10-Q 1 syy2016q110-q.htm 10-Q 10-Q



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 September 26, 2015

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6544 
________________ 
 
Sysco Corporation 
(Exact name of registrant as specified in its charter) 
Delaware
74-1648137
(State or other jurisdiction of
(IRS employer
incorporation or organization)
identification number)
1390 Enclave Parkway
77077-2099
Houston, Texas
(Zip Code)
(Address of principal executive offices)
 
 
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 ☑    No ☐ 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   
Yes  ☑    No ☐ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer  ☑
Accelerated Filer  ☐
Non-accelerated Filer   ☐    (Do not check if a smaller reporting company)
Smaller Reporting Company   ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes ☐     No ☑ 
 
564,515,133 shares of common stock were outstanding as of October 24, 2015.





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. 26, 2015
 
Jun. 27, 2015
 
Sep. 27, 2014
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
388,256

 
$
5,130,044

 
$
384,898

Accounts and notes receivable, less allowances of
$46,470, $41,720, and $60,879
3,531,105

 
3,353,381

 
3,646,817

Inventories
2,841,361

 
2,691,823

 
2,845,641

Deferred income taxes
85,416

 
135,254

 
140,554

Prepaid expenses and other current assets
93,015

 
93,039

 
90,493

Prepaid income taxes
88,807

 
90,763

 

Total current assets
7,027,960

 
11,494,304

 
7,108,403

Plant and equipment at cost, less depreciation
3,961,299

 
3,982,143

 
3,968,713

Other assets
 

 
 

 
 

Goodwill
1,981,390

 
1,959,817

 
1,980,524

Intangibles, less amortization
168,541

 
154,809

 
180,325

Restricted cash

 
168,274

 
165,437

Other assets
232,361

 
229,934

 
190,631

Total other assets
2,382,292

 
2,512,834

 
2,516,917

Total assets
$
13,371,551

 
$
17,989,281

 
$
13,594,033

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
51,806

 
$
70,751

 
$
78,635

Accounts payable
2,887,863

 
2,881,953

 
2,924,417

Accrued expenses
999,337

 
1,467,610

 
1,132,069

Accrued income taxes

 

 
94,437

Current maturities of long-term debt
31,810

 
4,979,301

 
306,931

Total current liabilities
3,970,816

 
9,399,615

 
4,536,489

Other liabilities
 

 
 

 
 

Long-term debt
3,004,618

 
2,271,825

 
2,626,610

Deferred income taxes
160,688

 
81,591

 
115,500

Other long-term liabilities
885,501

 
934,722

 
959,920

Total other liabilities
4,050,807

 
3,288,138

 
3,702,030

Commitments and contingencies


 


 


Noncontrolling interest
44,243

 
41,304

 
34,098

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
1,231,506

 
1,213,999

 
1,155,838

Retained earnings
8,816,245

 
8,751,985

 
8,878,693

Accumulated other comprehensive loss
(1,007,539
)
 
(923,197
)
 
(743,172
)
Treasury stock at cost, 169,052,528,
    170,857,231 and 177,897,055 shares
(4,499,702
)
 
(4,547,738
)
 
(4,735,118
)
Total shareholders' equity
5,305,685

 
5,260,224

 
5,321,416

Total liabilities and shareholders' equity
$
13,371,551

 
$
17,989,281

 
$
13,594,033

 Note: The June 27, 2015 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. 26, 2015
 
Sep. 27, 2014
Sales
$
12,562,611

 
$
12,445,081

Cost of sales
10,324,616

 
10,256,364

Gross profit
2,237,995

 
2,188,717

Operating expenses
1,744,521

 
1,723,104

Operating income
493,474

 
465,613

Interest expense
126,907

 
30,934

Other expense (income), net
(15,240
)
 
(2,188
)
Earnings before income taxes
381,807

 
436,867

Income taxes
137,387

 
158,054

Net earnings
$
244,420

 
$
278,813

 
 
 
 
Net earnings:
 

 
 

Basic earnings per share
$
0.41

 
$
0.47

Diluted earnings per share
0.41

 
0.47

 
 
 
 
Average shares outstanding
596,698,935

 
588,277,056

Diluted shares outstanding
600,789,913

 
593,309,750

 
 
 
 
Dividends declared per common share
$
0.30

 
$
0.29

 
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. 26, 2015
 
Sep. 27, 2014
Net earnings
$
244,420

 
$
278,813

Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment
(87,229
)
 
(71,254
)
Items presented net of tax:
 

 
 

Amortization of cash flow hedges
1,676

 
126

Change in fair value of cash flow hedges
(3,778
)
 
(34,111
)
Amortization of prior service cost
1,715

 
1,737

Amortization of actuarial loss (gain), net
3,275

 
2,993

Total other comprehensive (loss) income
(84,341
)
 
(100,509
)
Comprehensive income
$
160,079

 
$
178,304

 
See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED CASH FLOWS (Unaudited) 
(In thousands)
 
13-Week Period Ended
 
Sep. 26, 2015
 
Sep. 27, 2014
Cash flows from operating activities:
 

 
 

Net earnings
$
244,420

 
$
278,813

Adjustments to reconcile net earnings to cash provided by operating
    activities:
 

 
 

Share-based compensation expense
11,636

 
12,161

Depreciation and amortization
135,961

 
133,996

Amortization of debt issuance and other debt-related costs
6,161

 
3,803

Loss on extinguishment of debt
86,460

 

