Docoh
Loading...

SYY Sysco

Filed: 4 Nov 19, 7:00pm



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 September 28, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
syylogoa02.jpg
Sysco Corporation
(Exact name of registrant as specified in its charter)
Delaware74-1648137
(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 FilerAccelerated Filer
Non-accelerated FilerSmaller 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

510,226,830 shares of common stock were outstanding as of October 18, 2019.





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)
 Sep. 28, 2019 Jun. 29, 2019
 (unaudited)  
ASSETS
Current assets   
Cash and cash equivalents$455,482
 $513,460
Accounts and notes receivable, less allowances of $49,443 and $28,1764,397,005
 4,181,696
Inventories3,386,808
 3,216,034
Prepaid expenses and other current assets235,014
 210,582
Income tax receivable9,855
 19,733
Total current assets8,484,164
 8,141,505
Plant and equipment at cost, less accumulated depreciation4,493,016
 4,501,705
Other long-term assets   
Goodwill3,871,722
 3,896,226
Intangibles, less amortization825,287
 857,301
Deferred income taxes98,118
 80,760
Operating lease right-of-use assets, net626,580
 
Other assets557,688
 489,025
Total other long-term assets5,979,395
 5,323,312
Total assets$18,956,575
 $17,966,522
    
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities   
Notes payable$3,433
 $3,957
Accounts payable4,247,276
 4,314,620
Accrued expenses1,596,925
 1,729,941
Accrued income taxes96,932
 17,343
Current operating lease liabilities102,544
 
Current maturities of long-term debt54,361
 37,322
Total current liabilities6,101,471
 6,103,183
Long-term liabilities   
Long-term debt8,637,706
 8,122,058
Deferred income taxes178,719
 172,232
Long-term operating lease liabilities545,566
 
Other long-term liabilities1,005,337
 1,031,020
Total long-term liabilities10,367,328
 9,325,310
Noncontrolling interest33,028
 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 capital1,490,661
 1,457,419
Retained earnings11,486,833
 11,229,679
Accumulated other comprehensive loss(1,675,430) (1,599,729)
Treasury stock at cost, 254,310,626 and 252,297,926 shares(9,612,491) (9,349,941)
Total shareholders’ equity2,454,748
 2,502,603
Total liabilities and shareholders’ equity$18,956,575
 $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
 Sep. 28, 2019 Sep. 29, 2018
Sales$15,303,005
 $15,215,279
Cost of sales12,359,635
 12,311,494
Gross profit2,943,370
 2,903,785
Operating expenses2,275,052
 2,275,645
Operating income668,318
 628,140
Interest expense83,335
 89,016
Other (income) expense, net3,112
 1,132
Earnings before income taxes581,871
 537,992
Income taxes128,090
 106,950
Net earnings$453,781
 $431,042
     
Net earnings: 
  
Basic earnings per share$0.88
 $0.83
Diluted earnings per share0.87
 0.81
    
Average shares outstanding513,496,296
 520,856,599
Diluted shares outstanding518,761,456
 529,034,470

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
 Sep. 28, 2019 Sep. 29, 2018
Net earnings$453,781
 $431,042
Other comprehensive (loss) income:   
Foreign currency translation adjustment(126,159) (24,927)
Items presented net of tax:   
Amortization of cash flow hedges2,155
 2,155
Change in net investment hedges30,000
 8,588
Change in cash flow hedges9,259
 (3,008)
Amortization of prior service cost1,428
 1,600
Amortization of actuarial loss6,683
 6,529
Actuarial (loss) gain
 (32,511)
Change in marketable securities933
 
Total other comprehensive (loss) income(75,701) (41,574)
Comprehensive income$378,080
 $389,468

See Notes to Consolidated Financial Statements

3



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

         
Accumulated
Other Comprehensive
Loss
      
 Common Stock 
Paid-in
Capital
 
Retained
Earnings
  Treasury Stock  
 Shares Amount    Shares Amounts Totals
Balance as of June 29, 2019765,174,900
 $765,175
 $1,457,419
 $11,229,679
 $(1,599,729) 252,297,926
 $(9,349,941) $2,502,603
Net earnings      453,781
       453,781
Foreign currency translation adjustment        (126,159)     (126,159)
Amortization of cash flow hedges, net of tax        2,155
     2,155
Change in cash flow hedges, net of tax        9,259
     9,259
Change in net investment hedges, net of tax        30,000
     30,000
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax        8,111
     8,111
Change in marketable securities, net of tax        933
     933
Adoption of ASU 2016-02, Leases (Topic 842), net of tax      1,978
       1,978
Dividends declared ($0.39 per common share)      (198,605)       (198,605)
Treasury stock purchases          4,587,397
 (347,867) (347,867)
Share-based compensation awards    33,242
     (2,574,697) 85,317
 118,559
Balance as of September 28, 2019765,174,900
 $765,175
 $1,490,661
 $11,486,833
 $(1,675,430) 254,310,626
 $(9,612,491) $2,454,748
                
         
Accumulated
Other Comprehensive
Loss
      
 Common Stock 
Paid-in
Capital
 
Retained
Earnings
  Treasury Stock  
 Shares Amount    Shares Amounts Totals
Balance as of June 30, 2018765,174,900
 $765,175
 $1,383,619
 $10,348,628
 $(1,409,269) 244,533,248
 $(8,581,196) $2,506,957
Net earnings      431,042
       431,042
Foreign currency translation adjustment        (24,927)     (24,927)
Amortization of cash flow hedges, net of tax        2,155
     2,155
Change in cash flow hedges, net of tax        (3,008)     (3,008)
Change in net investment hedges, net of tax        8,588
     8,588
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax        8,129
     8,129
Pension funded status adjustment, net of tax        (32,511)     (32,511)
Dividends declared ($0.36 per common share)      (187,180)       (187,180)
Treasury stock purchases          2,911,677
 (209,541) (209,541)
Share-based compensation awards    54,478
     (2,419,654) 84,392
 138,870
Balance as of September 29, 2018765,174,900
 $765,175
 $1,438,097
 $10,592,490
 $(1,450,843) 245,025,271
 $(8,706,345) $2,638,574

See Notes to Consolidated Financial Statements


4



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 13-Week Period Ended
 Sep. 28, 2019 Sep. 29, 2018
Cash flows from operating activities:   
Net earnings$453,781
 $431,042
Adjustments to reconcile net earnings to cash provided by operating activities:   
Share-based compensation expense21,386
 29,193
Depreciation and amortization187,405
 187,627
Operating lease asset amortization26,925
 
Amortization of debt issuance and other debt-related costs4,920
 6,170
Deferred income taxes(25,494) (20,249)
Provision for losses on receivables18,712
 10,464
Other non-cash items2,295
 (3,695)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:   
(Increase) in receivables(236,136) (182,233)
(Increase) in inventories(186,331) (229,100)
(Increase) in prepaid expenses and other current assets(30,133) (23,540)
(Decrease) increase in accounts payable(38,894) 78,112
(Decrease) in accrued expenses(92,661) (111,309)
(Decrease) in operating lease liabilities(30,597) 
Increase in accrued income taxes89,467
 100,868
Decrease (increase) in other assets3,141
 (4,261)
Increase in other long-term liabilities3,793
 2,056
Net cash provided by operating activities171,579
 271,145
Cash flows from investing activities:   
Additions to plant and equipment(175,728) (104,322)
Proceeds from sales of plant and equipment4,902
 3,839
Acquisition of businesses, net of cash acquired(74,814) 
Purchase of marketable securities(4,002) 
Proceeds from sales of marketable securities3,018
 
