UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 1, 2006

OR

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

For the transition period from                      to                     

Commission file number 1-6544

SYSCO CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-1648137 (IRS employer identification number)

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

Registrant’s telephone number, including area code: (281) 584-1390

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ		Accelerated Filer o		Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No þ

618,528,798 shares of common stock were outstanding as of April 29, 2006.

 

 

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			36
Part II. Other Information
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			38
Signatures			41
First Amendment to the Sixth Amended Supplemental Executive Retirement Plan
Description of Compensation Arrangement with Colin Campbell
Report from Ernst & Young LLP
Acknowledgment letter from Ernst & Young LLP
CEO Certification pursuant to Section 302
CFO Certification pursuant to Section 302
CEO Certification pursuant to Section 906
CFO Certification pursuant to Section 906

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands Except for Share Data)

		Apr. 1, 2006				July 2, 2005				Apr. 2, 2005
		(unaudited)								(unaudited)
ASSETS
Current assets
Cash		$	205,605			$	191,678			$	199,518
Accounts and notes receivable, less allowances of $62,012, $29,604 and $64,604			2,467,308				2,284,033				2,242,837
Inventories			1,601,250				1,466,161				1,490,305
Prepaid expenses			72,049				59,914				63,482
Total current assets			4,346,212				4,001,786				3,996,142
Plant and equipment at cost, less depreciation			2,399,345				2,268,301				2,247,555
Other assets
Goodwill			1,292,527				1,212,603				1,209,362
Intangibles, less amortization			97,733				72,581				59,265
Restricted cash			103,301				101,731				185,233
Prepaid pension cost			408,183				389,766				272,266
Other assets			236,787				221,134				197,413
Total other assets			2,138,531				1,997,815				1,923,539
Total assets		$	8,884,088			$	8,267,902			$	8,167,236
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable		$	12,000			$	63,998			$	73,043
Accounts payable			1,839,477				1,795,824				1,770,379
Accrued expenses			736,798				742,282				698,135
Income taxes			47,647				10,195				114,170
Deferred taxes			346,980				434,338				312,357
Current maturities of long-term debt			208,570				410,933				365,755
Total current liabilities			3,191,472				3,457,570				3,333,839
Other liabilities
Long-term debt			1,787,155				956,177				1,032,822
Deferred taxes			692,176				724,929				705,918
Other long-term liabilities			413,455				370,387				278,877
Total other liabilities			2,892,786				2,051,493				2,017,617
Contingencies
Shareholders’ equity
Preferred stock, par value $1 per share
Authorized 1,500,000 shares, issued none			—				—				—
Common stock, par value $1 per share
Authorized 2,000,000,000 shares, issued 765,174,900 shares			765,175				765,175				765,175
Paid-in capital			498,322				389,053				377,067
Retained earnings			4,849,518				4,552,379				4,362,360
Other comprehensive income (loss)			19,870				(13,677	)			45,928
			6,132,885				5,692,930				5,550,530
Less cost of treasury stock, 146,967,829, 136,607,370 and 132,144,351 shares			3,333,055				2,934,091				2,734,750
Total shareholders’ equity			2,799,830				2,758,839				2,815,780
Total liabilities and shareholders’ equity		$	8,884,088			$	8,267,902			$	8,167,236

Note: The July 2, 2005 balance sheet has been derived from the audited financial statements at that date.
See Notes to Consolidated Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In Thousands Except for Share and Per Share Data)

		39-Week Period Ended								13-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Sales		$	24,119,361			$	22,300,635			$	8,137,816			$	7,437,453
Costs and expenses
Cost of sales			19,517,648				18,060,611				6,602,102				6,032,165
Operating expenses			3,541,395				3,112,808				1,193,270				1,052,477
Interest expense			80,914				55,616				29,441				20,151
Other, net			(6,154	)			(6,581	)			(819	)			(2,919	)
Total costs and expenses			23,133,803				21,222,454				7,823,994				7,101,874
Earnings before income taxes and cumulative effect of accounting change			985,558				1,078,181				313,822				335,579
Income taxes			393,627				401,404				125,283				117,359
Earnings before cumulative effect of accounting change			591,931				676,777				188,539				218,220
Cumulative effect of accounting change			9,285				—				—				—
Net earnings		$	601,216			$	676,777			$	188,539			$	218,220
Earnings before cumulative effect of accounting change:
Basic earnings per share		$	0.95			$	1.06			$	0.30			$	0.34
Diluted earnings per share			0.94				1.04				0.30				0.34
Net earnings:
Basic earnings per share			0.97				1.06				0.30				0.34
Diluted earnings per share			0.95				1.04				0.30				0.34
Average shares outstanding			621,995,157				637,487,017				618,973,143				635,654,561
Diluted shares outstanding			629,661,119				653,057,150				625,101,592				650,753,697
Dividends declared per common share		$	0.49			$	0.43			$	0.17			$	0.15

See Notes to Consolidated Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)

		39-Week Period Ended								13-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Net earnings		$	601,216			$	676,777			$	188,539			$	218,220
Other comprehensive income, net of tax:
Foreign currency translation adjustment			26,257				29,849				(2,217	)			(5,324	)
Change in fair value of forward-starting interest rate swap			7,064				(1,561	)			—				(1,561	)
Amortization of cash flow hedge			226				—				107				—
Total other comprehensive income (loss)			33,547				28,288				(2,110	)			(6,885	)
Comprehensive income		$	634,763			$	705,065			$	186,429			$	211,335

