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 September 26, 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 [ ] 334,088,349 shares of common stock were outstanding as of October 23, 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 27, 1998, consolidated balance sheet which was taken from the audited financial statements included in the Company's Fiscal 1998 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations 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 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 1998 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> Sept. 26, June 27, Sept 27, 1998 1998 1997 ---------- --------- ----------- (Unaudited) (Audited) (Unaudited) ASSETS ---------- <S> <C> <C> <C> Current assets Cash $ 108,264 $ 110,288 $ 88,509 Accounts and notes receivable, less allowances of $27,609, $20,081 and $23,229 1,313,797 1,215,610 1,205,697 Inventories 853,064 790,501 793,574 Deferred taxes 35,293 37,073 26,912 Prepaid expenses 28,892 26,595 27,109 ---------- ---------- ---------- Total current assets 2,339,310 2,180,067 2,141,801 Plant and equipment at cost, less depreciation 1,157,860 1,151,054 1,075,822 Other assets Goodwill and intangibles, less amortization 309,322 307,959 245,459 Other 152,769 141,109 172,395 ---------- ---------- ---------- Total other assets 462,091 449,068 417,854 ---------- ---------- ---------- Total assets $3,959,261 $3,780,189 $3,635,477 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities Notes payable $ 13,770 $ 42,333 $ 16,438 Accounts payable 1,003,878 849,159 908,370 Accrued expenses 272,096 292,255 239,778 Accrued income taxes 59,581 25,523 58,334 Current maturities of long-term debt 115,412 114,920 13,132 ---------- --------- ---------- Total current liabilities 1,464,737 1,324,190 1,236,052 Long-term debt 873,057 867,017 752,573 Deferred taxes 227,024 232,193 240,398 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, 382,587 382,587 191,294 382,587,450 and 191,293,725 shares Paid-in capital 2,271 --- 32,743 Retained earnings 1,852,758 1,796,488 1,825,787 ---------- ---------- ---------- 2,237,616 2,179,075 2,049,824 Less cost of treasury stock, 48,257,269, 47,978,288 and 20,134,890 shares 843,173 822,286 643,370 ---------- ---------- ---------- Total shareholders' equity 1,394,443 1,356,789 1,406,454 ---------- ---------- ---------- Total liabilities and shareholders' equity $3,959,261 $3,780,189 $3,635,477 ========== ========== ========== <FN> Note: The June 27, 1998 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. 4 SYSCO Corporation and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In Thousands Except for Share Data) 13-Week Period Ended ---------------------------- Sept. 26, Sept. 27, 1998 1997 ------------ ----------- Sales $ 4,192,630 $ 3,828,244 Costs and expenses Cost of sales 3,426,045 3,130,883 Operating expenses 607,812 553,032 Interest expense 16,931 13,140 Other, net 170 (122) ------------ ----------- Total costs and expenses 4,050,958 3,696,933 ------------ ----------- Earnings before income taxes 141,672 131,311 Income taxes 55,252 51,211 ------------ ------------ Net earnings $ 86,420 $ 80,100 ============ ============ Basic earnings per share $ 0.26 $ 0.23 ============ ============ Diluted earnings per share $ 0.26 $ 0.23 ============ ============ Average shares outstanding 334,849,272 343,684,554 ============ ============ Diluted average shares outstanding 338,184,255 345,725,156 ============ ============ Dividends paid per common share $ 0.09 $ 0.08 ============ ============ Note: All share information has been adjusted for the 2-for-1 stock split on March 20, 1998. 5 SYSCO CORPORATION and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS - (Unaudited) (In Thousands) 13- Week Period Ended ------------------------ Sept. 26, Sept. 27, 1998 1997 -------- --------- Cash flows from operating activities: Net earnings $ 86,420 $ 80,100 Add non-cash items: Depreciation and amortization 47,983 43,287 Deferred tax (benefit) provision (3,389) 3,289 Provision for losses on accounts receivable 5,688 4,711 Additional investment in certain assets and liabilities: (Increase) in receivables (103,875) (145,406) (Increase) in inventories (62,563) (59,792) (Increase) in prepaid expenses (2,297) (5,680) Increase in accounts payable 154,719 80,777 (Decrease) in accrued expenses (20,159) (1,150) Increase in accrued income taxes 34,058 40,593 (Increase) in other assets (14,725) (8,924) -------- -------- Net cash provided by operating activities 121,860 31,805 -------- -------- Cash flows from investing activities: Additions to plant and equipment (58,021) (56,660) Proceeds from sales of plant and equipment 4,934 815 -------- -------- Net cash used for investing activities (53,087) (55,845) -------- -------- Cash flows from financing activities: Bank and commercial paper (repayments) borrowings (243,472) 70,800 Other debt borrowings (repayments) 221,441 (1,829) Common stock reissued from treasury 14,964 12,577 Treasury stock purchases (33,580) (60,834) Dividends paid (30,150) (25,861) -------- -------- Net cash used for financing activities (70,797) (5,147) -------- -------- Net decrease in cash (2,024) (29,187) Cash at beginning of period 110,288 117,696 -------- -------- Cash at end of period $ 108,264 $ 88,509 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,447 $ 9,828 Income taxes 19,421 7,064 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 12 of the Company's Fiscal 1998 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 continued into the first quarter of Fiscal 1999, resulting in the repurchase of 72,000,000 shares of common stock. The Board of Directors authorized the repurchase of an additional 8,000,000 shares in September, 1998. Under this latest authorization, 418,700 shares were purchased through September 26, 1998. Results of Operations --------------------- Sales and cost of sales increased about 9.5% and 9.4%, respectively, over the same quarter of the prior year. Real sales growth of over 6% resulted primarily from volume growth and was a point