Other investing activities
 912
Net cash used for investing activities(246,624) (99,571)
Cash flows from financing activities:   
Bank and commercial paper borrowings (repayments), net533,400
 
Other debt borrowings31,789
 386,142
Other debt repayments(16,139) (8,078)
Proceeds from stock option exercises85,317
 84,393
Treasury stock purchases(349,314) (204,640)
Dividends paid(200,037) (187,229)
Other financing activities(22,311) (2,200)
Net cash provided by financing activities62,705
 68,388
Effect of exchange rates on cash, cash equivalents and restricted cash(5,485) (2,435)
Net (decrease) increase in cash, cash equivalents and restricted cash(17,825) 237,527
Cash, cash equivalents and restricted cash at beginning of period532,245
 715,844
Cash, cash equivalents and restricted cash at end of period$514,420
 $953,371
Supplemental disclosures of cash flow information:   
Cash paid during the period for:   
Interest$84,407
 $81,392
Income taxes70,013
 70,675
 
See Notes to Consolidated Financial Statements

5



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 reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:
 Sep. 28, 2019 Sep. 29, 2018
 (In thousands)
Cash and cash equivalents$455,482
 $790,304
Restricted cash (1)
58,938
 163,067
Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows$514,420
 $953,371


(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.”


6



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 September 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 September 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 Sep. 28, 2019
  US Foodservice Operations International Foodservice Operations SYGMA Other Total
  (In thousands)
Principal Product Categories          
Fresh and frozen meats $2,075,300
 $412,155
 $381,377
 $
 $2,868,832
Canned and dry products 1,898,889
 586,625
 37,190
 
 2,522,704
Frozen fruits, vegetables, bakery and other 1,449,218
 552,014
 254,455
 
 2,255,687
Dairy products 1,148,381
 312,178
 145,921
 
 1,606,480
Poultry 1,090,106
 218,600
 204,269
 
 1,512,975
Fresh produce 998,164
 257,758
 60,933
 
 1,316,855
Paper and disposables 719,540
 98,342
 168,436
 17,373
 1,003,691
Seafood 685,410
 149,590
 24,855
 
 859,855
Beverage products 290,785
 132,852
 143,679
 24,329
 591,645
Other (1)
 302,840
 192,274
 25,879
 243,288
 764,281
Total Sales $10,658,633
 $2,912,388
 $1,446,994
 $284,990
 $15,303,005

(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.


7



  13-Week Period Ended Sep. 29, 2018
  US Foodservice Operations International Foodservice Operations SYGMA Other Total
  (In thousands)
Principal Product Categories          
Fresh and frozen meats $2,121,517
 $420,456
 $372,334
 $
 $2,914,307
Canned and dry products 1,852,168
 611,470
 77,621
 
 2,541,259
Frozen fruits, vegetables, bakery and other 1,423,386
 628,559
 291,864
 
 2,343,809
Dairy products 1,086,404
 318,347
 154,806
 
 1,559,557
Poultry 1,026,936
 215,582
 272,061
 
 1,514,579
Fresh produce 937,580
 257,544
 64,849
 
 1,259,973
Paper and disposables 710,759
 104,539
 188,616
 16,409
 1,020,323
Seafood 661,687
 188,436
 25,385
 
 875,508
Beverage products 290,571
 52,069
 147,294
 23,180
 513,114
Other (1)
 288,403
 123,948
 26,627
 233,872
 672,850
Total Sales $10,399,411
 $2,920,950
 $1,621,457
 $273,461
 $15,215,279

(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 13 weeks of fiscal 2020, the company paid cash of $74.8 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 September 28, 2019, aggregate contingent consideration outstanding was $28.3 million, of which $21.5 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.

8



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 September 28, 2019 and June 29, 2019:
 Assets Measured at Fair Value as of Sep. 28, 2019
 Level 1 Level 2 Level 3 Total
 (In thousands)
Assets:       
Cash equivalents       
Cash and cash equivalents$108,962
 $1,400
 $
 $110,362
Other assets (1)
58,938
 
 
 58,938
Total assets at fair value$167,900
 $1,400
 $
 $169,300

(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 $9.5 billion and $8.6 billion as of September 28, 2019 and June 29, 2019, respectively. The carrying value of total debt was $8.7 billion and $8.2 billion as of September 28, 2019 and June 29, 2019, respectively.

9




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 September 28, 2019 and June 29, 2019:

 September 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$88,505
 $2,067
 $(2) $90,570
 $12,017
 $78,553
Government bonds28,834
 2,695
 
 31,529
 
 31,529
Total marketable securities$117,339
 $4,762
 $(2) $122,099
 $12,017
 $110,082
            
 June 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 bonds28,900
 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 September 28, 2019 had effective maturities ranging from less than one year to approximately eleven years. There were 0 significant realized gains or losses in marketable securities in the first quarter of 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 currencies matching the inventory purchase, which operate as cash flow hedges of the company’s foreign currency-denominated inventory purchases.

10




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 September 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 (September 30, 2019 to January 2020) Swedish Krona 280
Various (October 2019 to June 2020) British Pound Sterling 23
June 2021 Canadian Dollar 187
July 2021 British Pound Sterling 234
August 2021 British Pound Sterling 466
June 2023 Euro 500
     
Hedging of fuel risk    
Various (September 30, 2019 to September 2020) Gallons 55


The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 28, 2019 and June 29, 2019 are as follows:
   Derivative Fair Value
 Balance Sheet location Sep. 28, 2019 Jun. 29, 2019
   (In thousands)
Fair Value Hedges:     
Interest rate swapsOther assets $44,407
 $37,396
Interest rate swapsOther long-term liabilities 6,061
 9,285
      
Cash Flow Hedges:     
Fuel SwapsOther current assets $16
 $154
Foreign currency forwardsOther current assets 275
 624
Fuel swapsOther assets 
 136
Cross currency swapsOther assets 21,046
 8,592
Fuel SwapsOther current liabilities 6,262
 6,537
Foreign currency forwardsOther current liabilities 591
 162
Fuel swapsOther long-term liabilities 28
 239
      
Net Investment Hedges:     
Foreign currency swapsOther assets $28,171
 $18,614
Foreign currency swapsOther long-term liabilities 
 9,973



11



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 Sep. 28, 2019
  Cost of Sales Operating Expense Interest Expense
  (In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded $12,359,635
 $2,275,052
 $83,335
Gain or (loss) on fair value hedging relationships:      
Interest rate swaps:      
Hedged items (1)
 $
 $
 $(24,736)
Derivatives designated as hedging instruments 
 
 8,857

(1) 
The hedged total includes interest expense of $14.6 million and change in fair value of debt of $10.2 million.

  13-Week Period Ended Sep. 29, 2018
  Cost of Sales Operating Expense Interest Expense
  (In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded $12,311,494
 $2,275,645
 $89,016
Gain or (loss) on fair value hedging relationships:      
Interest rate swaps:      
Hedged items (1)
 $
 $
 $(8,588)
Derivatives designated as hedging instruments 
 
 (10,859)

(1) 
The hedged total includes interest expense of $15.1 million and change in fair value of debt of $6.5 million.


12



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 September 28, 2019 and September 29, 2018, presented on a pretax basis, are as follows:
 13-Week Period Ended Sep. 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$344
 Operating expense $(3,406)
Foreign currency contracts12,307
 Cost of sales 2
Total$12,651
   $(3,404)
      
Derivatives in net investment hedging relationships:     
Foreign currency contracts$20,852
 N/A $
Foreign denominated debt21,450
 N/A 
Total$42,302
   $
      
 13-Week Period Ended Sep. 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$1,026
 Operating expense $4,353
Foreign currency contracts(4,803) Cost of sales 483
Total$(3,777)   $4,836
      
Derivatives in net investment hedging relationships:     
Foreign currency contracts$7,228
 N/A $
Foreign denominated debt3,950
 N/A 
Total$11,178
   $


13



The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 28, 2019 are as follows:
 Sep. 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:   
Long-term debt$(2,312,113) $(38,795)


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 September 28, 2019, there were $665.4 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 13 weeks of fiscal 2020, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from approximately $208.9 million to approximately $911.3 million.