See Notes to Consolidated Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In Thousands)

		39-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005
Operating activities:
Net earnings		$	601,216			$	676,777
Add non-cash items:
Cumulative effect of accounting change			(9,285	)			—
Share-based compensation expense			101,944				15,779
Depreciation and amortization			251,955				230,964
Deferred tax provision			365,548				383,852
Provision for losses on receivables			22,508				21,873
Additional investment in certain assets and liabilities, net of effect of businesses acquired:
(Increase) in receivables			(158,778	)			(48,948	)
(Increase) in inventories			(118,535	)			(69,578	)
(Increase) in prepaid expenses			(11,333	)			(8,080	)
Increase in accounts payable			11,452				7,967
Increase (decrease) in accrued expenses			15,387				(54,004	)
(Decrease) in accrued income taxes			(449,976	)			(342,831	)
(Increase) in other assets			(22,038	)			(10,245	)
Increase in other long-term liabilities and prepaid pension cost, net			39,724				17,743
Excess tax benefits from share-based compensation Arrangements			(5,484	)			—
Net cash provided by operating activities			634,305				821,269
Investing activities:
Additions to plant and equipment			(364,421	)			(304,400	)
Proceeds from sales of plant and equipment			14,913				17,059
Acquisition of businesses, net of cash acquired			(109,423	)			(49,485	)
Increase in restricted cash			(1,570	)			(16,584	)
Net cash used for investing activities			(460,501	)			(353,410	)
Financing activities:
Bank and commercial paper borrowings (repayments), net			282,460				(725	)
Other debt borrowings			500,436				8,965
Other debt repayments			(209,625	)			(12,123	)
Cash (paid for) received from termination of interest rate swap			(21,196	)			5,316
Common stock reissued from treasury			104,782				150,467
Treasury stock purchases			(527,616	)			(354,078	)
Dividends paid			(293,535	)			(261,974	)
Excess tax benefits from share-based compensation arrangements			5,484				—
Net cash used for financing activities			(158,810	)			(464,152	)
Effect of exchange rates on cash			(1,067	)			(3,895	)
Net increase (decrease) in cash			13,927				(188	)
Cash at beginning of period			191,678				199,706
Cash at end of period		$	205,605			$	199,518
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	80,064			$	50,136
Income taxes			472,063				357,135

See Notes to Consolidated Financial Statements

SYSCO CORPORATION and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.		Basis of Presentation

		The consolidated financial statements have been prepared by the company, without audit, with the exception of the July 2, 2005 consolidated balance sheet which was taken from the audited financial statements included in the company’s Fiscal 2005 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations and consolidated cash flows. Certain amounts in the prior periods presented have been reclassified to conform to the fiscal 2006 presentation. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made.

		These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company’s Fiscal 2005 Annual Report on Form 10-K.

		A review of the financial information herein has been made by Ernst & Young LLP, independent auditors, in accordance with established professional standards and procedures for such a review. A report from Ernst & Young LLP concerning their review is included as Exhibit 15(a).

2.		Change in Accounting

		Beginning in fiscal 2006, SYSCO changed the measurement date for the pension and other postretirement benefit plans from fiscal year-end to May 31st, which represents a change in accounting. The one-month acceleration of the measurement date will allow additional time for management to evaluate and report the actuarial pension measurements in the year-end financial statements and disclosures within the accelerated filing deadlines of the Securities and Exchange Commission. The cumulative effect of this change in accounting resulted in an increase to earnings in the first quarter of fiscal 2006 of $9,285,000, net of tax.

		Pro forma net earnings and earnings per share adjusted for the effect of retroactive application of the change in measurement date on net pension costs, net of tax, are as follows:

		39-Week Period Ended				13-Week Period Ended
		Apr. 2, 2005				Apr. 2, 2005
Reported net earnings		$	676,777,000			$	218,220,000
Retroactive effect, net of tax			4,336,000				1,445,000
Pro forma net earnings		$	681,113,000			$	219,665,000
Basic earnings per share:
Reported net earnings		$	1.06			$	0.34
Retroactive effect, net of tax			0.01				0.01
Pro forma net earnings		$	1.07			$	0.35
Diluted earnings per share:
Reported net earnings		$	1.04			$	0.34
Retroactive effect, net of tax			—				—
Pro forma net earnings		$	1.04			$	0.34

3.		Earnings Per Share

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

		39-Week Period Ended								13-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Numerator:
Earnings before cumulative effect of accounting change		$	591,931,000			$	676,777,000			$	188,539,000			$	218,220,000
Cumulative effect of accounting change			9,285,000				—				—				—
Net earnings		$	601,216,000			$	676,777,000			$	188,539,000			$	218,220,000
Denominator:
Weighted-average basic shares outstanding			621,995,157				637,487,017				618,973,143				635,654,561
Dilutive effect of employee and director stock options			7,665,962				15,570,133				6,128,449				15,099,136
Weighted-average diluted shares outstanding			629,661,119				653,057,150				625,101,592				650,753,697
Basic earnings per share:
Earnings before cumulative effect of accounting change		$	0.95			$	1.06			$	0.30			$	0.34
Cumulative effect of accounting change			0.02				—				—				—
Net earnings		$	0.97			$	1.06			$	0.30			$	0.34
Diluted earnings per share:
Earnings before cumulative effect of accounting change		$	0.94			$	1.04			$	0.30			$	0.34
Cumulative effect of accounting change			0.01				—				—				—
Net earnings		$	0.95			$	1.04			$	0.30			$	0.34