Deferred income taxes
124,631

 
9,940

Provision for losses on receivables
1,546

 
6,058

Other non-cash items
(4,511
)
 
(1,280
)
Additional changes in certain assets and liabilities, net of effect of
    businesses acquired:
 

 
 

(Increase) in receivables
(211,035
)
 
(267,602
)
(Increase) in inventories
(162,867
)
 
(251,998
)
Decrease (increase) in prepaid expenses and other current assets
165

 
(7,019
)
Increase in accounts payable
23,580

 
99,744

Decrease in accrued expenses
(470,409
)
 
(28,725
)
Increase in accrued income taxes
5,833

 
137,506

Decrease (increase) in other assets
(10,354
)
 
2,327

Decrease in other long-term liabilities
(38,419
)
 
(64,417
)
Excess tax benefits from share-based compensation arrangements
(4,280
)
 
(689
)
Net cash (used in) provided by operating activities
(261,482
)
 
62,618

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(121,243
)
 
(118,821
)
Proceeds from sales of plant and equipment
1,506

 
1,126

Acquisition of businesses, net of cash acquired
(83,598
)
 
(32,074
)
Decrease (increase) in restricted cash
168,274

 
(20,025
)
Net cash used for investing activities
(35,061
)
 
(169,794
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net
717,600

 
268,598

Other debt borrowings
4,148

 
13,901

Other debt repayments
(3,659
)
 
(4,207
)
Redemption of senior notes
(5,050,000
)
 

Debt issuance costs

 
(642
)
Cash paid for settlement of cash flow hedge

 
(58,935
)
Cash received from termination of interest rate swap agreements
14,496

 

Proceeds from stock option exercises
54,768

 
35,179

Dividends paid
(179,037
)
 
(170,049
)
Excess tax benefits from share-based compensation arrangements
4,280

 
689

Net cash (used for) provided by financing activities
(4,437,404
)
 
84,534

Effect of exchange rates on cash and cash equivalents
(7,841
)
 
(5,506
)
Net (decrease) in cash and cash equivalents
(4,741,788
)
 
(28,148
)
Cash and cash equivalents at beginning of period
5,130,044

 
413,046

Cash and cash equivalents at end of period
$
388,256

 
$
384,898

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
93,976

 
$
49,921

Income taxes
13,298

 
15,827

 
See Notes to Consolidated Financial Statements

4



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, with the exception of the June 27, 2015 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the company's fiscal 2015 Annual Report on Form 10-K.  The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income 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 and cash flows for all periods presented have been made. 
 
Prior year amounts within the consolidated balance sheets have been reclassified to conform to the current year presentation as it relates to the presentation of debt issuance costs due to a change in accounting standards. See Note 2, "Changes in Accounting" for additional information on these changes.
    
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2015 Annual Report on Form 10-K.   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.
 
The interim financial information herein has been reviewed by Ernst & Young LLP, independent registered public accounting firm, in accordance with established professional standards and procedures for such a review.  A Review Report of Independent Registered Public Accounting Firm has been issued by Ernst & Young LLP and is included as Exhibit 15.1 to this Form 10-Q. 

2.  CHANGES IN ACCOUNTING 
 
Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This guidance requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. Upon adoption, this guidance requires retrospective application. The company early adopted this standard for the fiscal year ended June 27, 2015. Although the new guidance had no impact on the company’s results of operations, the debt issuance costs presented as assets within the company’s consolidated balance sheet as of September 27, 2014 of $23.9 million has been reclassified as a reduction of the related debt liability.

3.  NEW ACCOUNTING STANDARDS 

Revenue from Contracts with Customers
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for interim and annual periods beginning after December 15, 2017, which is fiscal 2019 for Sysco, and could be early adopted in fiscal 2018. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The company has not selected a transition method and is currently evaluating the impact of the pending adoption of this ASU on its ongoing financial reporting.

4.  ACQUISITIONS
 
During the first 13 weeks of fiscal 2016, the company paid cash of $83.6 million for an acquisition. The acquisition did not have a material effect on the company's operating results, cash flows or financial position. Certain acquisitions involve

5



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 attained. As of September 26, 2015, aggregate contingent consideration outstanding was $38.3 million, of which $28.7 million was recorded as earnout liabilities as of September 26, 2015.

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 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.  Restricted cash consists of investments in high-quality money market funds.    
 
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:
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. 

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 and restricted cash as Level 1 measurements in the tables below. 

The interest rate swap agreements, discussed further in Note 6, "Derivative Financial Instruments" 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.  These are included within prepaid expenses and other current assets, other assets, accrued expenses and other long-term liabilities as Level 2 measurements in the tables below.


6



The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of September 26, 2015June 27, 2015 and September 27, 2014:  

 
Assets and Liabilities Measured at Fair Value as of Sep. 26, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
102,508

 
$
62,131

 
$

 
$
164,639

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
8,219

 

 
8,219

Total assets at fair value
$
102,508

 
$
70,350

 
$

 
$
172,858

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$

 
$
506,713

 
$

 
$
506,713

Total liabilities at fair value
$

 
$
506,713

 
$

 
$
506,713


 
Assets and Liabilities Measured at Fair Value as of Jun. 27, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
4,677,735

 
$
63,689

 
$

 
$
4,741,424

Restricted cash
168,274

 

 

 
168,274

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
12,597

 

 
12,597

Total assets at fair value
$
4,846,009

 
$
76,286

 
$

 
$
4,922,295

Liabilities:
 

 
 

 
 

 
 