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.


14



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

  Consolidated Balance Sheet Location September 28, 2019
    (In thousands)
Finance lease right-of-use assets Plant and equipment at cost, less accumulated depreciation $92,052
Current finance lease liabilities Current maturities of long-term debt 27,300
Long-term finance lease liabilities Long-term debt 69,213


The following table presents lease costs for the 13-week period ended September 28, 2019:
  Consolidated Results of Operations Location 13-Week Period Ended Sep. 28, 2019
    (In thousands)
Operating lease cost Operating expenses $30,425
Financing lease cost:    
Amortization of right-of-use assets Operating expenses 8,613
Interest on lease obligations Interest expense 1,182
Variable lease cost Operating expenses 468
Short-term lease cost Operating expenses 2,896
Net lease cost   $43,584


Future minimum lease obligations under existing noncancelable operating and finance lease agreements by fiscal year as of September 28, 2019 are as follows:
  Operating Leases Finance Leases
  (In thousands)
Remainder of fiscal 2020 $88,622
 $24,112
2021 109,589
 27,829
2022 84,288
 20,370
2023 68,088
 14,046
2024 46,874
 8,912
2025 43,721
 5,742
Thereafter 322,335
 6,378
Total undiscounted lease obligations 763,517
 107,389
Less imputed interest (115,407) (10,876)
Present value of lease obligations $648,110
 $96,513





15



Other information related to lease agreements was as follows:
  13-Week Period Ended Sep. 28, 2019
Cash Paid For Amounts Included In Measurement of Liabilities: (Dollars in thousands)
Operating cash flows for operating leases $30,597
Operating cash flows for financing leases 1,182
Financing cash flows for financing leases 7,232
   
Supplemental Non-cash Information on Lease Liabilities:  
Assets obtained in exchange for operating lease obligations $5,781
Assets obtained in exchange for finance lease obligations 1,553
   
Lease Term and Discount Rate:  
Weighted-average remaining lease term (years):  
Operating leases 11.35 years
Financing leases 4.34 years
Weighted-average discount rate:  
Operating leases 2.39%
Financing leases 4.96%


10.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 13-Week Period Ended
 Sep. 28, 2019 Sep. 29, 2018
 (In thousands, except for share
and per share data)
Numerator:   
Net earnings$453,781
 $431,042
Denominator:   
Weighted-average basic shares outstanding513,496,296
 520,856,599
Dilutive effect of share-based awards5,265,160
 8,177,871
Weighted-average diluted shares outstanding518,761,456
 529,034,470
Basic earnings per share$0.88
 $0.83
Diluted earnings per share$0.87
 $0.81


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 3,321,000 and 1,067,000 for the first quarter 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 $378.1 million and $389.5 million for the first quarter of fiscal 2020 and fiscal 2019, respectively.


16



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 Sep. 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 costOther expense, net $1,905
 $477
 $1,428
Amortization of actuarial loss, netOther expense, net 8,942
 2,259
 6,683
Total reclassification adjustments  10,847
 2,736
 8,111
Foreign currency translation:       
Foreign currency translation adjustmentN/A (126,159) 
 (126,159)
Marketable securities:       
   Change in marketable securities (1)
N/A 1,181
 248
 933
Hedging instruments:       
Other comprehensive income (loss) before reclassification adjustments:       
Change in cash flow hedges
Operating expenses (2)
 12,651
 3,392
 9,259
Change in net investment hedgesN/A 42,302
 12,302
 30,000
Total other comprehensive income (loss) before reclassification adjustments  54,953
 15,694
 39,259
Reclassification adjustments:       
Amortization of cash flow hedgesInterest expense 2,874
 719
 2,155
Total other comprehensive (loss) income  $(56,304) $19,397
 $(75,701)

(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 quarter of 2020.

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


17



   13-Week Period Ended Sep. 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, arising in the current year  $(36,891) $(4,380) $(32,511)
Reclassification adjustments:   
  
  
Amortization of prior service costOther expense, net 2,133
 533
 1,600
Amortization of actuarial loss (gain), netOther 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 adjustmentN/A (24,927) 
 (24,927)
Hedging instruments:       
Other comprehensive income (loss) before reclassification adjustments:       
Change in cash flow hedges
Operating expenses (1)
 (3,777) (769) (3,008)
Change in net investment hedgesN/A 11,178
 2,590
 8,588
Total other comprehensive income (loss) before reclassification adjustments  7,401
 1,821
 5,580
Reclassification adjustments:       
Amortization of cash flow hedgesInterest expense 2,873
 718
 2,155
Total other comprehensive income (loss)  $(40,705) $869
 $(41,574)

(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:
 13-Week Period Ended Sep. 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
 (126,159) 
 
 (126,159)
Amortization of cash flow hedges
 
 2,155
 
 2,155
Change in net investment hedges
 
 30,000
 
 30,000
Change in cash flow hedge
 
 9,259
 
 9,259
Amortization of unrecognized prior service cost1,428
 
 
 
 1,428
Amortization of unrecognized net actuarial losses6,683
 
 
 
 6,683
Change in marketable securities
 
 
 933
 933
Balance as of Sep. 28, 2019$(1,209,506) $(416,328) $(53,356) $3,760
 $(1,675,430)

18




 13-Week Period Ended Sep. 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
 (24,927) 
 (24,927)
Amortization of cash flow hedges
 
 2,155
 2,155
Change in net investment hedges
 
 8,588
 8,588
Change in cash flow hedges
 
 (3,008) (3,008)
Net actuarial loss(32,511) 
 
 (32,511)
Amortization of unrecognized prior service cost1,600
 
 
 1,600
Amortization of unrecognized net actuarial losses6,529
 
 
 6,529
Balance as of Sep. 29, 2018$(1,119,441) $(195,970) $(135,432) $(1,450,843)


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 quarter of fiscal 2020, options to purchase 2,291,085 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 quarter of fiscal 2020 was $10.40.

In the first quarter of fiscal 2020, 512,765 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 quarter of fiscal 2020 was $72.66. 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 240,802 shares of common stock under the Sysco ESPP during the first quarter of fiscal 2020. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $10.61 during the first quarter 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 $21.4 million and $29.2 million for the first quarter of fiscal 2020 and fiscal 2019, respectively.

As of September 28, 2019, there was $136.8 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.06 years.


19



13.  INCOME TAXES

Effective Tax Rate

The effective tax rates for the first quarters of fiscal 2020 and 2019 were 22.01% and 19.88%, respectively. As compared to the company’s statutory tax rate, the lower effective tax rate for the first quarter of fiscal 2020 was primarily due to the favorable impact of excess tax benefits of equity-based compensation that totaled $15.7 million. The lower effective tax rate for the first quarter of 2019 was primarily due to the favorable impact of excess tax benefits of equity-based compensation that totaled $14.3 million and the release of certain tax contingencies due to the lapse of statutes of limitations.

Uncertain Tax Positions

As of September 28, 2019, the gross amount of unrecognized tax benefit and related accrued interest was $23.9 million and $3.8 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 3 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.

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.


20



The following tables set forth certain financial information for Sysco’s reportable business segments. Sysco reclassified prior year amounts to conform to the current year presentation of net periodic pension and postretirement benefit costs in accordance with ASU 2017-07.

