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SYSCO CORP - Quarter Report: 2019 December (Form 10-Q)




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
syylogoa03.jpg
Sysco Corporation
(Exact name of registrant as specified in its charter)
Delaware
74-1648137
(State or other jurisdiction of incorporation or organization)
(IRS employer identification number)

1390 Enclave Parkway, Houston, Texas 77077-2099
(Address of principal executive offices and zip code)

Registrant’s Telephone Number, Including Area Code:
(281) 584-1390

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, $1.00 Par Value
 
SYY
 
New York Stock Exchange
1.25% Notes due June 2023
 
SYY 23
 
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
(Do not check if a smaller reporting company)
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

508,508,581 shares of common stock were outstanding as of January 17, 2020.





TABLE OF CONTENTS





PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 
Dec. 28, 2019
 
Jun. 29, 2019
 
(unaudited)
 
 
ASSETS
Current assets
 
 
 
Cash and cash equivalents
$
524,578

 
$
513,460

Accounts and notes receivable, less allowances of $71,612 and $28,176
4,375,583

 
4,181,696

Inventories
3,508,260

 
3,216,034

Prepaid expenses and other current assets
245,480

 
210,582

Income tax receivable
7,709

 
19,733

Total current assets
8,661,610

 
8,141,505

Plant and equipment at cost, less accumulated depreciation
4,593,890

 
4,501,705

Other long-term assets
 
 
 
Goodwill
4,023,639

 
3,896,226

Intangibles, less amortization
855,489

 
857,301

Deferred income taxes
117,885

 
80,760

Operating lease right-of-use assets, net
631,035

 

Other assets
488,486

 
489,025

Total other long-term assets
6,116,534

 
5,323,312

Total assets
$
19,372,034

 
$
17,966,522

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
 
 
 
Notes payable
$
3,507

 
$
3,957

Accounts payable
4,159,607

 
4,314,620

Accrued expenses
1,686,866

 
1,729,941

Accrued income taxes
187,876

 
17,343

Current operating lease liabilities
103,963

 

Current maturities of long-term debt
790,149

 
37,322

Total current liabilities
6,931,968

 
6,103,183

Long-term liabilities
 
 
 
Long-term debt
8,092,914

 
8,122,058

Deferred income taxes
142,301

 
172,232

Long-term operating lease liabilities
561,610

 

Other long-term liabilities
1,081,645

 
1,031,020

Total long-term liabilities
9,878,470

 
9,325,310

Noncontrolling interest
34,070

 
35,426

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

Paid-in capital
1,526,132

 
1,457,419

Retained earnings
11,639,727

 
11,229,679

Accumulated other comprehensive loss
(1,566,329
)
 
(1,599,729
)
Treasury stock at cost, 256,332,388 and 252,297,926 shares
(9,837,179
)
 
(9,349,941
)
Total shareholders’ equity
2,527,526

 
2,502,603

Total liabilities and shareholders’ equity
$
19,372,034

 
$
17,966,522


Note: The June 29, 2019 balance sheet has been derived from the audited financial statements at that date.
See Notes to Consolidated Financial Statements

1



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In thousands, except for share and per share data)
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Sales
$
15,025,042

 
$
14,765,707

 
$
30,328,047

 
$
29,980,986

Cost of sales
12,196,643

 
11,993,995

 
24,556,278

 
24,305,489

Gross profit
2,828,399

 
2,771,712

 
5,771,769

 
5,675,497

Operating expenses
2,275,906

 
2,319,817

 
4,550,958

 
4,595,462

Operating income
552,493

 
451,895

 
1,220,811

 
1,080,035

Interest expense
76,762

 
87,113

 
160,097

 
176,129

Other (income) expense, net
(807
)
 
10,197

 
2,305

 
11,329

Earnings before income taxes
476,538

 
354,585

 
1,058,409

 
892,577

Income taxes
93,128

 
87,205

 
221,218

 
194,155

Net earnings
$
383,410

 
$
267,380

 
$
837,191

 
$
698,422

  
 
 
 
 
 
 
 
Net earnings:
 

 
 

 
 
 
 
Basic earnings per share
$
0.75

 
$
0.52

 
$
1.64

 
$
1.34

Diluted earnings per share
0.74

 
0.51

 
1.62

 
1.33

 
 
 
 
 
 
 
 
Average shares outstanding
509,984,743

 
517,871,328

 
511,721,290

 
519,363,973

Diluted shares outstanding
515,517,792

 
524,600,510

 
517,120,395

 
526,817,501


See Notes to Consolidated Financial Statements

2



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Net earnings
$
383,410

 
$
267,380

 
$
837,191

 
$
698,422

Other comprehensive income (loss) :
 
 
 
 
 
 
 
Foreign currency translation adjustment
154,955

 
(101,533
)
 
28,796

 
(126,460
)
Items presented net of tax:
 
 
 
 
 
 
 
Amortization of cash flow hedges
2,155

 
2,155

 
4,310

 
4,310

Change in net investment hedges
(41,479
)
 
26,469

 
(11,479
)
 
35,057

Change in cash flow hedges
(14,797
)
 
(8,784
)
 
(5,538
)
 
(11,792
)
Amortization of prior service cost
1,428

 
1,600

 
2,856

 
3,200

Amortization of actuarial loss
7,225

 
6,529

 
13,908

 
13,058

Actuarial loss

 

 

 
(32,511
)
Change in marketable securities
(386
)
 

 
547

 

Total other comprehensive income (loss)
109,101

 
(73,564
)
 
33,400

 
(115,138
)
Comprehensive income
$
492,511

 
$
193,816

 
$
870,591

 
$
583,284


See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries
CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except for share data)

Quarter to Date
 
 
 
 
 
 
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Paid-in
Capital
 
Retained
Earnings
 
 
Treasury Stock
 
 

 
Shares
 
Amount
 
 
 
 
Shares
 
Amounts
 
Totals
Balance as of September 28, 2019
765,174,900

 
$
765,175

 
$
1,490,661

 
$
11,486,833

 
$
(1,675,430
)
 
254,310,626

 
$
(9,612,491
)
 
$
2,454,748

Net earnings
 
 
 
 
 
 
383,410

 
 
 
 
 
 
 
383,410

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
154,955

 
 
 
 
 
154,955

Amortization of cash flow hedges, net of tax
 
 
 
 
 
 
 
 
2,155

 
 
 
 
 
2,155

Change in cash flow hedges, net of tax
 
 
 
 
 
 
 
 
(14,797
)
 
 
 
 
 
(14,797
)
Change in net investment hedges, net of tax
 
 
 
 
 
 
 
 
(41,479
)
 
 
 
 
 
(41,479
)
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax
 
 
 
 
 
 
 
 
8,653

 
 
 
 
 
8,653

Change in marketable securities, net of tax
 
 
 
 
 
 
 
 
(386
)
 
 
 
 
 
(386
)
Dividends declared ($0.45 per common share)
 
 
 
 
 
 
(230,516
)
 
 
 
 
 
 
 
(230,516
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
3,501,930

 
(281,081
)
 
(281,081
)
Share-based compensation awards
 
 
 
 
35,471

 
 
 
 
 
(1,480,168
)
 
56,393

 
91,864

Balance as of December 28, 2019
765,174,900

 
$
765,175

 
$
1,526,132

 
$
11,639,727

 
$
(1,566,329
)
 
256,332,388

 
$
(9,837,179
)
 
$
2,527,526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Paid-in
Capital
 
Retained
Earnings
 
 
Treasury Stock
 
 

 
Shares
 
Amount
 
 
 
 
Shares
 
Amounts
 
Totals
Balance as of September 29, 2018
765,174,900

 
$
765,175

 
$
1,438,097

 
$
10,592,490

 
$
(1,450,843
)
 
245,025,271

 
$
(8,706,345
)
 
$
2,638,574

Net earnings
 
 
 
 
 
 
267,380

 
 
 
 
 
 
 
267,380

Foreign currency translation adjustment
 
 
 
 
 
 
 
 
(101,533
)
 
 
 
 
 
(101,533
)
Amortization of cash flow hedges, net of tax
 
 
 
 
 
 
 
 
2,155

 
 
 
 
 
2,155

Change in cash flow hedges, net of tax
 
 
 
 
 
 
 
 
(8,784
)
 
 
 
 
 
(8,784
)
Change in net investment hedges, net of tax
 
 
 
 
 
 
 
 
26,469

 
 
 
 
 
26,469

Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax
 
 
 
 
 
 
 
 
8,129

 
 
 
 
 
8,129

Dividends declared ($0.39 per common share)
 
 
 
 
 
 
(205,159
)
 
 
 
 
 
 
 
(205,159
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
8,103,590

 
(540,462
)
 
(540,462
)
Share-based compensation awards
 
 
 
 
27,364

 
 
 
 
 
(1,470,142
)
 
53,503

 
80,867

Balance as of December 29, 2018
765,174,900

 
$
765,175

 
$
1,465,461

 
$
10,654,711

 
$
(1,524,407
)
 
251,658,719

 
$
(9,193,304
)
 
$
2,167,636



4



Year to Date
 
 
 
 
 
 
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Paid-in
Capital
 
Retained
Earnings
 
 
Treasury Stock
 
 

 
Shares
 
Amount
 
 
 
 
Shares
 
Amounts
 
Totals
Balance as of June 29, 2019
765,174,900

 
$
765,175

 
$
1,457,419

 
$
11,229,679

 
$
(1,599,729
)
 
252,297,926

 
$
(9,349,941
)
 
$
2,502,603

Net earnings
 

 
 

 
 

 
837,191

 
 

 
 

 
 

 
837,191

Foreign currency translation adjustment
 

 
 

 
 

 
 

 
28,796

 
 

 
 

 
28,796

Amortization of cash flow hedges, net of tax
 

 
 

 
 

 
 

 
4,310

 
 

 
 

 
4,310

Change in cash flow hedges, net of tax
 
 
 
 
 
 
 
 
(5,538
)
 
 
 
 
 
(5,538
)
Change in net investment hedges, net of tax
 
 
 
 
 
 
 
 
(11,479
)
 
 
 
 
 
(11,479
)
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax
 

 
 

 
 

 
 

 
16,764

 
 

 
 

 
16,764

Change in marketable securities, net of tax
 
 
 
 
 
 
 
 
547

 
 
 
 
 
547

Adoption of ASU 2016-02, Leases (Topic 842), net of tax
 
 
 
 
 
 
1,978

 
 
 
 
 
 
 
1,978

Dividends declared ($0.84 per common share)
 

 
 

 
 

 
(429,121
)
 
 

 
 

 
 

 
(429,121
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
8,089,327

 
(628,948
)
 
(628,948
)
Share-based compensation awards
 

 
 

 
68,713

 
 

 
 

 
(4,054,865
)
 
141,710

 
210,423

Balance as of December 28, 2019
765,174,900

 
$
765,175

 
$
1,526,132

 
$
11,639,727

 
$
(1,566,329
)
 
256,332,388

 
$
(9,837,179
)
 
$
2,527,526

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Paid-in
Capital
 
Retained
Earnings
 
 
Treasury Stock
 
 

 
Shares
 
Amount
 
 
 
 
Shares
 
Amounts
 
Totals
Balance as of June 30, 2018
765,174,900

 
$
765,175

 
$
1,383,619

 
$
10,348,628

 
$
(1,409,269
)
 
244,533,248

 
$
(8,581,196
)
 
$
2,506,957

Net earnings
 

 
 

 
 

 
698,422

 
 

 
 

 
 

 
698,422

Foreign currency translation adjustment
 

 
 

 
 

 
 

 
(126,460
)
 
 

 
 

 
(126,460
)
Amortization of cash flow hedges, net of tax
 

 
 

 
 

 
 

 
4,310

 
 

 
 

 
4,310

Change in cash flow hedges, net of tax
 

 
 

 
 

 
 

 
(11,792
)
 
 

 
 

 
(11,792
)
Change in net investment hedge, net of tax
 
 
 
 
 
 
 
 
35,057

 
 
 
 
 
35,057

Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax
 

 
 

 
 

 
 

 
16,258

 
 

 
 

 
16,258

Dividends declared ($0.75 per common share)
 

 
 

 
 

 
(392,339
)
 
 

 
 

 
 

 
(392,339
)
Treasury stock purchases
 
 
 
 
 
 
 
 
 
 
11,015,267

 
(750,003
)
 
(750,003
)
Share-based compensation awards
 

 
 

 
81,842

 
 

 
 

 
(3,889,796
)
 
137,895

 
219,737

Balance as of December 29, 2018
765,174,900

 
$
765,175

 
$
1,465,461

 
$
10,654,711

 
$
(1,524,407
)
 
251,658,719

 
$
(9,193,304
)
 
$
2,167,636


See Notes to Consolidated Financial Statements


5



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
Cash flows from operating activities:
 
 
 
Net earnings
$
837,191

 
$
698,422

Adjustments to reconcile net earnings to cash provided by operating activities:
 
 
 
Share-based compensation expense
46,644

 
54,199

Depreciation and amortization
372,416

 
392,413

Operating lease asset amortization
53,444

 

Amortization of debt issuance and other debt-related costs
9,889

 
10,814

Deferred income taxes
(75,898
)
 
(89,098
)
Provision for losses on receivables
38,418

 
27,647

Other non-cash items
3,239

 
411

Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 
 
 
(Increase) in receivables
(161,158
)
 
(137,314
)
(Increase) in inventories
(279,403
)
 
(204,437
)
(Increase) in prepaid expenses and other current assets
(38,503
)
 
(31,465
)
(Decrease) increase in accounts payable
(191,280
)
 
131,715

(Decrease) increase in accrued expenses
(49,866
)
 
92,100

(Decrease) in operating lease liabilities
(62,101
)
 

Increase (decrease) in accrued income taxes
182,557

 
(11,117
)
Decrease (increase) in other assets
13,023

 
(21,138
)
Increase in other long-term liabilities
55,857

 
4,638

Net cash provided by operating activities
754,469

 
917,790

Cash flows from investing activities:
 
 
 
Additions to plant and equipment
(393,379
)
 
(223,825
)
Proceeds from sales of plant and equipment
10,293

 
6,901

Acquisition of businesses, net of cash acquired
(142,783
)
 

Purchase of marketable securities
(11,424
)
 

Proceeds from sales of marketable securities
9,038

 

Other investing activities
565

 
(88
)
Net cash used for investing activities
(527,690
)
 
(217,012
)
Cash flows from financing activities:
 
 
 
Bank and commercial paper borrowings, net
721,415

 
109,900

Other debt borrowings
18,966

 
383,163

Other debt repayments
(23,234
)
 
(16,617
)
Proceeds from stock option exercises
141,709

 
137,896

Treasury stock purchases
(630,395
)
 
(739,205
)
Dividends paid
(399,093
)
 
(379,216
)
Other financing activities
(22,461
)
 
(6,653
)
Net cash used for financing activities
(193,093
)
 
(510,732
)
Effect of exchange rates on cash, cash equivalents and restricted cash
5,565

 
(8,904
)
Net increase in cash, cash equivalents and restricted cash
39,251

 
181,142

Cash, cash equivalents and restricted cash at beginning of period
532,245

 
715,844

Cash, cash equivalents and restricted cash at end of period
$
571,496

 
$
896,986

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
162,720

 
$
158,574

Income taxes
122,049

 
328,574

 
See Notes to Consolidated Financial Statements

6



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. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income, changes in consolidated shareholders’ equity and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity 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 our Annual Report on Form 10-K for the fiscal year ended June 29, 2019. Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

Supplemental Cash Flow Information

The following table sets forth the company’s reconciliation of cash, cash equivalents and restricted cash included within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:
 
Dec. 28, 2019
 
Dec. 29, 2018
 
(In thousands)
Cash and cash equivalents
$
524,578

 
$
744,808

Restricted cash (1)
46,918

 
152,178

Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows
$
571,496

 
$
896,986



(1) 
Restricted cash primarily represents cash and cash equivalents of Sysco’s wholly owned captive insurance subsidiary, restricted for use to secure the insurer’s obligations for workers’ compensation, general liability and auto liability programs. Restricted cash is located within Other assets in each consolidated balance sheet.

2. CHANGES IN ACCOUNTING

Leases

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), specifying the accounting for leases, which supersedes the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount and timing of cash flows arising from a lease. The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases currently classified as operating leases. In addition, Topic 842 expands the disclosure requirements of lease arrangements. Sysco adopted this ASU and related amendments as of June 30, 2019, the first day of fiscal 2020, under the modified retrospective approach and elected certain practical expedients permitted under the transition guidance, including to retain the historical lease classification, as well as relief from separating and allocating consideration across all categories of leases to lease and non-lease components of an agreement. For leases subject to index or rate adjustments, the most current index or rate adjustments were included in the measurement of operating lease obligations at adoption.

The adoption of this ASU and related amendments resulted in Sysco recognizing $647.2 million and $657.9 million of operating lease right-of-use (ROU) assets and operating lease liabilities, respectively, as of June 30, 2019. There were no other significant impacts to the company’s consolidated financial statements. Updated accounting policies and additional lease disclosures as a result of the adoption of this ASU are described in Note 9, “Leases.”


