10-Q 1 d342468d10q.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)

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

 

For the quarterly period ended March 31, 2012

 

¨ 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   (IRS employer
incorporation or organization)   identification number)

1390 Enclave Parkway

Houston, Texas

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

Registrant’s Telephone Number, Including Area Code:

(281) 584-1390

 

 

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

Indicate by check mark whether the registrant 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  x    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   x    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  x

585,764,508 shares of common stock were outstanding as of April 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

     23   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     39   
Item 4.  

Controls and Procedures

     40   

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 4.  

Mine Safety Disclosures

     41   
Item 5.  

Other Information

     41   
Item 6.  

Exhibits

     42   
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)

 

     Mar. 31, 2012     Jul. 2, 2011     Apr. 2, 2011  
     (unaudited)           (unaudited)  

ASSETS

      

Current assets

      

Cash and cash equivalents

   $ 350,464      $ 639,765      $ 385,668   

Accounts and notes receivable, less allowances of $82,762, $42,436, and $86,668

     3,094,175        2,898,283        2,926,033   

Inventories

     2,250,460        2,073,766        2,047,371   

Deferred income taxes

     144,131        —          —     

Prepaid expenses and other current assets

     85,712        72,496        79,485   

Prepaid income taxes

     —          48,572        —     
  

 

 

   

 

 

   

 

 

 

Total current assets

     5,924,942        5,732,882        5,438,557   

Plant and equipment at cost, less depreciation

     3,846,870        3,512,389        3,419,862   

Other assets

      

Goodwill

     1,659,818        1,633,289        1,596,727   

Intangibles, less amortization

     116,011        109,938        101,518   

Restricted cash

     140,287        110,516        110,488   

Other assets

     204,185        286,541        282,782   
  

 

 

   

 

 

   

 

 

 

Total other assets

     2,120,301        2,140,284        2,091,515   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 11,892,113      $ 11,385,555      $ 10,949,934   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current liabilities

      

Notes payable

   $ 3,250      $ 181,975      $ 2,250   

Accounts payable

     2,285,744        2,183,417        2,143,219   

Accrued expenses

     870,674        856,569        800,155   

Accrued income taxes

     88,112        —          84,838   

Deferred income taxes

     —          146,083        98,946   

Current maturities of long-term debt

     455,972        207,031        7,042   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,703,752        3,575,075        3,136,450   

Other liabilities

      

Long-term debt

     2,412,477        2,279,517        2,663,470   

Deferred income taxes

     245,496        204,223        130,453   

Other long-term liabilities

     652,373        621,498        812,356   
  

 

 

   

 

 

   

 

 

 

Total other liabilities

     3,310,346        3,105,238        3,606,279   

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

     923,189        887,754        861,835   

Retained earnings

     8,024,536        7,681,669        7,499,532   

Accumulated other comprehensive loss

     (286,623     (259,958     (330,060

Treasury stock at cost, 179,884,245, 173,597,346 and 182,347,524 shares

     (4,548,262     (4,369,398     (4,589,277
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     4,878,015        4,705,242        4,207,205   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 11,892,113      $ 11,385,555      $ 10,949,934   
  

 

 

   

 

 

   

 

 

 

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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Table of Contents

Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)

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

 

     13-Week Period Ended     39-Week Period Ended  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  

Sales

   $ 10,504,746      $ 9,761,660      $ 31,335,557      $ 28,897,786   

Cost of sales

     8,633,130        7,929,111        25,670,691        23,457,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,871,616        1,832,549        5,664,866        5,440,320   

Operating expenses

     1,432,786        1,405,062        4,289,698        4,069,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     438,830        427,487        1,375,168        1,370,752   

Interest expense

     28,290        28,972        86,088        88,133   

Other expense (income), net

     (2,248     (6,957     (5,470     (9,941
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     412,788        405,472        1,294,550        1,292,560   

Income taxes

     153,238        146,994        482,234        476,840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 259,550      $ 258,478      $ 812,316      $ 815,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings:

        

Basic earnings per share

   $ 0.44      $ 0.44      $ 1.38      $ 1.39   

Diluted earnings per share

     0.44        0.44        1.38        1.39   

Average shares outstanding

     585,823,393        583,722,009        588,004,593        585,792,383   

Diluted shares outstanding

     587,214,691        585,421,864        589,232,150        587,878,509   

Dividends declared per common share

   $ 0.27      $ 0.26      $ 0.80      $ 0.77   

See Notes to Consolidated Financial Statements

 

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Table of Contents

Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

     13-Week Period Ended      39-Week Period Ended  
     Mar. 31, 2012      Apr. 2, 2011      Mar. 31, 2012     Apr. 2, 2011  

Net earnings

   $ 259,550       $ 258,478       $ 812,316      $ 815,720   

Other comprehensive income (loss):

          

Foreign currency translation adjustment

     26,823         44,339         (57,021     111,126   

Items presented net of tax:

          

Amortization of cash flow hedge

     107         107         321        321   

Amortization of unrecognized prior service cost

     773         638         2,319        1,914   

Amortization of unrecognized actuarial loss, net

     9,215         12,253         27,646        36,760   

Amortization of unrecognized transition obligation

     24         24         70        70   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     36,942         57,361         (26,665     150,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 296,492       $ 315,839       $ 785,651      $ 965,911   
  

 

 

    

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Sysco Corporation and its Consolidated Subsidiaries

CONSOLIDATED CASH FLOWS (Unaudited)

(In thousands)

 

     39-Week Period Ended  
     Mar. 31, 2012     Apr. 2, 2011  

Cash flows from operating activities:

    

Net earnings

   $ 812,316      $ 815,720   

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

    

Share-based compensation expense

     54,328        48,518   

Depreciation and amortization

     304,966        298,307   

Deferred income taxes

     (276,947     (244,658

Provision for losses on receivables

     29,663        35,624   

Other non-cash items

     (1,267     (7,286

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

    

(Increase) in receivables

     (225,668     (301,932

(Increase) in inventories

     (167,964     (244,636

(Increase) in prepaid expenses and other current assets

     (10,380     (7,486

Increase in accounts payable

     104,239        158,488   

Increase (decrease) in accrued expenses

     4,117        (83,826

Increase in accrued income taxes

     141,784        83,580   

Decrease (increase) in other assets

     67,443        (26,622

Increase in other long-term liabilities

     71,674        142,253   

Excess tax benefits from share-based compensation arrangements

     (15     (285
  

 

 

   

 

 

 

Net cash provided by operating activities

     908,289        665,759   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to plant and equipment