 13-Week Period Ended
 Sep. 28, 2019 Sep. 29, 2018
Sales:(In thousands)
U.S. Foodservice Operations$10,658,633
 $10,399,411
International Foodservice Operations2,912,388
 2,920,950
SYGMA1,446,994
 1,621,457
Other284,990
 273,461
Total$15,303,005
 $15,215,279
    
 13-Week Period Ended
 Sep. 28, 2019 Sep. 29, 2018
Operating income:(In thousands)
U.S. Foodservice Operations$861,406
 $815,758
International Foodservice Operations54,800
 66,772
SYGMA7,570
 2,431
Other10,137
 10,335
Total segments933,913
 895,296
Corporate(265,595) (267,156)
Total operating income668,318
 628,140
Interest expense83,335
 89,016
Other expense (income), net3,112
 1,132
Earnings before income taxes$581,871
 $537,992


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 September 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.


21



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
 Sep. 28, 2019
 Sysco Certain U.S.
 Broadline
Subsidiaries
 Other
Non-Guarantor
Subsidiaries
 Eliminations Consolidated
Totals
 (In thousands)
Current assets$172,317
 $4,548,019
 $3,763,828
 $
 $8,484,164
Intercompany receivables6,517,293
 148,589
 3,229,688
 (9,895,570) 
Investment in subsidiaries5,305,887
 
 1,255,862
 (6,561,749) 
Plant and equipment, net242,040
 2,184,301
 2,066,675
 
 4,493,016
Other assets817,530
 729,136
 4,974,095
 (541,366) 5,979,395
Total assets$13,055,067
 $7,610,045
 $15,290,148
 $(16,998,685) $18,956,575
Current liabilities$443,234
 $1,061,795
 $4,596,442
 $
 $6,101,471
Intercompany payables1,307,665
 3,261,317
 5,326,588
 (9,895,570) 
Long-term debt8,192,123
 10,747
 434,836
 
 8,637,706
Other liabilities657,297
 551,789
 1,061,902
 (541,366) 1,729,622
Noncontrolling interest
 
 33,028
 
 33,028
Shareholders’ equity2,454,748
 2,724,397
 3,837,352
 (6,561,749) 2,454,748
Total liabilities and shareholders’ equity$13,055,067
 $7,610,045
 $15,290,148
 $(16,998,685) $18,956,575

 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 receivables6,162,303
 30,469
 3,220,237
 (9,413,009) 
Investment in subsidiaries4,680,530
 
 1,126,315
 (5,806,845) 
Plant and equipment, net252,101
 2,162,668
 2,086,936
 
 4,501,705
Other assets787,986
 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 payables686,116
 3,443,182
 5,283,711
 (9,413,009) 
Long-term debt7,668,314
 7,938
 445,806
 
 8,122,058
Other liabilities682,779
 545,391
 531,081
 (555,999) 1,203,252
Noncontrolling interest
 
 35,426
 
 35,426
Shareholders’ equity2,502,603
 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


22



 Condensed Consolidated Statement of Comprehensive Income
 For the 13-Week Period Ended Sep. 28, 2019
 Sysco Certain U.S.
 Broadline
Subsidiaries
 Other
Non-Guarantor
Subsidiaries
 Eliminations Consolidated
Totals
 (In thousands)
Sales$
 $9,810,408
 $6,043,288
 $(550,691) $15,303,005
Cost of sales
 7,910,440
 4,999,886
 (550,691) 12,359,635
Gross profit
 1,899,968
 1,043,402
 
 2,943,370
Operating expenses198,840
 1,075,837
 1,000,375
 
 2,275,052
Operating income (loss)(198,840) 824,131
 43,027
 
 668,318
Interest expense (income) (1)
107,336
 (20,528) (3,473) 
 83,335
Other expense (income), net7,053
 (167) (3,774) 
 3,112
Earnings (losses) before income taxes(313,229) 844,826
 50,274
 
 581,871
Income tax (benefit) provision(98,500) 212,546
 14,044
 
 128,090
Equity in earnings of subsidiaries668,510
 
 129,548
 (798,058) 
Net earnings453,781
 632,280
 165,778
 (798,058) 453,781
Other comprehensive income (loss)(75,701) 
 (126,159) 126,159
 (75,701)
Comprehensive income$378,080
 $632,280
 $39,619
 $(671,899) $378,080
 

(1) 
Interest expense (income) includes $20.5 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation for the first quarter ended September 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 Sep. 29, 2018
 Sysco Certain U.S.
 Broadline
Subsidiaries
 Other
Non-Guarantor
Subsidiaries
 Eliminations Consolidated
Totals
 (In thousands)
Sales$
 $9,479,806
 $6,234,158
 $(498,685) $15,215,279
Cost of sales
 7,660,101
 5,150,078
 (498,685) 12,311,494
Gross profit
 1,819,705
 1,084,080
 
 2,903,785
Operating expenses220,281
 1,052,350
 1,003,014
 
 2,275,645
Operating income (loss)(220,281) 767,355
 81,066
 
 628,140
Interest expense (income) (1)
41,413
 (21,538) 69,141
 
 89,016
Other expense (income), net6,600
 (54) (5,414) 
 1,132
Earnings (losses) before income taxes(268,294) 788,947
 17,339
 
 537,992
Income tax (benefit) provision(93,587) 196,445
 4,092
 
 106,950
Equity in earnings of subsidiaries605,750
 
 94,341
 (700,091) 
Net earnings431,043
 592,502
 107,588
 (700,091) 431,042
Other comprehensive income (loss)(41,574) 
 (24,927) 24,927
 (41,574)
Comprehensive income$389,469
 $592,502
 $82,661
 $(675,164) $389,468

(1) 
Interest expense (income) includes $21.5 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation for the first quarter ended September 29, 2018. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.


23



 Condensed Consolidated Cash Flows
 For the 13-Week Period Ended Sep. 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$11,776
 $69,098
 $90,705
 $
 $171,579
Investing activities(49,434) (85,903) (128,923) 17,636
 (246,624)
Financing activities109,226
 742
 (29,627) (17,636) 62,705
Effect of exchange rates on cash
 
 (5,485) 
 (5,485)
Net increase (decrease) in cash, cash equivalents and restricted cash71,568
 (16,063) (73,330) 
 (17,825)
Cash, cash equivalents and restricted cash at the beginning of period29,868
 117,643
 384,734
 
 532,245
Cash, cash equivalents and restricted cash at the end of period$101,436
 $101,580
 $311,404
 $
 $514,420

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

 Condensed Consolidated Cash Flows
 For the 13-Week Period Ended Sep. 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$167,767
 $69,459
 $33,919
 $
 $271,145
Investing activities361,777
 (42,188) (12,229) (406,931) (99,571)
Financing activities(332,988) (1,581) (3,974) 406,931
 68,388
Effect of exchange rates on cash
 
 (2,435) 
 (2,435)
Net increase (decrease) in cash, cash equivalents and restricted cash196,556
 25,690
 15,281
 
 237,527
Cash, cash equivalents and restricted cash at the beginning of period29,144
 111,843
 574,857
 
 715,844
Cash, cash equivalents and restricted cash at the end of period$225,700
 $137,533
 $590,138
 $
 $953,371
(1) 
Represents primarily intercompany loans between the subsidiaries and the parent, Sysco Corporation.

24



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 the first quarter of fiscal 2020 and 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 quarter of fiscal 2020 and 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, first quarter 2019 results of operations were impacted by acquisition-related integration costs specific to the Brakes Acquisition. Sysco’s results of operations for the first quarter of fiscal 2020 were also impacted by changes in foreign statutory tax rates. 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 first quarter of fiscal 2020 performance reflects improved year-over-year performance, including operating income and net earnings growth in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, both including and excluding Certain Items.