7



3. REVENUE

The company recognizes revenues when its performance obligations are satisfied in an amount that reflects the consideration Sysco expects to be entitled to receive in exchange for those goods and services. After completion of Sysco’s performance obligations, the company has an unconditional right to consideration as outlined in its contracts with customers. Sysco’s customer receivables will generally be collected in less than 30 days in accordance with the underlying payment terms. Customer receivables, which are included in Accounts and notes receivable, less allowances in the consolidated balance sheet, were $4.1 billion and $3.9 billion as of December 28, 2019 and June 29, 2019, respectively.

Sysco has certain customer contracts in which upfront monies are paid to its customers. These payments have become industry practice and are not related to financing of the customer’s business. They are not associated with any distinct good or service to be received from the customer and, therefore, are treated as a reduction of transaction prices. All upfront payments are capitalized in Other assets and amortized over the life of the contract or the expected life of the relationship with the customer on a straight-line basis. As of December 28, 2019, Sysco’s contract assets were not significant. Sysco has no significant commissions paid that are directly attributable to obtaining a particular contract.

The following tables present our sales disaggregated by reportable segment and sales mix for the company’s principal product categories for the periods presented:

 
 
13-Week Period Ended Dec. 28, 2019
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
2,071,447

 
$
409,483

 
$
392,584

 
$

 
$
2,873,514

Canned and dry products
 
1,861,743

 
578,998

 
38,652

 

 
2,479,393

Frozen fruits, vegetables, bakery and other
 
1,459,470

 
572,991

 
266,540

 

 
2,299,001

Dairy products
 
1,139,820

 
299,830

 
142,967

 

 
1,582,617

Poultry
 
1,064,679

 
214,781

 
200,481

 

 
1,479,941

Fresh produce
 
952,857

 
256,183

 
59,318

 

 
1,268,358

Paper and disposables
 
689,890

 
90,778

 
166,313

 
15,290

 
962,271

Seafood
 
601,709

 
129,065

 
23,383

 

 
754,157

Beverage products
 
276,626

 
130,766

 
139,106

 
20,912

 
567,410

Other (1)
 
295,334

 
207,178

 
26,549

 
229,319

 
758,380

Total Sales
 
$
10,413,575

 
$
2,890,053

 
$
1,455,893

 
$
265,521

 
$
15,025,042


(1) 
Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.


8



 
 
13-Week Period Ended Dec. 29, 2018
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
2,084,648

 
$
409,086

 
$
374,069

 
$

 
$
2,867,803

Canned and dry products
 
1,799,535

 
611,609

 
66,719

 

 
2,477,863

Frozen fruits, vegetables, bakery and other
 
1,417,063

 
354,178

 
315,129

 

 
2,086,370

Dairy products
 
1,041,436

 
306,364

 
148,103

 

 
1,495,903

Poultry
 
1,001,579

 
209,542

 
208,674

 

 
1,419,795

Fresh produce
 
927,997

 
322,020

 
57,048

 

 
1,307,065

Paper and disposables
 
681,890

 
87,376

 
181,896

 
14,175

 
965,337

Seafood
 
581,655

 
196,413

 
23,451

 

 
801,519

Beverage products
 
271,182

 
161,317

 
136,244

 
20,422

 
589,165

Other (1)
 
280,120

 
232,693

 
25,274

 
216,800

 
754,887

Total Sales
 
$
10,087,105

 
$
2,890,598

 
$
1,536,607

 
$
251,397

 
$
14,765,707


(1) 
Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.

 
 
26-Week Period Ended Dec. 28, 2019
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
4,146,747

 
$
821,638

 
$
773,962

 
$

 
$
5,742,347

Canned and dry products
 
3,760,632

 
1,165,622

 
75,842

 

 
5,002,096

Frozen fruits, vegetables, bakery and other
 
2,908,688

 
1,125,005

 
520,995

 

 
4,554,688

Poultry
 
2,154,785

 
433,381

 
404,749

 

 
2,992,915

Dairy products
 
2,288,201

 
612,008

 
288,888

 

 
3,189,097

Fresh produce
 
1,951,020

 
513,941

 
120,252

 

 
2,585,213

Paper and disposables
 
1,409,431

 
189,120

 
334,748

 
32,663

 
1,965,962

Seafood
 
1,287,119

 
278,656

 
48,238

 

 
1,614,013

Beverage products
 
567,412

 
263,618

 
282,785

 
45,240

 
1,159,055

Other (1)
 
598,173

 
399,452

 
52,428

 
472,608

 
1,522,661

Total Sales
 
$
21,072,208

 
$
5,802,441

 
$
2,902,887

 
$
550,511

 
$
30,328,047


(1) 
Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.


9



 
 
26-Week Period Ended Dec. 29, 2018
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
4,206,167

 
$
829,542

 
$
746,401

 
$

 
$
5,782,110

Canned and dry products
 
3,651,702

 
1,223,079

 
144,341

 

 
5,019,122

Frozen fruits, vegetables, bakery and other
 
2,840,449

 
982,735

 
606,995

 

 
4,430,179

Poultry
 
2,028,515

 
425,124

 
480,735

 

 
2,934,374

Dairy products
 
2,127,840

 
624,711

 
302,909

 

 
3,055,460

Fresh produce
 
1,865,577

 
579,564

 
121,897

 

 
2,567,038

Paper and disposables
 
1,392,649

 
191,915

 
370,512

 
30,584

 
1,985,660

Seafood
 
1,243,342

 
384,850

 
48,835

 

 
1,677,027

Beverage products
 
561,752

 
213,388

 
283,538

 
43,601

 
1,102,279

Other (1)
 
568,523

 
356,640

 
51,901

 
450,673

 
1,427,737

Total Sales
 
$
20,486,516

 
$
5,811,548

 
$
3,158,064

 
$
524,858

 
$
29,980,986


(1) 
Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.

4.  ACQUISITIONS

During the first 26 weeks of fiscal 2020, the company paid cash of $142.8 million for acquisitions. These acquisitions did not have a material effect on the company’s operating results, cash flows or financial position. Certain acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of December 28, 2019, aggregate contingent consideration outstanding was $35.6 million, of which $29.0 million was recorded as earnout liabilities. Earnout liabilities are all measured using unobservable inputs that are considered a Level 3 measurement.

5.  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 cash deposits, 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.

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

Cash deposits included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 1 measurement in the tables below.
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.

10



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 as Level 1 measurements in the tables below.
Fixed income securities are valued using evaluated bid prices based on a compilation of observable market information or a broker quote in a non-active market. Inputs used vary by type of security, but include spreads, yields, rate benchmarks, rate of prepayment, cash flows, rating changes and collateral performance and type.
The interest rate swap agreements 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.
The foreign currency swap agreements, including cross-currency swaps, are valued using a swap valuation model that utilizes an income approach applying observable market inputs including interest rates, LIBOR swap rates for U.S. dollars, Canadian dollars, pound sterling and euro currencies, and credit default swap rates.
Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments.
Fuel swap contracts are valued based on observable market transactions of forward commodity prices.

The fair value of the company’s marketable securities are all measured using inputs that are considered a Level 2 measurement, as they are actively traded and are valued using quoted market prices in active markets. The location and the fair value of the company’s marketable securities in the consolidated balance sheet are disclosed in Note 6, “Marketable Securities.” The fair value of the company’s derivative instruments are all measured using inputs that are considered a Level 2 measurement, as they are not actively traded and are valued using pricing models that use observable market quotations. The location and the fair value of derivative assets and liabilities designated as hedges in the consolidated balance sheet are disclosed in Note 7, “Derivative Financial Instruments.”

The following tables present the company’s assets measured at fair value on a recurring basis as of December 28, 2019 and June 29, 2019:
 
Assets Measured at Fair Value as of Dec. 28, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
135,965

 
$
200

 
$

 
$
136,165

Other assets (1)
46,918

 

 

 
46,918

Total assets at fair value
$
182,883

 
$
200

 
$

 
$
183,083


(1) 
Represents restricted cash balance recorded within other assets in the consolidated balance sheet.
 
Assets Measured at Fair Value as of Jun. 29, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
72,824

 
$
200

 
$

 
$
73,024

Other assets (1)
18,785

 

 

 
18,785

Total assets at fair value
$
91,609

 
$
200

 
$

 
$
91,809


(1) 
Represents restricted cash balance recorded within other assets in the consolidated balance sheet.

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for new debt with the same maturities as existing debt, and is considered a Level 2 measurement. The fair value of total debt was approximately $9.6 billion and $8.6 billion as of December 28, 2019 and June 29, 2019, respectively. The carrying value of total debt was $8.9 billion and $8.2 billion as of December 28, 2019 and June 29, 2019, respectively.

11




6. MARKETABLE SECURITIES

Sysco invests a portion of the assets held by its wholly owned captive insurance subsidiary in a restricted investment portfolio of marketable fixed income securities, which have been classified and accounted for as available-for-sale. The company includes fixed income securities maturing in less than twelve months within Prepaid expenses and other current assets and includes fixed income securities maturing in more than twelve months within Other assets in the accompanying Consolidated Balance Sheets. The company records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period. Unrealized gains and losses on marketable securities are recorded in Accumulated other comprehensive loss. The following table presents the company’s available-for-sale marketable securities as of December 28, 2019 and June 29, 2019:

 
Dec. 28, 2019
 
Amortized Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities
 
(In thousands)
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
89,872

 
$
2,122

 
$
(3
)
 
$
91,991

 
$
15,047

 
$
76,944

Government bonds
28,768

 
2,152

 

 
30,920

 

 
30,920

Total marketable securities
$
118,640

 
$
4,274

 
$
(3
)
 
$
122,911

 
$
15,047

 
$
107,864

 
 
 
 
 
 
 
 
 
 
 
 
 
Jun. 29, 2019
 
Amortized Cost Basis
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Short-Term Marketable Securities
 
Long-Term Marketable Securities
 
(In thousands)
Corporate bonds
$
87,540

 
$
1,734

 
$

 
$
89,274

 
$
12,006

 
$
77,268

Government bonds
28,900

 
1,845

 

 
30,745

 

 
30,745

Total marketable securities
$
116,440

 
$
3,579

 
$

 
$
120,019

 
$
12,006

 
$
108,013



The fixed income securities held at December 28, 2019 had effective maturities ranging from less than one year to approximately eleven years. There were no significant realized gains or losses in marketable securities in the second quarter or the first 26 weeks of fiscal 2020.

7.  DERIVATIVE FINANCIAL INSTRUMENTS

Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes. Hedging strategies are used to manage interest rate risk, foreign currency risk and fuel price risk.

Hedging of interest rate risk

Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates.

Hedging of foreign currency risk

Sysco enters into cross-currency swap contracts to hedge the foreign currency transaction risk of certain intercompany loans. There are no credit-risk related contingent features associated with these swaps, which have been designated as cash flow hedges. The company also uses cross-currency swap contracts and euro-bond denominated debt to hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in Europe have inventory purchases denominated in currencies other than their functional currency, such as the euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of each entity and these currencies. The company enters into foreign currency forward swap contracts to sell the applicable entity’s functional currency and buy

12



currencies matching the inventory purchase, which operate as cash flow hedges of the company’s foreign currency-denominated inventory purchases.

Hedging of fuel price risk

Sysco uses fuel commodity swap contracts to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have been designated as cash flow hedges.

None of the company’s hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of December 28, 2019 are presented below:
Maturity Date of the Hedging Instrument
 
Currency / Unit of Measure
 
Notional Value
 
 
 
 
(In millions)
Hedging of interest rate risk
 
 
 
 
October 2020
 
U.S. Dollar
 
750
July 2021
 
U.S. Dollar
 
500
June 2023
 
Euro
 
500
March 2025
 
U.S. Dollar
 
500
 
 
 
 
 
Hedging of foreign currency risk
 
 
 
 
Various (December 30, 2019 to April 2020)
 
Swedish Krona
 
281
Various (January 2020 to December 2020)
 
British Pound Sterling
 
23
July 2021
 
British Pound Sterling
 
234
August 2021
 
British Pound Sterling
 
466
June 2023
 
Euro
 
500
 
 
 
 
 
Hedging of fuel risk
 
 
 
 
Various (December 31, 2019 to December 2020)
 
Gallons
 
54


13




The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of December 28, 2019 and June 29, 2019 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Dec. 28, 2019
 
Jun. 29, 2019
 
 
 
(In thousands)
Fair Value Hedges:
 
 
 
 
 
Interest rate swaps
Other assets
 
$
34,208

 
$
37,396

Interest rate swaps
Other current liabilities
 
2,154

 

Interest rate swaps
Other long-term liabilities
 
2,836

 
9,285

 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
Fuel Swaps
Other current assets
 
$
4,325

 
$
154

Foreign currency forwards
Other current assets
 
11

 
624

Fuel swaps
Other assets
 
207

 
136

Cross currency swaps
Other assets
 

 
8,592

Fuel Swaps
Other current liabilities
 
278

 
6,537

Foreign currency forwards
Other current liabilities
 
1,922

 
162

Fuel swaps
Other long-term liabilities
 

 
239

Cross currency swaps
Other long-term liabilities
 
1,739

 

 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
4,250

 
$
18,614

Foreign currency swaps
Other long-term liabilities
 
11,894

 
9,973



Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are not significant for each of the periods presented. The location and amount of gains or losses recognized in the consolidated results of operations for fair value hedging relationships for each of the periods, presented on a pretax basis, are as follows:
 
 
13-Week Period Ended
 
26-Week Period Ended
 
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
 
 
 
 
 
 
 
 
 
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value hedges are recorded
 
$
76,762

 
$
87,113

 
$
160,097

 
$
176,129

Gain or (loss) on fair value hedging relationships:
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Hedged items
 
$
(5,350
)
 
$
(46,919
)
 
$
(30,086
)
 
$
(55,506
)
Derivatives designated as hedging instruments
 
(9,248
)
 
31,550

 
(391
)
 
20,691


The losses on the fair value hedging relationships associated with the hedged items as disclosed in the table above are comprised of the following components for each of the periods presented:
 
 
13-Week Period Ended
 
26-Week Period Ended
 
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Interest expense
 
$
(14,560
)
 
$
(15,669
)
 
$
(29,117
)
 
$
(30,783
)
Increase (decrease) in fair value of debt
 
(9,210
)
 
31,250

 
969

 
24,723

Hedged items
 
$
(5,350
)
 
$
(46,919
)

$
(30,086
)

$
(55,506
)





14



The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 13-week periods ended December 28, 2019 and December 29, 2018, presented on a pretax basis, are as follows:
 
13-Week Period Ended Dec. 28, 2019
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
10,345

 
Operating expense
 
$
(3,213
)
Foreign currency contracts
(29,658
)
 
Cost of sales / Other income
 
3,624

Total
$
(19,313
)
 
 
 
$
411

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
(34,639
)
 
N/A
 
$

Foreign denominated debt
(11,650
)
 
N/A
 

Total
$
(46,289
)
 
 
 
$

 
 
 
 
 
 
 
13-Week Period Ended Dec. 29, 2018
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
(36,843
)
 
Operating expense
 
$
5,040

Foreign currency contracts
25,463

 
Cost of sales / Other income
 
8

Total
$
(11,380
)
 
 
 
$
5,048

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
27,143

 
N/A
 
$

Foreign denominated debt
8,150

 
N/A
 

Total
$
35,293

 
 
 
$



15



The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 26-week periods ended December 28, 2019 and December 29, 2018, presented on a pretax basis, are as follows:
 
26-Week Period Ended Dec. 28, 2019
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
10,689

 
Operating expense
 
$
(6,619
)
Foreign currency contracts
(17,351
)
 
Cost of sales / Other income
 
3,626

Total
$
(6,662
)
 
 
 
$
(2,993
)
 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
(13,787
)
 
N/A
 
$

Foreign denominated debt
9,800

 
N/A
 

Total
$
(3,987
)
 
 
 
$

 
 
 
 
 
 
 
26-Week Period Ended Dec. 29, 2018
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
(35,817
)
 
Operating expense
 
$
9,393

Foreign currency contracts
20,660

 
Cost of sales / Other income
 
491

Total
$
(15,157
)
 
 
 
$
9,884

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
34,371

 
N/A
 
$

Foreign denominated debt
12,100

 
N/A
 

Total
$
46,471

 
 
 
$




16



The location and carrying amount of hedged liabilities in the consolidated balance sheet as of December 28, 2019 are as follows:
 
Dec. 28, 2019
 
Carrying Amount of Hedged Assets (Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
 
(In thousands)
Balance sheet location:
 
 
 
Current maturities of long-term debt
$
(749,782
)
 
$
2,154

Long-term debt
(1,562,810
)
 
(31,739
)


The location and carrying amount of hedged liabilities in the consolidated balance sheet as of June 29, 2019 are as follows:
 
Jun. 29, 2019
 
Carrying Amount of Hedged Assets (Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
 
(In thousands)
Balance sheet location:
 
 
 
Long-term debt
$
(2,311,636
)
 
$
(28,616
)


8. DEBT

Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $2.0 billion. As of December 28, 2019, there were $853.3 million in commercial paper issuances outstanding. Any outstanding amounts are classified within long-term debt, as the program is supported by a long-term revolving credit facility. During the first 26 weeks of fiscal 2020, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from approximately $208.9 million to approximately $1.2 billion.

