Page 1 of 16 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 28, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-6544 SYSCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-1648137 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1390 Enclave Parkway Houston, Texas 77077-2099 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (281) 584-1390 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 337,582,062 shares of common stock were outstanding as of April 24, 1998.
2 PART I. FINANCIAL INFORMATION --------------------------------------------------- Item 1. Financial Statements The following consolidated financial statements have been prepared by the Company, without audit, with the exception of the June 28, 1997 consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1997 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. Certain amounts in the prior year have been reclassified to conform to the current presentation. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Fiscal 1997 Annual Report on Form 10-K. A review of the financial information herein has been made by Arthur Andersen LLP, independent public accountants, in accordance with established professional standards and procedures for such a review. A letter from Arthur Andersen LLP concerning their review is included as Exhibit 15.
3 <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In Thousands Except for Share Data) <CAPTION> March 28, June 28, March 29, 1998 1997 1997 ----------- ---------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- <S> <C> <C> <C> Current assets Cash $ 94,901 $ 117,696 $ 84,093 Accounts and notes receivable, less allowances of $37,659, $17,240 and $39,402 1,178,393 1,065,002 1,075,408 Inventories 777,723 733,782 745,304 Deferred taxes 28,560 23,720 30,595 Prepaid expenses 26,949 21,429 24,405 ---------- ---------- ---------- Total current assets 2,106,526 1,961,629 1,959,805 Plant and equipment at cost, less depreciation 1,113,362 1,058,432 1,034,711 Goodwill and intangibles, less amortization 241,533 247,423 249,375 Other assets 138,593 166,339 164,678 ---------- ---------- ---------- Total other assets 380,126 413,762 414,053 __________ __________ __________ Total assets $3,600,014 $3,433,823 $3,408,569 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 73,102 $ 14,267 $ 13,103 Accounts payable 888,454 827,593 827,322 Accrued expenses 265,874 240,928 241,939 Accrued income taxes 27,465 17,741 33,563 Current maturities of long-term debt 14,686 13,285 9,525 ---------- --------- ---------- Total current liabilities 1,269,581 1,113,814 1,125,452 Long-term debt 747,803 685,620 623,158 Deferred taxes 210,772 233,917 222,080 Shareholders' equity Preferred stock, par value $1 per share: Authorized 1,500,000 shares; issued none --- --- --- Common stock, par value $1 per share: Authorized 500,000,000 shares; issued 382,587,450 and 191,293,725 shares 382,587 191,294 191,294 Paid-in capital --- 32,258 33,391 Retained earnings 1,729,446 1,771,548 1,706,749 ---------- ---------- ---------- 2,112,033 1,995,100 1,931,434 Less cost of treasury stock, 44,297,815, 37,710,916 and 31,988,076 shares 740,175 594,628 493,555 ---------- ---------- ---------- Total shareholders' equity 1,371,858 1,400,472 1,437,879 ---------- ---------- ---------- Total liabilities and shareholders' equity $3,600,014 $3,433,823 $3,408,569 ========== ========== ========== <FN> Note: The June 28, 1997 balance sheet has been taken from the audited financial statements at that date. Share information has been adjusted for the 2-for-1 stock split on March 20, 1998. Certain prior period amounts have been reclassified to conform to the current presentation. </TABLE>
4 <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) <CAPTION> 39-Week Period Ended 13-Week Period Ended ---------------------------- ----------------------------- March 28, March 29, March 28, March 29, 1998 1997 1998 1997 ------------ ------------ ------------ -------------- <S> <C> <C> <C> <C> Sales $ 11,326,162 $ 10,759,905 $ 3,711,822 $ 3,470,334 Costs and expenses Cost of sales 9,248,908 8,827,840 3,035,112 2,844,881 Operating expenses 1,662,057 1,550,986 557,136 512,563 Interest expense 42,810 34,385 15,170 11,580 Other, net (246) 48 179 307 ------------ ----------- ------------ ------------ Total costs and expenses 10,953,529 10,413,259 3,607,597 3,369,331 ------------ ----------- ------------ ------------ Earnings before income taxes 372,633 346,646 104,225 101,003 Income taxes 145,327 135,192 40,648 39,391 ------------ ------------ ------------ ------------ Earnings before cumulative effect of accounting change 227,306 211,454 63,577 61,612 Cumulative effect of accounting change (28,053) --- --- --- ____________ ____________ ____________ ____________ Net earnings $ 199,253 $ 211,454 $ 63,577 $ 61,612 ============ ============ ============ ============ Earnings before accounting change: Basic earnings per share $ 0.67 $ 0.59 $ 0.19 $ 0.17 ============ ============ ============ ============ Diluted earnings per share $ 0.66 $ 0.59 $ 0.19 $ 0.17 ============ ============ ============ ============ Cumulative effect of accounting change, net of income taxes: Basic earnings per share $ (0.08) $ --- $ --- $ --- ============ ============ ============ ============ Diluted earnings per share $ (0.08) $ --- $ --- $ --- ============ ============ ============ ============ Net earnings: Basic earnings per share $ 0.58 $ 0.59 $ 0.19 $ 0.17 ============ ============ ============ ============ Diluted earnings per share $ 0.58 $ 0.59 $ 0.19 $ 0.17 ============ ============ ============ ============ Average shares outstanding 341,632,614 356,666,498 339,626,373 353,068,030 ============ ============ ============ ============ Diluted average shares outstanding 344,505,263 358,193,800 343,230,897 354,667,704 ============ ============ ============ ============ Dividends paid per common share $ 0.24 $ 0.21 $ 0.09 $ 0.08 ============ ============ ============ ============ Note: All share information has been adjusted for the 2-for-1 stock split on March 20, 1998 (/Table)
5 </TABLE> <TABLE> SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) <CAPTION> 39-Week Period Ended ------------------------ March 28, March 29, 1998 1997 --------- ---------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 199,253 $ 211,454 Add non-cash items: Cumulative effect of accounting change 28,053 --- Depreciation and amortization 133,510 118,904 Deferred tax provision (27,985) (7,631) Provision for losses on accounts receivable 16,750 18,595 Additional investment in certain assets and liabilities net of effect of business acquired: (Increase) in receivables (130,141) (47,660) (Increase) in inventories (43,941) (18,405) (Increase) in prepaid expenses (5,520) (5,510) Increase in accounts payable 60,861 42,874 Increase in accrued expenses 24,946 28,523 Increase in accrued income taxes 9,724 10,233 (Increase) in other assets (8,626) (8,804) --------- --------- Net cash provided by operating activities 256,884 342,573 Cash flows from investing activities: Additions to plant and equipment (179,014) (149,072) Sales and retirements of plant and equipment 4,783 1,878 Acquisition of business --- (5,330) --------- --------- Net cash used for investing activities (174,231) (152,524) Cash flows from financing activities: Bank and commercial paper borrowings 124,636 33,005 Other debt (repayments) borrowings (2,217) 1,533 Common stock reissued from treasury 28,107 22,551 Treasury stock purchases (175,519) (197,510) Dividends paid (80,455) (73,294) --------- --------- Net cash used for financing activities (105,448) (213,715) --------- --------- Net (decrease) in cash (22,795) (23,666) Cash at beginning of period 117,696 107,759 --------- --------- Cash at end of period $ 94,901 $ 84,093 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 31,335 $ 26,026 Income taxes 143,782 134,716 </TABLE>
6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources ------------------------------- The liquidity and capital resources discussion included on page 11 of the Company's Fiscal 1997 Annual Report on Form 10-K remains applicable, other than the common stock repurchase program described below. All share information has been adjusted for the 2-for-1 stock split on March 20, 1998. In Fiscal 1992, the Company began a common stock repurchase program which was continued through early Fiscal 1998, resulting in the repurchase 60,000,000 shares of common stock. In July 1997, the Board of Directors authorized the repurchase of 12,000,000 additional shares. Under this latest authorization, 7,354,500 shares were purchased through March 28, 1998. Results of Operations --------------------- Sales increased 5.3% during the 39 weeks and 7.0% in the third quarter of Fiscal 1998 over comparable periods of the prior year. Cost of sales also increased 4.8% during the 39 weeks and 6.7% in the third quarter of Fiscal 1998 which is in line with the sales increases. Real sales growth for the 39 weeks of Fiscal 1998 was 5.4% after eliminating the effects of approximately 0.1% food cost deflation. Real sales growth for the quarter was 6.3%, with food cost inflation measuring 0.7%. The third quarter return to inflation was principally reflected in higher costs for dairy items, seafood and produce. Operating expenses for the periods presented remained approximately the same as a percent of sales. Interest expense in the current periods presented increased over the prior periods due to increased borrowings primarily related to the Company's share repurchase program. Income taxes for the periods presented reflect an effective rate of 39%.