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

Sales:
increased 0.6%, or $87.7 million, to $15.3 billion;
Operating income:
increased 6.4%, or $40.2 million, to $668.3 million;
adjusted operating income increased 7.3%, or $50.3 million, to $741.9 million;
Net earnings:
increased 5.3%, or $22.7 million, to $453.8 million;
adjusted net earnings increased 6.5%, or $31.1 million, to $510.3 million;
Basic earnings per share:
increased 6.0%, or $0.05, to $0.88 per share;
Diluted earnings per share:
increased 7.4%, or $0.06, to $0.87 per share; and
adjusted diluted earnings per share increased 8.6%, or $0.08, to $0.98 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 quarter of fiscal 2019, illustrated by gross domestic product (GDP) growth of 1.9% during the 2019 calendar third quarter and unemployment remaining at an all-time low. Consumer spending rose 2.9%, signaling that the economy is doing well, despite some broader global concerns; however, this amount is

25



lower than the 4.6% rate that was applicable to the prior quarter. While some other economic indicators have recently been lower than expected, restaurant industry data has not been meaningfully impacted, and we continue to observe positive trends in the food-away-from-home market. During the calendar quarter, according to Black Box Intelligence, restaurant same-store sales rose slightly, driven by average guest check increases. Although traffic in the food industry remains mixed, 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, which appears to be delayed until 2020, affect foodservice and other economic activity. These trends, however, are relatively stable compared to conditions in the prior quarter. In Canada, GDP and consumer spending are stable and unemployment continues to decline, which is reflected in the positive broader restaurant industry performance. In France, GDP growth is expected to continue, household spending has increased and unemployment is trending lower, partially due to labor market reforms.

The beginning of the first quarter of fiscal 2020 had slower sales growth, which began to accelerate in the latter part of the quarter. We believe that this sales growth will continue into the second quarter. Our sales growth during the first quarter of fiscal 2020 was driven by continued growth with our local restaurant customers, partially offset by the continued transition of certain national customers including accounts that we exited during fiscal 2019 from both our U.S. Broadline operations and SYGMA, the divestiture of Iowa Premium, LLC (Iowa Premium) in the fourth quarter of fiscal 2019 and the negative impact of foreign exchange rates. We expect to continue to see the impact of certain customer transitions in the second quarter of fiscal 2020. 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. Meanwhile, inflation is a factor that contributes to the level of sales and gross profit growth. We experienced inflation at a rate of 2.9% within our U.S. Broadline operations during the first quarter of fiscal 2020, primarily in the meat, produce, dairy products and poultry categories. Our sales growth has been stronger in our U.S. Broadline operations, with lower levels of growth experienced in our International businesses, with the exception of our Canadian and Latin American operations. A strengthening U.S. dollar negatively affected total Sysco sales growth by 0.6% and negatively impacted sales growth for our International Foodservice Operations by 3.3% for the first quarter of fiscal 2020, respectively, as we translated our foreign sales due to foreign currency exchange rate changes.

Total operating expenses were flat during the first quarter of fiscal 2020, as compared to the first quarter 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 slightly higher due to our decision to retain driver and warehouse personnel in a tight labor market; however, there are signs of improvement in the labor market. Effective expense management in our International Foodservice Operations segment provided continued benefits from integrations and other initiatives. Our business in France was adversely affected by operational and supply chain challenges arising from our integration efforts with regard to our France operations. We believe these challenges will continue to negatively impact our performance through the remainder of the fiscal year. Although we had strong expense reductions throughout the quarter, we continue to invest in areas of our business that will help facilitate future growth. We continue to make progress in areas that help us streamline work-flow efficiencies while better supporting our customers and helping to support their growth.

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

In the first quarter of fiscal 2020, we acquired, within our U.S. Foodservice Operations, J. Kings Food Service Professionals, a New York broadline distributor with approximately $150 million in annual sales.

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 include:

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.

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.

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
 Sep. 28, 2019 Sep. 29, 2018
Sales100.0% 100.0%
Cost of sales80.8
 80.9
Gross profit19.2
 19.1
Operating expenses14.9
 15.0
Operating income4.3
 4.1
Interest expense0.5
 0.6
Other expense (income), net
 
Earnings before income taxes3.8
 3.5
Income taxes0.8
 0.7
Net earnings3.0% 2.8%


26



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
 Sep. 28, 2019
Sales0.6 %
Cost of sales0.4
Gross profit1.4
Operating expenses
Operating income6.4
Interest expense(6.4)
Other expense (income), net (1)
174.9
Earnings before income taxes8.2
Income taxes19.8
Net earnings5.3 %
Basic earnings per share6.0 %
Diluted earnings per share7.4
Average shares outstanding(1.4)
Diluted shares outstanding(1.9)

(1) 
Other expense (income), net was expense of $3.1 million in the first quarter of fiscal 2020 and income of $1.1 million in the first quarter of fiscal 2019.

The following represents our results by reportable segments:
 13-Week Period Ended Sep. 28, 2019
 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated
Totals
 (In thousands)
Sales$10,658,633
 $2,912,388
 $1,446,994
 $284,990
 $
 $15,303,005
Sales increase (decrease)2.5% (0.3)% (10.8)% 4.2 %   0.6%
Percentage of total69.7% 19.0 % 9.5 % 1.8 %   100.0%
            
Operating income$861,406
 $54,800
 $7,570
 $10,137
 $(265,595) $668,318
Operating income increase (decrease)5.6% (17.9)% 211.4 % (1.9)%   6.4%
Percentage of total segments92.2% 5.9 % 0.8 % 1.1 %   100.0%
Operating income as a percentage of sales8.1% 1.9 % 0.5 % 3.6 %   4.3%

 13-Week Period Ended Sep. 29, 2018
 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated
Totals
 (In thousands)
Sales$10,399,411
 $2,920,950
 $1,621,457
 $273,461
 $
 $15,215,279
Percentage of total68.3% 19.2% 10.7% 1.8%   100.0%
            
Operating income$815,758
 $66,772
 $2,431
 $10,335
 $(267,156) $628,140
Percentage of total segments91.1% 7.5% 0.3% 1.1%   100.0%
Operating income as a percentage of sales7.8% 2.3% 0.1% 3.8%   4.1%

Based on information in Note 15, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 1 of Part I, in the first quarter of fiscal 2020, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 87.5% of Sysco’s overall sales. In the first quarter of fiscal 2020, U.S. Foodservice

27



Operations and International Foodservice Operations collectively represented approximately 98.6% of the total segment operating income. This illustrates that these segments represent the majority of our total segment results when compared to the other reportable segment.

Results of U.S. Foodservice Operations

The following table sets 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 Sep. 28, 2019 13-Week Period Ended Sep. 29, 2018 Change in Dollars % Change
 (Dollars in thousands)
Sales$10,658,633
 $10,399,411
 $259,222
 2.5%
Gross profit2,144,886
 2,090,227
 54,659
 2.6
Operating expenses1,283,480
 1,274,469
 9,011
 0.7
Operating income$861,406
 $815,758
 $45,648
 5.6%
        
Gross profit$2,144,886
 $2,090,227
 $54,659
 2.6%
Adjusted operating expenses (Non-GAAP)1,279,354
 1,274,469
 4,885
 0.4
Adjusted operating income (Non-GAAP)$865,532
 $815,758
 $49,774
 6.1%

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)
 13-Week Period
 (Dollars in millions)
Cause of changePercentage Dollars
Case volume0.5 % $47.1
Inflation3.0
 310.4
Acquisitions0.1
 5.6
Other (1)
(1.1) (103.9)
Total sales increase2.5 % $259.2

(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.” Approximately $114 million of this decrease results from Sysco’s sale of its interest in Iowa Premium in the fourth fiscal quarter of 2019.