		The net reduction in average shares outstanding is primarily due to share repurchases. The net reduction in diluted shares outstanding is primarily due to share repurchases, the exclusion of certain options from the diluted share calculation due to their anti-dilutive effect and a modification of the treasury stock method calculation utilized to compute the dilutive effect of stock options as a result of the adoption of SFAS 123(R). This modification results in lower diluted shares outstanding than would have been calculated had compensation cost not been recorded for stock options and stock issuances under the Employees’ Stock Purchase Plan.

		The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 25,000,000 and 35,000,000 for the first 39 weeks and third quarter of fiscal 2006, respectively. The number of options that were not included in the diluted earnings per share calculation for the comparable periods of fiscal 2005 was insignificant.

4.		Share-Based Compensation

		Prior to July 3, 2005, SYSCO accounted for its stock option plans and its Employees’ Stock Purchase Plan using the intrinsic value method of accounting provided under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) under which no compensation expense was recognized for stock option grants and issuances of stock pursuant to the Employees’ Stock Purchase Plan. However, share-based compensation expense was recognized in periods prior to fiscal 2006 (and continues to be recognized) for stock issuances pursuant to the Management Incentive Plans and stock grants to non-employee directors. Share-based compensation was a pro forma disclosure in the financial statement footnotes and continues to be provided for periods prior to fiscal 2006.

		Effective July 3, 2005, SYSCO adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment,” (SFAS 123(R)) using the modified-prospective transition method. Under this transition method, compensation cost recognized in fiscal 2006 includes: a) compensation cost for all share-based payments granted through July 2, 2005, but for which the requisite service period had not been completed as of July 2, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and b) compensation cost for all share-based payments granted subsequent to July 2, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

		As a result of adopting SFAS 123(R) on July 3, 2005, SYSCO’s earnings before income taxes and net earnings for the 39-week period ended April 1, 2006 were $90,918,000 and $80,867,000 lower, respectively, than if the company had continued to account for share-based compensation under APB 25. Basic and diluted earnings before the cumulative effect of the accounting change per share for the 39-week period ended April 1, 2006 would have been $1.08 and $1.07, respectively, if the company had not adopted SFAS 123(R), compared to reported basic and diluted earnings before the cumulative effect of the accounting change per share of $0.95 and $0.94, respectively.

		As a result of adopting SFAS 123(R) on July 3, 2005, SYSCO’s earnings before income taxes and net earnings for the 13-week period ended April 1, 2006 were $26,108,000 and $23,918,000 lower, respectively, than if the company had continued to account for share-based compensation under APB 25. Basic and diluted earnings before the cumulative effect of the accounting change per share for the 13-week period ended April 1, 2006 would have

		each been $0.34 if the company had not adopted SFAS 123(R), compared to reported basic and diluted earnings before the cumulative effect of the accounting change per share of $0.30 each.

		The adoption of SFAS 123(R) results in lower diluted shares outstanding than would have been calculated had compensation cost not been recorded for stock options and stock issuances under the Employees’ Stock Purchase Plan. This is due to a modification required by SFAS 123(R) of the treasury stock method calculation utilized to compute the dilutive effect of stock options.

		Prior to the adoption of SFAS 123(R), the company presented all tax benefits of deductions resulting from the exercise of options as operating cash flows in the Consolidated Cash Flow statement. SFAS 123(R) requires the cash flows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $5,484,000 excess tax benefit classified as a financing cash inflow for the 39-week period ended April 1, 2006 would have been classified as an operating cash inflow if the Company had not adopted SFAS 123(R).

		SYSCO provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, the Employees’ Stock Purchase Plan, the Management Incentive Plans and the 2005 Non-Employee Directors Stock Plan.

		Stock Option Plans

		SYSCO’s 2004 Stock Option Plan was adopted in fiscal 2005 and reserves 23,500,000 shares of SYSCO common stock for grants of options and dividend equivalents to directors, officers and other employees of the company and its subsidiaries at the market price at the date of grant. This plan provides for the issuance of options qualified as incentive stock options under the Internal Revenue Code of 1986, options which are non-qualified, and dividend equivalents. To date, SYSCO has only issued options under this plan. Vesting requirements for awards under this plan will vary by individual grant and may include either time-based vesting or time-based vesting subject to acceleration based on performance criteria. The contractual life of all options granted under this plan will be no greater than seven years.

		SYSCO has also granted employee options under several previous employee stock option plans for which previously granted options remain outstanding at April 1, 2006. No new options will be issued under any of the prior plans, as future grants to employees will be made through the 2004 Stock Option Plan or subsequently adopted plans. Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or time-based vesting subject to acceleration based on performance criteria. The contractual life of all options granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years.