     (633,196     (454,054

Proceeds from sales of plant and equipment

     5,852        15,286   

Acquisition of businesses, net of cash acquired

     (83,354     (35,486

Maturities of short-term investments

     —          24,713   

(Increase) decrease in restricted cash

     (29,771     14,000   
  

 

 

   

 

 

 

Net cash used for investing activities

     (740,469     (435,541
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Bank and commercial paper borrowings (repayments), net

     211,267        188,249   

Other debt borrowings

     3,090        2,592   

Other debt repayments

     (6,424     (6,516

Debt issuance costs

     (977     (7

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

     82,545        103,328   

Treasury stock purchases

     (272,299     (291,600

Dividends paid

     (464,809     (445,406

Excess tax benefits from share-based compensation arrangements

     15        285   
  

 

 

   

 

 

 

Net cash used for financing activities

     (447,592     (449,075
  

 

 

   

 

 

 

Effect of exchange rates on cash

     (9,529     19,082   
  

 

 

   

 

 

 

Net (decrease) in cash and cash equivalents

     (289,301     (199,775

Cash and cash equivalents at beginning of period

     639,765        585,443   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 350,464      $ 385,668   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 109,618      $ 111,924   

Income taxes

     617,640        657,961   

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 13, 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 13, Note 14 and Note 15 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. ACCOUNTING CHANGES

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB issued Accounting Standard Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This update amends ASC 820, “Fair Value Measurement” to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. In addition, the update explains how to measure fair value, but does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. This update is effective for interim reporting periods ending after December 15, 2011, which is the third quarter of fiscal 2012 for Sysco. The amendments in this update are to be applied prospectively and early application of this standard was not permitted. The adoption of this standard did not have a material impact on the company’s consolidated financial statements. The required additional disclosures are included in Note 4, “Fair Value Measurements.”

3. 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.

 

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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.

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.

4. 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 5, “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.

 

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The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, July 2, 2011 and April 2, 2011:

 

     Assets Measured at Fair Value as of Mar. 31,  2012  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Cash and cash equivalents

           

Cash equivalents

   $ —         $ 140,283       $ —         $ 140,283   

Prepaid expenses and other current assets

           

Interest rate swap agreement

     —           3,440         —           3,440   

Restricted cash

     140,287         —           —           140,287   

Other assets

           

Interest rate swap agreement

     —           7,005         —           7,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 140,287       $ 150,728       $ —         $ 291,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 Apr. 2, 2011  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Cash and cash equivalents

           

Cash equivalents

   $ —         $ 214,562       $ —         $ 214,562   

Restricted cash

     110,488         —           —           110,488   

Other assets

           

Interest rate swap agreements

     —           10,871         —           10,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 110,488       $ 225,433       $ —         $ 335,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and is considered a Level 2 measurement. The fair value of total debt approximated $3,264.0 million, $2,919.4 million and $2,874.0 million as of March 31, 2012, July 2, 2011 and April 2, 2011, respectively. The carrying value of total debt was $2,871.7 million, $2,668.5 million and $2,672.8 million as of March 31, 2012, July 2, 2011 and April 2, 2011, respectively.

5. 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.

 

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The location and the fair value of derivative instruments in the consolidated balance sheet as of March 31, 2012, July 2, 2011 and April 2, 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

           

Mar. 31, 2012

   Prepaid expenses and other current assets    $ 3,440         N/A         N/A   

Mar. 31, 2012

   Other assets      7,005         N/A         N/A   

Jul. 2, 2011

   Other assets      13,482         N/A         N/A   

Apr. 2, 2011

   Other assets      10,871         N/A         N/A   

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended March 31, 2012 and April 2, 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  
            Mar. 31, 2012     Apr. 2, 2011  
            (In thousands)  

Fair Value Hedge Relationships:

     

Interest rate swap agreements

     Interest expense       $ (2,163   $ (2,261

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week periods ended March 31, 2012 and April 2, 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
 
            39-Week Period Ended  
            Mar. 31, 2012     Apr. 2, 2011  
            (In thousands)  

Fair Value Hedge Relationships:

       

Interest rate swap agreements

     Interest expense       $ (5,993   $ (6,746

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 39-week periods ended March 31, 2012 and April 2, 2011. The interest rate swaps do not contain credit-risk-related contingent features.

6. DEBT

As of March 31, 2012, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $95.0 million, of which $3.3 million was outstanding.

As of March 31, 2012, commercial paper issuances outstanding were $390.0 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 39-week period ended March 31, 2012, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $481.4 million.

 

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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.

In February 2012, Sysco filed with the Securities and Exchange Commission an automatically effective well-known seasoned issuer shelf registration statement for the issuance of an indeterminate amount of common stock, preferred stock, debt securities and guarantees of debt securities that may be issued from time to time.

7. 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  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  
     (In thousands)  

Service cost

   $ 27,055      $ 24,861      $ 114      $ 99   

Interest cost

     36,878        33,743        158        131   

Expected return on plan assets

     (40,401     (32,980     —          —     

Amortization of prior service cost

     1,202        990        53        46   

Recognized net actuarial loss (gain)

     15,042        19,988        (82     (97

Amortization of transition obligation

     —          —          39        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 39,776      $ 46,602      $ 282      $ 218   
  

 

 

   

 

 

   

 

 

   

 

 

 

The components of net company-sponsored benefit cost for the 39-week periods presented are as follows:

 

     Pension Benefits     Other Postretirement Plans  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  
     (In thousands)  

Service cost

   $ 81,166      $ 74,582      $ 342      $ 297   

Interest cost

     110,635        101,230        474        393   

Expected return on plan assets

     (121,204     (98,940     —          —     

Amortization of prior service cost

     3,604        2,969        161        139   

Recognized net actuarial loss (gain)

     45,125        59,964        (248     (291

Amortization of transition obligation

     —          —          115        115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 119,326      $ 139,805      $ 844      $ 653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sysco’s contributions to its company-sponsored defined benefit plans were $16.7 million and $16.0 million during the 39-week periods ended March 31, 2012 and April 2, 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

 

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(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.

8. EARNINGS PER SHARE

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

 

     13-Week Period Ended      39-Week Period Ended  
     Mar. 31, 2012      Apr. 2, 2011      Mar. 31, 2012      Apr. 2, 2011  
     (In thousands, except for share and per share data)  

Numerator:

           

Net earnings

   $ 259,550       $ 258,478       $ 812,316       $ 815,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average basic shares outstanding

     585,823,393         583,722,009         588,004,593         585,792,383   

Dilutive effect of share-based awards

     1,391,298         1,699,855         1,227,557         2,086,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average diluted shares outstanding

     587,214,691         585,421,864         589,232,150         587,878,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share:

   $ 0.44       $ 0.44       $ 1.38       $ 1.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

   $ 0.44       $ 0.44       $ 1.38       $ 1.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 50,000,000 and 54,400,000 for the third 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 49,700,000 and 51,300,000 for the first 39 weeks of fiscal 2012 and 2011, respectively.