Accrued expenses
 

 
 

 
 

 
 

Current portion of long-term debt
$

 
$
1,257,127

 
$

 
$
1,257,127

Long-term debt

 
503,379

 

 
503,379

Total liabilities at fair value
$

 
$
1,760,506

 
$

 
$
1,760,506

 


7



 
Assets and Liabilities Measured at Fair Value as of Sep. 27, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash equivalents
$

 
$
143,416

 
$

 
$
143,416

Restricted cash
165,437

 

 

 
165,437

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
264

 

 
264

Total assets at fair value
$
165,437

 
$
143,680

 
$

 
$
309,117

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swap agreement
$

 
$
3,496

 
$

 
$
3,496

Long-term debt

 
499,110

 

 

Total Liabilities at fair value
$

 
$
502,606

 
$

 
$
3,496

 
The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short‑term maturities of these instruments.  The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement.  The table above reflects the fair value for any long-term debt that has been hedged and is recorded at fair value. Non-hedged debt is recorded at book value. The fair value of total non-hedged debt approximated $2.6 billion, $5.6 billion and $2.8 billion as of September 26, 2015, June 27, 2015 and September 27, 2014, respectively.  The carrying value of total non-hedged debt was $2.4 billion, $5.4 billion and $2.5 billion as of September 26, 2015June 27, 2015 and September 27, 2014, respectively.

6.  DERIVATIVE FINANCIAL INSTRUMENTS 
 
Sysco manages its debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this position. The company does not use derivative financial instruments for trading or speculative purposes. 
 
In August 2015, the company entered into forward starting swap agreements with a notional amount totaling $500 million. The company designated these derivatives as cash flow hedges to reduce interest rate exposure on forecasted 10-year debt due to changes in the benchmark interest rates for debt the company expected to issue in fiscal 2016. Sysco priced this debt offering in September 2015 and terminated these hedges, resulting in a liability of $6.1 million at September 26, 2015. The loss was recorded in Accumulated other comprehensive income (loss) and will be amortized to interest expense over the term of the issued debt. See Note 16, "Subsequent Events" for additional information on these hedges.

In October 2014, Sysco obtained long-term financing for its proposed merger with US Foods by completing a six-part senior notes offering totaling $5 billion. At the same time of these note issuances, the company entered into interest rate swap agreements that effectively converted $500 million of senior notes maturing in fiscal 2018 and $750 million of senior notes maturing in fiscal 2020 to floating rate debt. These are collectively referred to as the 2015 swaps.  These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates. In the first quarter of 2016, we terminated the 2015 swaps for proceeds of $14.5 million in connection with the redemption of these senior notes.
 
In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2 billion in contemplation of securing long-term financing for the proposed US Foods merger or for other long-term financing purposes in the event the merger did not occur.  The company designated these derivatives as cash flow hedges to reduce interest rate exposure on forecasted 10-year and 30-year debt due to changes in the benchmark interest rates for debt the company issued in fiscal 2015.  In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing in fiscal 2025 and the $1 billion senior notes maturing in fiscal 2045, the company terminated these swaps, locking in the effective yields on the related debt.  Cash of $58.9 million was paid to settle the 10-year swap in September 2014, and cash of $129.9 million was paid

8



to settle the 30-year swap in October 2014.  The cash payments are located within the line Cash paid for settlement of cash flow hedge within financing activities in the statement of consolidated cash flows.  The cumulative losses recorded in Accumulated other comprehensive (loss) income related to these swaps will continue to be amortized through interest expense over the term of the originally issued debt as the amount hedged is anticipated to remain within our capital structure.

In August 2013, the company entered into an interest rate swap agreement that effectively converted $500 million of fixed rate debt maturing in fiscal 2018 to floating rate debt.

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 26, 2015, June 27, 2015 and September 27, 2014 are as follows:
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
(In thousands)
Interest rate swap agreements:
 
 
 
 
 
 
 
Sep. 26, 2015
Other assets
 
$
8,219

 
Other liabilities
 
$

Sep. 27, 2014
Other assets
 
264

 
Other long-term liabilities
 
3,496

 
The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-Week Period Ended September 26, 2015 and September 27, 2014 presented on a pre-tax basis are as follows:
 
 
Location of (Gain) or Loss
Recognized
 
Amount of (Gain) or Loss
Recognized
 
 
 
13-Week Period Ended
 
 
 
Sep. 26, 2015
 
Sep. 27, 2014
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$
(1,997
)
 
$
(3,269
)
 
 
 
 
 
 
Cash Flow  Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Other comprehensive income
 
6,134

 
55,374

Interest rate contracts
Interest expense
 
2,720

 
205

      
Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rates.  Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for the first quarter of fiscal 2016 and 2015.  The interest rate swaps do not contain credit-risk-related contingent features.