higher than in the same quarter last year, after adjusting for a 1.5% increase due to acquisitions and an increase in food cost inflation of about 2%, due primarily to higher costs for dairy products. Operating expenses for the periods presented remained approximately the same as a percent of sales. Interest expense in the current period increased over the prior period due to increased borrowings. Income taxes for the periods presented reflect an effective rate of 39%. Pretax earnings and net earnings increased about 8% over the prior year due to the factors discussed above as well as the Company's continued efforts to increase sales to the Company's higher margin territorial street customers. Basic and diluted earnings per share increased 13% over the prior year due to the factors discussed above, coupled with the decrease in average shares outstanding for the quarter, reflecting purchases of shares made through the Company's share repurchase program. A reconciliation of basic and diluted earnings per share follows on the next page. 7 The following table sets forth the computation of basic and diluted earnings per share: 13-Week Period Ended ---------------------------- Sept. 26, Sept. 27, 1998 1997 ------------ ----------- Numerator: Numerator for basic earnings per share -- income available to common shareholders $ 86,420,000 $ 80,100,000 Effect of dilutive securities --- --- ------------ ------------ Numerator for diluted earnings per share -- income available to common shareholders $ 86,420,000 $ 80,100,000 ============ ============ Denominator: Denominator for basic earnings per share -- weighted-average shares 334,849,272 343,684,554 Effect of dilutive securities: Employee and director stock options 3,334,983 2,040,602 ------------ ------------ Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 338,184,255 345,725,156 ============ ============ Basic earnings per share $ 0.26 $ 0.23 ============ ============ Diluted earnings per share $ 0.26 $ 0.23 ============ ============ 8 Year 2000 --------- In recent years, SYSCO has been replacing and enhancing its information systems to gain operational efficiencies. In addition, a company-wide program has been underway to prepare its information systems and applications for the year 2000. SYSCO has completed a comprehensive assessment of the impact of the year 2000 on all of its information systems and applications. SYSCO expects to make the necessary revisions or upgrades to its systems to render it year 2000 compliant. Attention is also being focused on compliance attainment efforts of, and key interfaces with, suppliers and customers. SYSCO could potentially experience disruptions to some aspects of its various activities and operations as a result of non-compliant systems utilized by SYSCO or unrelated third parties. Contingency plans are therefore under development to mitigate the extent of any such potential disruption to business operations. Based on preliminary information, the costs to the company of addressing potential year 2000 issues are not expected to have a material adverse impact on SYSCO's consolidated results of operations or financial position. There can be no assurance that the efforts or the contingency plans related to the company's systems, or those of other entities relied upon will be successful or that any failure to convert, upgrade or appropriately plan for contingencies would not have a material adverse effect on SYSCO. -------------- Statements made herein regarding continuation of the share repurchase program, the expected level of capital expenditures 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. Share repurchases could be affected by market prices of the company's stock as well as management's decision to utilize its capital for other purposes. Capital expenditures could be affected by management's allocation of capital and the costs of capital items to be constructed or acquired. Potential year 2000 costs could be affected by conditions in the economy, the industry and internal factors that may alter planned results. Futhermore, potential year 2000 costs and compliance efforts could be affected by the ability of SYSCO's suppliers and customers to effectively address year 2000 issues. 9 PART II. OTHER INFORMATION --------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risks SYSCO does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the company to significant market risk. SYSCO's exposure to market risk for changes in interest rates relates primarily to its long-term obligations. At September 26, 1998 the company had outstanding $79,889,000 of commercial paper with maturities through October 13, 1998. The company's remaining long-term debt obligations of $793,168,000 were primarily at fixed rates of interest. SYSCO has no significant cash flow exposure due to interest rate changes for long-term debt obligations. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 10 PART II. OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 3(a) Restated Certificate of Incorporation 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. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 15 Letter from Arthur Andersen LLP dated November 4, 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 and Chief Financial Officer Date: November 4, 1998 13 EXHIBIT INDEX ---------------------- SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ----- ----------------------------------------- ------------- 3(a) Restated Certificate of Incorporation 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 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. 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. 4(h) Fifth Supplemental Indenture, dated as of July 27, 1998 between Sysco Corporation and First Union National Bank of North Carolina, Trustee incorporated by reference to Form 10-K for the year ended June 27, 1998. 15 Letter from Arthur Andersen LLP dated November 4, 1998, re unaudited financial statements. 15 27 Sysco Corporation and its Consolidated Subsidiaries Financial Data Schedule 16 </TABLE>