulting increase in selling prices, combined with case volume improvement, contributed to the increase in sales in the second quarter and first 26 weeks of fiscal 2012. Changes in product costs, an internal measure of inflation or deflation, were estimated as inflation of 6.4% and 7.0% in the second quarter and first 26 weeks of fiscal 2012, respectively. Our case volume growth trends improved in the latter part of the second quarter due to favorable market conditions our customers experienced during the holiday season. Non-comparable acquisitions contributed 0.9% to the overall sales comparison for both the second quarter and the first 26 weeks of fiscal 2012, respectively. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.2% in the second quarter and positively impacted sales by 0.3% in the first 26 weeks of fiscal 2012 compared to the second quarter and first 26 weeks of fiscal 2011, respectively.

Operating Income

Operating income increased by 4.5% in the second quarter and 4.9% in the first 26 weeks of fiscal 2012 over the comparable prior year periods. This increase was driven b