7.  DEBT 
 
Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. As of September 26, 2015, there were $717.5 million in commercial paper issuances outstanding.  These amounts are classified within long-term debt, as the program is supported by a long-term revolving credit facility.  During the first quarter of 2016, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from zero to approximately $1.0 billion
 
In June 2015, Sysco terminated the US Foods merger agreement triggering the redemption of the senior notes that had been issued in contemplation of the proposed merger at a redemption price equal to 101% of the principal of the senior notes. Sysco redeemed the senior notes in July 2015 using cash on hand and proceeds from our commercial paper program in the amount of $5.05 billion. The repayment of these senior notes triggered a redemption loss of $86.5 million included in interest expense

9



for the first quarter of fiscal 2016. Additionally, as discussed in Note 6, "Derivative Financial Instruments," the company terminated fair value hedges associated with these senior notes. Interest expense for the first quarter of fiscal 2016 includes the amounts from these transactions:
 
 
 

13-Week Period Ended Sep. 27, 2015

 
 
 
 
(In thousands)
Redemption Payment
 
 
 
 
$
50,000

Debt issuance cost write-off
 
 
 
 
28,642

Bond discount write-off
 
 
 
 
17,869

Gain on swap termination
 
 
 
 
(10,051
)
Loss on extinguishment of debt
 
 
 
 
86,460

Interest expense on senior notes
 
 
 
 
8,375

Total
 
 
 
 
$
94,835

See Note 16, "Subsequent Events" for additional information on changes in debt.

8.  COMPANY-SPONSORED EMPLOYEE BENEFIT PLANS 
 
In the tables below, the caption “Pension Benefits” includes both the company-sponsored qualified pension plan and the Supplemental Executive Retirement Plan.  The components of net company-sponsored benefit cost for the first quarter of fiscal 2016 and fiscal 2015 are as follows:    
 
 
Pension Benefits
 
Other Postretirement Plans
 
Sep. 26, 2015
 
Sep. 27, 2014
 
Sep. 26, 2015
 
Sep. 27, 2014
 
(In thousands)
Service cost
$
2,902

 
$
2,815

 
$
134

 
$
134

Interest cost
42,833

 
42,779

 
153

 
148

Expected return on plan assets
(53,203
)
 
(57,156
)
 

 

Amortization of prior service cost
2,743

 
2,777

 
41

 
42

Amortization of actuarial loss (gain)
5,435

 
4,968

 
(118
)
 
(109
)
Net periodic costs (benefits)
$
710

 
$
(3,817
)
 
$
210

 
$
215

 
     Sysco’s contributions to its company-sponsored defined benefit plans were $37.0 million and $56.1 million during the first quarter of fiscal 2016 and 2015, respectively. 

9.  EARNINGS PER SHARE 
 
The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
Sep. 26, 2015
 
Sep. 27, 2014
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
Net earnings
$
244,420

 
$
278,813

Denominator:
 

 
 

Weighted-average basic shares outstanding
596,698,935

 
588,277,056

Dilutive effect of share-based awards
4,090,978

 
5,032,694

Weighted-average diluted shares outstanding
600,789,913

 
593,309,750

Basic earnings per share
$
0.41

 
$
0.47

Diluted earnings per share
$
0.41

 
$
0.47

 

10



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 4,500,000 and 600,000 for the first quarter of fiscal 2016 and fiscal 2015, respectively.  

10.  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 and certain amounts related to pension and other postretirement plans.  Comprehensive income was $160.1 million and $178.3 million for the first quarter of fiscal 2016 and fiscal 2015, respectively. 

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. 26, 2015
 
Location of Expense
(Income) Recognized
in Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,784

 
$
1,069

 
$
1,715

Amortization of actuarial loss (gain), net
Operating expenses
 
5,317

 
2,042

 
3,275

Total reclassification adjustments
 
 
8,101

 
3,111

 
4,990

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before
    reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(87,229
)
 

 
(87,229
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,720

 
1,044

 
1,676

Change in fair value of cash flow hedge
N/A
 
(6,134
)
 
(2,356
)
 
(3,778
)
Total other comprehensive (loss) income
 
 
$
(82,542
)
 
$
1,799

 
$
(84,341
)
 
 

11



 
 
 
13-Week Period Ended Sep. 27, 2014
 
Location of Expense
(Income) Recognized
in Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,819

 
$
1,082

 
$
1,737

Amortization of actuarial loss (gain), net
Operating expenses
 
4,859

 
1,866

 
2,993

Total reclassification adjustments
 
 
7,678

 
2,948

 
4,730

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before
    reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(71,254
)
 

 
(71,254
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
205

 
79

 
126

Other comprehensive income before
    reclassification adjustments:
 
 
 

 
 

 
 

Change in fair value of cash flow hedges
N/A
 
(55,374
)
 
(21,263
)
 
(34,111
)
Total other comprehensive (loss) income
 
 
$
(118,745
)
 
$
(18,236
)
 
$
(100,509
)
 
 
The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
13-Week Period Ended Sep. 26, 2015
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Interest Rate Swaps,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 27, 2015
$
(705,311
)
 
$
(97,733
)
 
$
(120,153
)
 
$
(923,197
)
Other comprehensive income before
    reclassification adjustments

 
(87,229
)
 

 
(87,229
)
Amortization of cash flow hedges

 

 
1,676

 
1,676

Change in fair value of cash flow hedges

 

 
(3,778
)
 
(3,778
)
Amortization of unrecognized prior service cost
1,715

 

 

 
1,715

Amortization of unrecognized net actuarial losses
3,274

 

 

 
3,274

Balance as of Sep. 26, 2015
$
(700,322
)
 
$
(184,962
)
 
$
(122,255
)
 
$
(1,007,539
)
 

12



 
13-Week Period Ended Sep. 27, 2014
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Interest Rate Swaps,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 28, 2014
$
(685,957
)
 
$
134,452

 
$
(91,158
)
 
$
(642,663
)
Other comprehensive income before
    reclassification adjustments

 
(71,254
)
 
(34,111
)
 
(105,365
)
Amounts reclassified from accumulated
    other comprehensive loss
4,730

 

 
126

 
4,856

Balance as of Sep. 27, 2014
$
(681,227
)
 
$
63,198

 
$
(125,143
)
 
$
(743,172
)

11.  SHARE-BASED COMPENSATION  
 
Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employee Stock Purchase Plan, and various non‑employee director plans. 
 