7 Pretax earnings and earnings before accounting change increased about 7.5% for the 39 weeks and 3.2% for the 13 weeks over the prior year due to the factors discussed above as well as the Company's continued efforts to increase sales to its traditional territorial street customers. Basic and diluted earnings per share before accounting change increased about 14% and 12% for the 39 weeks, respectively, over the prior year due to the factors discussed above, coupled with the decrease in average shares outstanding for the periods presented, reflecting purchases of shares made through the Company's share repurchase program. For the 13 weeks basic and diluted earnings per share before accounting change increased about 12% over the prior year for the same reasons discussed above. Summary of Accounting Policies ============================== For the period ended December 27, 1997, SYSCO recorded a one-time, after-tax, non-cash charge of $28 million to comply with a new consensus ruling by the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF Issue No. 97-13), requiring reengineering costs associated with computer system development to be expensed as they are incurred. Prior to this change, SYSCO had capitalized business process reengineering costs incurred in connection with its SYSCO Uniform Systems information systems redevelopment project in accordance with generally accepted accounting principles. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share under Statement 128 is very similar to the previously reported earnings per share. Earnings per share amounts for each period have been presented and restated to conform to the Statement 128 requirements. A reconciliation of basic and diluted earnings per share follows on the next page.
8 <TABLE> The following table sets forth the computation of basic and diluted earnings per share: <CAPTION> 39-Week Period Ended 13-Week Period Ended ============================== =============================== March 28, March 29, March 28, March 29, 1998 1997 1998 1997 ============= ============= ============= ============== <S> <C> <C> <C> <C> Numerator: Numerator for basic earnings per share--income available to common shareholders $ 199,253,000 $ 211,454,000 $ 63,577,000 $ 61,612,000 Effect of dilutive securities - - - - - - - - - - - - ------------- ------------- ------------- -------------- Numerator for diluted earnings per share -- income available to common shareholders $ 199,253,000 $ 211,454,000 $ 63,577,000 $ 61,612,000 ============= ============= ============= ============== Denominator: Denominator for basic earnings per share -- weighted-average shares 341,632,614 356,666,498 339,626,373 353,068,030 Effect of dilutive securities: Employee incentive stock options 2,872,649 1,527,302 3,604,524 1,599,674 ------------- ------------- ------------- -------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 344,505,263 358,193,800 343,230,897 354,667,704 ============= ============= ============= ============== Basic earnings per share $ 0.58 $ 0.59 $ 0.19 $ 0.17 ============= ============= ============= ============== Diluted earnings per share $ 0.58 $ 0.59 $ 0.19 $ 0.17 ============= ============= ============= ============== (/Table) In March 1998, the AICPA issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP provides guidance with respect to accounting for the various types of costs incurred for computer software developed or obtained for SYSCO's use. SYSCO is required to and will adopt SOP 98-1 in the first quarter of fiscal 2000 and believes that adoption will not have a significant effect on its consolidated financial statements. In April of 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. At adoption, SOP 98-5 requires SYSCO to write-off any unamortized start-up costs as a cumulative effect of a change in accounting principle and, going forward, expense all start-up activity costs as they are incurred. SYSCO is required to and will adopt SOP 98-5 in the first quarter of fiscal 2000 and believes that adoption will not have a significant effect on its consolidated financial statements.