9. LEASES

Sysco leases certain of its distribution and warehouse facilities, office facilities, fleet vehicles, and office and warehouse equipment. The company determines if an arrangement is a lease at inception and recognizes a finance or operating lease liability and ROU asset in the consolidated balance sheets if a lease exists. Lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at the commencement date. If the borrowing rate implicit in the lease is not readily determinable, Sysco uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.

The lease term is defined as the noncancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the company will exercise one of these options. Leases with an initial term of 12 months or less are not recorded in Sysco’s consolidated balance sheets, and the company recognizes expense for these leases on a straight-line basis over the lease term. Variable lease payments that do not depend on an index or a rate, such as insurance and property taxes, are excluded from the measurement of the lease liability and are recognized as variable lease cost when the obligation for that payment is incurred. For leases in which the lease and non-lease components have been combined, the variable lease expense includes expenses such as common area maintenance, utilities, and repairs and maintenance. Sysco’s leases do not contain significant residual value guarantees and do not impose significant restrictions or covenants.


17



The following table presents the location of the finance lease ROU assets and lease liabilities in the company’s Consolidated Balance Sheet at December 28, 2019:

 
 
Consolidated Balance Sheet Location
 
Dec. 28, 2019
 
 
 
 
(In thousands)
Finance lease right-of-use assets
 
Plant and equipment at cost, less accumulated depreciation
 
$
98,006

Current finance lease liabilities
 
Current maturities of long-term debt
 
30,280

Long-term finance lease liabilities
 
Long-term debt
 
72,176



The following table presents lease costs for each of the presented periods ended December 28, 2019:
 
 
Consolidated Results of Operations Location
 
13-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 28, 2019
 
 
 
 
(In thousands)
Operating lease cost
 
Operating expenses
 
$
31,917

 
$
62,342

Financing lease cost:
 
 
 
 
 
 
Amortization of right-of-use assets
 
Operating expenses
 
10,343

 
18,956

Interest on lease obligations
 
Interest expense
 
1,227

 
2,409

Variable lease cost
 
Operating expenses
 
5,979

 
6,447

Short-term lease cost
 
Operating expenses
 
3,274

 
6,170

Net lease cost
 
 
 
$
52,740

 
$
96,324



Future minimum lease obligations under existing noncancelable operating and finance lease agreements by fiscal year as of December 28, 2019 are as follows:
 
 
Operating Leases
 
Finance Leases
 
 
(In thousands)
Remainder of fiscal 2020
 
$
60,961

 
$
18,004

2021
 
114,626

 
32,199

2022
 
88,350

 
23,470

2023
 
72,233

 
16,784

2024
 
50,433

 
10,398

2025
 
44,622

 
5,977

Thereafter
 
314,928

 
5,828

Total undiscounted lease obligations
 
746,153

 
112,660

Less imputed interest
 
(80,580
)
 
(10,204
)
Present value of lease obligations
 
$
665,573

 
$
102,456






18



Other information related to lease agreements was as follows:
 
 
26-Week Period Ended Dec. 28, 2019
Cash Paid For Amounts Included In Measurement of Liabilities:
 
(Dollars in thousands)
Operating cash flows for operating leases
 
$
62,101

Operating cash flows for financing leases
 
2,409

Financing cash flows for financing leases
 
16,634

 
 
 
Supplemental Non-cash Information on Lease Liabilities:
 
 
Assets obtained in exchange for operating lease obligations
 
$
29,249

Assets obtained in exchange for finance lease obligations
 
9,700

 
 
 
Lease Term and Discount Rate:
 
 
Weighted-average remaining lease term (years):
 
 
Operating leases
 
11.49 years

Financing leases
 
4.11 years

Weighted-average discount rate:
 
 
Operating leases
 
2.44
%
Financing leases
 
4.67
%


10.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
 
(In thousands, except for share
and per share data)
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
 
 
 
 
Net earnings
$
383,410

 
$
267,380

 
$
837,191

 
$
698,422

Denominator:
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
509,984,743

 
517,871,328

 
511,721,290

 
519,363,973

Dilutive effect of share-based awards
5,533,049

 
6,729,182

 
5,399,105

 
7,453,528

Weighted-average diluted shares outstanding
515,517,792

 
524,600,510

 
517,120,395

 
526,817,501

Basic earnings per share
$
0.75

 
$
0.52

 
$
1.64

 
$
1.34

Diluted earnings per share
$
0.74

 
$
0.51

 
$
1.62

 
$
1.33



The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 2,947,000 and 2,565,000 for the second quarters of fiscal 2020 and fiscal 2019, respectively. The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,134,000 and 3,630,000 for the first 26 weeks of fiscal 2020 and fiscal 2019, respectively.

11.  OTHER COMPREHENSIVE INCOME

Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, amounts related to cash flow hedging arrangements, certain amounts related to pension and other postretirement plans and changes in marketable securities. Comprehensive income was $492.5 million and $193.8 million for the second quarters of fiscal 2020 and fiscal 2019, respectively. Comprehensive income was $870.6 million and $583.3 million for the first 26 weeks of fiscal 2020 and fiscal 2019, respectively.


19



A summary of the components of other comprehensive income (loss) and the related tax effects for each of the periods presented is as follows:
 
 
 
13-Week Period Ended Dec. 28, 2019
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of prior service cost
Other expense, net
 
$
1,905

 
$
477

 
$
1,428

Amortization of actuarial loss, net
Other expense, net
 
9,630

 
2,405

 
7,225

Total reclassification adjustments
 
 
11,535

 
2,882

 
8,653

Foreign currency translation:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
154,955

 

 
154,955

Marketable securities:
 
 
 
 
 
 
 
   Change in marketable securities (1)
N/A
 
(489
)
 
(103
)
 
(386
)
Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (2)
 
(19,313
)
 
(4,516
)
 
(14,797
)
Change in net investment hedges
N/A
 
(46,289
)
 
(4,810
)
 
(41,479
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(65,602
)
 
(9,326
)
 
(56,276
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,874

 
719

 
2,155

Total other comprehensive (loss) income
 
 
$
103,273

 
$
(5,828
)
 
$
109,101


(1) 
Realized gains or losses on marketable securities are presented within Other (income) expense, net in the Consolidated Results of Operations; however, there were no significant gains or losses realized in the second quarter of fiscal 2020.

(2) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.


20



 
 
 
13-Week Period Ended Dec. 29, 2018
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Other expense, net
 
$
2,133

 
$
533

 
$
1,600

Amortization of actuarial loss (gain), net
Other expense, net
 
8,706

 
2,177

 
6,529

Total reclassification adjustments
 
 
10,839

 
2,710

 
8,129

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income (loss) before
   reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(101,533
)
 

 
(101,533
)
Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (1)
 
(11,380
)
 
(2,596
)
 
(8,784
)
Change in net investment hedges
N/A
 
35,293

 
8,824

 
26,469

Total other comprehensive income (loss) before reclassification adjustments
 
 
23,913

 
6,228

 
17,685

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
718

 
2,155

Total other comprehensive (loss) income
 
 
$
(63,908
)
 
$
9,656

 
$
(73,564
)

(1) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.


21



 
 
 
26-Week Period Ended Dec. 28, 2019
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of prior service cost
Other expense, net
 
$
3,810

 
$
954

 
$
2,856

Amortization of actuarial loss, net
Other expense, net
 
18,572

 
4,664

 
13,908

Total reclassification adjustments
 
 
22,382

 
5,618

 
16,764

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
28,796

 

 
28,796

Marketable securities:
 
 
 
 
 
 
 
Change in marketable securities (1)
N/A
 
692

 
145

 
547

Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (2)
 
(6,662
)
 
(1,124
)
 
(5,538
)
Change in net investment hedges
N/A
 
(3,987
)
 
7,492

 
(11,479
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(10,649
)
 
6,368

 
(17,017
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
5,748

 
1,438

 
4,310

Total other comprehensive (loss) income
 
 
$
46,969

 
$
13,569

 
$
33,400


(1) 
Realized gains or losses on marketable securities are presented within Other (income) expense, net in the Consolidated Results of Operations; however, there were no significant gains or losses realized in the first 26 weeks of fiscal 2020.

(2) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.


22





 
 
 
26-Week Period Ended Dec. 29, 2018
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Net actuarial (loss) gain, net arising in the current year
 
 
$
(36,891
)
 
$
(4,380
)
 
$
(32,511
)
Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Other expense, net
 
4,266

 
1,066

 
3,200

Amortization of actuarial loss (gain), net
Other expense, net
 
17,412

 
4,354

 
13,058

Total reclassification adjustments
 
 
21,678

 
5,420

 
16,258

Foreign currency translation:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(126,460
)
 

 
(126,460
)
Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (1)
 
(15,157
)
 
(3,365
)
 
(11,792
)
Change in net investment hedges
N/A
 
46,471

 
11,414

 
35,057

Total other comprehensive income (loss) before reclassification adjustments
 
 
31,314

 
8,049

 
23,265

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
5,746

 
1,436

 
4,310

Total other comprehensive (loss) income
 
 
$
(104,613
)
 
$
10,525

 
$
(115,138
)

(1) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.

The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
26-Week Period Ended Dec. 28, 2019
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging,
net of tax
 
Marketable Securities,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 29, 2019
$
(1,217,617
)
 
$
(290,169
)
 
$
(94,770
)
 
$
2,827

 
$
(1,599,729
)
Equity adjustment from foreign currency translation

 
28,796

 

 

 
28,796

Amortization of cash flow hedges

 

 
4,310

 

 
4,310

Change in net investment hedges

 

 
(11,479
)
 

 
(11,479
)
Change in cash flow hedge

 

 
(5,538
)
 

 
(5,538
)
Amortization of unrecognized prior service cost
2,856

 

 

 

 
2,856

Amortization of unrecognized net actuarial losses
13,908

 

 

 

 
13,908

Change in marketable securities

 

 

 
547

 
547

Balance as of Dec. 28, 2019
$
(1,200,853
)
 
$
(261,373
)
 
$
(107,477
)
 
$
3,374

 
$
(1,566,329
)

23




 
26-Week Period Ended Dec. 29, 2018
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 30, 2018
$
(1,095,059
)
 
$
(171,043
)
 
$
(143,167
)
 
$
(1,409,269
)
Equity adjustment from foreign currency translation

 
(126,460
)
 

 
(126,460
)
Amortization of cash flow hedges

 

 
4,310

 
4,310

Change in net investment hedges

 

 
35,057

 
35,057

Change in cash flow hedges

 

 
(11,792
)
 
(11,792
)
Net actuarial loss
(32,511
)
 

 

 
(32,511
)
Amortization of unrecognized prior service cost
3,200

 

 

 
3,200

Amortization of unrecognized net actuarial losses
13,058

 

 

 
13,058

Balance as of Dec. 29, 2018
$
(1,111,312
)
 
$
(297,503
)
 
$
(115,592
)
 
$
(1,524,407
)


12.  SHARE-BASED COMPENSATION

Sysco provides compensation benefits to employees under several share-based payment arrangements, including various long-term employee stock incentive plans and the 2015 Employee Stock Purchase Plan (ESPP).

Stock Incentive Plans

In the first 26 weeks of fiscal 2020, options to purchase 2,465,089 shares were granted to employees. 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 option granted during the first 26 weeks of fiscal 2020 was $10.53.

In the first 26 weeks of fiscal 2020, 537,275 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs 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 PSU granted during the first 26 weeks of fiscal 2020 was $73.02. The PSUs will convert into shares of Sysco common stock at the end of the performance period based on financial performance targets consisting of Sysco’s adjusted earnings per share compound annual growth rate and adjusted return on invested capital.

Employee Stock Purchase Plan

Plan participants purchased 510,197 shares of common stock under the Sysco ESPP during the first 26 weeks of fiscal 2020. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $11.30 during the first 26 weeks of fiscal 2020. The fair value of each stock purchase right is estimated as the difference between the stock price at the date of issuance 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 $46.6 million and $54.2 million for the first 26 weeks of fiscal 2020 and fiscal 2019, respectively.

As of December 28, 2019, there was $121.5 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 1.92 years.


24



13.  INCOME TAXES

Effective Tax Rate

The effective tax rates for the second quarter and first 26 weeks of fiscal 2020 were 19.54% and 20.90%, respectively. As compared to the company’s statutory tax rate, the lower effective tax rate for the second quarter and first 26 weeks of fiscal 2020 was primarily due to the favorable impact of excess tax benefits of equity-based compensation that totaled $11.8 million and $27.5 million, respectively. The effective tax rates for the second quarter and first 26 weeks of fiscal 2019 were 24.59% and 21.75%, respectively. The effective tax rate for the second quarter of fiscal 2019 is primarily due to lower tax rates enacted from the Tax Cuts and Jobs Act (Tax Act), the favorable impact of excess tax benefits of equity-based compensation that totaled $7.6 million, the unfavorable impact of $11.9 million attributable to finalizing accounting with regard to certain provisions of the Tax Act.

Uncertain Tax Positions

As of December 28, 2019, the gross amount of unrecognized tax benefit and related accrued interest was $23.9 million and $4.2 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months. At this time, an estimate of the range of the reasonably possible change cannot be made.

Other

The determination of the company’s provision for income taxes requires 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 unrecognized tax benefits or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

14.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Sysco is engaged in various legal proceedings that 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 to probable. When probable and reasonably estimable, the losses have been accrued. Although the final results of legal proceedings cannot be predicted with certainty, 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.

15.  BUSINESS SEGMENT INFORMATION

The company has aggregated certain of its operating segments into three reportable segments. “Other” financial information is attributable to the company’s other operating segments that do not meet the quantitative disclosure thresholds.

U.S. Foodservice Operations - primarily includes U.S. Broadline operations, which distribute a full line of food products including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products;
International Foodservice Operations - primarily includes operations that the company has grouped into Canada, Latin America and Europe, which distribute a full line of food products and a wide variety of non-food products. Latin America primarily consists of operations in Bahamas, Mexico, Costa Rica and Panama, as well as our operations that distribute to international customers. Our European operations primarily consist of operations in the United Kingdom, France, Ireland and Sweden;
SYGMA - our U.S. customized distribution subsidiary; and
Other - primarily our hotel supply operations and Sysco Labs, which includes our suite of technology solutions that help support the business needs of our customers and provide support for some of our business technology needs.


25



The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared services center. These expenses also include all share-based compensation costs.
 
The following tables set forth certain financial information for Sysco’s reportable business segments.

 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Sales:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
10,413,575

 
$
10,087,105

 
$
21,072,208

 
$
20,486,516

International Foodservice Operations
2,890,053

 
2,890,598

 
5,802,441

 
5,811,548

SYGMA
1,455,893

 
1,536,607

 
2,902,887

 
3,158,064

Other
265,521

 
251,397

 
550,511

 
524,858

Total
$
15,025,042

 
$
14,765,707

 
$
30,328,047

 
$
29,980,986

 
 
 
 
 
 
 
 
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Operating income:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
768,777

 
$
737,477

 
$
1,630,183

 
$
1,553,235

International Foodservice Operations
34,881

 
(14,917
)
 
89,681

 
51,855

SYGMA
9,861

 
3,114

 
17,431

 
5,545

Other
9,403

 
5,718

 
19,540

 
16,053

Total segments
822,922

 
731,392

 
1,756,835

 
1,626,688

Corporate
(270,429
)
 
(279,497
)
 
(536,024
)
 
(546,653
)
Total operating income
552,493

 
451,895

 
1,220,811

 
1,080,035

Interest expense
76,762

 
87,113

 
160,097

 
176,129

Other expense (income), net
(807
)
 
10,197

 
2,305

 
11,329

Earnings before income taxes
$
476,538

 
$
354,585

 
$
1,058,409

 
$
892,577



16.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES

On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation at that time entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. All subsequent issuances of senior notes and debentures in the U.S. have also been guaranteed by these subsidiaries. As of December 28, 2019, Sysco had a total of $7.5 billion in senior notes and debentures that was covered by these guarantees.

All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional, and all guarantees are joint and several, except that the guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances. If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series. Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable subsidiary guarantor shall consolidate with or merge into Sysco Corporation or any successor of Sysco Corporation or (2) Sysco Corporation or any successor of Sysco Corporation consolidates with or merges into the applicable subsidiary guarantor.


26



The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (certain of the company’s U.S. Broadline subsidiaries), and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.
 