Stock Incentive Plans 
 
In the first quarter of fiscal 2016, 2,075 restricted stock units were granted to employees. Based on the jurisdiction in which the employee resides, some of these restricted stock units were granted with forfeitable dividend equivalents. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards 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 restricted stock unit granted during the first quarter of fiscal 2016 was $36.31

Employee Stock Purchase Plan 
 
Plan participants purchased 346,219 shares of Sysco common stock under the Sysco Employee Stock Purchase Plan during the first quarter of fiscal 2016
 
The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employee Stock Purchase Plan was $5.42 during the first quarter of fiscal 2016. The fair value of the stock purchase rights is estimated as the difference between the stock price 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 $11.6 million and $12.2 million for the first quarter of fiscal 2016 and fiscal 2015, respectively. 
 
As of September 26, 2015, there was $56.4 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 2.3 years. 

12.  INCOME TAXES 
 
Uncertain Tax Positions 
 
As of September 26, 2015, the gross amount of unrecognized tax benefits was $37.5 million, and the gross amount of liability for accrued interest related to unrecognized tax benefits was $34.1 million. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months, either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made. 
 
Effective Tax Rate 

13



 
Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rate in all periods presented. The effective tax rates for the first quarter of fiscal 2016 and fiscal 2015 were 35.98% and 36.18%, respectively. 
 
Other 
 
The determination of the company’s provision for income taxes requires significant 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.  

13.  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.  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.  However, the final results of legal proceedings cannot be predicted with certainty and, if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods.

14.  BUSINESS SEGMENT INFORMATION 
 
The company has aggregated certain of its operating companies into two reporting segments, Broadline and SYGMA in accordance with the accounting literature related to disclosures about segments of an enterprise.  The Broadline reportable segment is an aggregation of the company’s U.S. and International Broadline segments located in the Bahamas, Canada, Costa Rica and Ireland.  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, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served.  SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.  "Other" financial information is attributable to the company's other operating segments, including the company's specialty produce, custom-cut meat operations, lodging industry segments, a company that distributes specialty imported products,  a company that distributes to international customers and the company’s Sysco Ventures platform, which includes a suite of technology solutions that help support the business needs of Sysco’s customers.  In fiscal 2015, our leadership structure was realigned and now our custom-cut meat operations no longer report through our U.S. Broadline leadership. As a result, these operations are no longer included in our Broadline segment and are now reported in "Other." Prior year amounts have been reclassified to conform to the current year presentation.
 
The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements.  Intersegment sales primarily represent products the Broadline and SYGMA operating companies procured from the specialty produce, custom-cut meat operations, imported specialty products and a company that distributes to international customers. Management evaluates the performance of each of the operating segments based on its respective operating income results. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared service center.  These also include all share-based compensation costs. 

The following tables set forth certain financial information for Sysco’s business segments:


14



 
13-Week Period Ended
 
Sep. 26, 2015
 
Sep. 27, 2014
Sales:
(In thousands)
Broadline
$
10,028,096

 
$
9,971,375

SYGMA
1,445,904

 
1,541,612

Other
1,446,938

 
1,252,086

Intersegment sales
(358,327
)
 
(319,992
)
Total
$
12,562,611

 
$
12,445,081

 
 
 
 
 
13-Week Period Ended
 
Sep. 26, 2015
 
Sep. 27, 2014
Operating income:
(In thousands)
Broadline
$
726,965

 
$
686,482

SYGMA
5,224

 
5,150

Other
26,508

 
37,729

Total segments
758,697

 
729,361

Corporate expenses
(265,223
)
 
(263,748
)
Total operating income
493,474

 
465,613

Interest expense
126,907

 
30,934

Other expense (income), net
(15,240
)
 
(2,188
)
Earnings before income taxes
$
381,807

 
$
436,867

 
 
Sep. 26, 2015
 
Jun. 27, 2015
 
Sep. 27, 2014
Assets:
(In thousands)
Broadline
$
7,989,108

 
$
7,730,239

 
$
8,861,929

SYGMA
508,403

 
512,044

 
519,554

Other
1,515,458

 
1,415,038

 
1,643,808

Total segments
10,012,969

 
9,657,321

 
11,025,291

Corporate
3,358,582

 
8,331,960

 
2,568,742

Total
$
13,371,551

 
$
17,989,281

 
$
13,594,033



15



15.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES 
 
On January 19, 2011, the wholly-owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation.   Borrowings under the company’s revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs are also covered under these guarantees.  As of September 26, 2015, Sysco had a total of $2.9 billion in senior notes, debentures and commercial paper outstanding 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. 
 
