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

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

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



Highlights and Trends

Highlights

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

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



• Sales:

• increased 1.8%, or $259.3 million, to $15.0 billion;

• Operating income:

• increased 22.3%, or $100.6 million, to $552.5 million;

• adjusted operating income increased 3.9%, or $23.6 million, to $626.9 million;

• Net earnings:

• increased 43.4%, or $116.0 million, to $383.4 million;

• adjusted net earnings increased 11.3%, or $44.3 million, to $437.8 million;

• Basic earnings per share:

• increased 44.2%, or $0.23, to $0.75 per share;

• Diluted earnings per share:

• increased 45.9%, or $0.23, to $0.74 per share; and




•               adjusted diluted earnings per share increased 13.2%, or $0.10, to
                $0.85 per share.

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



• Sales:

• increased 1.2%, or $347.1 million, to $30.3 billion;

• Operating income:

• increased 13.0%, or $140.8 million, to $1.2 billion;

• adjusted operating income increased 5.7%, or $73.8 million, to $1.4 billion;

• Net earnings:

• increased 19.9%, or $138.8 million, to $837.2 million;

• adjusted net earnings increased 8.6%, or $75.4 million, to $948.1 million;





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• Basic earnings per share:

• increased 22.4%, or $0.30, to $1.64 per share;

• Diluted earnings per share:

• increased 22.1%, or $0.29, to $1.62 per share; and




•               adjusted diluted earnings per share increased 10.7%, or $0.17, to
                $1.83 per share.

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

Trends

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

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

While our gross profit has increased, in the second quarter of fiscal 2020, our gross margin declined in our U.S Foodservice Operations. We experienced inflation at a rate of 2.6% during the second quarter of fiscal 2020, primarily in the dairy products and beef categories. The unusually high rate of inflation in these categories limited our ability to efficiently pass inflation in these categories to our customers. We also experienced a return to more normalized pricing in produce markets in the second quarter of fiscal 2020, as compared to a sharp increase in the second quarter of fiscal 2019. We expect this year over year unfavorable impact to continue in the third quarter of fiscal 2020. Lastly, fuel surcharges have declined as compared to the second quarter of fiscal 2019.

Total operating expenses decreased 1.9% and 1.0% during the second quarter and first 26 weeks of fiscal 2020, respectively, as compared to the second quarter and first 26 weeks of fiscal 2019 due to effective expense management, including benefits from our transformation initiatives. Operating costs within our U.S. operations grew slightly due to higher labor and operational costs. Labor costs were higher due to our decision to retain driver and warehouse personnel in a tight labor market and we will continue to evaluate our staffing needs over the next several quarters. In the second quarter of fiscal 2020, we experienced a twelve-day strike in Denver, which resulted in added costs associated with continuing to serve customers during that period. Our business in France continues to experience challenges arising from our efforts to integrate our France operations. We believe these challenges will continue to negatively impact our performance through the remainder of the fiscal year. We are maintaining our focus on expense reductions as we continue to invest in areas of our business that will help facilitate future growth.

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

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



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



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



Strategy

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

• reaching $600 million of adjusted operating income growth as compared

to fiscal 2017;

• growing earnings per share faster than operating income; and

• achieving 16% in adjusted return on invested capital for existing businesses.

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



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

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

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

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




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Results of Operations

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:


                                      13-Week Period Ended                26-Week Period Ended
                                 Dec. 28, 2019     Dec. 29, 2018    Dec. 28, 2019     Dec. 29, 2018
Sales                                 100.0  %            100.0 %         100.0 %            100.0 %
Cost of sales                          81.2                81.2            81.0               81.1
Gross profit                           18.8                18.8            19.0               18.9
Operating expenses                     15.1                15.7            15.0               15.3
Operating income                        3.7                 3.1             4.0                3.6
Interest expense                        0.5                 0.6             0.5                0.6
Other expense (income), net               -                 0.1               -                  -
Earnings before income taxes            3.2                 2.4             3.5                3.0
Income taxes                            0.6                 0.6             0.7                0.7
Net earnings                            2.6  %              1.8 %           2.8 %              2.3 %




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The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:


                                    13-Week Period Ended     26-Week Period Ended
                                        Dec. 28, 2019           Dec. 28, 2019
Sales                                           1.8  %                  1.2  %
Cost of sales                                   1.7                     1.0
Gross profit                                    2.0                     1.7
Operating expenses                             (1.9 )                  (1.0 )
Operating income                               22.3                    13.0
Interest expense                              (11.9 )                  (9.1 )
Other expense (income), net (1) (2)          (107.9 )                 (79.7 )
Earnings before income taxes                   34.4                    18.6
Income taxes                                    6.8                    13.9
Net earnings                                   43.4  %                 19.9  %
Basic earnings per share                       44.2  %                 22.4  %
Diluted earnings per share                     45.9                    22.1
Average shares outstanding                     (1.5 )                  (1.5 )
Diluted shares outstanding                     (1.7 )                  (1.8 )

(1) Other expense (income), net was income of $0.8 million in the second quarter


     of fiscal 2020 and expense of $10.2 million in the second quarter of fiscal
     2019.

(2) Other expense (income), net was expense of $2.3 million in the first 26


     weeks of fiscal 2020 and expense of $11.3 million in the first 26 weeks of
     fiscal 2019.

The following tables represent our results by reportable segments:

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