Condensed Consolidated Balance Sheet
 
Dec. 28, 2019
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
123,848

 
$
4,414,664

 
$
4,123,098

 
$

 
$
8,661,610

Intercompany receivables
6,545,764

 
102,177

 
3,675,995

 
(10,323,936
)
 

Investment in subsidiaries
5,877,563

 

 
1,244,417

 
(7,121,980
)
 

Plant and equipment, net
235,093

 
2,220,719

 
2,138,078

 

 
4,593,890

Other assets
820,636

 
728,806

 
5,134,269

 
(567,177
)
 
6,116,534

Total assets
$
13,602,904

 
$
7,466,366

 
$
16,315,857

 
$
(18,013,093
)
 
$
19,372,034

Current liabilities
$
1,371,102

 
$
923,600

 
$
4,637,266

 
$

 
$
6,931,968

Intercompany payables
1,364,060

 
3,284,353

 
5,675,523

 
(10,323,936
)
 

Long-term debt
7,636,689

 
9,557

 
446,668

 

 
8,092,914

Other liabilities
703,527

 
550,395

 
1,098,811

 
(567,177
)
 
1,785,556

Noncontrolling interest

 

 
34,070

 

 
34,070

Shareholders’ equity
2,527,526

 
2,698,461

 
4,423,519

 
(7,121,980
)
 
2,527,526

Total liabilities and shareholders’ equity
$
13,602,904

 
$
7,466,366

 
$
16,315,857

 
$
(18,013,093
)
 
$
19,372,034


 
Condensed Consolidated Balance Sheet
 
Jun. 29, 2019
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
121,993

 
$
4,195,543

 
$
3,823,969

 
$

 
$
8,141,505

Intercompany receivables
6,162,303

 
30,469

 
3,220,237

 
(9,413,009
)
 

Investment in subsidiaries
4,680,530

 

 
1,126,315

 
(5,806,845
)
 

Plant and equipment, net
252,101

 
2,162,668

 
2,086,936

 

 
4,501,705

Other assets
787,986

 
718,600

 
4,372,725

 
(555,999
)
 
5,323,312

Total assets
$
12,004,913

 
$
7,107,280

 
$
14,630,182

 
$
(15,775,853
)
 
$
17,966,522

Current liabilities
$
465,101

 
$
1,018,650

 
$
4,619,432

 
$

 
$
6,103,183

Intercompany payables
686,116

 
3,443,182

 
5,283,711

 
(9,413,009
)
 

Long-term debt
7,668,314

 
7,938

 
445,806

 

 
8,122,058

Other liabilities
682,779

 
545,391

 
531,081

 
(555,999
)
 
1,203,252

Noncontrolling interest

 

 
35,426

 

 
35,426

Shareholders’ equity
2,502,603

 
2,092,119

 
3,714,726

 
(5,806,845
)
 
2,502,603

Total liabilities and shareholders’ equity
$
12,004,913

 
$
7,107,280

 
$
14,630,182

 
$
(15,775,853
)
 
$
17,966,522



27



 
Condensed Consolidated Statement of Comprehensive Income
 
For the 13-Week Period Ended Dec. 28, 2019
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
9,489,129

 
$
6,135,069

 
$
(599,156
)
 
$
15,025,042

Cost of sales

 
7,712,606

 
5,083,193

 
(599,156
)
 
12,196,643

Gross profit

 
1,776,523

 
1,051,876

 

 
2,828,399

Operating expenses
206,921

 
1,053,004

 
1,015,981

 

 
2,275,906

Operating income (loss)
(206,921
)
 
723,519

 
35,895

 

 
552,493

Interest expense (income) (1)
110,821

 
(23,993
)
 
(10,066
)
 

 
76,762

Other expense (income), net
(612
)
 
(183
)
 
(12
)
 

 
(807
)
Earnings (losses) before income taxes
(317,130
)
 
747,695

 
45,973

 

 
476,538

Income tax (benefit) provision
(106,906
)
 
188,909

 
11,125

 

 
93,128

Equity in earnings of subsidiaries
593,634

 

 
113,153

 
(706,787
)
 

Net earnings
383,410

 
558,786

 
148,001

 
(706,787
)
 
383,410

Other comprehensive income (loss)
109,101

 

 
154,955

 
(154,955
)
 
109,101

Comprehensive income
$
492,511

 
$
558,786

 
$
302,956

 
$
(861,742
)
 
$
492,511

 

(1) 
Interest expense (income) includes $24.0 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation for the second quarter ended December 28, 2019. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.

 
Condensed Consolidated Statement of Comprehensive Income
 
For the 13-Week Period Ended Dec. 29, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
9,101,114

 
$
6,329,665

 
$
(665,072
)
 
$
14,765,707

Cost of sales

 
7,381,785

 
5,277,282

 
(665,072
)
 
11,993,995

Gross profit

 
1,719,329

 
1,052,383

 

 
2,771,712

Operating expenses
232,621

 
1,035,676

 
1,051,520

 

 
2,319,817

Operating income (loss)
(232,621
)
 
683,653

 
863

 

 
451,895

Interest expense (income) (1)
63,491

 
(8,920
)
 
32,542

 

 
87,113

Other expense (income), net
3,772

 
(86
)
 
6,511

 

 
10,197

Earnings (losses) before income taxes
(299,884
)
 
692,659

 
(38,190
)
 

 
354,585

Income tax (benefit) provision
(73,057
)
 
170,960

 
(10,698
)
 

 
87,205

Equity in earnings of subsidiaries
494,207

 

 
128,030

 
(622,237
)
 

Net earnings
267,380

 
521,699

 
100,538

 
(622,237
)
 
267,380

Other comprehensive income (loss)
(73,564
)
 

 
(101,533
)
 
101,533

 
(73,564
)
Comprehensive income
$
193,816

 
$
521,699

 
$
(995
)
 
$
(520,704
)
 
$
193,816


(1) 
Interest expense (income) includes $8.9 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation for the second quarter ended December 29, 2018. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.


28



 
Condensed Consolidated Statement of Comprehensive Income
 
For the 26-Week Period Ended Dec. 28, 2019
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
19,299,537

 
$
12,178,357

 
$
(1,149,847
)
 
$
30,328,047

Cost of sales

 
15,623,046

 
10,083,079

 
(1,149,847
)
 
24,556,278

Gross profit

 
3,676,491

 
2,095,278

 

 
5,771,769

Operating expenses
405,761

 
2,128,841

 
2,016,356

 

 
4,550,958

Operating income (loss)
(405,761
)
 
1,547,650

 
78,922

 

 
1,220,811

Interest expense (income) (1)
218,157

 
(44,521
)
 
(13,539
)
 

 
160,097

Other expense (income), net
6,441

 
(350
)
 
(3,786
)
 

 
2,305

Earnings (losses) before income taxes
(630,359
)
 
1,592,521

 
96,247

 

 
1,058,409

Income tax (benefit) provision
(205,406
)
 
401,455

 
25,169

 

 
221,218

Equity in earnings of subsidiaries
1,262,144

 

 
242,701

 
(1,504,845
)
 

Net earnings
837,191

 
1,191,066

 
313,779

 
(1,504,845
)
 
837,191

Other comprehensive income (loss)
33,400

 

 
28,796

 
(28,796
)
 
33,400

Comprehensive income
$
870,591

 
$
1,191,066

 
$
342,575

 
$
(1,533,641
)
 
$
870,591


(1) 
Interest expense (income) includes $44.5 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.

 
Condensed Consolidated Statement of Comprehensive Income
 
For the 26-Week Period Ended Dec. 29, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
18,580,920

 
$
12,563,823

 
$
(1,163,757
)
 
$
29,980,986

Cost of sales

 
15,041,886

 
10,427,360

 
(1,163,757
)
 
24,305,489

Gross profit

 
3,539,034

 
2,136,463

 

 
5,675,497

Operating expenses
452,902

 
2,088,027

 
2,054,533

 

 
4,595,462

Operating income (loss)
(452,902
)
 
1,451,007

 
81,930

 

 
1,080,035

Interest expense (income) (1)
104,905

 
(30,459
)
 
101,683

 

 
176,129

Other expense (income), net
10,372

 
(140
)
 
1,097

 

 
11,329

Earnings (losses) before income taxes
(568,179
)
 
1,481,606

 
(20,850
)
 

 
892,577

Income tax (benefit) provision
(166,645
)
 
367,404

 
(6,604
)
 

 
194,155

Equity in earnings of subsidiaries
1,099,956

 

 
222,371

 
(1,322,327
)
 

Net earnings
698,422

 
1,114,202

 
208,125

 
(1,322,327
)
 
698,422

Other comprehensive income (loss)
(115,138
)
 

 
(126,460
)
 
126,460

 
(115,138
)
Comprehensive income
$
583,284

 
$
1,114,202

 
$
81,665

 
$
(1,195,867
)
 
$
583,284


(1) 
Interest expense (income) includes $30.5 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.


29



 
Condensed Consolidated Cash Flows
 
For the 26-Week Period Ended Dec. 28, 2019
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Elimination (1)
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
 
 
Operating activities
$
283,101

 
$
175,343

 
$
296,025

 
$

 
$
754,469

Investing activities
(146,118
)
 
(186,480
)
 
(306,521
)
 
111,429

 
(527,690
)
Financing activities
(112,342
)
 
(7,053
)
 
37,731

 
(111,429
)
 
(193,093
)
Effect of exchange rates on cash

 

 
5,565

 

 
5,565

Net increase (decrease) in cash, cash equivalents and restricted cash
24,641

 
(18,190
)
 
32,800

 

 
39,251

Cash, cash equivalents and restricted cash at the beginning of period
29,868

 
117,643

 
384,734

 

 
532,245

Cash, cash equivalents and restricted cash at the end of period
$
54,509

 
$
99,453

 
$
417,534

 
$

 
$
571,496


(1) 
Represents primarily intercompany loans between the subsidiaries and the parent, Sysco Corporation.

 
Condensed Consolidated Cash Flows
 
For the 26-Week Period Ended Dec. 29, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Elimination (1)
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
 
 
Operating activities
$
485,875

 
$
100,079

 
$
331,836

 
$

 
$
917,790

Investing activities
432,730

 
(85,254
)
 
(66,591
)
 
(497,897
)
 
(217,012
)
Financing activities
(912,101
)
 
(2,819
)
 
(93,709
)
 
497,897

 
(510,732
)
Effect of exchange rates on cash

 

 
(8,904
)
 

 
(8,904
)
Net increase (decrease) in cash, cash equivalents and restricted cash
6,504

 
12,006

 
162,632

 

 
181,142

Cash, cash equivalents and restricted cash at the beginning of period
29,144

 
111,843

 
574,857

 

 
715,844

Cash, cash equivalents and restricted cash at the end of period
$
35,648

 
$
123,849

 
$
737,489

 
$

 
$
896,986

(1) 
Represents primarily intercompany loans between the subsidiaries and the parent, Sysco Corporation.

30



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 June 29, 2019, and for the fiscal year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year ended June 29, 2019 (our 2019 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.

Sysco’s results of operations for fiscal 2020 and fiscal 2019 were impacted by restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges. All acquisition-related costs in fiscal 2020 and fiscal 2019 that have been designated as Certain Items relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). These include acquisition-related intangible amortization expense. In addition, fiscal 2019 results of operations were negatively affected by acquisition-related integration costs specific to the Brakes Acquisition and the impact of recognizing a foreign tax credit. These fiscal 2020 and fiscal 2019 items are collectively referred to as “Certain Items.” The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies to U.S. dollars. We measure our International Foodservice Operations results on a constant currency basis. Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from Certain Items, and certain metrics are stated on a constant currency basis.

More information on the rationale for the use of non-GAAP financial measures and reconciliations to the most directly comparable numbers calculated in accordance with U.S. generally accepted accounting principles (GAAP) can be found under “Non-GAAP Reconciliations.”

Highlights and Trends

Highlights

Our second quarter of fiscal 2020 performance reflects improved year-over-year performance, including operating income and net earnings growth in the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019, both including and excluding Certain Items.

Comparisons of results from the second quarter of fiscal 2020 to the second quarter of fiscal 2019:

Sales:
increased 1.8%, or $259.3 million, to $15.0 billion;
Operating income:
increased 22.3%, or $100.6 million, to $552.5 million;
adjusted operating income increased 3.9%, or $23.6 million, to $626.9 million;
Net earnings:
increased 43.4%, or $116.0 million, to $383.4 million;
adjusted net earnings increased 11.3%, or $44.3 million, to $437.8 million;
Basic earnings per share:
increased 44.2%, or $0.23, to $0.75 per share;
Diluted earnings per share:
increased 45.9%, or $0.23, to $0.74 per share; and
adjusted diluted earnings per share increased 13.2%, or $0.10, to $0.85 per share.

Comparisons of results from the first 26 weeks of fiscal 2020 to the first 26 weeks of fiscal 2019:

Sales:
increased 1.2%, or $347.1 million, to $30.3 billion;
Operating income:
increased 13.0%, or $140.8 million, to $1.2 billion;
adjusted operating income increased 5.7%, or $73.8 million, to $1.4 billion;
Net earnings:
increased 19.9%, or $138.8 million, to $837.2 million;
adjusted net earnings increased 8.6%, or $75.4 million, to $948.1 million;

31



Basic earnings per share:
increased 22.4%, or $0.30, to $1.64 per share;
Diluted earnings per share:
increased 22.1%, or $0.29, to $1.62 per share; and
adjusted diluted earnings per share increased 10.7%, or $0.17, to $1.83 per share.

See “Non-GAAP Reconciliations” below for an explanation of adjusted operating income, adjusted net earnings and adjusted diluted earnings per share, which are non-GAAP financial measures, and reconciliations to the most directly comparable GAAP financial measures.

Trends

The economic and industry trends in the U.S. were favorable in the first 26 weeks of fiscal 2020, illustrated by U.S. gross domestic product growth and continued low unemployment rates. During the calendar quarter, according to Black Box Intelligence, restaurant same-store sales declined, offset by average guest check increases. Although traffic in the food industry shows some decline, market conditions are modestly favorable for foodservice operators in the U.S. Within the international markets, traffic and sales in the United Kingdom (U.K.) and Ireland continue to be soft, as uncertainties around Brexit, affect foodservice and other economic activity. These trends, however, are relatively stable compared to conditions at the end of fiscal 2019. In Canada, signs of a slowing economy were present in some parts of the country during the second quarter of fiscal 2020. In France, GDP growth is expected to continue, household spending has increased and unemployment is trending lower, partially due to labor market reforms.

Our sales growth was driven by continued growth with our local restaurant customers, partially offset by the divestiture of Iowa Premium, LLC (Iowa Premium) in the fourth quarter of fiscal 2019 and the negative impact of foreign exchange rates. Gross profit growth was driven by a continued shift in our customer mix, as we grew local cases at a faster pace than total case growth. Additionally, we experienced continued growth in penetration of our Sysco brand portfolio. Our sales growth has been stronger in our U.S. Broadline operations, with positive levels of growth experienced in our International businesses, with the exception of our operations in France. A strengthening U.S. dollar negatively affected total Sysco sales growth by 0.2% and 0.4% for the second quarter and first 26 weeks of fiscal 2020, respectively, and negatively impacted sales growth for our International Foodservice Operations by 0.9% and 2.1% for the second quarter and first 26 weeks of fiscal 2020, respectively, as we translated our foreign sales due to foreign currency exchange rate changes.

While our gross profit has increased, in the second quarter of fiscal 2020, our gross margin declined in our U.S Foodservice Operations. We experienced inflation at a rate of 2.6% during the second quarter of fiscal 2020, primarily in the dairy products and beef categories. The unusually high rate of inflation in these categories limited our ability to efficiently pass inflation in these categories to our customers. We also experienced a return to more normalized pricing in produce markets in the second quarter of fiscal 2020, as compared to a sharp increase in the second quarter of fiscal 2019. We expect this year over year unfavorable impact to continue in the third quarter of fiscal 2020. Lastly, fuel surcharges have declined as compared to the second quarter of fiscal 2019.
 
Total operating expenses decreased 1.9% and 1.0% during the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019 due to effective expense management, including benefits from our transformation initiatives. Operating costs within our U.S. operations grew slightly due to higher labor and operational costs. Labor costs were higher due to our decision to retain driver and warehouse personnel in a tight labor market and we will continue to evaluate our staffing needs over the next several quarters. In the second quarter of fiscal 2020, we experienced a twelve-day strike in Denver, which resulted in added costs associated with continuing to serve customers during that period. Our business in France continues to experience challenges arising from our efforts to integrate our France operations. We believe these challenges will continue to negatively impact our performance through the remainder of the fiscal year. We are maintaining our focus on expense reductions as we continue to invest in areas of our business that will help facilitate future growth.

Sysco sold its interests in Iowa Premium in the fourth quarter of fiscal 2019, and, therefore, our operating results for the first 26 weeks of fiscal 2020, as compared to the first 26 weeks of fiscal 2019, reflect decreases that relate to the divestiture of that business.

We have completed the following new acquisitions thus far in fiscal 2020 within our U.S. Foodservice Operations:

In the first quarter of fiscal 2020, we acquired J. Kings Food Service Professionals, a New York broadline distributor with approximately $150 million in annual revenue.

32



In the second quarter of fiscal 2020, we acquired Armstrong Produce and Kula Produce, a Hawaii-based broadline fresh produce wholesaler and distributor with approximately $155 million in combined annual revenue.

Strategy

Fiscal 2020 is the third year in our current three-year plan that was established in fiscal 2018 and includes our strategic and financial objectives through fiscal 2020, which will enable us to continue transforming our business, while improving the customer experience of doing business with Sysco. Our target financial objectives have included:

reaching $600 million of adjusted operating income growth as compared to fiscal 2017;
growing earnings per share faster than operating income; and
achieving 16% in adjusted return on invested capital for existing businesses.