The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (the majority 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 Consolidating Balance Sheet
 
Sep. 26, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
237,758

 
$
4,252,595

 
$
2,537,607

 
$

 
$
7,027,960

Investment in subsidiaries
9,473,425

 

 

 
(9,473,425
)
 

Plant and equipment,  net
512,397

 
1,662,227

 
1,786,675

 

 
3,961,299

Other assets
203,535

 
525,372

 
1,653,385

 

 
2,382,292

Total assets
$
10,427,115

 
$
6,440,194

 
$
5,977,667

 
$
(9,473,425
)
 
$
13,371,551

Current liabilities
$
478,158

 
$
1,105,347

 
$
2,387,311

 
$

 
$
3,970,816

Intercompany payables (receivables)
1,041,230

 
(1,670,713
)
 
629,483

 

 

Long-term debt
2,884,581

 
9,337

 
110,700

 

 
3,004,618

Other liabilities
715,169

 
271,194

 
59,826

 

 
1,046,189

Noncontrolling interest

 

 
44,243

 

 
44,243

Shareholders’ equity  
5,307,977

 
6,725,029

 
2,746,104

 
(9,473,425
)
 
5,305,685

Total liabilities and  shareholders’ equity
$
10,427,115

 
$
6,440,194

 
$
5,977,667

 
$
(9,473,425
)
 
$
13,371,551

 
 
Condensed Consolidating Balance Sheet
 
Jun. 27, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
4,894,387

 
$
4,012,924

 
$
2,586,993

 
$

 
$
11,494,304

Investment in subsidiaries
9,088,455

 

 

 
(9,088,455
)
 

Plant and equipment,  net
510,285

 
1,694,659

 
1,777,199

 

 
3,982,143

Other assets
371,802

 
522,566

 
1,618,466

 

 
2,512,834

Total assets
$
14,864,929

 
$
6,230,149

 
$
5,982,658

 
$
(9,088,455
)
 
$
17,989,281

Current liabilities
$
5,851,364

 
$
1,658,558

 
$
1,889,693

 
$

 
$
9,399,615

Intercompany payables (receivables)
973,497

 
(1,996,915
)
 
1,023,418

 

 

Long-term debt
2,154,923

 
10,121

 
106,781

 

 
2,271,825

Other liabilities
624,795

 
278,458

 
113,060

 

 
1,016,313

Noncontrolling interest

 

 
41,304

 

 
41,304

Shareholders’ equity  
5,260,350

 
6,279,927

 
2,808,402

 
(9,088,455
)
 
5,260,224

Total liabilities and  shareholders’ equity
$
14,864,929

 
$
6,230,149

 
$
5,982,658

 
$
(9,088,455
)
 
$
17,989,281


16



 
Condensed Consolidating Balance Sheet
 
Sep. 27, 2014
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
233,010

 
$
4,345,475

 
$
2,529,918

 
$

 
$
7,108,403

Investment in subsidiaries
8,297,396

 

 

 
(8,297,396
)
 

Plant and equipment,  net
488,618

 
1,758,530

 
1,721,565

 

 
3,968,713

Other assets
332,075

 
522,013

 
1,662,829

 

 
2,516,917

Total assets
$
9,351,099

 
$
6,626,018

 
$
5,914,312

 
$
(8,297,396
)
 
$
13,594,033

Current liabilities
$
831,556

 
$
953,078

 
$
2,751,855

 
$

 
$
4,536,489

Intercompany payables (receivables)
2,292

 
(111,694
)
 
109,402

 

 

Long-term debt
2,560,245

 
15,232

 
51,133

 

 
2,626,610

Other liabilities
635,590

 
318,736

 
121,094

 

 
1,075,420

Noncontrolling interest

 

 
34,098

 

 
34,098

Shareholders’ equity  
5,321,416

 
5,450,666

 
2,846,730

 
(8,297,396
)
 
5,321,416

Total liabilities and  shareholders’ equity
$
9,351,099

 
$
6,626,018

 
$
5,914,312

 
$
(8,297,396
)
 
$
13,594,033

 
 
Condensed Consolidating Statement of Comprehensive Income
 
For the 13-Week Period Ended Sep. 26, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
8,524,550

 
$
4,426,998

 
$
(388,937
)
 
$
12,562,611

Cost of sales

 
6,912,169

 
3,801,384

 
(388,937
)
 
10,324,616

Gross profit

 
1,612,381

 
625,614

 

 
2,237,995

Operating expenses
199,375

 
956,915

 
588,231

 

 
1,744,521

Operating income (loss)
(199,375
)
 
655,466

 
37,383

 

 
493,474

Interest expense (income)
146,097

 
(39,983
)
 
20,793

 

 
126,907

Other expense (income), net
(5,077
)
 
(477
)
 
(9,686
)
 

 
(15,240
)
Earnings (losses) before income taxes
(340,395
)
 
695,926

 
26,276

 

 
381,807

Income tax (benefit) provision
(122,484
)
 
250,417

 
9,454

 

 
137,387

Equity in earnings of subsidiaries
462,331

 

 

 
(462,331
)
 

Net earnings
244,420

 
445,509

 
16,822

 
(462,331
)
 
244,420

Other comprehensive income (loss)
(84,341
)
 

 
(183,185
)
 
183,185

 
(84,341
)
Comprehensive income
$
160,079

 
$
445,509

 
$
(166,363
)
 
$
(279,146
)
 
$
160,079

 
 
 
Condensed Consolidating Statement of Comprehensive Income
 
For the 13-Week Period Ended Sep. 27, 2014
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
8,322,308

 
$
4,464,469

 
$
(341,696
)
 
$
12,445,081

Cost of sales

 
6,774,508

 
3,823,552

 
(341,696
)
 
10,256,364

Gross profit

 
1,547,800

 
640,917

 

 
2,188,717

Operating expenses
190,897

 
932,195

 
600,012

 

 
1,723,104

Operating income (loss)
(190,897
)
 
615,605

 
40,905

 

 
465,613

Interest expense (income)
50,166

 
(21,474
)
 