9. 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 39 weeks of fiscal 2012, options to purchase 6,390,952 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 39 weeks of fiscal 2012 was $3.64.

In the first 39 weeks of fiscal 2012, 1,443,356 restricted stock units were granted to employees from the 2007 Stock Incentive Plan. Some 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 39 weeks of fiscal 2012 was $27.23.

 

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In the first 39 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 39 weeks of fiscal 2012 was $27.65.

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 39 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 1,266,699 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first 39 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 $4.28 during the first 39 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 $54.3 million and $48.5 million for the first 39 weeks of fiscal 2012 and fiscal 2011, respectively.

As of March 31, 2012, there was $75.7 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 2.50 years.

10. 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 39 weeks of fiscal 2012, $159.0 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 $159.0 million was paid in the first 39 weeks of fiscal 2011. Remaining amounts to be paid in fiscal 2012 will occur in connection with Sysco’s quarterly tax payment in the fourth quarter.

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.

 

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Uncertain Tax Positions

As of March 31, 2012, the gross amount of unrecognized tax benefits was $69.4 million and the gross amount of accrued interest liabilities was $36.1 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.

Effective Tax Rates

The effective tax rate for the third quarter of fiscal 2012 was 37.12%. Indefinitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate.

The effective tax rate of 36.25% for the third quarter of fiscal 2011 was favorably impacted by the recording of a tax benefit of approximately $10.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. This favorable impact was partially offset by the recording of $4.1 million in tax and interest related to various federal and state uncertain tax positions.

The effective tax rate for the first 39 weeks of fiscal 2012 was 37.25%. Indefinitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate.

The effective tax rate of 36.89% for the first 39 weeks of fiscal 2011 was favorably impacted by two items. First, the company recorded a tax benefit of approximately $11.6 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. Second, the company adjusted the carrying values of the company’s COLI policies to their cash surrender values. The gain of $29.5 million recorded in the first 39 weeks of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.3 million. Partially offsetting these favorable impacts was the recording of $7.7 million in tax and interest related to various federal and state uncertain tax positions.

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.

11. ACQUISITIONS

During the first 39 weeks of fiscal 2012, in the aggregate, the company paid cash of $83.4 million for acquisitions made during fiscal 2012 and for contingent consideration related to operations acquired in previous fiscal years. Acquisitions in the first 39 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 March 31, 2012, aggregate contingent consideration amounts outstanding relating to acquisitions was $72.4 million, of which $45.7 million could result in the recording of additional goodwill.

 

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12. 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.

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 March 31, 2012, 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 March 31, 2012, Sysco had approximately $47.7 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 March 31, 2012, outstanding forward diesel fuel purchase commitments totaled approximately $83.4 million at a fixed price through February 2013.

 

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13. 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 both traditional and chain restaurant customers and also provide custom-cut meat operations. 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, a company that distributes specialty imported products 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 and imported specialty 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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The following tables set forth certain financial information for Sysco’s business segments:

 

     13-Week Period Ended     39-Week Period Ended  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  
     (In thousands)  

Sales:

        

Broadline

   $ 8,513,483      $ 7,910,994      $ 25,493,000      $ 23,453,164   

SYGMA

     1,445,214        1,315,439        4,233,238        3,947,705   

Other

     586,440        586,050        1,734,123        1,627,588   

Intersegment sales

     (40,391     (50,823     (124,804     (130,671
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10,504,746      $ 9,761,660      $ 31,335,557      $ 28,897,786   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     13-Week Period Ended     39-Week Period Ended  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  
     (In thousands)  

Operating income:

        

Broadline

   $ 564,603      $ 533,273      $ 1,753,599      $ 1,666,214   

SYGMA

     17,063        17,382        46,050        46,725   

Other

     19,999        29,622        64,737        70,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     601,665        580,277        1,864,386        1,783,484   

Corporate expenses

     (162,835     (152,790     (489,218     (412,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     438,830        427,487        1,375,168        1,370,752   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     28,290        28,972        86,088        88,133   

Other expense (income), net

     (2,248     (6,957     (5,470     (9,941
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

   $ 412,788      $ 405,472      $ 1,294,550      $ 1,292,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Mar. 31, 2012      Jul. 2, 2011      Apr. 2, 2011  
     (In thousands)  

Assets:

        

Broadline

   $ 8,119,798       $ 7,220,046       $ 7,134,189   

SYGMA

     483,348         456,204         424,087   

Other

     871,122         814,174         831,368   
  

 

 

    

 

 

    

 

 

 

Total segments

     9,474,268         8,490,424         8,389,644   

Corporate

     2,417,845         2,895,131         2,560,290   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,892,113       $ 11,385,555       $ 10,949,934   
  

 

 

    

 

 

    

 

 

 

 

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14. 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, comprehensive income 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
Mar. 31, 2012
 
     Sysco      Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 214,681       $ —        $ 5,710,261      $ —        $ 5,924,942   

Investment in subsidiaries

     15,282,816         412,753        53,867        (15,749,436     —     

Plant and equipment, net

     701,743         —          3,145,127        —          3,846,870   

Other assets

     326,707         78        1,793,516        —          2,120,301   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 16,525,947       $ 412,831      $ 10,702,771      $ (15,749,436   $ 11,892,113   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 651,346       $ 204,099      $ 2,848,307      $ —        $ 3,703,752   

Intercompany payables (receivables)

     8,327,458         (1,033     (8,326,425     —          —     

Long-term debt

     2,362,970         —          49,507        —          2,412,477   

Other liabilities

     500,889         —          396,980        —          897,869   

Shareholders’ equity

     4,683,284         209,765        15,734,402        (15,749,436     4,878,015   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,525,947       $ 412,831      $ 10,702,771      $ (15,749,436   $ 11,892,113   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

16


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

Current assets

   $ 178,969       $ —         $ 5,259,588      $ —        $ 5,438,557   

Investment in subsidiaries

     13,888,258         537,424         114,035        (14,539,717     —     

Plant and equipment, net

     583,676         —           2,836,186        —          3,419,862   

Other assets

     378,046         410         1,713,059        —          2,091,515   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 15,028,949       $ 537,834       $ 9,922,868      $ (14,539,717   $ 10,949,934   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 385,558       $ 4,137       $ 2,746,755      $ —        $ 3,136,450   