		SYSCO’s 2005 Non-Employee Directors Stock Plan was adopted in fiscal 2006 and reserves 550,000 shares of common stock for grants to non-employee directors in the form of options, stock grants, restricted stock units and dividend equivalents. In addition, options and unvested common shares also remained outstanding as of April 1, 2006 under previous non-employee director stock plans. No further grants will be made under these plans, as all future grants to non-employee directors will be made through the 2005 Non-Employee Directors Stock Plan or subsequently adopted plans. Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or time-based vesting subject to acceleration based on performance criteria. The contractual life of all options

		granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years.

		Certain of SYSCO’s option awards are generally subject to graded vesting over a service period. In those cases, SYSCO recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. In other cases, certain of SYSCO’s option awards provide for graded vesting over a service period but include a performance-based provision allowing for accelerated vesting. In these cases, if it is probable that the performance condition will be met, SYSCO recognizes compensation cost on a straight-line basis over the shorter performance period; otherwise, it will recognize compensation cost over the longer service period.

		In addition, certain of SYSCO’s options provide that if the optionee retires and meets certain age and years of service thresholds, the options continue to vest as if the optionee continued to be an employee. In these cases, for awards granted through July 2, 2005, SYSCO will recognize the compensation cost for such awards over the service period and accelerate any remaining unrecognized compensation cost when the employee retires. For awards granted subsequent to July 2, 2005, SYSCO will recognize compensation cost for such awards over the period from the grant date to the date the employee first becomes eligible to retire with the options continuing to vest after retirement.

		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 assumptions for the periods indicated are noted in the following table. Expected volatility is based on historical volatility of SYSCO’s stock, implied volatilities from traded options on SYSCO’s stock and other factors. SYSCO utilizes historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

		39-Week Period Ended				Fiscal Year
		April 1, 2006				2005
Dividend yield			1.40	%			1.45	%
Expected volatility			23	%			22	%
Risk-free interest rate			3.9	%			3.4	%
Expected term		5		years	5			years

The following summary presents information regarding outstanding options as of April 1, 2006 and changes during the 39-week period then ended with regard to options under all stock option plans:

										Weighted Average
		Shares				Weighted				Remaining				Aggregate
		Under				Average Exercise				Contractual				Intrinsic
		Option				Price Per Share				Term				Value
Outstanding at July 2, 2005			65,963,380			$	27.82
Granted			4,859,000				32.99
Exercised			(3,371,999	)			21.14
Forfeited			(785,174	)			28.81
Expired			(179,773	)			30.05
Outstanding at April 1, 2006			66,485,434			$	28.52				5.79			$	241,469,000
Vested or expected to vest at April 1, 2006			63,962,248			$	28.40				5.77			$	239,185,000
Exercisable at April 1, 2006			36,023,126			$	26.47				5.40			$	201,119,000

The weighted average grant-date fair value of options granted during the 39-week period ended April 1, 2006 and fiscal year 2005 was $7.83 and $7.12, respectively. The total intrinsic value of options exercised during the 39 weeks ended April 1, 2006 and fiscal year 2005 was $41,274,000 and $81,220,000, respectively.

Employees’ Stock Purchase Plan

SYSCO has an Employees’ Stock Purchase Plan which permits employees to invest in SYSCO common stock by means of periodic payroll deductions at 85% of the closing price on the last business day of each calendar quarter. The total number of shares which may be sold pursuant to the plan may not exceed 68,000,000 shares, of which 5,348,988 remained available at April 1, 2006.

During the 39 weeks ended April 1, 2006, 1,386,124 shares of SYSCO common stock were purchased by plan participants. During fiscal 2005, 1,712,244 shares of SYSCO common stock were purchased by plan participants.

The weighted average fair value of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $4.91 during the 39-week period ended April 1, 2006 and $5.19 during fiscal 2005. The fair value of the stock purchase rights was calculated as the difference between the stock price and the employee purchase price.

Management Incentive Compensation

In November 2005, SYSCO adopted the 2005 Management Incentive Plan. The first bonus under the 2005 Plan will be earned during fiscal 2007 (at which time no further bonuses will be earned under the 2000 Management Incentive Plan) and paid in the following fiscal year.

SYSCO’s Management Incentive Plans compensate key management personnel for specific performance achievements. The bonuses earned and expensed under these plans during a fiscal year are paid in the following fiscal year in both cash and stock, and a portion of the bonus may be deferred for payment in future years at the election of each participant. The stock awards under these plans immediately vest upon issuance; however, participants are restricted from selling, transferring, giving or otherwise conveying the shares for a period of two years from the date of issuance of such shares. The fair value of the stock issued under the Management Incentive Plans is based on the stock price less a 12% discount for post-vesting restrictions. The discount for post-vesting restrictions is estimated based on restricted

stock studies and by calculating the cost of a hypothetical protective put option over the restriction period.

A total of 617,637 shares and 1,001,624 shares at a fair value of $36.25 and $34.80 were issued pursuant to this plan during the first quarter of fiscal 2006 and fiscal 2005, respectively, for bonuses earned in the preceding fiscal years.

Non-Employee Director Stock Grants

Each newly elected director is granted a one-time retainer award of 6,000 shares of SYSCO common stock under the 2005 Non-Employee Directors Stock Plan. These shares vest one-third every two years during a six-year period based on increases in earnings per share. In addition, there are one-time retainer awards outstanding under the Non-Employee Directors Stock Plan, which was replaced by the 2005 Non-Employee Directors Stock Plan. The total amount of unvested shares related to the one-time retainer awards as of April 1, 2006 and July 2, 2005 was not significant.