2,242

 

 
30,934

Other expense (income), net
(2,402
)
 
(399
)
 
613

 

 
(2,188
)
Earnings (losses) before income taxes
(238,661
)
 
637,478

 
38,050

 

 
436,867

Income tax (benefit) provision
(86,344
)
 
230,631

 
13,767

 

 
158,054

Equity in earnings of subsidiaries
431,130

 

 

 
(431,130
)
 

Net earnings
278,813

 
406,847

 
24,283

 
(431,130
)
 
278,813

Other comprehensive income (loss)
(100,509
)
 

 
(71,254
)
 
71,254

 
(100,509
)
Comprehensive income
$
178,304

 
$
406,847

 
$
(46,971
)
 
$
(359,876
)
 
$
178,304

 

17



 
Condensed Consolidating Cash Flows
 
For the 13-Week Period Ended Sep. 26, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
Operating activities
$
(525,626
)
 
$
(317,193
)
 
$
581,337

 
$
(261,482
)
Investing activities
138,186

 
(13,083
)
 
(160,164
)
 
(35,061
)
Financing activities
(4,445,507
)
 
(800
)
 
8,903

 
(4,437,404
)
Effect of exchange rates on cash

 

 
(7,841
)
 
(7,841
)
Intercompany activity
59,403

 
329,064

 
(388,467
)
 

Net increase (decrease) in cash and cash equivalents
(4,773,544
)
 
(2,012
)
 
33,768

 
(4,741,788
)
Cash and cash equivalents at the beginning of period
4,851,074

 
26,377

 
252,593

 
5,130,044

Cash and cash equivalents at the end of period
$
77,530

 
$
24,365

 
$
286,361

 
$
388,256

 
 
Condensed Consolidating Cash Flows
 
For the 13-Week Period Ended Sep. 27, 2014
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
Operating activities
$
(93,666
)
 
$
(24,502
)
 
$
180,786

 
$
62,618

Investing activities
(33,867
)
 
(33,841
)
 
(102,086
)
 
(169,794
)
Financing activities
46,544

 
605

 
37,385

 
84,534

Effect of exchange rates on cash

 

 
(5,506
)
 
(5,506
)
Intercompany activity
58,326

 
55,264

 
(113,590
)
 

Net increase (decrease) in cash and cash equivalents
(22,663
)
 
(2,474
)
 
(3,011
)
 
(28,148
)
Cash and cash equivalents at the beginning of period
158,957

 
27,772

 
226,317

 
413,046

Cash and cash equivalents at the end of period
$
136,294

 
$
25,298

 
$
223,306

 
$
384,898


16.  SUBSEQUENT EVENTS
 
Senior Notes Offering
On September 28, 2015, which is in Sysco's second quarter of fiscal 2016, Sysco issued senior notes totaling $2.0 billion. Details of the senior notes are as follows:
Maturity Date
 
Par Value
(in millions)
 
Coupon Rate
 
Pricing
(percentage of par)
October 1, 2020
 
$
750

 
2.60
%
 
99.809
%
October 1, 2025
 
750

 
3.75
%
 
100.00
%
October 1, 2045
 
500

 
4.85
%
 
99.921
%
Sysco used the net proceeds from the offering to fund repurchases of outstanding shares of its common stock pursuant to Sysco’s previously announced $1.5 billion share repurchase program, to repay approximately $500 million of its outstanding commercial paper and for general corporate purposes. The notes initially are fully and unconditionally guaranteed by Sysco’s direct and indirect wholly owned subsidiaries that guarantee Sysco’s other senior notes. Interest on the senior notes will be paid semi-annually in arrears on April 1 and October 1, beginning April 1, 2016. At Sysco’s option, any or all of the senior notes may be redeemed, in whole or in part, at any time prior to maturity. If Sysco elects to redeem (i) the senior notes maturing in 2020 before the date that is one month prior to the maturity date, (ii) the senior notes maturing in 2025 before the date that is three months prior to the maturity date or (iii) the senior notes maturing in 2045 before the date that is six months prior to the maturity date, Sysco will pay an amount equal to the greater of 100% of the principal amount of the senior notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the senior notes to be redeemed that would be due if such senior notes matured on the applicable date described above. If Sysco elects to redeem a series of senior notes on or after the applicable date described in the preceding sentence, Sysco will pay an amount equal to 100% of the principal amount of the senior notes to be redeemed. Sysco will pay accrued and unpaid interest on the notes redeemed to the redemption date.

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Hedging Transactions
As noted in Note 6, "Derivative Financial Instruments" the company terminated forward starting interest rate swap agreements used to hedge the senior notes offering discussed above. Payments of $6.1 million were made in relation to the termination of the swap agreements in the second quarter of fiscal 2016.

Concurrent with the offering of senior notes discussed above, the company entered into interest rate swap agreements that effectively converted $750 million of senior notes maturing in fiscal 2020 to floating rate debt. These transactions were designated as fair value hedges against the changes in fair value of fixed rate debt resulting from changes in interest rates.

Accelerated Share Repurchase Program
On September 23, 2015, the company entered into a Master Confirmation and Supplemental Confirmation (collectively, the ASR Agreement) with Goldman, Sachs & Co. (Goldman) relating to an accelerated share repurchase program (the ASR Program). Pursuant to the terms of the ASR Agreement, Sysco agreed to repurchase $1.5 billion of its common stock from Goldman.