Intercompany payables (receivables)

     7,736,759         99,435         (7,836,194     —          —     

Long-term debt

     2,411,205         199,928         52,337        —          2,663,470   

Other liabilities

     528,883         —           413,926        —          942,809   

Shareholders’ equity

     3,966,544         234,334         14,546,044        (14,539,717     4,207,205   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 15,028,949       $ 537,834       $ 9,922,868      $ (14,539,717   $ 10,949,934   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Statement of Comprehensive Income
For the 13-Week Period Ended Mar. 31, 2012
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 10,504,746      $ —        $ 10,504,746   

Cost of sales

     —          —          8,633,130        —          8,633,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          1,871,616        —          1,871,616   

Operating expenses

     124,546        19        1,308,221        —          1,432,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (124,546     (19     563,395        —          438,830   

Interest expense (income)

     103,060        2,607        (77,377     —          28,290   

Other expense (income), net

     (1,502     (174     (572     —          (2,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (226,104     (2,452     641,344        —          412,788   

Income tax (benefit) provision

     (83,960     (911     238,109        —          153,238   

Equity in earnings of subsidiaries

     401,694        8,693        —          (410,387     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     259,550        7,152        403,235        (410,387     259,550   

Other comprehensive income (loss)

     10,119        —          26,823        —          36,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 269,669      $ 7,152      $ 430,058      $ (410,387   $ 296,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Statement of Comprehensive Income
For the 13-Week Period Ended Apr. 2, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 9,761,660      $ —        $ 9,761,660   

Cost of sales

     —          —          7,929,111        —          7,929,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          1,832,549        —          1,832,549   

Operating expenses

     148,165        36        1,256,861        —          1,405,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (148,165     (36     575,688        —          427,487   

Interest expense (income)

     95,879        2,317        (69,224     —          28,972   

Other expense (income), net

     (3,106     —          (3,851     —          (6,957
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (240,938     (2,353     648,763        —          405,472   

Income tax (benefit) provision

     (87,357     (851     235,202        —          146,994   

Equity in earnings of subsidiaries

     412,059        9,444        —          (421,503     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     258,478        7,942        413,561        (421,503     258,478   

Other comprehensive income (loss)

     13,022        —          44,339        —          57,361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 271,500      $ 7,942      $ 457,900      $ (421,503   $ 315,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents
     Condensed Consolidating Statement of Comprehensive Income
For the 39-Week Period Ended Mar. 31, 2012
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 31,335,557      $ —        $ 31,335,557   

Cost of sales

     —          —          25,670,691        —          25,670,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          5,664,866        —          5,664,866   

Operating expenses

     377,069        85        3,912,544        —          4,289,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (377,069     (85     1,752,322        —          1,375,168   

Interest expense (income)

     296,323        7,752        (217,987     —          86,088   

Other expense (income), net

     (5,014     (51     (405     —          (5,470
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (668,378     (7,786     1,970,714        —          1,294,550   

Income tax (benefit) provision

     (248,978     (2,901     734,113        —          482,234   

Equity in earnings of subsidiaries

     1,231,716        46,638        —          (1,278,354     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     812,316        41,753        1,236,601        (1,278,354     812,316   

Other comprehensive income (loss)

     30,356        —          (57,021     —          (26,665
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 842,672      $ 41,753      $ 1,179,580      $ (1,278,354   $ 785,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Statement of Comprehensive Income For the 39-Week
Period Ended Apr. 2, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ —        $ 28,897,786      $ —        $ 28,897,786   

Cost of sales

     —          —          23,457,466        —          23,457,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          5,440,320        —          5,440,320   

Operating expenses

     410,290        101        3,659,177        —          4,069,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (410,290     (101     1,781,143        —          1,370,752   

Interest expense (income)

     357,735        7,994        (277,596     —          88,133   

Other expense (income), net

     (3,198     —          (6,743     —          (9,941
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (764,827     (8,095     2,065,482        —          1,292,560   

Income tax (benefit) provision

     (282,151     (2,986     761,977        —          476,840   

Equity in earnings of subsidiaries

     1,298,396        41,191        —          (1,339,587     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     815,720        36,082        1,303,505        (1,339,587     815,720   

Other comprehensive income (loss)

     39,065        —          111,126        —          150,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 854,785      $ 36,082      $ 1,414,631      $ (1,339,587   $ 965,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Cash Flows
For the 39-Week Period Ended Mar. 31, 2012
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (209,046   $ 45,121      $ 1,072,214      $ 908,289   

Investing activities

     (209,944     —          (530,525     (740,469

Financing activities

     (261,622     —          (185,970     (447,592

Effect of exchange rates on cash

     —          —          (9,529     (9,529

Intercompany activity

     521,530        (45,121     (476,409     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (159,082     —          (130,219     (289,301

Cash and cash equivalents at the beginning of period

     305,513        —          334,252        639,765   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 146,431      $ —        $ 204,033      $ 350,464   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents
     Condensed Consolidating Cash Flows
For the 39-Week Period Ended Apr. 2, 2011
 
     Sysco     Sysco
International
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
     (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (351,710   $ 39,372      $ 978,097      $ 665,759   

Investing activities

     (170,172     —          (265,369     (435,541

Financing activities

     (444,484     —          (4,591     (449,075

Effect of exchange rates on cash

     —          —          19,082        19,082   

Intercompany activity

     725,367        (39,372     (685,995     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (240,999     —          41,224        (199,775

Cash and cash equivalents at the beginning of period

     373,523        —          211,920        585,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 132,524      $ —        $ 253,144      $ 385,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

15. 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 March 31, 2012, 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, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (the majority of our 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
Mar. 31, 2012
 
     Sysco      U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 214,681       $ 3,844,705      $ 1,865,556       $ —        $ 5,924,942   

Investment in subsidiaries

     15,282,816         —          —           (15,282,816     —     

Plant and equipment, net

     701,743         1,915,373        1,229,754         —          3,846,870   

Other assets

     326,707         504,852        1,288,742         —          2,120,301   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 16,525,947       $ 6,264,930      $ 4,384,052       $ (15,282,816   $ 11,892,113   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Current liabilities

   $ 651,346       $ 962,558      $ 2,089,848       $ —        $ 3,703,752   

Intercompany payables (receivables)