The 2005 Non-Employee Directors Stock Plan provides for the issuance of restricted stock. During the first 39 weeks of fiscal 2006, 27,000 shares of restricted stock were granted to non-employee directors. These shares will vest ratably over a three-year period.

All Share-Based Payment Arrangements

The total share-based compensation cost that has been recognized in results of operations was $101,944,000 and $15,779,000 for the first 39 weeks of fiscal 2006 and fiscal 2005, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $14,186,000 and $5,957,000 for the first 39 weeks of fiscal 2006 and fiscal 2005, respectively.

The total share-based compensation cost that has been recognized in results of operations was $27,776,000 and $4,082,000 for the third quarter of fiscal 2006 and fiscal 2005, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $2,816,000 and $1,541,000 for the third quarter of fiscal 2006 and fiscal 2005, respectively.

As of April 1, 2006, there was $136,100,000 of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.73 years.

Cash received from option exercises was $77,123,000 and $85,747,000 during the first 39 weeks of fiscal 2006 and fiscal 2005, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $10,741,000 and $13,226,000 during the first 39 weeks of fiscal 2006 and fiscal 2005, respectively.

Pro Forma Net Earnings

The following table provides pro forma net earnings and earnings per share had SYSCO applied the fair value method of SFAS 123 for the 39-week and 13-week periods ended April 2, 2005:

		39-Week Period Ended				13-Week Period Ended
		Apr. 2, 2005				Apr. 2, 2005
Net earnings:
Reported net earnings		$	676,777,000			$	218,220,000
Add: Stock-based employee compensation expense included in reported earnings, net of related tax effects (1)			9,822,000				2,541,000
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(75,807,000	)			(24,536,000	)
Pro forma net earnings		$	610,792,000			$	196,225,000
Basic earnings per share:
Reported basic earnings per share		$	1.06			$	0.34
Pro forma basic earnings per share			0.96				0.31
Diluted earnings per share:
Reported diluted earnings per share		$	1.04			$	0.34
Pro forma diluted earnings per share			0.94				0.30

		The pro forma presentation includes only options granted after 1995. The pro forma effects for the periods presented are not necessarily indicative of the pro forma effects in future years.

5.		Employee Benefit Plans

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

		Pension Benefits								Other Postretirement Plans
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Service cost		$	75,021,000			$	60,962,000			$	384,000			$	359,000
Interest cost			62,703,000				55,369,000				354,000				366,000
Expected return on plan assets			(78,132,000	)			(61,960,000	)			—				—
Amortization of prior service cost			3,699,000				1,320,000				151,000				151,000
Recognized net actuarial loss (gain)			34,653,000				24,454,000				(12,000	)			—
Amortization of net transition obligation			—				—				114,000				115,000
Net periodic benefit cost		$	97,944,000			$	80,145,000			$	991,000			$	991,000

The components of net benefit cost for the 13-week periods presented are as follows:

		Pension Benefits								Other Postretirement Plans
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Service cost		$	25,007,000			$	20,320,000			$	128,000			$	120,000
Interest cost			20,901,000				18,456,000				118,000				122,000
Expected return on plan assets			(26,044,000	)			(20,654,000	)			—				—
Amortization of prior service cost			1,233,000				440,000				50,000				50,000
Recognized net actuarial loss (gain)			11,551,000				8,152,000				(4,000	)			—
Amortization of net transition obligation			—				—				38,000				38,000
Net periodic benefit cost		$	32,648,000			$	26,714,000			$	330,000			$	330,000

		SYSCO’s contributions to its defined benefit plans were $71,538,000 and $84,603,000 during the 39-week periods ended April 1, 2006 and April 2, 2005, respectively.

		Although contributions to its qualified pension plan (Retirement Plan) are not required to meet ERISA minimum funding requirements, the company made a voluntary contribution of approximately $66,000,000 in the second quarter of fiscal 2006. The company does not anticipate making additional contributions to the Retirement Plan during the remainder of the fiscal year. The company’s contributions to the Supplemental Executive Retirement Plan (SERP) and other post-retirement plans are made in the amounts needed to fund current year benefit payments. The estimated fiscal 2006 contributions to fund benefit payments for the SERP and other post-retirement plans are $7,659,000 and $338,000, respectively.

6.		Restricted Cash

		SYSCO is required by its insurers to collateralize a part of the self-insured portion of its workers’ compensation and liability claims. SYSCO has chosen to satisfy these collateral requirements by depositing funds in insurance trusts.

		In addition, for certain acquisitions, SYSCO has placed funds into escrow to be disbursed to the sellers in the event that specified operating results are attained or contingencies are resolved. There were no escrowed funds released to sellers during the first 39 weeks of fiscal 2006.

		A summary of restricted cash balances appears below:

		Apr. 1, 2006				July 2, 2005				Apr. 2, 2005
Funds deposited in insurance trusts		$	81,980,000			$	80,410,000			$	163,912,000
Escrow funds related to acquisitions			21,321,000				21,321,000				21,321,000
Total		$	103,301,000			$	101,731,000			$	185,233,000

7.		Debt

		In September 2005, SYSCO issued 5.375% senior notes totaling $500,000,000 due on September 21, 2035, under its April 2005 shelf registration. These notes, which were priced at 99.911% of par, are unsecured, are not subject to any sinking fund requirement and include a redemption provision which allows SYSCO to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the

		noteholders are not penalized by the early redemption. Proceeds from the notes were utilized to retire commercial paper issuances outstanding as of September 2005.