Sales for the first quarter of fiscal 2020 were 2.5% higher than the first 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. Broadline operations, including acquisitions within the last 12 months, increased 0.5% in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, and included a 1.5% improvement in locally managed customer case growth, partially offset by a decrease of 0.7% 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 0.1% for the first quarter of fiscal 2020; therefore, organic local case volume, which excludes acquisitions, grew 1.4%. 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.

Operating Income

Operating income increased 5.6% for the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019.


28



Gross profit dollars increased 2.6% in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, driven primarily by higher inflation, growth in local cases, growth in Sysco-branded products, continued category management improvement and changes in our customer mix. The estimated change in product costs, an internal measure of inflation or deflation, for the first quarter of fiscal 2020 for our U.S. Broadline operations was inflation of 2.9%. For the first quarter of fiscal 2020, this change in product costs was primarily driven by inflation in the meat, produce, dairy products and poultry categories. Our Sysco brand sales to local customers and to all customers increased by approximately 20 basis points and 36 basis points for the first quarter of fiscal 2020, respectively. Gross margin, which is gross profit as a percentage of sales, was 20.12% in the first quarter of fiscal 2020, which was an increase of 2 basis points from the gross margin of 20.10% in the first quarter of fiscal 2019, primarily attributable to a continued shift in in our customer mix and continued growth in penetration of our Sysco brand portfolio.

Operating expenses for the first quarter of fiscal 2020 increased 0.7%, or $9.0 million, compared to the first quarter of fiscal 2019. Our operating expense growth is primarily driven by higher labor and operational costs due to our decision to retain driver and warehouse personnel in a tight labor market. An increase in bad debt expense, along with rising fuel costs, contributed to our operating expense growth. 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.

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 Sep. 28, 2019 13-Week Period Ended Sep. 29, 2018 Change in Dollars % Change
 (Dollars in thousands)
Sales$2,912,388
 $2,920,950
 $(8,562) (0.3)%
Gross profit605,185
 615,505
 (10,320) (1.7)
Operating expenses550,385
 548,733
 1,652
 0.3
Operating income$54,800
 $66,772
 $(11,972) (17.9)%
        
Gross profit$605,185
 $615,505
 $(10,320) (1.7)%
Adjusted operating expenses (Non-GAAP)506,204
 520,107
 (13,903) (2.7)
Adjusted operating income (Non-GAAP)$98,981
 $95,398
 $3,583
 3.8 %
        
Sales on a constant currency basis (Non-GAAP)$3,009,537
 $2,920,950
 $88,587
 3.0 %
Gross profit on a constant currency basis (Non-GAAP)628,202
 615,505
 12,697
 2.1
Adjusted operating expenses on a constant currency basis (Non-GAAP)526,891
 520,107
 6,784
 1.3
Adjusted operating income on a constant currency basis (Non-GAAP)$101,311
 $95,398
 $5,913
 6.2 %


29



Sales

The following table sets 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)
 13-Week Period
 (Dollars in millions)
Cause of changePercentage Dollars
Inflation1.8 % $52.5
Acquisitions0.4
 12.6
Foreign currency(3.3) (96.8)
Other (1)
0.8
 23.1
Total sales increase(0.3)% $(8.6)

(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 first quarter of fiscal 2020 were 0.3% lower, as compared to the first quarter 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, partially offset by product cost inflation in Europe and Canada. Canada and Latin America experienced modestly improved performance in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, driven by positive business environments. Sales grew in the U.K. during the first quarter of fiscal 2020, and performance has been stable, despite continuing uncertainty regarding the outcome of Brexit.

Operating Income

Operating income decreased by $12.0 million, or 17.9%, for the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019. Our operating expenses increased during the first quarter of fiscal 2020 due to ongoing regionalization efforts in our Canadian operations. Our business in France was adversely affected by operational and supply chain challenges arising from our integration efforts with regard to our France operations. Restructuring and business transformation charges also negatively affected our U.K. operations. Operating income, on an adjusted basis, increased by $3.6 million, or 3.8%, for the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019. Foreign exchange rates negatively affected operating income by 2.4%, resulting in adjusted operating income increasing 6.2% on a constant currency basis.

Gross profit dollars decreased by 1.7% in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, primarily attributable to changes in foreign exchange rates that negatively affected gross profit by 3.7%, resulting in adjusted gross profit increasing 2.1% on a constant currency basis.

Operating expenses for the first quarter of fiscal 2020 increased 0.3%, or $1.7 million, as compared to the first quarter of fiscal 2019, due to $22.7 million of restructuring and business transformation charges in France and the U.K. during the first quarter of fiscal 2020. We incurred restructuring charges of $4.3 million primarily relating to the ongoing regionalization efforts in our Canadian operations during the first quarter of fiscal 2020. Operating expenses, on an adjusted basis, for the first quarter of fiscal 2020 decreased 2.7%, or $13.9 million, compared to the first quarter of fiscal 2019. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars positively affected operating expenses by 4.0%, resulting in adjusted operating expenses increasing 1.3% on a constant currency basis.

Results of SYGMA and Other Segment

For SYGMA, sales were 10.8% lower in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, primarily from a decline in case volume due to the exit of certain customers during the quarter, as we remain disciplined and focused on improving the profitability of our portfolio of customers. Operating income increased by $5.1 million in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, due to improved gross margins, strong expense management and the closure of a distribution location.


30



For the operations that are grouped within Other, operating income decreased 1.9%, or $0.2 million, in the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019. The decrease was primarily attributable to unfavorable results from our hotel supply operations, partially offset by improved results from Sysco Labs. Guest Supply gross profit decreased 0.6% in the first quarter of fiscal 2020, as the business was negatively impacted by changes in foreign exchange rates and continued cost challenges.

Corporate Expenses

Corporate expenses in the first quarter of fiscal 2020 decreased $3.1 million, or 1.2%, as compared to the first quarter of fiscal 2019, due primarily 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 $9.1 million, or 3.9%, as compared to the first quarter of fiscal 2019.

Included in corporate expenses are Certain Items that totaled $22.7 million in the first quarter of fiscal 2020, as compared to $34.9 million in the first quarter of fiscal 2019. Certain Items impacting the first quarter of fiscal 2020 and the first quarter of fiscal 2019 were primarily expenses associated with our various transformation initiatives. Certain Items in the first quarter of fiscal 2019 also included severance charges.

Interest Expense

Interest expense decreased $5.7 million for the first quarter of fiscal 2020, as compared to the first quarter of fiscal 2019, primarily due to a favorable comparison to the prior year attributable to lower floating interest rates and a lower average balance of fixed rate debt.

Net Earnings

Net earnings increased 5.3% in the first quarter of fiscal 2020, as compared to the first quarter 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 6.5% in the first 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.

Earnings Per Share

Basic earnings per share in the first quarter of fiscal 2020 were $0.88, a 6.0% increase from the comparable prior year period amount of $0.83 per share. Diluted earnings per share in the first quarter of fiscal 2020 were $0.87, a 7.4% increase from the comparable prior year period amount of $0.81 per share. Adjusted diluted earnings per share, excluding Certain Items, in the first quarter of fiscal 2020 were $0.98, an 8.6% increase from the comparable prior year period amount of $0.91 per share. These results were primarily attributable to the factors discussed above related to net earnings in the first quarter of fiscal 2020.