     8,327,458         (8,379,218     51,760         —          —     

Long-term debt

     2,362,970         24,627        24,880         —          2,412,477   

Other liabilities

     500,889         307,820        89,160         —          897,869   

Shareholders’ equity

     4,683,284         13,349,143        2,128,404         (15,282,816     4,878,015   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,525,947       $ 6,264,930      $ 4,384,052       $ (15,282,816   $ 11,892,113   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

19


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
Apr. 2, 2011
 
     Sysco      U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Current assets

   $ 178,969       $ 3,570,059      $ 1,689,529      $ —        $ 5,438,557   

Investment in subsidiaries

     13,888,258         —          —          (13,888,258     —     

Plant and equipment, net

     583,676         1,782,067        1,054,119        —          3,419,862   

Other assets

     378,046         500,882        1,212,587        —          2,091,515   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 15,028,949       $ 5,853,008      $ 3,956,235      $ (13,888,258   $ 10,949,934   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

   $ 385,558       $ 988,065      $ 1,762,827      $ —        $ 3,136,450   

Intercompany payables (receivables)

     7,736,759         (7,613,836     (122,923     —          —     

Long-term debt

     2,411,205         24,313        227,952        —          2,663,470   

Other liabilities

     528,883         355,312        58,614        —          942,809   

Shareholders’ equity

     3,966,544         12,099,154        2,029,765        (13,888,258     4,207,205   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 15,028,949       $ 5,853,008      $ 3,956,235      $ (13,888,258   $ 10,949,934   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     Condensed Consolidating Statement of Comprehensive Income
For the 13-Week Period Ended Mar. 31, 2012
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
     (In thousands)  

Sales

   $ —        $ 7,161,585      $ 3,556,677      $ (213,516   $ 10,504,746   

Cost of sales

     —          5,771,040        3,053,131        (191,041     8,633,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          1,390,545        503,546        (22,475     1,871,616   

Operating expenses

     124,546        866,651        464,064        (22,475     1,432,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (124,546     523,894        39,482        —          438,830   

Interest expense (income)

     103,060        (73,511     (1,259     —          28,290   

Other expense (income), net

     (1,502     (162     (584     —          (2,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (226,104     597,567        41,325        —          412,788   

Income tax (benefit) provision

     (83,960     221,879        15,319        —          153,238   

Equity in earnings of subsidiaries

     401,694        —          —          (401,694     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     259,550        375,688        26,006        (401,694     259,550   

Other comprehensive income (loss)

     10,119        —          26,823        —          36,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 269,669      $ 375,688      $ 52,829      $ (401,694   $ 296,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
      Condensed Consolidating Statement of Comprehensive Income
For the 13-Week Period Ended Apr. 2, 2011
 
      Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
      (In thousands)  

Sales

   $ —        $ 6,740,097      $ 3,204,336      $ (182,773   $ 9,761,660   

Cost of sales

     —          5,367,078        2,721,761        (159,728     7,929,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          1,373,019        482,575        (23,045     1,832,549   

Operating expenses

     148,165        885,536        394,406        (23,045     1,405,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (148,165     487,483        88,169        —          427,487   

Interest expense (income)

     95,879        (65,674     (1,233     —          28,972   

Other expense (income), net

     (3,106     (2,191     (1,660     —          (6,957
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (240,938     555,348        91,062        —          405,472   

Income tax (benefit) provision

     (87,357     201,305        33,046        —          146,994   

Equity in earnings of subsidiaries

     412,059        —          —          (412,059     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     258,478        354,043        58,016        (412,059     258,478   

Other comprehensive income (loss)

     13,022        —          44,339        —          57,361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 271,500      $ 354,043      $ 102,355      $ (412,059   $ 315,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      Condensed Consolidating Statement of Comprehensive Income
For the 39-Week Period Ended Mar. 31, 2012
 
      Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
      (In thousands)  

Sales

   $ —        $ 21,538,153      $ 10,407,185      $ (609,781   $ 31,335,557   

Cost of sales

     —          17,309,754        8,903,583        (542,646     25,670,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          4,228,399        1,503,602        (67,135     5,664,866   

Operating expenses

     377,069        2,637,301        1,342,463        (67,135     4,289,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (377,069     1,591,098        161,139        —          1,375,168   

Interest expense (income)

     296,323        (204,897     (5,338     —          86,088   

Other expense (income), net

     (5,014     (1,426     970        —          (5,470
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (668,378     1,797,421        165,507        —          1,294,550   

Income tax (benefit) provision

     (248,978     669,559        61,653        —          482,234   

Equity in earnings of subsidiaries

     1,231,716        —          —          (1,231,716     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     812,316        1,127,862        103,854        (1,231,716     812,316   

Other comprehensive income (loss)

     30,356        —          (57,021     —          (26,665
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 842,672      $ 1,127,862      $ 46,833      $ (1,231,716   $ 785,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      Condensed Consolidating Statement of Comprehensive Income
For the 39-Week Period Ended Apr. 2, 2011
 
      Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated
Totals
 
      (In thousands)  

Sales

   $ —        $ 19,973,534      $ 9,405,806      $ (481,554   $ 28,897,786   

Cost of sales

     —          15,881,728        7,990,969        (415,231     23,457,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          4,091,806        1,414,837        (66,323     5,440,320   

Operating expenses

     410,290        2,582,924        1,142,677        (66,323     4,069,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (410,290     1,508,882        272,160        —          1,370,752   

Interest expense (income)

     357,735        (266,871     (2,731     —          88,133   

Other expense (income), net

     (3,198     (3,113     (3,630     —          (9,941
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

     (764,827     1,778,866        278,521        —          1,292,560   

Income tax (benefit) provision

     (282,151     656,242        102,749        —          476,840   

Equity in earnings of subsidiaries

     1,298,396        —          —          (1,298,396     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     815,720        1,122,624        175,772        (1,298,396     815,720   

Other comprehensive income (loss)

     39,065        —          111,126        —          150,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 854,785      $ 1,122,624      $ 286,898      $ (1,298,396   $ 965,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Condensed Consolidating Cash Flows
For the 39-Week Period Ended Mar. 31, 2012
 
     Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
      (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (209,046   $ 1,013,324      $ 104,011      $ 908,289   

Investing activities

     (209,944     (303,194     (227,331     (740,469

Financing activities

     (261,622     (2,965     (183,005     (447,592

Effect of exchange rates on cash

     —          —          (9,529     (9,529

Intercompany activity

     521,530        (708,021     186,491        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (159,082     (856     (129,363     (289,301

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

   $ 146,431      $ 31,298      $ 172,735      $ 350,464   
  

 

 

   

 

 

   

 

 

   

 

 