		In September 2005, in conjunction with the issuance of the 5.375% senior notes, SYSCO settled a $350,000,000 notional amount forward-starting interest rate swap which was designated as a cash flow hedge of the variability in the cash outflows of interest payments on the debt issuance due to changes in the benchmark interest rate. See Note 9 for further discussion.

		In November 2005, SYSCO and one of its subsidiaries, SYSCO International, Co., entered into a new revolving credit facility to support the company’s U.S. and Canadian commercial paper programs. The facility, which was increased to $750,000,000 in March 2006, may be increased up to $1,000,000,000 at the option of the company, and terminates on November 4, 2010, subject to extension. The facility replaced the previous $450,000,000 (U.S. dollar) and $100,000,000 (Canadian dollar) revolving credit agreements in the U.S. and Canada, respectively, both of which were terminated. Since this long-term facility supports the company’s commercial paper programs, the $459,311,000 of commercial paper issuances outstanding at April 1, 2006 were classified as long-term debt.

		In April 2006, SYSCO initiated a new commercial paper program allowing the company to issue short-term unsecured notes in an aggregate not to exceed $1.3 billion. This new commercial paper program will replace notes that were issued under SYSCO’s existing commercial paper program as they mature and become due and payable.

		As of April 1, 2006, SYSCO had uncommitted bank lines of credit which provide for unsecured borrowings for working capital of up to $145,000,000, of which $12,000,000 was outstanding as of April 1, 2006.

		As of April 1, 2006, SYSCO’s outstanding borrowings under its commercial paper programs were $459,311,000. During the 39-week period ended April 1, 2006, commercial paper and short-term bank borrowings ranged from approximately $126,846,000 to $696,950,000.

		Included in current maturities of long-term debt at April 1, 2006 are the 7.0% Senior Notes due May 2006 totaling $200,000,000. The company funded these notes at maturity through a combination of short-term bank borrowings and issuances of commercial paper.

8.		Acquisitions

		During the first 39 weeks of fiscal 2006, the company issued 60,049 shares with a value of $1,481,000 for contingent consideration related to operations acquired in previous fiscal years.

		Acquisitions of businesses are accounted for using the purchase method of accounting and the financial statements of SYSCO include the results of the acquired companies from the respective dates they joined SYSCO. Acquisitions in the periods presented were immaterial, individually and in the aggregate, to the consolidated financial statements.

		The purchase price of the acquired operations is allocated to the net assets acquired and liabilities assumed based on the estimated fair value at the dates of acquisition, with any excess of cost over the fair value of net assets acquired, including intangibles, recognized as goodwill. The balances included in the Consolidated Balance Sheets related to recent acquisitions are based upon preliminary information and are subject to change when final

		asset and liability valuations are obtained. Material changes to the preliminary allocations are not anticipated by management.

		Certain acquisitions involve contingent consideration typically payable only in the event that specified operating results are attained. Aggregate contingent consideration amounts outstanding as of April 1, 2006 included approximately 102,000 shares and $148,948,000 in cash, which, if distributed, could result in recording up to $149,826,000 in additional goodwill. Such amounts typically are to be paid out over periods of up to five years from the date of acquisition.

9.		Derivative Financial Instruments

		In September 2005, in conjunction with the issuance of the 5.375% senior notes, SYSCO settled a $350,000,000 notional amount forward-starting interest rate swap which was designated as a cash flow hedge of the variability in the cash outflows of interest payments on the debt issuance due to changes in the benchmark interest rate. Upon settlement, SYSCO paid cash of $21,196,000, which represented the fair value of the swap agreement at the time of settlement. This amount will be amortized as interest expense over the 30-year term of the debt, and the unamortized balance is reflected as a loss, net of tax, in Other Comprehensive Income.

10.		Income Taxes

		Reflected in the changes in the net deferred tax liability and prepaid/accrued income tax balances from July 2, 2005 to April 1, 2006 is the reclassification of deferred tax liabilities related to supply chain distributions to accrued income taxes. This reclassification reflects the tax payments to be made during the next twelve months related to previously deferred supply chain distributions.

		The effective tax rate for the first 39 weeks of fiscal 2006 was 39.94%, an increase from the effective tax rate of 37.23% for the first 39 weeks of fiscal 2005. The effective tax rate for the third quarter of fiscal 2006 was 39.92%, an increase from the effective tax rate of 34.97% for the third quarter of fiscal 2005. The increase in the effective tax rate was primarily due to the adoption of SFAS 123(R) which is discussed in Note 4. SYSCO recorded a tax benefit of $14,186,000, or 13.9% of the total $101,944,000 in share-based compensation expense recorded in the 39-week period ended April 1, 2006. SYSCO recorded a tax benefit of $2,816,000, or 10.1% of the total $27,776,000 in share-based compensation expense recorded in the 13-week period ended April 1, 2006.