These goals were determined on the belief that by fiscal 2020, we could also achieve growth in six financial metrics as compared to fiscal 2017. The goals and our forecasted results for our current three-year plan ending fiscal 2020 are as follows:

case growth of 2.5% to 3.0%, we have forecasted to achieve 2.5%;
local case growth of 3.0% to 3.3%, we have forecasted to achieve 3.3%;
sales and gross profit growth of 3.5% to 4.0%, we have forecasted to achieve 3.7%;
adjusted operating income growth of 8% or $600 million, we have forecasted to achieve 7.0% and
adjusted diluted earnings per share growth of 15%, we have forecasted to achieve 15.6%.

The company announced a senior leadership change in mid-January of fiscal 2020 with a goal of accelerating growth and operating improvements. At the time of this announcement, we noted that our fiscal year 2020 performance was generally tracking along with consensus estimates. With 10 quarters of our three-year plan completed, we continue to generate strong performance relative to the plan across most of the metrics noted above. However, after completing our second quarter close and considering recent performance, even with some clear positives such as acceleration in local case growth, we have recently decided to make certain adjustments to our outlook for the remainder of fiscal 2020. Specifically, given challenges we are experiencing such as those related to inflation, integration challenges in France and increased discrete corporate expenses, combined with investment opportunities that can deliver strong returns over time, we have decided to amend our plan. Therefore, we are lowering our fiscal 2018 to fiscal 2020 adjusted operating income growth target to approximately $500 million to $525 million, from the prior $600 million target and we are lowering our three-year adjusted operating income growth guidance from approximately 8% to 7%. Benefits that we have experienced within our results of operations below operating income such as in interest expense and tax expense have provided us with the flexibility to make these investments now while still delivering on top-line and bottom-line earnings per share targets. We believe investing for the long-term is more prudent than seeking a short-term gain and will allow us to advance the work that will both further enhance our customer focus and accelerate future growth as we continue to efficiently manage costs through improved processes.

Our operating income goal was established on an adjusted basis given Certain Item charges that were applicable in fiscal 2018, which primarily were due to restructuring and Brakes-related acquisition costs. The business transformation initiatives we have in place will allow us to continue to grow our business and capitalize on our strong fundamentals.

See “Non-GAAP Reconciliations” below for an explanation of adjusted operating income and adjusted return on invested capital, which are non-GAAP financial measures.


33



Results of Operations

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 29, 2018
 
Dec. 28, 2019
 
Dec. 29, 2018
Sales
100.0
 %
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
81.2

 
81.2

 
81.0

 
81.1

Gross profit
18.8

 
18.8

 
19.0

 
18.9

Operating expenses
15.1

 
15.7

 
15.0

 
15.3

Operating income
3.7

 
3.1

 
4.0

 
3.6

Interest expense
0.5

 
0.6

 
0.5

 
0.6

Other expense (income), net

 
0.1

 

 

Earnings before income taxes
3.2

 
2.4

 
3.5

 
3.0

Income taxes
0.6

 
0.6

 
0.7

 
0.7

Net earnings
2.6
 %
 
1.8
%
 
2.8
%
 
2.3
%


34



The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 28, 2019
 
Dec. 28, 2019
Sales
1.8
 %
 
1.2
 %
Cost of sales
1.7

 
1.0

Gross profit
2.0

 
1.7

Operating expenses
(1.9
)
 
(1.0
)
Operating income
22.3

 
13.0

Interest expense
(11.9
)
 
(9.1
)
Other expense (income), net (1) (2)
(107.9
)
 
(79.7
)
Earnings before income taxes
34.4

 
18.6

Income taxes
6.8

 
13.9

Net earnings
43.4
 %
 
19.9
 %
Basic earnings per share
44.2
 %
 
22.4
 %
Diluted earnings per share
45.9

 
22.1

Average shares outstanding
(1.5
)
 
(1.5
)
Diluted shares outstanding
(1.7
)
 
(1.8
)

(1) 
Other expense (income), net was income of $0.8 million in the second quarter of fiscal 2020 and expense of $10.2 million in the second quarter of fiscal 2019.

(2) 
Other expense (income), net was expense of $2.3 million in the first 26 weeks of fiscal 2020 and expense of $11.3 million in the first 26 weeks of fiscal 2019.

The following tables represent our results by reportable segments:
 
13-Week Period Ended Dec. 28, 2019
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
10,413,575

 
$
2,890,053

 
$
1,455,893

 
$
265,521

 
$

 
$
15,025,042

Sales increase (decrease)
3.2
%
 
 %
 
(5.3
)%
 
5.6
%
 
 
 
1.8
%
Percentage of total
69.3
%
 
19.2
 %
 
9.7
 %
 
1.8
%
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
768,777

 
$
34,881

 
$
9,861

 
$
9,403

 
$
(270,429
)
 
$
552,493

Operating income increase (decrease)
4.2
%
 
(333.8
)%
 
216.7
 %
 
64.4
%
 
 
 
22.3
%
Percentage of total segments
93.4
%
 
4.2
 %
 
1.2
 %
 
1.2
%
 
 
 
100.0
%
Operating income as a percentage of sales
7.4
%
 
1.2
 %
 
0.7
 %
 
3.5
%
 
 
 
3.7
%

 
13-Week Period Ended Dec. 29, 2018
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
10,087,105

 
$
2,890,598

 
$
1,536,607

 
$
251,397

 
$

 
$
14,765,707

Percentage of total
68.3
%
 
19.6
 %
 
10.4
%
 
1.7
%
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
737,477

 
$
(14,917
)
 
$
3,114

 
$
5,718

 
$
(279,497
)
 
$
451,895

Percentage of total segments
100.8
%
 
(2.0
)%
 
0.4
%
 
0.8
%
 
 
 
100.0
%
Operating income as a percentage of sales
7.3
%
 
(0.5
)%
 
0.2
%
 
2.3
%
 
 
 
3.1
%


35



 
26-Week Period Ended Dec. 28, 2019
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
21,072,208

 
$
5,802,441

 
$
2,902,887

 
$
550,511

 
$

 
$
30,328,047

Sales increase (decrease)
2.9
%
 
(0.2
)%
 
(8.1
)%
 
4.9
%
 
 
 
1.2
%
Percentage of total
69.5
%
 
19.1
 %
 
9.6
 %
 
1.8
%
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
1,630,183

 
$
89,681

 
$
17,431

 
$
19,540

 
$
(536,024
)
 
$
1,220,811

Operating income increase (decrease)
5.0
%
 
72.9
 %
 
214.4
 %
 
21.7
%
 
 
 
13.0
%
Percentage of total segments
92.8
%
 
5.1
 %
 
1.0
 %
 
1.1
%
 
 
 
100.0
%
Operating income as a percentage of sales
7.7
%
 
1.5
 %
 
0.6
 %
 
3.5
%
 
 
 
4.0
%

 
26-Week Period Ended Dec. 29, 2018
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
20,486,516

 
$
5,811,548

 
$
3,158,064

 
$
524,858

 
$

 
$
29,980,986

Percentage of total
68.3
%
 
19.4
%
 
10.5
%
 
1.8
%
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
1,553,235

 
$
51,855

 
$
5,545

 
$
16,053

 
$
(546,653
)
 
$
1,080,035

Percentage of total segments
95.5
%
 
3.2
%
 
0.3
%
 
1.0
%
 
 
 
100.0
%
Operating income as a percentage of sales
7.6
%
 
0.9
%
 
0.2
%
 
3.1
%
 
 
 
3.6
%

Based on information in Note 15, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 1 of Part I, in the second quarter and first 26 weeks of fiscal 2020, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 88.5% and 88.6% of Sysco’s overall sales, respectively. In the second quarter and first 26 weeks of fiscal 2020, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 97.6% and 97.9% of the total segment operating income, respectively. This illustrates that these segments represent the majority of our total segment results when compared to the other reportable segment.


36



Results of U.S. Foodservice Operations

The following tables set forth a summary of the components of operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended Dec. 28, 2019
 
13-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
 
(Dollars in thousands)
Sales
$
10,413,575

 
$
10,087,105

 
$
326,470

 
3.2
%
Gross profit
2,048,905

 
2,001,819

 
47,086

 
2.4

Operating expenses
1,280,128

 
1,264,342

 
15,786

 
1.2

Operating income
$
768,777

 
$
737,477

 
$
31,300

 
4.2
%
 
 
 
 
 
 
 
 
Gross profit
$
2,048,905

 
$
2,001,819

 
$
47,086

 
2.4
%
Adjusted operating expenses (Non-GAAP)
1,276,449

 
1,264,342

 
12,107

 
1.0

Adjusted operating income (Non-GAAP)
$
772,456

 
$
737,477

 
$
34,979

 
4.7
%
 
 
 
 
 
 
 
 
 
26-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
 % Change
 
(Dollars in thousands)
Sales
$
21,072,208

 
$
20,486,516

 
$
585,692

 
2.9
%
Gross profit
4,193,791

 
4,092,046

 
101,745

 
2.5

Operating expenses
2,563,608

 
2,538,811

 
24,797

 
1.0

Operating income
$
1,630,183

 
$
1,553,235

 
$
76,948

 
5.0
%
 
 
 
 
 
 
 
 
Gross profit
$
4,193,791

 
$
4,092,046

 
$
101,745

 
2.5
%
Adjusted operating expenses (Non-GAAP)
2,555,803

 
2,538,811

 
16,992

 
0.7

Adjusted operating income (Non-GAAP)
$
1,637,988

 
$
1,553,235

 
$
84,753

 
5.5
%

Sales

The following table sets forth the percentage and dollar value increase or decrease in the major factors impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change.
 
Increase (Decrease)
 
Increase (Decrease)
 
13-Week Period
 
26-Week Period
 
(Dollars in millions)
 
(Dollars in millions)
Cause of change
Percentage
 
Dollars
 
Percentage
 
Dollars
Case volume
1.3
 %
 
$
128.9

 
1.0
 %
 
$
199.1

Inflation
2.4

 
243.1

 
2.7

 
549.6

Acquisitions
0.8

 
81.1

 
0.6

 
113.9

Other (1) (2)
(1.3
)
 
(126.6
)
 
(1.4
)
 
(276.9
)
Total sales increase
3.2
 %
 
$
326.5

 
2.9
 %
 
$
585.7


(1) 
Case volume excludes the volume impact from our custom-cut meat companies that do not measure volume in cases. Any impact in volumes from these operations is included within “Other.”
(2) 
Approximately $122 million and $235 million of this decrease for the second quarter and first 26 weeks of fiscal 2020, respectively, results from Sysco’s sale of its interest in Iowa Premium in the fourth quarter of fiscal 2019.

Sales for the second quarter of fiscal 2020 were 3.2% higher than the second quarter of fiscal 2019. The primary drivers of the increase were inflation and modest case volume growth in our U.S. Broadline operations. Case volumes from our U.S.

37



Broadline operations, including acquisitions within the last 12 months, increased 2.0% in the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019, and included a 3.7% improvement in locally managed customer case growth along with a 0.1% increase in national customer case volume, reflecting the continued transition of certain national customers, including accounts that we exited during the second quarter of fiscal 2019. Sales from acquisitions within the last 12 months favorably impacted locally managed customer sales by 1.2% for the second quarter of fiscal 2020; therefore, organic local case volume, which excludes acquisitions, grew 2.5%. The increase in local case volume was partially offset by the loss of less profitable business and the divestiture of Iowa Premium in the fourth quarter of fiscal 2019.

Sales for the first 26 weeks of fiscal 2020 were 2.9% higher than the first 26 weeks of fiscal 2019. The primary drivers of the increase were inflation and local customer case volume growth in our U.S. Broadline operations. Case volumes from our U.S. Broadline operations, including acquisitions within the last 12 months, increased 1.4% in the first 26 weeks of fiscal 2020, compared to the first 26 weeks of fiscal 2019, and included a 2.9% improvement in locally managed customer case growth, partially offset by a decrease of 0.3% in national customer case volume. Sales from acquisitions within the last 12 months favorably impacted locally managed customer sales by 1.0% for the first 26 weeks of fiscal 2020; therefore, organic local case volume, which excludes acquisitions, grew 1.9%.

Operating Income

Operating income increased 4.2% and 5.0% for the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019.

Gross profit dollars increased 2.4% and 2.5% in the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019, driven primarily by higher inflation, growth in local cases, growth in Sysco-branded products and changes in our customer mix. The estimated change in product costs, an internal measure of inflation or deflation, for the second quarter and first 26 weeks of fiscal 2020 for our U.S. Broadline operations was inflation of 2.6% and 2.7%, respectively. For the second quarter and first 26 weeks of fiscal 2020, this change in product costs was primarily driven by inflation in the dairy products and meat, primarily beef, categories. Our Sysco brand sales to local customers increased by approximately 27 basis points and 23 basis points for the second quarter and first 26 weeks of fiscal 2020, respectively. Gross margin, which is gross profit as a percentage of sales, was 19.68% and 19.90% in the second quarter and first 26 weeks of fiscal 2020, respectively, which was a decrease of 17 and 7 basis points from the gross margin of 19.85% and 19.97% in the second quarter and first 26 weeks of fiscal 2019, respectively, primarily attributable to inflation that we were unable to efficiently pass through to our customers and to a reduction in fuel surcharges. Additionally, we experienced a sharp decline in produce markets in the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019, which negatively affected our gross profit dollar growth. Our local case volume grew at a strong pace during the second quarter of fiscal 2020 mostly driven by increased penetration with current accounts.

Operating expenses for the second quarter of fiscal 2020 increased 1.2%, or $15.8 million, compared to the second quarter of fiscal 2019, primarily driven by higher labor costs due to our decision to retain driver and warehouse personnel in a tight labor market along with rising fuel costs. Operating expenses for the first 26 weeks of fiscal 2020 decreased 1.0%, or $24.8 million, compared to the first 26 weeks of fiscal 2019. Our operating expense growth during the second quarter of fiscal 2020 was primarily driven by rising fuel costs and an increase in bad debt expense. These increases were largely offset by the impact of transformational initiatives and by decreases in operating expenses associated with the divestiture of Iowa Premium in the fourth quarter of fiscal 2019.


38



Results of International Foodservice Operations

The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended Dec. 28, 2019
 
13-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
 
(Dollars in thousands)
Sales
$
2,890,053

 
$
2,890,598

 
$
(545
)
 
 %
Gross profit
586,039

 
589,922

 
(3,883
)
 
(0.7
)
Operating expenses
551,158

 
604,839

 
(53,681
)
 
(8.9
)
Operating income
$
34,881

 
$
(14,917
)
 
$
49,798

 
NM

 
 
 
 
 
 
 
 
Gross profit
$
586,039

 
$
589,922

 
$
(3,883
)
 
(0.7
)%
Adjusted operating expenses (Non-GAAP)
511,996

 
506,872

 
5,124

 
1.0

Adjusted operating income (Non-GAAP)
$
74,043

 
$
83,050

 
$
(9,007
)
 
(10.8
)%
 
 
 
 
 
 
 
 
Sales on a constant currency basis (Non-GAAP)
$
2,915,342

 
$
2,890,598

 
$
24,744

 
0.9
 %
Gross profit on a constant currency basis (Non-GAAP)
592,076

 
589,922

 
2,154

 
0.4

Adjusted operating expenses on a constant currency basis (Non-GAAP)
518,268

 
506,872

 
11,396

 
2.2

Adjusted operating income on a constant currency basis (Non-GAAP)
$
73,808

 
$
83,050

 
$
(9,242
)
 
(11.1
)%
 
 
 
 
 
 
 
 
 
26-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
 % Change
 
(Dollars in thousands)
Sales
$
5,802,441

 
$
5,811,548

 
$
(9,107
)
 
(0.2
)%
Gross profit
1,191,224

 
1,205,427

 
(14,203
)
 
(1.2
)
Operating expenses
1,101,543

 
1,153,572

 
(52,029
)
 
(4.5
)
Operating income
$
89,681

 
$
51,855

 
$
37,826

 
72.9
 %
 
 
 
 
 
 
 
 
Gross profit
$
1,191,224

 
$
1,205,427

 
$
(14,203
)
 
(1.2
)%
Adjusted operating expenses (Non-GAAP)
1,018,199

 
1,026,980

 
(8,781
)
 
(0.9
)
Adjusted operating income (Non-GAAP)
$
173,025

 
$
178,447

 
$
(5,422
)
 
(3.0
)%
 
 
 
 
 
 
 
 
Sales on a constant currency basis (Non-GAAP)
$
5,924,879

 
$
5,811,548

 
$
113,331

 
2.0
 %
Gross profit on a constant currency basis (Non-GAAP)
1,220,278

 
1,205,427

 
14,851

 
1.2

Adjusted operating expenses on a constant currency basis (Non-GAAP)
1,045,158

 
1,026,980

 
18,178

 
1.8

Adjusted operating income on a constant currency basis (Non-GAAP)
$
175,120

 
$
178,447

 
$
(3,327
)
 
(1.9
)%


39



Sales

The following tables set forth the percentage and dollar value increase or decrease in the major components impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change.
 