 
      Condensed Consolidating Cash Flows
For the 39-Week Period Ended Apr. 2, 2011
 
      Sysco     U.S.
Broadline
Subsidiaries
    Other
Non-Guarantor
Subsidiaries
    Consolidated
Totals
 
      (In thousands)  

Cash flows provided by (used for):

        

Operating activities

   $ (351,710   $ 831,058      $ 186,411      $ 665,759   

Investing activities

     (170,172     (206,823     (58,546     (435,541

Financing activities

     (444,484     (1,755     (2,836     (449,075

Effect of exchange rates on cash

     —          —          19,082        19,082   

Intercompany activity

     725,367        (622,195     (103,172     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (240,999     285        40,939        (199,775

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

   $ 132,524      $ 32,220      $ 220,924      $ 385,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents

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, a significant charge from a withdrawal from a multiemployer pension plan, corporate-owned life insurance policies (COLI) policies and recognized tax benefits. 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), a company that distributes specialty imported products 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 costs and competitive pressures in a low growth market environment contributed to a challenging business environment in the first 39 weeks of fiscal 2012. Our case volume growth has shown modest improvement and our earnings growth has been moderate due to high levels of inflation and rising operating expenses, driven in part by our expenses related to our Business Transformation Project.

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

 

   

Sales increased 7.6% to $10.5 billion primarily due to increased prices due to inflation and secondarily from case volume growth.

 

   

Operating income increased 2.7%, or $11.3 million, to $438.8 million, primarily driven by rising gross profit dollars partially offset by increased operating expenses. Gross profit dollars increased 2.1%, or $39.1 million, but declined as a percentage of sales primarily due to the impact of significant inflation in certain product categories and competitive pressures on pricing. Operating expenses increased 2.0%, or $27.7 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. The third quarter of fiscal 2011 included a $36.1 million charge related to a withdrawal from a multiemployer pension plan. Adjusted operating expenses increased 2.6%, or $34.7 million from the third quarter of fiscal 2011. Adjusted operating income increased 0.9%, or $4.3 million.

 

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Table of Contents
   

Net earnings increased 0.4% to $259.6 million primarily due to the increase in operating income, partially offset by a decrease in other income and an increase in the effective tax rate. Adjusted net earnings increased 2.8%.

 

   

Basic and diluted earnings per share in the third quarter of fiscal 2012 were $0.44, which is consistent with the comparable prior year period amount of $0.44 per share. Adjusted diluted earnings per share were $0.49 in the third quarter of fiscal 2012 and $0.48 in the third quarter of fiscal 2011, or an increase of 2.1%.

Comparisons of results from the first 39 weeks of fiscal 2012 to the first 39 weeks of fiscal 2011:

 

   

Sales increased 8.4% to $31.3 billion primarily due increased prices due to inflation and secondarily from case volume growth.

 

   

Operating income increased 0.3%, or $4.4 million, to $1.4 billion, primarily driven by increased gross profit dollars largely offset by increased operating expenses. Gross profit dollars increased 4.1%, or $224.5 million, but declined as a percentage of sales primarily due to the impact of significant inflation in certain product categories and competitive pressures on pricing. Operating expenses increased 5.4%, or $220.1 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. The third quarter of fiscal 2011 included a $36.1 million charge related to a withdrawal from a multiemployer pension plan. Adjusted operating expenses increased 4.5%, or $177.7 million from the first 39 weeks of fiscal 2011. Adjusted operating income increased 3.2%, or $46.9 million.

 

   

Net earnings decreased 0.4% to $812.3 million primarily due to the small increase in operating income which was more than offset by a decrease in other income and a small increase in income tax expense. Adjusted net earnings increased 5.1%.

 

   

Basic and diluted earnings per share in the first 39 weeks of fiscal 2012 were $1.38, a 0.7% decrease from the comparable prior year period amount of $1.39 per share. Adjusted diluted earnings per share were $1.50 in the first 39 weeks of fiscal 2012 and $1.44 in the first 39 weeks of fiscal 2011, or an increase of 4.2%.

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

 

24


Table of Contents

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.

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 third quarter of fiscal 2012. We continue to assess the results of this second pilot implementation and make refinements to the underlying system in order for it to function as intended. We do not anticipate deploying the software to any of our locations during the remainder of fiscal 2012, but believe deployment activities will commence in early fiscal 2013. 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 $49.5 million in third quarter of fiscal 2012 or $0.05 per share and $25.2 million in the third quarter of fiscal 2011 or $0.03 per share. Expenses related to the Business Transformation Project were $122.8 million in the first 39 weeks of fiscal 2012 or $0.12 per share and $71.1 million in the first 39 weeks of fiscal 2011 or $0.08 per share. We do not anticipate the software will be ready for its intended use in the fourth quarter of fiscal 2012; therefore, our expenses related to this project will not be as high as previously anticipated in the remainder of fiscal 2012. As software amortization will not begin until early fiscal 2013, costs to build the software will continue to be capitalized for the remainder of fiscal 2012 and deployment costs in fiscal 2012 will not be as significant as previously anticipated ; however, we anticipate that project expenses for fiscal 2013 will continue to significantly increase primarily due to the initiation of software amortization as the system is placed into service. We expect our costs in fiscal 2012 to increase as compared to fiscal 2011 as we 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 $175 million to $195 million and capital expenditures to be approximately $145 million to $165 million. We continue to evaluate our overall project timeline and believe the costs for the entire project will significantly exceed our original estimate; however, we remain committed to completing this multi-year project and believe it will provide meaningful long-term benefits. We are developing strategies to capture benefits of business transformation prior to the completion of deployment which management believes will offset some or all of the anticipated project costs over the next few years.