		SYSCO’s option grants include options which qualify as incentive stock options for income tax purposes. The treatment of the potential tax deduction, if any, related to incentive stock options is the primary reason for the company’s increased effective tax rate in fiscal 2006 and may cause variability in the company’s effective tax rate in future periods. In the period the compensation cost related to incentive stock options is recorded, a corresponding tax benefit is not recorded as it is assumed that the company will not receive a tax deduction upon the sale of such incentive stock options. The company may be eligible for tax deductions in subsequent periods to the extent that there is a disqualifying disposition of the incentive stock option. In such cases, the company would record a tax benefit related to the tax deduction in an amount not to exceed the corresponding cumulative compensation cost recorded in the financial statements on the particular options multiplied by the statutory tax rate.

		The determination of the company’s overall effective tax rate requires the use of estimates. The effective tax rate reflects a combination of income earned and taxed in the various U.S.

		federal and state, as well as Canadian federal and provincial, jurisdictions. Jurisdictional tax law changes, increases/decreases in permanent differences between book and tax items, tax credits and the company’s change in earnings from these taxing jurisdictions all affect the overall effective tax rate.

		In evaluating the exposures connected with the various tax filing positions, the company establishes an accrual when, despite management’s belief that the company’s tax return positions are supportable, management believes that certain positions may be successfully challenged and a loss is probable. When facts and circumstances change, these accruals are adjusted. Included in income tax expense for the third quarter of fiscal 2005 is the reversal of an accrual for tax contingencies of $11,000,000. Based on additional information and supported by a third party analysis, the company concluded that the accrual was no longer necessary.

11.		Contingencies

		SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial statements of the company when ultimately concluded.

12.		Business Segment Information

		The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to some of the chain restaurant customer locations. “Other” financial information is attributable to the company’s other segments, including the company’s specialty produce, custom-cut meat, and lodging industry products segments. The Asian cuisine foodservice operations, previously classified in “Other,” have been moved to the Broadline segment beginning with the fiscal quarter ended December 31, 2005. All corresponding items in prior periods have been restated to reflect this change. The company’s Canadian operations are not significant for geographical disclosure purposes.

		Intersegment sales represent specialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include allocation of centrally incurred costs for shared services that eliminate upon consolidation. Centrally incurred costs are allocated based upon the relative level of service used by each operating company.

		39-Week Period Ended								13-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Sales (in thousands):
Broadline		$	19,039,142			$	17,941,621			$	6,367,953			$	5,931,955
SYGMA			3,216,424				2,840,043				1,086,429				982,842
Other			2,152,151				1,765,216				783,622				606,454
Intersegment sales			(288,356	)			(246,245	)			(100,188	)			(83,798	)
Total		$	24,119,361			$	22,300,635			$	8,137,816			$	7,437,453

		39-Week Period Ended								13-Week Period Ended
		Apr. 1, 2006				Apr. 2, 2005				Apr. 1, 2006				Apr. 2, 2005
Earnings before income taxes and cumulative effect of accounting change (in thousands):
Broadline		$	1,093,429			$	1,068,806			$	346,219			$	339,519
SYGMA			5,987				12,931				4,961				5,297
Other			80,119				61,984				26,537				21,451
Total segments			1,179,535				1,143,721				377,717				366,267
Unallocated corporate expenses			(193,977	)			(65,540	)			(63,895	)			(30,688	)
Total		$	985,558			$	1,078,181			$	313,822			$	335,579

		Apr. 1, 2006				July 2, 2005				Apr. 2, 2005
Assets (in thousands):
Broadline		$	5,233,549			$	4,885,175			$	4,921,253
SYGMA			373,288				301,729				289,509
Other			802,646				636,549				608,107
Total segments			6,409,483				5,823,453				5,818,869
Corporate			2,474,605				2,444,449				2,348,367
Total		$	8,884,088			$	8,267,902			$	8,167,236

		The company does not allocate share-based compensation related to stock option grants, issuances of stock pursuant to the Employees’ Stock Purchase Plan and stock grants to non-employee directors and corporate officers. The increase in unallocated corporate expenses in fiscal 2006 over fiscal 2005 is primarily attributable to these items. See further discussion of Share-Based Compensation in Note 4.

13.		New Accounting Standards

		Emerging Issues Task Force (“EITF”) 04-13, “Accounting for Purchases and Sales of Inventory With the Same Counterparty,” requires that two or more inventory transactions with the same counterparty should be viewed as a single nonmonetary transaction, if the transactions were entered into in contemplation of one another. Exchanges of inventory between entities in the same line of business should be accounted for at fair value or recorded at carrying amounts, depending on the classification of such inventory. The company is still evaluating this guidance which is effective in the fourth quarter of fiscal year 2006.

14.		Supplemental Guarantor Information

		SYSCO International, Co. is an unlimited liability company organized under the laws of the Province of Nova Scotia, Canada and is a wholly-owned subsidiary of SYSCO. In May 2002, SYSCO International, Co. issued $200,000,000 of 6.10% notes due in 2012. These notes are fully and unconditionally guaranteed by SYSCO.

		The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the parent guarantor (SYSCO), the subsidiary issuer (SYSCO International) and all other non-guarantor subsidiaries of SYSCO (Other Non-Guarantor Subsidiaries) on a combined basis and eliminating entries.