9 Year 2000 - --------- SYSCO is working to address the potential impact of the Year 2000 on its computerized information systems and operations. Based on the accumulation of preliminary information, costs of addressing potential issues are not expected to have a material adverse impact on SYSCO's consolidated financial statements. However, if SYSCO, its customers or its vendors are unable to resolve Year 2000 processing issues in a timely manner, a material financial risk could result. Accordingly, SYSCO is devoting the neccessary resources to resolve significant Year 2000 issues in a timely manner. ------------ Statements made herein regarding management's estimates, sales increases, customer mix, product cost inflation/deflation, consistency and predictability of earnings growth, continuation of the share repurchase program and potential Year 2000 costs are forward- looking statements under the Private Securities Litigation Reform Act of 1995. They are based on current expectations and actual results may differ materially. Industry growth, sales increases, customer mix, product cost inflation/deflation, the consistency and predictability of earnings growth and potential Year 2000 costs could be affected by conditions in the economy, the industry and internal factors that may alter planned results. Furthermore, potential Year 2000 costs could be affected by the ability of SYSCO's customers and vendors to effectively address Year 2000 issues. The share repurchase could be affected by market prices of the Company's stock as well as management's decision to utilize its capital for other purposes. PART II. OTHER INFORMATION ------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None
10 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3(a) Restated Certificate of Incorporation, as amended, incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997, incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989, incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(f) Third Supplemented Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Form 10-K for the year ended June 28, 1997.
11 4(g) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Form 10-K for the year ended June 28, 1997. 15 Letter from Arthur Andersen LLP dated May 11, 1998, re unaudited financial statements. 27 Financial Data Schedule (b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
12 SIGNATURES ------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYSCO CORPORATION (Registrant) By /s/ JOHN K. STUBBLEFIELD, JR. ----------------------------- John K. Stubblefield, Jr. Senior Vice President & Chief Financial Officer Date: May 11, 1998
13 </TABLE> <TABLE> EXHIBIT INDEX ---------------------- <CAPTION> SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- <S> <C> <C> 3(a) Restated Certificate of Incorporation, as amended, incorporated by reference to Form 10-K for the year ended June 28, 1997. 3(b) Bylaws, as amended, incorporated by reference to Form 10-K for the year ended July 2, 1994. 3(c) Amended Certificate of Designation, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(a) Seventh Amendment and Restatement of Competitive Advance and Revolving Credit Facility Agreement dated as of June 27, 1997, incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(b) Sysco Corporation Note Agreement dated as of June 1, 1989, incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(c) Indenture, dated as of June 15, 1995, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Registration Statement on Form S-3 (File No. 33-60023). 4(d) First Supplemental Indenture, dated as of June 27, 1995, between Sysco Corporation and First Union Bank of North Carolina, Trustee, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996.
14 <CAPTION> SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- <S> <C> <C> 4(e) Second Supplemental Indenture, dated as of May 1, 1996, between Sysco Corporation and First Union Bank of North Carolina, Trustee, as amended, incorporated by reference to Form 10-K for the year ended June 29, 1996. 4(f) Third Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Form 10-K for the year ended June 28, 1997. 4(g) Fourth Supplemental Indenture, dated as of April 25, 1997, between Sysco Corporation and First Union National Bank of North Carolina, Trustee, incorporated by reference to Form 10-K for the year ended June 28, 1997. 15 Letter from Arthur Andersen LLP dated May 11, 1998, re unaudited financial statements. 15 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule. 16 </TABLE>