 

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Table of Contents

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     39-Week Period Ended  
     Mar. 31, 2012     Apr. 2, 2011     Mar. 31, 2012     Apr. 2, 2011  

Sales

     100.0      100.0     100.0     100.0

Cost of sales

     82.2        81.2        81.9        81.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     17.8        18.8        18.1        18.8   

Operating expenses

     13.6        14.4        13.7        14.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4.2        4.4        4.4        4.7   

Interest expense

     0.3        0.3        0.3        0.3   

Other expense (income), net

     (0.0     (0.1     (0.0     (0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     3.9        4.2        4.1        4.4   

Income taxes

     1.4        1.6        1.5        1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     2.5     2.6     2.6     2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

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     39-Week Period  

Sales

     7.6     8.4

Cost of sales

     8.9        9.4   
  

 

 

   

 

 

 

Gross margin

     2.1        4.1   

Operating expenses

     2.0        5.4   
  

 

 

   

 

 

 

Operating income

     2.7        0.3   

Interest expense

     (2.4     (2.3

Other expense (income), net

     (67.7     (45.0
  

 

 

   

 

 

 

Earnings before income taxes

     1.8        0.2   

Income taxes

     4.2        1.1   
  

 

 

   

 

 

 

Net earnings

     0.4     (0.4 )% 
  

 

 

   

 

 

 

Basic earnings per share

     —       (0.7 )% 

Diluted earnings per share

     —          (0.7

Average shares outstanding

     0.4        0.4   

Diluted shares outstanding

     0.3        0.2   

Sales

Sales were 7.6% higher in the third quarter and 8.4% higher in the first 39 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 third quarter and first 39 weeks of fiscal 2012. Changes in product costs, an internal measure of inflation or deflation, were estimated as inflation of 5.5% during the third quarter and 6.3% during the first 39 weeks of fiscal 2012, as compared to inflation of 5.1% during the third quarter and 4.2% during the first 39 weeks of fiscal 2011. Case volumes including acquisitions within the last 12 months improved approximately 2.9% in the third quarter and 2.7% during the first 39 weeks of fiscal 2012. Case volumes excluding acquisitions within the last 12 months improved approximately 2.3% in the third quarter and 2.1% during the first 39 weeks of fiscal 2012. Our case volumes represent our results from our Broadline and SYGMA segments only. Sales from acquisitions within the last 12 months favorably impacted sales by 0.7% for both the third quarter and the first 39 weeks of fiscal 2012. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.2% in the third quarter and positively impacted sales by 0.1% in the first 39 weeks of fiscal 2012 compared to the third quarter and first 39 weeks of fiscal 2011, respectively.

 

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Table of Contents

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 increased 2.7%, or $11.3 million, in the third quarter of fiscal 2012 from the third quarter of fiscal 2011 to $438.8 million. Operating income increased 0.3%, or $4.4 million, in the first 39 weeks of fiscal 2012 from the first 39 weeks of fiscal 2011 to $1.4 billion. This increase in operating income for both periods was primarily driven by increases in gross profit dollars exceeding increases in operating expenses. Gross profit dollars increased 2.1%, or $39.1 million, in the third quarter of fiscal 2012 from the third quarter of fiscal 2011, while operating expenses increased 2.0%, or $27.7 million, in the third quarter of fiscal 2012. Gross profit dollars increased 4.1%, or $224.5 million, in the first 39 weeks of fiscal 2012 from the first 39 weeks of fiscal 2011, while operating expenses increased 5.4%, or $220.1 million, in the first 39 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. The third quarter of fiscal 2011 included a $36.1 million charge related to a withdrawal from a multiemployer pension plan. Adjusted operating expenses increased 2.6%, or $34.7 million, from the third quarter of fiscal 2011. Adjusted operating income increased 0.9%, or $4.3 million, during the same period. Adjusted operating expenses increased 4.5%, or $177.7 million, from the first 39 weeks of fiscal 2011. Adjusted operating income increased 3.2%, or $46.9 million, during the same period.

Gross profit dollars increased in the third quarter and first 39 weeks of fiscal 2012 as compared to the third quarter and first 39 weeks of fiscal 2011 primarily due to increased sales. Gross margin, which is gross profit as a percentage of sales, was 17.82% in the third quarter of fiscal 2012, a decline of 95 basis points from the gross margin of 18.77% in the third quarter of fiscal 2011. Gross margin was 18.08% in the first 39 weeks of fiscal 2012, a decline of 75 basis points from the gross margin of 18.83% in the first 39 weeks of fiscal 2011. This decline in gross margin was primarily the result of product cost inflation and competitive pressures on pricing. Sysco’s product cost inflation was estimated to be 5.5% during the third quarter and 6.3% during the first 39 weeks of fiscal 2012. Based on our product sales mix for the third quarter of fiscal 2012, we were most impacted by higher levels of inflation in the meat, poultry, canned and dry and frozen product categories. Based on our product sales mix for the first 39 weeks of fiscal 2012, we were most impacted by higher levels of inflation in the meat, canned and dry, dairy, and frozen 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 third quarter and first 39 weeks of fiscal 2012 also increased as a result of higher fuel surcharges. Fuel surcharges were approximately $12.2 million higher in the third quarter and $46.4 million higher in the first 39 weeks of fiscal 2012 than in the comparable prior year periods due to higher fuel prices incurred during the third quarter and first 39 weeks of fiscal 2012 and the application of fuel surcharges to a broader customer base in the third quarter and first 39 weeks of fiscal 2012 as compared to the third quarter and first 39 weeks of fiscal 2011.

Operating expenses for the third quarter and first 39 weeks of 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. The third quarter of fiscal 2011 included a $36.1 million charge related to a withdrawal from a multiemployer pension plan.

Pay-related expenses, excluding labor costs associated with our Business Transformation Project, increased by $29.5 million in the third quarter and $127.3 million in the first 39 weeks of fiscal 2012 over the comparable prior year periods. These increases were primarily due to increased sales and delivery compensation and added costs from companies acquired in the last 12 months. Specific to our third quarter comparison, the increase experienced was partially offset by lower provisions for management incentive accruals. Our management incentives are tied to company performance and our estimates for these

 

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annual incentives required greater accruals in the third quarter of fiscal 2011 as compared to the third quarter of fiscal 2012. 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.

Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $49.5 million in the third quarter of fiscal 2012 and $25.2 million in the third quarter of fiscal 2011, representing an increase of $24.3 million. Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $122.8 million in the first 39 weeks of fiscal 2012 and $71.1 million in the first 39 weeks of fiscal 2011, representing an increase of $51.7 million. The increase in the third quarter and the first 39 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. We do not anticipate that the software will be ready for its intended use in the fourth quarter of fiscal 2012; therefore, our expenses related to this project will not be as high as previously anticipated. As software amortization will not begin until early fiscal 2013, costs to build the software will continue to be capitalized for the remainder of fiscal 2012 and deployment costs in fiscal 2012 will not be as significant as previously anticipated; however, we anticipate that project expenses for fiscal 2013 will continue to significantly increase primarily due to the initiation of software amortization as the system is placed into service. We expect our costs in fiscal 2012 to increase as compared to fiscal 2011 as we 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 $70 million to $90 million greater than the expense incurred in fiscal 2011.