Increase (Decrease)
 
Increase (Decrease)
 
13-Week Period
 
26-Week Period
 
(Dollars in millions)
 
(Dollars in millions)
Cause of change
Percentage
 
Dollars
 
Percentage
 
Dollars
Inflation
2.4
 %
 
$
68.8

 
2.1
 %
 
$
122.9

Acquisitions
0.5

 
14.7

 
0.5

 
27.2

Foreign currency
(0.9
)
 
(25.5
)
 
(2.1
)
 
(120.2
)
Other (1)
(2.0
)
 
(58.5
)
 
(0.7
)
 
(39.0
)
Total sales increase
 %
 
$
(0.5
)
 
(0.2
)%
 
$
(9.1
)

(1) 
The impact of volumes as a component of sales growth from international operations are included within “Other.” Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent, comparable basis.

Sales for the second quarter and first 26 weeks of fiscal 2020 were flat and 0.2% lower, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019, primarily due to changes in foreign exchange rates used to translate our foreign sales into U.S. dollars, as noted in the tables above, largely offset by product cost inflation in Europe and Canada. Canada experienced lower sales growth as a result of a slowing economy in some parts of the country and the loss of a large chain customer. Latin America experienced modestly improved performance in the second quarter and first 26 weeks of fiscal 2020, as compared to the second quarter and first 26 weeks of fiscal 2019, driven by strong sales growth despite slight economic contractions in some of the countries in which we operate. Performance in the U.K. during the second quarter and first 26 weeks of fiscal 2020 has been stable, despite continuing uncertainty regarding the outcome of Brexit. We had positive results in Ireland and Sweden as a result of a positive business environment and strong independent sales growth. Sales growth in the International business was partially offset by weaker results in France due to continued operational challenges.

Operating Income

Operating income increased by $49.8 million and $37.8 million, or 333.8% and 72.9%, for the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019. Our operating income increased during the second quarter and first 26 weeks of fiscal 2020 due to ongoing restructuring and integration work in our European operations and regionalization efforts in our Canadian operations. Our business in France continued to experience operational challenges arising from our integration efforts between our two business in France. Restructuring and business transformation charges also negatively affected our U.K. operations as we continue our efforts related to modernizing the business and growing our customer base. Operating income, on an adjusted basis, decreased by $9.0 million, or 10.8%, for the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019. Foreign exchange rates positively affected operating income by 0.3%, resulting in an 11.1% decrease in adjusted operating income on a constant currency basis. Operating income, on an adjusted basis, decreased by $5.4 million, or 3.0%, for the first 26 weeks of fiscal 2020, as compared to the first 26 weeks of fiscal 2019. Foreign exchange rates negatively affected operating income by 1.2%, resulting in a 1.9% decrease in adjusted operating income on a constant currency basis.

Gross profit dollars decreased by 0.7% in the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019, primarily attributable to changes in foreign exchange rates that negatively affected gross profit by 1.0%, resulting in a 0.4% increase in adjusted gross profit on a constant currency basis. Gross profit dollars decreased by 1.2% in the first 26 weeks of fiscal 2020, as compared to the first 26 weeks of fiscal 2019, primarily attributable to changes in foreign exchange rates that negatively affected gross profit by 2.4%, resulting in a 1.2% increase in adjusted gross profit on a constant currency basis.

Operating expenses for the second quarter and first 26 weeks of fiscal 2020 decreased 8.9% and 4.5%, or $53.7 million and $52.0 million, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019, primarily due to reduced restructuring and integration charges being incurred in France. We incurred restructuring charges of $48.5 million primarily relating to restructuring and integration in France and the U.K. and the ongoing regionalization efforts in our Canadian operations during the first 26 weeks of fiscal 2020, as compared to $83.8 million of restructuring charges in the first 26 weeks of fiscal 2019. Operating expenses, on an adjusted basis, for the second quarter of fiscal 2020 increased 1.0%, or $5.1 million, compared to the second

40



quarter of fiscal 2019. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars positively affected operating expenses during the period by 1.2%, resulting in a 2.2% increase in adjusted operating expenses on a constant currency basis. Operating expenses, on an adjusted basis, for the first 26 weeks of fiscal 2020, decreased 0.9%, or $8.8 million, compared to the first 26 weeks of fiscal 2019. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars positively affected operating expenses during the period by 2.6%, resulting in a 1.8% increase in adjusted operating expenses on a constant currency basis.

Results of SYGMA and Other Segment

For SYGMA, sales were 5.3% and 8.1% lower in the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019, primarily from a decline in case volume due to the exit of certain customers during the first 26 weeks of fiscal 2020, as we remain disciplined and focused on improving the profitability of our portfolio of customers, resulting in gross margin growth of 62 basis points and 67 basis points, respectively. Operating income increased by $6.7 million and $11.9 million in the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019, due to our focus on business and routing optimization.

For the operations that are grouped within Other, operating income increased 64.4%, or $3.7 million, in the second quarter of fiscal 2020, as compared to the second quarter of fiscal 2019. Operating income increased 21.7%, or $3.5 million, in the first 26 weeks of fiscal 2020, as compared to the first 26 weeks of fiscal 2019. The increase was primarily attributable to improved results from Sysco Labs. Guest Supply gross profit increased 5.0% and 2.0% in the second quarter and first 26 weeks of fiscal 2020, respectively, as the business continued to address cost challenges.

Corporate Expenses

Corporate expenses in the second quarter of fiscal 2020 decreased $1.3 million, or 0.5%, as compared to the second quarter of fiscal 2019, primarily due to a decrease in expenses related to our business technology initiatives. Corporate expenses in the first 26 weeks of fiscal 2020 decreased $4.4 million, or 0.8%, as compared to the first 26 weeks of fiscal 2019, primarily due to a decrease in expenses related to our business technology initiatives, along with lower pay-related expenses, partly driven by our Corporate office expense initiatives. Corporate expenses, on an adjusted basis, increased $21.6 million, or 9.8%, and $30.6 million, or 6.8% as compared to the second quarter and first 26 weeks of fiscal 2019, respectively. This increase is primarily due to costs associated with liability claims and expenses from the strike that occurred in Denver.

Included in corporate expenses are Certain Items that totaled $30.6 million and $53.4 million in the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to $53.5 million and $88.4 million in the second quarter and first 26 weeks of fiscal 2019, respectively. Certain Items impacting the second quarter and first 26 weeks of fiscal 2020 and fiscal 2019 were primarily expenses associated with our various transformation initiatives. Certain Items in the second quarter and first 26 weeks of fiscal 2019 also included severance charges.

Interest Expense

Interest expense decreased $10.4 million and $16.0 million for the second quarter and first 26 weeks of fiscal 2020, as compared to the second quarter and first 26 weeks of fiscal 2019, respectively, primarily due to a favorable comparison to the prior year attributable to lower floating interest rates and higher floating debt balances.

Net Earnings

Net earnings increased 43.4% and 19.9% in the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of the prior year, due primarily to the items noted above for operating income and interest expense, as well as items impacting our income taxes that are discussed in Note 13, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 1 of Part I.

Adjusted net earnings, excluding Certain Items, increased 11.3% in the second quarter of fiscal 2020, primarily due to gross profit growth and a decline in operating expense, partially offset by an unfavorable tax expense comparison to the prior year. Adjusted net earnings, excluding Certain Items, increased 8.6% in the first 26 weeks of fiscal 2020, primarily due to gross profit growth, partially offset by an unfavorable tax expense comparison to the prior year.

41




Earnings Per Share

Basic earnings per share in the second quarter of fiscal 2020 were $0.75, a 44.2% increase from the comparable prior year period amount of $0.52 per share. Diluted earnings per share in the second quarter of fiscal 2020 were $0.74, a 45.9% increase from the comparable prior year period amount of $0.51 per share. Adjusted diluted earnings per share, excluding Certain Items, in the second quarter of fiscal 2020 were $0.85, an 13.2% increase from the comparable prior year period amount of $0.75 per share. These results were primarily attributable to the factors discussed above related to net earnings in the second quarter of fiscal 2020.

Basic earnings per share in the first 26 weeks of fiscal 2020 were $1.64, a 22.4% increase from the comparable prior year period amount of $1.34 per share. Diluted earnings per share in the first 26 weeks of fiscal 2020 were $1.62, a 22.1% increase from the comparable prior year period amount of $1.33 per share. Adjusted diluted earnings per share, excluding Certain Items, in the first 26 weeks of fiscal 2020 were $1.83, a 10.7% increase from the comparable prior year period amount of $1.66 per share. These results were primarily attributable to the factors discussed above related to net earnings in the first 26 weeks of fiscal 2020.

Non-GAAP Reconciliations

Sysco’s results of operations for fiscal 2020 and fiscal 2019 were impacted by restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges. All acquisition-related costs in the first 26 weeks of fiscal 2020 and fiscal 2019 that have been designated as Certain Items relate to the Brakes Acquisition. These include acquisition-related intangible amortization expense. In addition, results of operations in the first 26 weeks of fiscal 2019 were negatively affected by acquisition-related integration costs specific to the Brakes Acquisition and the impact of recognizing a foreign tax credit.

The results of our foreign operations can be impacted due to changes in exchange rates applicable in converting local currencies to U.S. dollars. We measure our International Foodservice Operations results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period.

Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items and presenting its International Foodservice Operations results on a constant currency basis, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations, facilitating comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.

Although Sysco has a history of growth through acquisitions, the Brakes Group was significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2020 and fiscal 2019.


42



Set forth below is a reconciliation of sales, operating expenses, operating income, interest expense, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add up to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
 
13-Week Period Ended Dec. 28, 2019
 
13-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
 
(Dollars in thousands, except for per share data)
Operating expenses (GAAP)
$
2,275,906

 
$
2,319,817

 
$
(43,911
)
 
(1.9
)%
Impact of restructuring and transformational project costs (1)
(57,105
)
 
(134,436
)
 
77,331

 
(57.5
)
Impact of acquisition-related costs (2)
(17,312
)
 
(17,008
)
 
(304
)
 
1.8

Operating expenses adjusted for Certain Items (Non-GAAP)
$
2,201,489

 
$
2,168,373

 
$
33,116

 
1.5
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
552,493

 
$
451,895

 
$
100,598

 
22.3
 %
Impact of restructuring and transformational project costs (1)
57,105

 
134,436

 
(77,331
)
 
(57.5
)
Impact of acquisition-related costs (2)
17,312

 
17,008

 
304

 
1.8

Operating income adjusted for Certain Items (Non-GAAP)
$
626,910

 
$
603,339

 
$
23,571

 
3.9
 %
 
 
 
 
 
 
 
 
Net earnings (GAAP)
$
383,410

 
$
267,380

 
$
116,030

 
43.4
 %
Impact of restructuring and transformational project costs (1)
57,105

 
134,436

 
(77,331
)
 
(57.5
)
Impact of acquisition-related costs (2)
17,312

 
17,008

 
304

 
1.8

Tax impact of restructuring and transformational project costs (3)
(15,372
)
 
(34,886
)
 
19,514

 
(55.9
)
Tax impact of acquisition-related costs (3)
(4,658
)
 
(5,611
)
 
953

 
(17.0
)
Impact of US transition tax

 
15,154

 
(15,154
)
 
NM

Net earnings adjusted for Certain Items (Non-GAAP)
$
437,797

 
$
393,481

 
$
44,316

 
11.3
 %
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
$
0.74

 
$
0.51

 
$
0.23

 
45.9
 %
Impact of restructuring and transformational project costs (1)
0.11

 
0.26

 
(0.15
)
 
(57.7
)
Impact of acquisition-related costs (2)
0.03

 
0.03

 

 
NM

Tax impact of restructuring and transformational project costs (3)
(0.03
)
 
(0.07
)
 
0.04

 
(57.1
)
Tax impact of acquisition-related costs (3)
(0.01
)
 
(0.01
)
 

 
NM

Impact of US transition tax

 
0.03

 
(0.03
)
 
NM

Diluted EPS adjusted for Certain Items (Non-GAAP) (4)
$
0.85

 
$
0.75

 
$
0.10

 
13.2
 %
 

(1) 
Fiscal 2020 includes $34 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy, and $23 million related to restructuring, facility closure and severance charges. Fiscal 2019 includes $53 million related to various transformation initiative costs, of which $17 million relates to accelerated depreciation related to software that was replaced, and $81 million relates to severance, restructuring and facility closure charges in Europe and Canada, of which $55 million relates to our integration of Brake France and Davigel into Sysco France.
(2) 
Fiscal 2020 and fiscal 2019 each include $17 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of International Foodservice.
(3) 
The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(4) 
Individual components of diluted earnings per share may not add up to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
NM represents that the percentage change is not meaningful.

43



 
26-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
 
(Dollars in thousands, except for share and per share data)
Operating expenses (GAAP)
$
4,550,958

 
$
4,595,462

 
$
(44,504
)
 
(1.0
)%
Impact of restructuring and transformational project costs (1)
(113,827
)
 
(175,339
)
 
61,512

 
(35.1
)
Impact of acquisition-related costs (2)
(34,222
)
 
(39,645
)
 
5,423

 
(13.7
)
Operating expenses adjusted for Certain Items (Non-GAAP)
$
4,402,909

 
$
4,380,478

 
$
22,431

 
0.5
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
1,220,811

 
$
1,080,035

 
$
140,776

 
13.0
 %
Impact of restructuring and transformational project costs (1)
113,827

 
175,339

 
(61,512
)
 
(35.1
)
Impact of acquisition-related costs (2)
34,222

 
39,645

 
(5,423
)
 
(13.7
)
Operating income adjusted for Certain Items (Non-GAAP)
$
1,368,860

 
$
1,295,019

 
$
73,841

 
5.7
 %
 
 
 
 
 
 
 
 
Net earnings (GAAP)
$
837,191

 
$
698,422

 
$
138,769

 
19.9
 %
Impact of restructuring and transformational project costs (1)
113,827

 
175,339

 
(61,512
)
 
(35.1
)
Impact of acquisition-related costs (2)
34,222

 
39,645

 
(5,423
)
 
(13.7
)
Tax impact of restructuring and transformational project costs (3)
(29,294
)
 
(45,560
)
 
16,266

 
(35.7
)
Tax impact of acquisition-related costs (3)
(8,807
)
 
(10,302
)
 
1,495

 
(14.5
)
Impact of US transition tax

 
15,154

 
(15,154
)
 
NM

Impact of French tax rate change
924

 

 
924

 
NM

Net earnings adjusted for Certain Items (Non-GAAP)
$
948,063

 
$
872,698

 
$
75,365

 
8.6
 %
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
$
1.62

 
$
1.33

 
$
0.29

 
22.1
 %
Impact of restructuring and transformational project costs (1)
0.22

 
0.33

 
(0.11
)
 
(33.3
)
Impact of acquisition-related costs (2)
0.07

 
0.08

 
(0.01
)
 
(12.5
)
Tax impact of restructuring and transformational project costs (3)
(0.06
)
 
(0.09
)
 
0.03

 
(33.3
)
Tax impact of acquisition-related costs (3)
(0.02
)
 
(0.02
)
 

 
NM

Impact of US transition tax

 
0.03

 
(0.03
)
 
NM

Diluted EPS adjusted for Certain Items (Non-GAAP) (4)
$
1.83

 
$
1.66

 
$
0.17

 
10.7
 %
 

(1) 
Fiscal 2020 includes $62 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy, and $52 million related to severance, restructuring and facility closure charges. Fiscal 2019 includes $79 million related to various transformation initiative costs, of which $17 million relates to accelerated depreciation related to software that was replaced, and $96 million related to severance, restructuring and facility closure charges in Europe and Canada, of which $56 million relates to our integration of Brake France and Davigel into Sysco France.
(2) 
Fiscal 2020 and fiscal 2019 include $34 million and $39 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of International Foodservice and integration costs in fiscal 2019.
(3) 
The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(4) 
Individual components of diluted earnings per share may not add up to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
NM represents that the percentage change is not meaningful.