Non-GAAP Reconciliations

Sysco’s results of operations for fiscal 2020 and 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 quarter of fiscal 2020 and 2019 that have been designated as Certain Items relate to the Brakes Acquisition. These include acquisition-related intangible amortization expense. In addition, first quarter 2019 results of operations were impacted by acquisition-related integration costs specific to the Brakes Acquisition. Sysco’s results of operations for the first quarter of fiscal 2020 were also impacted by changes in foreign statutory tax rates.

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,

31



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.

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 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 Sep. 28, 2019 13-Week Period Ended Sep. 29, 2018 Change in Dollars % Change
 (Dollars in thousands, except for per share data)
Operating expenses (GAAP)$2,275,052
 $2,275,645
 $(593) NM
Impact of restructuring and transformational project costs (1)
(56,722) (40,903) (15,819) 38.7
Impact of acquisition-related costs (2)
(16,909) (22,636) 5,727
 (25.3)
Operating expenses adjusted for Certain Items (Non-GAAP)$2,201,421
 $2,212,106
 $(10,685) (0.5)%
        
Operating income (GAAP)$668,318
 $628,140
 $40,178
 6.4 %
Impact of restructuring and transformational project costs (1)
56,722
 40,903
 15,819
 38.7
Impact of acquisition-related costs (2)
16,909
 22,636
 (5,727) (25.3)
Operating income adjusted for Certain Items (Non-GAAP)$741,949
 $691,679
 $50,270
 7.3 %
        
Net earnings (GAAP)$453,781
 $431,042
 $22,739
 5.3 %
Impact of restructuring and transformational project costs (1)
56,722
 40,903
 15,819
 38.7
Impact of acquisition-related costs (2)
16,909
 22,636
 (5,727) (25.3)
Tax impact of restructuring and transformational project costs (3)
(13,921) (10,674) (3,247) 30.4
Tax impact of acquisition-related costs (3)
(4,149) (4,691) 542
 (11.6)
Impact of French tax rate change924
 
 924
 NM
Net earnings adjusted for Certain Items (Non-GAAP)$510,266
 $479,216
 $31,050
 6.5 %
        
Diluted earnings per share (GAAP)$0.87
 $0.81
 $0.06
 7.4 %
Impact of restructuring and transformational project costs (1)
0.11
 0.08
 0.03
 37.5
Impact of acquisition-related costs (2)
0.03
 0.04
 (0.01) (25.0)
Tax impact of restructuring and transformational project costs (3)
(0.03) (0.02) (0.01) 50.0
Tax impact of acquisition-related costs (3)
(0.01) (0.01) 
 NM
Diluted EPS adjusted for Certain Items (Non-GAAP) (4)
$0.98
 $0.91
 $0.08
 8.6 %
 

(1) 
Fiscal 2020 includes $30 million related to restructuring, facility closure and severance charges and $27 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2019 includes $26 million related to various transformation initiative costs and $15 million related to severance, restructuring and facility closure charges.
(2) 
Fiscal 2020 and fiscal 2019 include $17 million and $21 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of Brakes. Fiscal 2019 includes $1 million in integration costs.
(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.

32



(4) 
Individual components of diluted earnings per share may not add 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.

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 Sep. 28, 2019 13-Week Period Ended Sep. 29, 2018 Change in Dollars % Change
U.S. FOODSERVICE OPERATIONS       
Operating expenses (GAAP)$1,283,480
 $1,274,469
 $9,011
 0.7 %
Impact of restructuring and transformational project costs (1)
(4,126) 
 (4,126) NM
Operating expenses adjusted for Certain Items (Non-GAAP)$1,279,354
 $1,274,469
 $4,885
 0.4 %
        
Operating income (GAAP)$861,406
 $815,758
 $45,648
 5.6 %
Impact of restructuring and transformational project costs (1)
4,126
 
 4,126
 NM
Operating income adjusted for Certain Items (Non-GAAP)$865,532
 $815,758
 $49,774
 6.1 %
        
INTERNATIONAL FOODSERVICE OPERATIONS       
Sales (GAAP)$2,912,388
 $2,920,950
 $(8,562) (0.3)%
Unfavorable impact of currency fluctuations (2)
97,149
 
 97,149
 3.3
Comparable sales using a constant currency basis (Non-GAAP)$3,009,537
 $2,920,950
 $88,587
 3.0 %
        
Gross Profit (GAAP)$605,185
 $615,505
 $(10,320) (1.7)%
Unfavorable impact of currency fluctuations (2)
23,017
 
 23,017
 3.7
Comparable gross profit using a constant currency basis (Non-GAAP)$628,202
 $615,505
 $12,697
 2.1 %
        
Operating expenses (GAAP)$550,385
 $548,733
 $1,652
 0.3 %
Impact of restructuring and transformational project costs (3)
(27,272) (6,727) (20,545) NM
Impact of acquisition-related costs (4)
(16,909) (21,899) 4,990
 (22.8)
Operating expenses adjusted for Certain Items (Non-GAAP)$506,204
 $520,107
 $(13,903) (2.7)%
Favorable impact of currency fluctuations (2)
20,687
 
 20,687
 4.0
Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)$526,891
 $520,107
 $6,784
 1.3 %
        
Operating income (GAAP)$54,800
 $66,772
 $(11,972) (17.9)%
Impact of restructuring and transformational project costs (3)
27,272
 6,727
 20,545
 NM
Impact of acquisition related costs (4)
16,909
 21,899
 (4,990) (22.8)
Operating income adjusted for Certain Items (Non-GAAP)$98,981
 $95,398
 $3,583
 3.8 %
Unfavorable impact of currency fluctuations (2)
2,330
 
 2,330
 2.4
Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP)$101,311
 $95,398
 $5,913
 6.2 %
        
SYGMA       
Operating expenses (GAAP)$118,348
 $126,895
 $(8,547) (6.7)%
Impact of restructuring and transformational project costs (5)
(2,585) 
 (2,585) NM
Operating expenses adjusted for Certain Items (Non-GAAP)$115,763
 $126,895
 $(11,132) (8.8)%
        
Operating income (GAAP)$7,570
 $2,431
 $5,139
 NM

33



Impact of restructuring and transformational project costs (5)
2,585
 
 2,585
 NM
Operating income adjusted for Certain Items (Non-GAAP)$10,155
 $2,431
 $7,724
 NM
        
CORPORATE       
Operating expenses (GAAP)$261,232
 $264,348
 $(3,116) (1.2)%
Impact of restructuring and transformational project costs (6)
(22,739) (34,176) 11,437
 (33.5)
Impact of acquisition-related costs (7)

 (737) 737
 NM
Operating expenses adjusted for Certain Items (Non-GAAP)$238,493
 $229,435
 $9,058
 3.9 %
        
Operating income (GAAP)$(265,595) $(267,156) $1,561
 (0.6)%
Impact of restructuring and transformational project costs (6)
22,739
 34,176
 (11,437) (33.5)
Impact of acquisition-related costs (7)

 737
 (737) NM
Operating income adjusted for Certain Items (Non-GAAP)$(242,856) $(232,243) $(10,613) 4.6 %

(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 include $17 million and $21 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 and severance charges related to restructuring.
(7) 
Fiscal 2019 included $1 million in integration costs from the Brakes Acquisition.
NM represents that the percentage change is not meaningful.

34




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 target that we expect to achieve by the end of fiscal 2020 under our three-year plan. Our three-year plan further includes target amounts for adjusted net earnings and adjusted diluted earnings per share. Due to uncertainties in projecting Certain Items, we cannot provide a quantitative reconciliation of these non-GAAP measures to the most directly comparable GAAP measures without unreasonable effort. However, we would expect to calculate these adjusted results, if applicable, in the same manner as the reconciliations provided for historical periods presented herein. The impact of future Certain Items could cause projected non-GAAP amounts to differ significantly from our GAAP results.