		Condensed Consolidating Balance Sheet
		April 1, 2006
						SYSCO				Other Non-Guarantor								Consolidated
		SYSCO				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	150,938			$	6			$	4,195,268			$	—			$	4,346,212
Investment in subsidiaries			10,879,188				303,341				141,222				(11,323,751	)			—
Plant and equipment, net			149,924				—				2,249,421				—				2,399,345
Other assets			727,605				—				1,410,926				—				2,138,531
Total assets		$	11,907,655			$	303,347			$	7,996,837			$	(11,323,751	)		$	8,884,088
Current liabilities		$	444,645			$	4,201			$	2,742,626			$	—			$	3,191,472
Intercompany payables (receivables)			6,692,232				14,064				(6,706,296	)			—				—
Long-term debt			1,502,833				238,976				45,346				—				1,787,155
Other liabilities			555,102				—				550,529				—				1,105,631
Shareholders’ equity			2,712,843				46,106				11,364,632				(11,323,751	)			2,799,830
Total liabilities and shareholders’ equity		$	11,907,655			$	303,347			$	7,996,837			$	(11,323,751	)		$	8,884,088

		Condensed Consolidating Balance Sheet
		July 2, 2005
						SYSCO				Other Non-Guarantor								Consolidated
		SYSCO				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	156,812			$	32			$	3,844,942			$	—			$	4,001,786
Investment in subsidiaries			9,979,188				283,033				164,218				(10,426,439	)			—
Plant and equipment, net			120,800				—				2,147,501				—				2,268,301
Other assets			698,283				—				1,299,532				—				1,997,815
Total assets		$	10,955,083			$	283,065			$	7,456,193			$	(10,426,439	)		$	8,267,902
Current liabilities		$	696,995			$	34,330			$	2,726,245			$	—			$	3,457,570
Intercompany payables (receivables)			6,342,306				10,546				(6,352,852	)			—				—
Long-term debt			709,452				199,560				47,165				—				956,177
Other liabilities			508,221				—				587,095				—				1,095,316
Shareholders’ equity			2,698,109				38,629				10,448,540				(10,426,439	)			2,758,839
Total liabilities and shareholders’ equity		$	10,955,083			$	283,065			$	7,456,193			$	(10,426,439	)		$	8,267,902

19

		Condensed Consolidating Balance Sheet
		April 2, 2005
						SYSCO				Other Non-Guarantor								Consolidated
		SYSCO				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	148,605			$	44			$	3,847,493			$	—			$	3,996,142
Investment in subsidiaries			9,537,924				285,388				158,803				(9,982,115	)			—
Plant and equipment, net			135,428				—				2,112,127				—				2,247,555
Other assets			641,241				—				1,282,298				—				1,923,539
Total assets		$	10,463,198			$	285,432			$	7,400,721			$	(9,982,115	)		$	8,167,236
Current liabilities		$	588,293			$	77,666			$	2,667,880			$	—			$	3,333,839
Intercompany payables (receivables)			5,967,767				8,005				(5,975,772	)			—				—
Long-term debt			783,525				199,544				49,753				—				1,032,822
Other liabilities			376,055				—				608,740				—				984,795
Shareholders’ equity			2,747,558				217				10,050,120				(9,982,115	)			2,815,780
Total liabilities and shareholders’ equity		$	10,463,198			$	285,432			$	7,400,721			$	(9,982,115	)		$	8,167,236

		Condensed Consolidating Results of Operations
		For the 39-Week Period Ended April 1, 2006
						SYSCO				Other Non-Guarantor								Consolidated
		SYSCO				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Sales		$	—			$	—			$	24,119,361			$	—			$	24,119,361
Cost of sales			—				—				19,517,648				—				19,517,648
Operating expenses			175,486				81				3,365,828				—				3,541,395
Interest expense (income)			274,951				8,439				(202,476	)			—				80,914
Other, net			(1,920	)			—				(4,234	)			—				(6,154	)
Total costs and expenses			448,517				8,520				22,676,766				—				23,133,803
Earnings (losses) before income taxes and cumulative effect of accounting change			(448,517	)			(8,520	)			1,442,595				—				985,558
Income tax (benefit) provision			(144,151	)			(3,195	)			540,973				—				393,627
Equity in earnings of subsidiaries			896,297				4,273				—				(900,570	)			—
Net earnings before cumulative effect of accounting change			591,931				(1,052	)			901,622				(900,570	)			591,931
Cumulative effect of accounting change			9,285				—				—				—				9,285
Net earnings		$	601,216			$	(1,052	)		$	901,622			$	(900,570	)		$	601,216

		Condensed Consolidating Results of Operations
		39-Week Period Ended April 2, 2005
						SYSCO				Other Non-Guarantor								Consolidated
		SYSCO				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Sales		$	—			$	—			$	22,300,635			$	—			$	22,300,635
Cost of sales			—				—				18,060,611				—				18,060,611
Operating expenses			57,359				88				3,055,361				—				3,112,808
Interest expense (income)			233,002				8,755				(186,141	)			—				55,616
Other, net			(430	)			—				(6,151	)			—				(6,581	)
Total costs and expenses			289,931				8,843				20,923,680				—				21,222,454
Earnings (losses) before income taxes			(289,931	)			(8,843	)			1,376,955				—				1,078,181
Income tax (benefit) provision			(110,899	)			(3,382	)			515,685				—				401,404
Equity in earnings of Subsidiaries			855,809				3,440				—				(859,249	)			—
Net earnings		$	676,777			$	(2,021	)		$	861,270			$	(859,249	)		$	676,777