44




Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for applicable segments and corporate for the periods presented (dollars in thousands):
 
13-Week Period Ended Dec. 28, 2019
 
13-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
U.S. FOODSERVICE OPERATIONS
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
1,280,128

 
$
1,264,342

 
$
15,786

 
1.2
 %
Impact of restructuring and transformational project costs (1)
(3,679
)
 

 
(3,679
)
 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
1,276,449

 
$
1,264,342

 
$
12,107

 
1.0
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
768,777

 
$
737,477

 
$
31,300

 
4.2
 %
Impact of restructuring and transformational project costs (1)
3,679

 

 
3,679

 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
772,456

 
$
737,477

 
$
34,979

 
4.7
 %
 
 
 
 
 
 
 
 
INTERNATIONAL FOODSERVICE OPERATIONS
 
 
 
 
 
 
 
Sales (GAAP)
$
2,890,053

 
$
2,890,598

 
$
(545
)
 
NM

Impact of currency fluctuations (2)
25,289

 

 
25,289

 
0.9

Comparable sales using a constant currency basis (Non-GAAP)
$
2,915,342

 
$
2,890,598

 
$
24,744

 
0.9
 %
 
 
 
 
 
 
 
 
Gross Profit (GAAP)
$
586,039

 
$
589,922

 
$
(3,883
)
 
(0.7
)%
Impact of currency fluctuations (2)
6,037

 

 
6,037

 
1.0

Comparable gross profit using a constant currency basis (Non-GAAP)
$
592,076

 
$
589,922

 
$
2,154

 
0.4
 %
 
 
 
 
 
 
 
 
Gross Margin (GAAP)
20.28
%
 
20.41
%
 
 
 
-13 bps
Impact of currency fluctuations (2)
0.03

 

 
 
 
3 bps
Comparable gross margin using a constant currency basis (Non-GAAP)
20.31
%
 
20.41
%
 
 
 
-10 bps
 
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
551,158

 
$
604,839

 
$
(53,681
)
 
(8.9
)%
Impact of restructuring and transformational project costs (3)
(21,850
)
 
(81,020
)
 
59,170

 
(73.0
)
Impact of acquisition-related costs (4)
(17,312
)
 
(16,947
)
 
(365
)
 
2.2

Operating expenses adjusted for Certain Items (Non-GAAP)
$
511,996

 
$
506,872

 
$
5,124

 
1.0
 %
Impact of currency fluctuations (2)
6,272

 

 
6,272

 
1.2

Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)
$
518,268

 
$
506,872

 
$
11,396

 
2.2
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
34,881

 
$
(14,917
)
 
$
49,798

 
NM

Impact of restructuring and transformational project costs (3)
21,850

 
81,020

 
(59,170
)
 
(73.0
)
Impact of acquisition related costs (4)
17,312

 
16,947

 
365

 
2.2

Operating income adjusted for Certain Items (Non-GAAP)
$
74,043

 
$
83,050

 
$
(9,007
)
 
(10.8
)%
Impact of currency fluctuations (2)
(235
)
 

 
(235
)
 
(0.3
)
Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP)
$
73,808

 
$
83,050

 
$
(9,242
)
 
(11.1
)%
 
 
 
 
 
 
 
 
SYGMA
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
114,378

 
$
118,423

 
$
(4,045
)
 
(3.4
)%
Impact of restructuring and transformational project costs (5)
(956
)
 

 
(956
)
 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
113,422

 
$
118,423

 
$
(5,001
)
 
(4.2
)%
 
 
 
 
 
 
 
 

45



Operating income (GAAP)
$
9,861

 
$
3,114

 
$
6,747

 
NM

Impact of restructuring and transformational project costs (5)
956

 

 
956

 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
10,817

 
$
3,114

 
$
7,703

 
NM

 
 
 
 
 
 
 
 
CORPORATE
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
273,139

 
$
274,430

 
$
(1,291
)
 
(0.5
)%
Impact of restructuring and transformational project costs (6)
(30,620
)
 
(53,416
)
 
22,796

 
(42.7
)
Impact of acquisition-related costs (7)

 
(61
)
 
61

 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
242,519

 
$
220,953

 
$
21,566

 
9.8
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
(270,429
)
 
$
(279,497
)
 
$
9,068

 
(3.2
)%
Impact of restructuring and transformational project costs (6)
30,620

 
53,416

 
(22,796
)
 
(42.7
)
Impact of acquisition-related costs (7)

 
61

 
(61
)
 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
(239,809
)
 
$
(226,020
)
 
$
(13,789
)
 
6.1
 %

* Segment has no applicable Certain Items

(1) 
Includes charges related to business transformation projects.
(2) 
Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results.
(3) 
Includes restructuring, facility closure and severance costs primarily in Europe and Canada.
(4) 
Fiscal 2020 and fiscal 2019 each include $17 million related to intangible amortization expense from the Brakes Acquisition.
(5) 
Includes charges related to facility closures and other restructuring charges.
(6) 
Fiscal 2020 and fiscal 2019 include various transformation initiative costs, primarily consisting of changes to our business technology strategy and severance charges related to restructuring.
(7) 
Fiscal 2019 includes integration costs from the Brakes Acquisition.
NM represents that the percentage change is not meaningful.


Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for applicable segments and corporate for the periods presented (dollars in thousands):
 
26-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 29, 2018
 
Change in Dollars
 
% Change
U.S. FOODSERVICE OPERATIONS
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
2,563,608

 
$
2,538,811

 
$
24,797

 
1.0
 %
Impact of restructuring and transformational project costs (1)
(7,805
)
 

 
(7,805
)
 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
2,555,803

 
$
2,538,811

 
$
16,992

 
0.7
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
1,630,183

 
$
1,553,235

 
$
76,948

 
5.0
 %
Impact of restructuring and transformational project costs (1)
7,805

 

 
7,805

 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
1,637,988

 
$
1,553,235

 
$
84,753

 
5.5
 %
 
 
 
 
 
 
 
 
INTERNATIONAL FOODSERVICE OPERATIONS
 
 
 
 
 
 
 
Sales (GAAP)
$
5,802,441

 
$
5,811,548

 
$
(9,107
)
 
(0.2
)%
Impact of currency fluctuations (2)
122,438

 

 
122,438

 
2.1

Comparable sales using a constant currency basis (Non-GAAP)
$
5,924,879

 
$
5,811,548

 
$
113,331

 
2.0
 %
 
 
 
 
 
 
 
 
Gross Profit (GAAP)
$
1,191,224

 
$
1,205,427

 
$
(14,203
)
 
(1.2
)%

46



Impact of currency fluctuations (2)
29,054

 

 
29,054

 
2.4

Comparable gross profit using a constant currency basis (Non-GAAP)
$
1,220,278

 
$
1,205,427

 
$
14,851

 
1.2
 %
 
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
1,101,543

 
$
1,153,572

 
$
(52,029
)
 
(4.5
)%
Impact of restructuring and transformational project costs (3)
(49,122
)
 
(87,746
)
 
38,624

 
(44.0
)
Impact of acquisition-related costs (4)
(34,222
)
 
(38,846
)
 
4,624

 
(11.9
)
Operating expenses adjusted for Certain Items (Non-GAAP)
$
1,018,199

 
$
1,026,980

 
$
(8,781
)
 
(0.9
)%
Impact of currency fluctuations (2)
26,959

 

 
26,959

 
2.6

Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)
$
1,045,158

 
$
1,026,980

 
$
18,178

 
1.8
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
89,681

 
$
51,855

 
$
37,826

 
72.9
 %
Impact of restructuring and transformational project costs (3)
49,122

 
87,746

 
(38,624
)
 
(44.0
)
Impact of acquisition related costs (4)
34,222

 
38,846

 
(4,624
)
 
(11.9
)
Operating income adjusted for Certain Items (Non-GAAP)
$
173,025

 
$
178,447

 
$
(5,422
)
 
(3.0
)%
Impact of currency fluctuations (2)
2,095

 

 
2,095

 
1.2

Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP)
$
175,120

 
$
178,447

 
$
(3,327
)
 
(1.9
)%
 
 
 
 
 
 
 
 
SYGMA
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
232,726

 
$
245,318

 
$
(12,592
)
 
(5.1
)%
Impact of restructuring and transformational project costs (5)
(3,540
)
 

 
(3,540
)
 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
229,186

 
$
245,318

 
$
(16,132
)
 
(6.6
)%
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
17,431

 
$
5,545

 
$
11,886

 
NM

Impact of restructuring and transformational project costs (5)
3,540

 

 
3,540

 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
20,971

 
$
5,545

 
$
15,426

 
NM

 
 
 
 
 
 
 
 
CORPORATE
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
534,371

 
$
538,778

 
$
(4,407
)
 
(0.8
)%
Impact of restructuring and transformational project costs (6)
(53,360
)
 
(87,593
)
 
34,233

 
(39.1
)
Impact of acquisition-related costs (7)

 
(799
)
 
799

 
NM

Operating expenses adjusted for Certain Items (Non-GAAP)
$
481,011

 
$
450,386

 
$
30,625

 
6.8
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
(536,024
)
 
$
(546,653
)
 
$
10,629

 
(1.9
)%
Impact of restructuring and transformational project costs (6)
53,360

 
87,593

 
(34,233
)
 
(39.1
)
Impact of acquisition-related costs (7)

 
799

 
(799
)
 
NM

Operating income adjusted for Certain Items (Non-GAAP)
$
(482,664
)
 
$
(458,261
)
 
$
(24,403
)
 
5.3
 %

* Segment has no applicable Certain Items

(1) 
Includes charges related to business transformation projects.
(2) 
Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results.
(3) 
Includes restructuring, severance and facility closure costs in Europe and Canada.
(4) 
Fiscal 2020 and fiscal 2019 include $34 million and $39 million, respectively, related to intangible amortization expense from the Brakes Acquisition.
(5) 
Includes charges related to facility closures and other restructuring charges.
(6) 
Fiscal 2020 and fiscal 2019 include various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2019 includes $17 million of accelerated depreciation on software that is being replaced and severance charges related to restructuring.

47



(7) 
Fiscal 2019 includes integration costs from the Brakes Acquisition.

NM represents that the percentage change is not meaningful.

Three-Year Financial Targets

Sysco management considers adjusted return on invested capital (ROIC) to be a measure that provides useful information to management and investors in evaluating the efficiency and effectiveness of the company’s long-term capital investments. In addition, we have targets and expectations that are based on adjusted results, including an adjusted ROIC target of 16% under our three-year plan. We cannot predict with certainty whether or when we will achieve these results or whether the calculation of our ROIC in such future periods will be on an adjusted basis due to the effect of Certain Items, which would be excluded from such calculation. Due to these uncertainties, to the extent our future calculation of ROIC is on an adjusted basis excluding Certain Items, we cannot provide a quantitative reconciliation of this non-GAAP measure to the most directly comparable GAAP measure without unreasonable effort. However, we would expect to calculate adjusted ROIC, if applicable, in the same manner as we have historically calculated this measure. All components of our adjusted ROIC calculation would be impacted by Certain Items. We calculate adjusted ROIC as adjusted net earnings divided by (i) stockholders’ equity, computed as the average of adjusted stockholders’ equity at the beginning of the year and at the end of each fiscal quarter during the year; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year.
Form of calculation:
Net earnings (GAAP)
Impact of Certain Items on net earnings
Adjusted net earnings (Non-GAAP)
 
Invested Capital (GAAP)
Adjustments to invested capital
Adjusted Invested capital (Non-GAAP)
 
Return on invested capital (GAAP)
Return on invested capital (Non-GAAP)

Additional targets and expectations include our adjusted operating income and adjusted diluted earnings per share targets that we expect to achieve by the end of fiscal 2020 under our three-year plan. We have revised the expected growth rates for these targets within our three-year plan, and, although there are uncertainties in projecting Certain Items for the remainder of fiscal 2020, we have modeled a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures based on our forecasted full year results. We have calculated these adjusted forecasted results in the same manner as the reconciliations provided for historical periods presented herein. Nevertheless, the impact of future Certain Items could cause projected non-GAAP amounts to differ significantly from our GAAP results. Future results may differ from our expectations set forth in the table below as expressed in the forward-looking statements identified within Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements.”

Fiscal 2018 - Fiscal 2020 Three-Year Plan Projection

48



 
 
Year Ended
 
 
 
 
 
 
June 27, 2020
 
July 1, 2017
 
3-year Plan Change $ Results
 
CAGR
 
 
 
 
 
 
 
 
 
Operating income (GAAP)
 
$
2,539,614

 
$
2,054,616

 
$
484,998

 
7.3
%
Impact of restructuring and transformational project costs
 
257,340

 
161,011

 
96,329

 
 
Impact of acquisition-related costs
 
68,822

 
102,049

 
(33,227
)
 
 
Impact of MEPP charge
 

 
35,600

 
(35,600
)
 
 
Operating income adjusted for Certain Items (Non-GAAP) (1)
 
$
2,865,776

 
$
2,353,276

 
$
512,500

 
6.8
%
 
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
 
$
3.31

 
$
2.08

 
$
1.23

 
16.7
%
Impact of restructuring and transformational project costs, net of tax
 
0.39

 
0.20

 
0.19

 
 
Impact of acquisition-related costs, net of tax
 
0.10

 
0.16

 
(0.06
)
 
 
Impact of MEPP charge, net of tax
 

 
0.04

 
(0.04
)
 
 
Diluted EPS adjusted for Certain Items (Non-GAAP) (1)(2)
 
$
3.81

 
$
2.48

 
$
1.32

 
15.4
%

(1) The forecasted adjusted operating income and adjusted diluted EPS targets for fiscal 2020 represents the expected result required to achieve the mid-point of the fiscal 2018 to fiscal 2020 adjusted operating income growth target range of approximately $500 million to $525 million.
(2) Individual components of diluted earnings per share may not add up to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.

Liquidity and Capital Resources

Highlights

Below are comparisons of the cash flows from the first 26 weeks of fiscal 2020 to the first 26 weeks of fiscal 2019:

Cash flows from operations were $754.5 million in fiscal 2020, compared to $917.8 million in fiscal 2019;
Net capital expenditures totaled $383.1 million in fiscal 2020, compared to $216.9 million in fiscal 2019;
Free cash flow was $371.4 million in fiscal 2020, compared to free cash flow of $700.9 million in fiscal 2019 (see below under the heading “Free Cash Flow” for an explanation of this non-GAAP financial measure);
There were $721.4 million of commercial paper issuances and net bank borrowings in fiscal 2020, compared to $109.9 million commercial paper issuances and net bank borrowings in fiscal 2019;
Dividends paid were $399.1 million in fiscal 2020, compared to $379.2 million in fiscal 2019; and
Cash paid for treasury stock repurchases was $630.4 million in fiscal 2020, compared to $739.2 million in fiscal 2019.

Sources and Uses of Cash

Sysco’s strategic objectives include continuous investment in our business; these investments are funded by a combination of cash from operations and access to capital from financial markets. Our operations historically have produced significant cash flow. Cash generated from operations is generally allocated to:

working capital requirements;
investments in facilities, systems, fleet, other equipment and technology;
cash dividends;
acquisitions compatible with our overall growth strategy;
contributions to our various retirement plans; and

49



debt repayments and share repurchases.

Any remaining cash generated from operations may be invested in high-quality, short-term instruments. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses, and our overall capital structure. Any transactions resulting from these evaluations may materially impact our liquidity, borrowing capacity, leverage ratios and capital availability.

We continue to generate substantial cash flows from operations and remain in a strong financial position; however, our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations. We believe our mechanisms to manage working capital, such as credit monitoring, optimizing inventory levels and maximizing payment terms with vendors, and our mechanisms to manage the items impacting our gross profits have been sufficient to limit a significant unfavorable impact on our cash flows from operations. We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations. Seasonal trends also impact our cash flows from operations and free cash flow, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year.

As of December 28, 2019, we had $524.6 million in cash and cash equivalents, approximately 59% of which was held by our international subsidiaries and generated from our earnings of international operations. If these earnings were to be transferred among countries or repatriated to the U.S., such amounts may become subject to withholding and additional foreign tax obligations. Additionally, Sysco Corporation has provided intercompany loans to certain of its international subsidiaries, and when interest and principal payments are made, some of this cash will move to the U.S.

Our wholly owned captive insurance subsidiary (the Captive), must maintain a sufficient level of liquidity to fund future reserve payments. As of December 28, 2019, the Captive held $122.9 million of fixed income marketable securities and $46.9 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased $11.4 million in marketable securities in fiscal 2020 and received $9.0 million in proceeds from the sale of marketable securities in fiscal 2020.

We believe the following sources will be sufficient to meet our anticipated cash requirements for the next twelve months, while maintaining sufficient liquidity for normal operating purposes:

our cash flows from operations;
the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility and bank line of credit; and
our ability to access capital from financial markets, including issuances of debt securities, either privately or under our shelf registration statement filed with the Securities and Exchange Commission.

Due to our strong financial position, we believe that we will continue to be able to effectively access the commercial paper market and long-term capital markets, if necessary.

Cash Flows

Operating Activities

We generated $754.5 million in cash flows from operations in the first 26 weeks of fiscal 2020, compared to cash flows of $917.8 million in the first 26 weeks of fiscal 2019. These amounts include year-over-year unfavorable comparisons on working capital, partially offset by a favorable comparison on accrued income taxes.

Changes in working capital had a negative impact of $421.8 million on cash flow from operations period-over-period. There was an unfavorable comparison on accounts payable, inventories and accounts receivable. The impact to accounts payable is primarily due to more timely payments to suppliers due to improved processes achieved through our Finance Transformation Project. Inventories increased primarily due to replenishment immediately after a holiday time period and the impact of inflation. Accounts receivables increased primarily due to challenges in our collection efforts due to process changes that have occurred in our Finance Transformation Project and an increase in uncollectible accounts.

Seasonal trends also impact our cash flows from operating activities, as we typically use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year. Normally, our U.S. tax payments are greater in the second quarter of each fiscal year. In fiscal 2020, due to relief provided in connection with the impact of Tropical

50



Storm Imelda, our tax payments were not made until our third quarter of fiscal 2020, resulting in a one-quarter deferral and, therefore, lower tax payments in the first 26 weeks of fiscal 2020.