Liquidity and Capital Resources

Highlights

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

Cash flows from operations were $171.6 million in fiscal 2020, compared to $271.1 million in fiscal 2019;
Net capital expenditures totaled $170.8 million in fiscal 2020, compared to $100.5 million in fiscal 2019;
Free cash flow was $0.8 million in fiscal 2020, compared to free cash flow of $170.7 million in fiscal 2019 (see below under the heading “Free Cash Flow” for an explanation of this non-GAAP financial measure);
There were $533.4 million of commercial paper issuances and net bank borrowings in fiscal 2020, compared to no commercial paper issuances and net bank borrowings in fiscal 2019;
Dividends paid were $200.0 million in fiscal 2020, compared to $187.2 million in fiscal 2019; and
Cash paid for treasury stock repurchases was $349.3 million in fiscal 2020, compared to $204.6 million in fiscal 2019.

35




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
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 September 28, 2019, we had $455.5 million in cash and cash equivalents, approximately 40% of which was held by our international subsidiaries and generated from our earnings of international operations. If these earnings were transferred among countries or repatriated to the U.S., such amounts may be 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 September 28, 2019, the Captive held $122.1 million of fixed income marketable securities and $58.9 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased $4.0 million in marketable securities in fiscal 2020 and received $3.0 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.


36



Cash Flows

Operating Activities

We generated $171.6 million in cash flows from operations in the first quarter of fiscal 2020, compared to cash flows of $271.1 million in the first quarter of fiscal 2019. These amounts include year-over-year unfavorable comparisons on working capital, partially offset by higher operating results.

Changes in working capital, specifically accounts payable and accounts receivable, had a negative impact of $128.1 million on cash flow from operations period-over-period. There was an unfavorable comparison on accounts payable and accounts receivable, which was partially offset by a favorable comparison on inventory. During the first quarter of fiscal 2020, working capital was primarily impacted by an increase in receivables.

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 Storm Imelda, our tax payments will not be made until our third quarter of fiscal 2020, resulting in a one quarter deferral of approximately $200 million to $250 million.

Investing Activities

Our capital expenditures in the first quarter of fiscal 2020 primarily consisted of fleet, technology equipment, warehouse equipment and facility replacements and expansions. Our capital expenditures in the first quarter of fiscal 2020 were higher by $71.4 million, as compared to the first quarter of fiscal 2019, primarily due to timing of capital spend in the first quarter of fiscal 2019.

During the first quarter of fiscal 2020, we paid $74.8 million, net of cash acquired, for acquisitions. There were no such acquisitions made in the first quarter 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 quarter of fiscal 2020 decreased by $169.9 million, to $0.8 million, as compared to the first quarter of fiscal 2019, principally as a result of a year-over-year decrease in cash flows from operations and increased capital expenditures.

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.
 13-Week Period Ended Sep. 28, 2019 13-Week Period Ended Sep. 29, 2018
 (In thousands)
Net cash provided by operating activities (GAAP)$171,579
 $271,145
Additions to plant and equipment(175,728) (104,322)
Proceeds from sales of plant and equipment4,902
 3,839
Free Cash Flow (Non-GAAP)$753
 $170,662


37



Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $85.3 million in the first quarter of fiscal 2020, as compared to $84.4 million in the first quarter 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 4.6 million shares for $349.3 million during the first quarter of fiscal 2020, compared to 2.8 million shares repurchased in the first quarter of fiscal 2019 for $204.6 million. We repurchased approximately 1.1 million additional shares for $83.9 million through October 18, 2019, resulting in a remaining authorization of approximately $2.6 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.

Dividends paid in the first quarter of fiscal 2020 were $200.0 million, or $0.39 per share, as compared to $187.2 million, or $0.36 per share, in the first quarter of fiscal 2019. In July 2019, we declared our regular quarterly dividend for the first quarter of fiscal 2020 of $0.39 per share, which was paid in October 2019.

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 September 28, 2019, and repayment activity since the close of the first quarter of fiscal 2020, are disclosed within that note. Updated amounts through October 18, 2019, include:

$820.2 million outstanding from our commercial paper program; and
No amounts outstanding from the credit facility supporting the company’s U.S. commercial paper program.

During the first quarter of fiscal 2020 and 2019, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 2.31% and 2.17%, 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,”

38



“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;
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 $600 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 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;
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 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.


39



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;
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;

40



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;
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 anticipated exit from the European Union (EU), 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 September 28, 2019, there was $665.4 million in aggregate commercial paper issuances outstanding. Total debt as of September 28, 2019 was $8.7 billion, of which approximately 65% 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-

41



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 quarter 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 of September 28, 2019, we had diesel fuel swaps with a total notional amount of approximately 55 million gallons through September 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 September 28, 2019, we had diesel fuel swaps with a total notional amount of approximately 17 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 September 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 September 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 September 28, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42



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 anticipated exit from the EU (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 U.K. is currently negotiating the terms of Brexit. In November 2018, the U.K. and the EU agreed upon a draft Withdrawal Agreement that set out the terms governing the U.K.’s departure, including, among other things, a transition period to allow for a future trade deal to be agreed upon. After the U.K. Parliament rejected the draft Withdrawal Agreement multiple times during the third quarter of fiscal 2019, the EU agreed to an extension of the exit date to October 31, 2019. In October 2019, after the U.K. Parliament failed to ratify a renegotiated draft Withdrawal Agreement, the U.K. Government requested, and the EU agreed to, a further extension of the exit date to January 31, 2020. Meanwhile, U.K. Prime Minister Boris Johnson has called a general election for December 12, 2019, in an effort to obtain a Parliamentary majority that would ratify the renegotiated draft Withdrawal Agreement. Some smaller political parties continue to push for Brexit to be abandoned, however. The further extension is a so-called “flex-tension”, meaning that if the Prime Minister is able to secure agreement to a Withdrawal Agreement before the end of December 2019 (and the Withdrawal Agreement is ratified by the European Parliament within this time), the U.K. could leave the EU before January 31, 2020. As a result, there continues to be significant uncertainty about the terms and timing under which the U.K. will leave the EU. 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 U.K. were to leave the EU without an agreement (a “hard 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, which contracted in the second quarter of 2019 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 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.

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

Recent Sales of Unregistered Securities

None

43




Issuer Purchases of Equity Securities

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares Purchased (1)
 (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1       
June 30 – July 2721,788
 $70.55
 20,549
 
Month #2       
July 28 – August 24699,282
 73.09
 697,912
 
Month #3       
August 25 – September 283,897,225
 76.33
 3,889,484
 
Totals4,618,295
 $75.81
 4,607,945
 

(1) 
The total number of shares purchased includes 1,239, 1,370 and 7,741 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. 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. These repurchase programs are 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 programs were 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 4.6 million shares during the first quarter of fiscal 2020 and purchased approximately 1.1 million additional shares under these authorizations through October 18, 2019, resulting in a remaining authorization under these programs of approximately $2.6 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.

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.

44



EXHIBIT INDEX
3.1
   
3.2
   
3.3
   
3.4
   
10.1†#
   
10.2†
   
10.3†
   
10.4†
   
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
   
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
___________
† Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K
# Filed herewith

45



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: November 4, 2019By:/s/ THOMAS L. BENÉ
  Thomas L. Bené
  Chairman, President and Chief Executive Officer
   
Date: November 4, 2019By:/s/ JOEL T. GRADE
  Joel T. Grade
  Executive Vice President and
  Chief Financial Officer
   
Date: November 4, 2019By:/s/ ANITA A. ZIELINSKI
  Anita A. Zielinski
  Senior Vice President and
  Chief Accounting Officer

46