Sysco’s fuel costs increased by $10.4 million in the third quarter and $34.2 million in the first 39 weeks of fiscal 2012 over the comparable prior year periods primarily due to increased contracted and market diesel prices. Our costs per gallon increased 12.5% in the third quarter and 16.9% in the first 39 weeks of fiscal 2012 over the third quarter and the first 39 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 third quarter and first 39 weeks of fiscal 2012, the forward purchase commitments resulted in an estimated $2.7 million and $16.3 million, respectively, of avoided fuel costs as the fixed price contracts were generally lower than market prices for the contracted volumes. In the third quarter and first 39 weeks of fiscal 2011, the forward purchase commitments resulted in an estimated $4.2 million and $9.6 million of avoided fuel costs, respectively, as the fixed price contracts were generally lower than market prices for the contracted volumes.

As of March 31, 2012, we had forward diesel fuel commitments totaling approximately $83.4 million through February 2013. 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 last quarter 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 $35 million to $45 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 $5.7 million in the third quarter and $29.5 million in the first 39 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 39 weeks of fiscal 2012 were not significant. While we expect a year over year impact from COLI adjustments during the remaining quarter of fiscal 2012 as compared to the comparable period 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 third quarter and first 39 weeks of fiscal 2012 were $6.8 million and $20.5 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.

From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our exposure to these plans. In the first 39 weeks of fiscal 2012, we recorded provisions of $5.2 million for withdrawal liabilities from multiemployer pension plans. In the first 39 weeks and third quarter of fiscal 2011, we recorded provisions of $41.5 million and $36.1 million, respectively, for withdrawal liabilities from multiemployer pension plans.

Net Earnings

Net earnings increased 0.4% in the third quarter and decreased 0.4% in the first 39 weeks of fiscal 2012 from the comparable periods of the prior year due primarily to changes in operating income noted above. Both periods were also impacted by a decrease in other income and an increase in the effective tax rate. Adjusted net earnings increased 2.8% and 5.1% during the same periods.

The effective tax rate for the third quarter of fiscal 2012 was 37.12%. Indefinitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate.

The effective tax rate of 36.25% for the third quarter of fiscal 2011 was favorably impacted by the recording of a tax benefit of approximately $10.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. This favorable impact was partially offset by the recording of $4.1 million in tax and interest related to various federal and state uncertain tax positions.

The effective tax rate for the first 39 weeks of fiscal 2012 was 37.25%. Indefinitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate.

The effective tax rate of 36.89% for the first 39 weeks of fiscal 2011 was favorably impacted by two items. First, we recorded a tax benefit of approximately $11.6 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. Second, we adjust the carrying values of our COLI policies to their cash surrender values. The gain of $29.5 million recorded in the first 39 weeks of fiscal 2011 was non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.3 million. Partially offsetting these favorable impacts was the recording of $7.7 million in tax and interest related to various federal and state uncertain tax positions.

Earnings Per Share

Basic and diluted earnings per share in the third quarter of fiscal 2012 were $0.44, which is consistent with the comparable prior year period amount of $0.44 per share. Adjusted diluted earnings per share were $0.49 in the third quarter of fiscal 2012 and $0.48 in the third quarter of fiscal 2011, or an increase of 2.1%.

Basic and diluted earnings per share in the first 39 weeks of fiscal 2012 were $1.38, a 0.7% decrease from the comparable prior year period amount of $1.39 per share which was primarily attributable to the decline in net earnings. Adjusted diluted earnings per share were $1.50 in the first 39 weeks of fiscal 2012 and $1.44 in the first 39 weeks of fiscal 2011, or an increase of 4.2%.

Non-GAAP Reconciliations

Sysco’s results of operations are impacted by costs from our multi-year Business Transformation Project (BTP), significant charges from the withdrawal from a multiemployer pension plan (MEPP) and recognized tax benefits. 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. 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, multiemployer pension plan charges, COLI gains and tax benefits 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.

 

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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 periods presented. 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, each period presented is adjusted to remove expenses related to the Business Transformation Project, significant charges incurred from the withdrawal from a multiemployer pension plan, gains recorded on the adjustments to the carrying value of COLI policies and to remove the impact of tax benefits in fiscal 2011. 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:

 

     13-Week
Period Ended
Mar.  31, 2012
    13-Week
Period Ended
Apr. 2, 2011
    13-Week
Period

Change in
Dollars
    13-Week
Period

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

Operating expenses (GAAP)

   $ 1,432,786      $ 1,405,062      $ 27,724        2.0

Impact of BTP costs

     (49,478     (25,158     (24,320     96.7   

Impact of MEPP charge

     —          (36,118     36,118     

Impact of COLI

     872        5,655        (4,783     -84.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating expenses (Non-GAAP)

   $ 1,384,180      $ 1,349,441      $ 34,739        2.6

Operating Income (GAAP)

   $ 438,830      $ 427,487      $ 11,343        2.7

Impact of BTP costs

     49,478        25,158        24,320        96.7   

Impact of MEPP charge

     —          36,118        (36,118  

Impact of COLI

     (872     (5,655     4,783        -84.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income (Non-GAAP)

   $ 487,436      $ 483,108      $ 4,328        0.9

Net earnings (GAAP)

   $ 259,550      $ 258,478      $ 1,072        0.4

Impact of BTP costs (net of tax)

     31,112        16,038        15,074        94.0   

Impact of MEPP charge (net of tax)

     —          23,025        (23,025  

Impact of COLI

     (872     (5,655     4,783        -84.6   

Impact of tax benefits

     —          (10,000     10,000     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net earnings (Non-GAAP)

   $ 289,790      $ 281,886      $ 7,904        2.8

Diluted earnings per share (GAAP)

   $ 0.44      $ 0.44      $ —          0.0

Impact of BTP costs (net of tax) (1)

     0.05        0.03        0.02        66.7   

Impact of MEPP charge (net of tax) (1)

     —          0.04        (0.04  

Impact of COLI

     —          (0.01     0.01     

Impact of tax benefits

     —          (0.02     0.02     
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted diluted earnings per share (Non-GAAP)

   $ 0.49      $ 0.48      $ 0.01        2.1

Diluted shares outstanding

     587,214,691        585,421,864       

 

(1)

Tax impact of adjustments for Business Transformation Project and multiemployer pension plan expenses was $18,366 and $22,213 for the 13-week periods ended March 31, 2012 and April 2, 2011, respectively.

 

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     39-Week
Period Ended
Mar. 31, 2012
    39-Week
Period Ended
Apr. 2, 2011
    39-Week
Period
Change in
Dollars
    39-Week
Period

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

Operating expenses (GAAP)

   $ 4,289,698      $ 4,069,568      $ 220,130        5.4

Impact of BTP costs

     (122,839