Investing Activities

Our capital expenditures in the first 26 weeks of fiscal 2020 primarily consisted of facility replacements and expansions, fleet, technology equipment, and warehouse equipment. Our capital expenditures in the first 26 weeks of fiscal 2020 were higher by $169.6 million, as compared to the first 26 weeks of fiscal 2019, primarily due to timing of capital spend in the first 26 weeks of fiscal 2019.

During the first 26 weeks of fiscal 2020, we paid $142.8 million, net of cash acquired, for acquisitions. There were no such acquisitions made in the first 26 weeks of fiscal 2019.

Free Cash Flow

Free cash flow represents net cash provided from operating activities, less purchases of plant and equipment, plus proceeds from sales of plant and equipment. Sysco considers free cash flow to be a non-GAAP liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash, including dividend payments, share repurchases and acquisitions. However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments. Our free cash flow for the first 26 weeks of fiscal 2020 decreased by $329.5 million, to $371.4 million, as compared to the first 26 weeks of fiscal 2019, principally as a result of year-over-year increased capital expenditures and a decrease in cash flows from operations.

Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities.
 
26-Week Period Ended Dec. 28, 2019
 
26-Week Period Ended Dec. 29, 2018
 
(In thousands)
Net cash provided by operating activities (GAAP)
$
754,469

 
$
917,790

Additions to plant and equipment
(393,379
)
 
(223,825
)
Proceeds from sales of plant and equipment
10,293

 
6,901

Free Cash Flow (Non-GAAP)
$
371,383

 
$
700,866


Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $141.7 million in the first 26 weeks of fiscal 2020, as compared to $137.9 million in the first 26 weeks of fiscal 2019. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.

We routinely engage in share repurchase programs to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans and to make opportunistic repurchases. In November 2017, our Board of Directors approved a repurchase program to authorize the repurchase of the company’s common stock not to exceed $1.5 billion through the end of fiscal 2020. In August 2019, our Board of Directors approved a separate repurchase program to authorize the repurchase of the company’s common stock not to exceed $2.5 billion through the end of fiscal 2021. We repurchased 8.1 million shares for $630.4 million during the first 26 weeks of fiscal 2020, compared to 10.8 million shares repurchased in the first 26 weeks of fiscal 2019 for $739.2 million. We repurchased approximately 569.6 thousand additional shares for $48.0 million through January 17, 2020, resulting in a remaining authorization of approximately $2.3 billion. The number of shares we repurchase during the remainder of fiscal 2020 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash.


51



Dividends paid in the first 26 weeks of fiscal 2020 were $399.1 million, or $0.78 per share, as compared to $379.2 million, or $0.72 per share, in the first 26 weeks of fiscal 2019. In November 2019, we declared our regular quarterly dividend for the second quarter of fiscal 2020 of $0.45 per share, which was paid in January 2020.

Debt Activity and Borrowing Availability

Our debt activity, including issuances and repayments, and our borrowing availability is described in Note 8, “Debt,” in the Notes to Consolidated Financial Statements in Item 1 of Part I. Our outstanding borrowings at December 28, 2019, and repayment activity since the close of the second quarter of fiscal 2020, are disclosed within that note. Updated amounts through January 17, 2020, include:

$924.3 million outstanding from our commercial paper program; and
No amounts outstanding from the credit facility supporting our commercial paper program.

During the first 26 weeks of fiscal 2020 and 2019, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 2.09% and 2.23%, respectively.

Contractual Obligations

Our 2019 Form 10-K contains a table that summarizes our obligations and commitments to make specified contractual future cash payments as of June 29, 2019. Since June 29, 2019, there have been no material changes to our specified contractual obligations.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to goodwill and intangible assets, the company-sponsored pension plans, income taxes and share-based compensation, which are described in Item 7 of our 2019 Form 10-K.

Forward-Looking Statements

Certain statements made herein that look forward in time or express management’s expectations or beliefs with respect to the occurrence of future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” “projected,” “continues,” “continuously,” variations of such terms, and similar terms and phrases denoting anticipated or expected occurrences or results. Examples of forward-looking statements include, but are not limited to, statements about:

our expectations regarding improved operating income performance;
our expectations regarding multiple transformation initiatives, including (i) the Finance Transformation Roadmap and our expectation that we will receive financial benefits from this initiative, (ii) Smart Spending and our expectation that this initiative will provide unprecedented visibility, ownership and performance management in all areas of our business, (iii) Canadian Regionalization and our expectation that this initiative will contribute to increased cost savings and (iv) Administrative Expenses and our expectation that this initiative will drive costs out of the business to drive growth, and our expectation that we will receive financial benefits from these initiatives through the end of fiscal 2020;
our expectations regarding our ability to effectively centralize and standardize our business, including leveraging technology and strengthening Sysco overall;

52



our expectations that our four strategic priorities, which include the customer experience, delivering operational excellence, optimizing the business and activating the power of our people, will accelerate our current growth and guide us into the future;
projections of future performance under our three-year strategic financial plan, including, but not limited to, our expectation that we will reach approximately $500 million to $525 million of adjusted operating income growth as compared to fiscal 2017, our goal of growing earnings per share faster than operating income, and achieving 16% in adjusted return on invested capital improvement for existing businesses;
our forecasted results for our current three-year plan ending fiscal 2020;
our expectations regarding the accelerated investments we are making related to our long-term strategic growth plans in Europe, and our expectations that such investments will enrich the customer experience and position us well in the European market;
estimates regarding the outcome of legal proceedings;
the impact of seasonal trends on our free cash flow;
our expectations regarding the use of remaining cash generated from operations;
estimates regarding our capital expenditures;
our expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability;
our expectations regarding the impact on our performance of the operational challenges facing our business in France;
our expectations regarding GDP growth in France;
our plans to focus on accelerating our business;
our expectations regarding the impact of costs associated with the senior leadership change;
our expectations regarding future accelerated growth and performance, and expectations regarding the impact on adjusted operating income of investment spending to achieve those goals;
our expectations regarding trends in produce markets;
our expectations regarding the calculation of adjusted return on invested capital, adjusted operating income, adjusted net earnings and adjusted diluted earnings per share;
our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results;
the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms;
our ability to meet future cash requirements, including the ability to access financial markets effectively, including issuances of debt securities, and maintain sufficient liquidity;
our ability to effectively access the commercial paper market and long-term capital markets;
our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes, or a combination thereof; and
our expectations regarding share repurchases.

These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below, those within Part II, Item 1A of this document and those discussed in Item 1A of our 2019 Form 10-K:
the risk that if sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, or if we are unable to continue to accelerate local case growth, our gross margins may decline;

53



the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit;
periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability generally;
the risk that our efforts to modify truck routing, including our small truck initiative, in order to reduce outbound transportation costs may be unsuccessful;
the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges;
risks related to unfavorable conditions in North America and Europe and the impact on our results of operations and financial condition;
the risks related to our efforts to meet our long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated;
the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs;
the risk that the actual costs of any business initiatives may be greater or less than currently expected;
the risk that competition in our industry and the impact of GPOs may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability;
the risk that our relationships with long-term customers may be materially diminished or terminated;
the risk that changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations;
the risk that changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results;
the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs;
the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control;
the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products;
risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers;
the risk that we may not realize anticipated benefits from our operating cost reduction efforts;
difficulties in successfully expanding into international markets and complimentary lines of business;
the potential impact of product liability claims;
the risk that we fail to comply with requirements imposed by applicable law or government regulations;
risks related to our ability to effectively finance and integrate acquired businesses;
risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity;
our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position;
the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending;

54



the risk that divestiture of one or more of our businesses may not provide the anticipated effects on our operations;
the risk that the U.K.’s exit from the European Union (EU) on January 31, 2020, commonly referred to as Brexit, may adversely impact our operations in the U.K., including those of the Brakes Group;
the risk that future labor disruptions or disputes could disrupt the integration of Brake France and Davigel into Sysco France and our operations in France and the EU generally;
the risk that factors beyond management’s control, including fluctuations in the stock market, as well as management’s future subjective evaluation of the company’s needs, would impact the timing of share repurchases;
due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business;
the risk that a cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers;
the potential requirement to pay material amounts under our multiemployer defined benefit pension plans;
our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines;
labor issues, including the renegotiation of union contracts and shortage of qualified labor;
capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; and
the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders.

For a more detailed discussion of factors that could cause actual results to differ from those contained in the forward-looking statements, see the risk factors discussion contained in Item 1A of our 2019 Form 10-K and the risk factor discussion contained in Part II, Item 1A of this document.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks consist of interest rate risk, foreign currency exchange rate risk, fuel price risk and investment risk. For a discussion on our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risks” in our 2019 Form 10-K. There have been no significant changes to our market risks since June 29, 2019, except as noted below.

Interest Rate Risk

At December 28, 2019, there was $853.3 million in aggregate commercial paper issuances outstanding. Total debt as of December 28, 2019 was $8.9 billion, of which approximately 64% was at fixed rates of interest, including the impact of our interest rate swap agreements.

Fuel Price Risk

Due to the nature of our distribution business, we are exposed to potential volatility in fuel prices. The price and availability of diesel fuel fluctuates due to changes in production, seasonality and other market factors generally outside of our control. Increased fuel costs may have a negative impact on our results of operations in three areas. First, the high cost of fuel can negatively impact consumer confidence and discretionary spending and thus reduce the frequency and amount spent by consumers for food-away-from-home purchases. Second, the high cost of fuel can increase the price we pay for product purchases and we may not be able to pass these costs fully to our customers. Third, increased fuel costs impact the costs we incur to deliver product to our customers. Fuel costs related to outbound deliveries represented approximately 0.5% of sales during the first 26 weeks of fiscal 2020 and fiscal 2019.

Our activities to mitigate fuel costs include routing optimization with the goal of reducing miles driven, improving fleet utilization by adjusting idling time and maximum speeds and using fuel surcharges that primarily track with the change in market prices of fuel. We use diesel fuel swap contracts to fix the price of a portion of our projected monthly diesel fuel requirements. As

55



of December 28, 2019, we had diesel fuel swaps with a total notional amount of approximately 54 million gallons through December 2020. These swaps are expected to lock in the price of approximately 65% of our projected fuel purchase needs for fiscal 2020. Additional swaps have been entered into for hedging activity in fiscal 2021. As of December 28, 2019, we had diesel fuel swaps with a total notional amount of approximately 29 million gallons specific to fiscal 2021. Our remaining fuel purchase needs will occur at market rates unless contracted for a fixed price or hedged at a later date.

Item 4.  Controls and Procedures

Sysco’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 28, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Sysco’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of December 28, 2019, our chief executive officer and chief financial officer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended December 28, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

56



PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1A.  Risk Factors

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 29, 2019 and as set forth below.

Economic and political instability and potential unfavorable changes in laws and regulations in international markets could adversely affect our results of operations and financial condition.

Our international operations subject us to certain risks, including economic and political instability and potential unfavorable changes in laws and regulations in international markets in which we operate. For example, the U.K.’s exit from the EU on January 31, 2020 (commonly referred to as “Brexit”) and the resulting significant change to the U.K.’s relationship with the EU and with countries outside the EU (and the laws, regulations and trade deals impacting business conducted between them) could disrupt the overall economic growth or stability of the U.K. and the EU and otherwise negatively impact our European operations.

The Withdrawal Agreement between the U.K. and the EU that establishes the terms governing the U.K.’s departure provides that, among other things, there will be a transition period under which the U.K. will remain a part of the EU customs and regulatory area until December 31, 2020 (which may potentially be extended until December 31, 2022 at the latest). During this time, the U.K. and the EU will negotiate their future trading relationship, which under current U.K. Government policy is anticipated to take the form of a free trade agreement. As a result, there continues to be significant uncertainty about the terms under which the U.K. will continue to trade with the EU after the end of the transition period, and the date on which these terms will take effect. It is possible that Brexit will result in our U.K. and EU operations becoming subject to materially different, and potentially conflicting, laws, regulations or tariffs, which could require costly new compliance initiatives or changes to legal entity structures or operating practices. Furthermore, if the transition period were to expire without an agreement (a “no-deal Brexit”), there may be additional adverse impacts on immigration and trade between the U.K. and the EU or countries outside the EU. Such impacts may directly increase our costs or could decrease demand for our goods and services by adversely impacting the business of restaurants or other customers in the foodservice distribution industry.

The completion of Brexit could also adversely affect the value of our euro- and pound-denominated assets and obligations. Exchange rates related to the British pound sterling have been more volatile since the U.K. announced it would exit the EU and such volatility may continue in the future. Future fluctuations in the exchange rate between the British pound sterling and the local currencies of our suppliers may have the effect of increasing our cost of goods sold in the U.K., which increases we may not be able to pass on to our customers. Uncertainty surrounding Brexit has contributed to recent fluctuations in the U.K. economy and could experience future disruptions. In addition, Brexit could cause financial and capital markets within and outside the U.K. or the EU to constrict, thereby negatively impacting our ability to finance our business, and could cause a substantial dip in consumer confidence and spending that could negatively impact the foodservice distribution industry. Any one of these impacts could have an adverse effect on our results of operations and financial condition.

Additionally, the “yellow vest” protests in France against a fuel tax increase, pension reform and the French government have negatively impacted our sales in France and may continue to do so. Similarly, future labor disruptions or disputes could disrupt the integration of Brake France and Davigel into Sysco France and our operations in France and the EU generally. In addition, if changes occur in laws and regulations impacting the flow of goods, services and workers in either the U.K or France or in other parts of the EU, with respect to Brexit or otherwise, our European operations could also be negatively impacted.


57



We may not be able to achieve our three-year financial targets by the end of fiscal year 2020.

In fiscal 2018, we set new three-year financial targets to grow operating income, accelerate earnings per share growth faster than operating income growth and improve return on invested capital. Our ability to meet these financial targets depends largely on our successful execution of our business plan including various related initiatives. There are various risks related to these efforts, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Our intentions and expectations with regard to the execution of our business plan, and the timing of any related initiatives, are subject to change at any time based on management’s subjective evaluation of our overall business needs. In the third quarter of fiscal 2020, we lowered our fiscal 2018 to fiscal 2020 adjusted operating income growth target from $600 million to approximately $500 million to $525 million. See the discussion in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Strategy.” If we are unable to successfully execute our business plan, whether due to the risks and uncertainties discussed in Item 1A of our 2019 Form 10-K and/or Part II, Item 1A of this report, or otherwise, we may be unable to achieve our three-year financial targets.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

Issuer Purchases of Equity Securities

We made the following share repurchases during the second quarter of fiscal 2020:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1
 
 
 
 
 
 
 
September 29 – October 26
1,350,171

 
$
78.82

 
1,350,171

 

Month #2
 
 
 
 
 
 
 
October 27 – November 23
1,058,253

 
80.17

 
1,053,670

 

Month #3
 
 
 
 
 
 
 
November 24 – December 28
1,105,797

 
82.13

 
1,098,089

 

Totals
3,514,221

 
$
80.27

 
3,501,930

 


(1) 
The total number of shares purchased includes 0, 4,583 and 7,708 shares tendered by individuals in connection with stock option exercises in Month #1, Month #2 and Month #3, respectively.

We routinely engage in share repurchase programs. In November 2017, our Board of Directors approved a repurchase program to authorize the repurchase of the company’s common stock not to exceed $1.5 billion through the end of fiscal 2020. We executed all $1.5 billion under this authorization through November 2019. In August 2019, our Board of Directors approved a separate repurchase program to authorize the repurchase of the company’s common stock not to exceed $2.5 billion through the end of fiscal 2021. This repurchase program is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans and to make opportunistic repurchases. The share repurchase program was approved using a dollar value limit and, therefore, are not included in the table above for “Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs.”

We repurchased 8.1 million shares during the first 26 weeks of fiscal 2020 and purchased approximately 569.6 thousand additional shares under our authorization through January 17, 2020, resulting in a remaining authorization under our program of approximately $2.3 billion. The number of shares we repurchase during the remainder of fiscal 2020 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash.


58



Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None

Item 6.  Exhibits

The exhibits listed on the Exhibit Index below are filed as a part of this Quarterly Report on Form 10-Q.

59



EXHIBIT INDEX
3.1
 
 
 
3.2
 
 
 
3.3
 
 
 
3.4
 
 
 
10.1†#
 
 
 
10.2†
 
 
 
10.3†
 
 
 
10.4†
 
 
 
10.5†
 
 
 
31.1#
 
 
 
31.2#
 
 
 
32.1#
 
 
 
32.2#
 
 
 
101.SCH#
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL#
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF#
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB#
Inline XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE#
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
___________

60



† Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K
# Filed herewith

61



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)
 
 
 
 
 
 
Date: February 4, 2020
By:
/s/ KEVIN P. HOURICAN
 
 
Kevin P. Hourican
 
 
President and Chief Executive Officer
 
 
 
Date: February 4, 2020
By:
/s/ JOEL T. GRADE
 
 
Joel T. Grade
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
Date: February 4, 2020
By:
/s/ ANITA A. ZIELINSKI
 
 
Anita A. Zielinski
 
 
Senior Vice President and
 
 
Chief Accounting Officer

62