In connection with the ASR Program, the company paid $1.5 billion to Goldman on September 28, 2015, in exchange for 32,319,392 shares of the company’s outstanding common stock, which represents a substantial majority of the shares owed to Sysco by Goldman; however, the number of shares ultimately delivered to the company by Goldman is subject to adjustment based on the volume-weighted average share price of the company’s common stock during the term of the ASR Agreement, less an agreed discount. Sysco expects all purchases under the ASR Program to be completed by May 2016, although the exact date of completion will depend on whether or when Goldman exercises an acceleration option that it has under the ASR Agreement. At settlement, the company may be entitled to receive additional shares of common stock from Goldman or, under certain circumstances, may be required to issue additional shares or make a payment to Goldman at the company’s option.

The ASR Agreement contains the principal terms and provisions governing the ASR Program, including, but not limited to, the mechanism used to determine the number of shares that will be delivered, the required timing of delivery of the shares, the specific circumstances under which Goldman may delay any date of valuation or settlement under the ASR Program (such as upon the occurrence of certain market disruptions), the specific circumstances under which Goldman is permitted to make adjustments to the terms of the ASR Program or to terminate the ASR Program (such as upon the announcement of certain fundamental transactions affecting the company), and various acknowledgments, representations and warranties made by Sysco and Goldman to one another.

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 27, 2015, and 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 27, 2015, as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. 
 
The 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 severance charges, merger and integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods, Inc. (US Foods), facility closure charges and US Foods related financing costs. These fiscal 2016 and fiscal 2015 items are collectively referred to as "Certain Items".  Also, with respect to adjusted return on invested capital targets, our invested capital is adjusted for the accumulation of any excess cash against our average debt amounts. Our US Foods financing costs related to senior notes that were issued in fiscal 2015 in order to fund the proposed merger. These senior notes were redeemed in the first quarter of fiscal 2016 and triggered a redemption loss of $86.5 million, and we incurred interest on the notes through the redemption date. These senior notes were issued subsequent to the completion of the first quarter of fiscal 2015 and, therefore, our costs in the first quarter of fiscal 2015 only represent amortization of debt issuance costs for a bridge acquisition facility that existed at that time. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” 
 
Overview 
 
Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers.  Our primary operations are located throughout the United States (U.S.), Bahamas, Canada, Costa Rica, Ireland and Mexico and include broadline companies, SYGMA (our chain restaurant distribution subsidiary), specialty produce companies, custom-cut meat companies, hotel supply operations, a company that distributes specialty imported products,

19



a company that distributes to international customers and our Sysco Ventures platform, which includes our suite of technology solutions that help support the business needs of our customers.

Highlights    
 
Industry trends have been mixed, exhibiting both signs of improvement and cautionary indications. While consumer confidence and unemployment figures have been encouraging and certain industry segments have experienced positive spend and traffic trends, other segments have experienced the impacts of slowing same store sales growth and negative traffic growth rates. Among these conditions, our case volume growth remained strong in the first quarter of fiscal 2016, particularly for locally-managed customers, and our gross margin performance improved in a challenging deflationary environment. Despite these items contributing to improvements, our sales growth moderated in the first quarter of fiscal 2016, as compared to the first quarter of fiscal 2015, due to product cost deflation and unfavorable impacts from foreign exchange translation.  Our operating expenses for the first quarter of fiscal 2016 increased partially from higher case volumes and increased long-term incentive accruals; however, for our U.S. Broadline operations, our first quarter expense management performance trends improved on a cost per case basis.  Interest expense was negatively impacted by the redemption loss and interest through the redemption date related to debt that had been issued in fiscal 2015 for the purpose of funding the merger that had been proposed with US Foods. Our net earnings and earnings per share decreased for the first quarter of fiscal 2016, as compared to the corresponding period in fiscal 2015, primarily due to these factors. An increase in outstanding shares also negatively impacted our per-share amounts.  Excluding Certain Items, our net earnings slightly increased in the first quarter of fiscal 2016 as compared to the corresponding prior year period.
    
Comparisons of results from the first quarter of fiscal 2016 to the first quarter of fiscal 2015
Sales increased 0.9%, or $0.1 billion, to $13 billion;
Operating income increased 6.0%, or $27.9 million, to $493.5 million
Adjusted operating income decreased 0.5%, or $2.6 million, to $506.5 million;
Net earnings decreased 12.3%, or $34.4 million, to $244.4 million
Adjusted net earnings increased 0.9%, or $2.8 million, to $312 million;
Basic earnings per share and diluted earnings per share in the first quarter of fiscal 2016 were both $0.41, a
12.8% decrease from the comparable prior year amount of $0.47 per share; and
Adjusted diluted earnings per share were $0.52 in the first quarter of fiscal 2016 and fiscal 2015
 
See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures. 
 
Trends and Strategy 
 
Trends
 
General economic conditions can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. Consumer confidence and employment metrics, such as unemployment rates have shown some signs of improvement; however, consumer spending has been cautious. Restaurant same-store sales and traffic has been mixed.
 
Our sales and gross profit performance can be influenced by multiple factors including price, volume, product mix and our ability to grow both sales and gross profit. The modest level of growth in the foodservice market has created additional competitive pricing pressures, which is, in turn, negatively impacting sales and gross profits. Case growth with our locally-managed Broadline business is needed to drive gross profit dollar growth. Our locally-managed customers, including independent restaurant customers, comprise a significant portion of our overall volumes and an even greater percentage of profitability due to the high level of value added services we typically provide to this customer group. Through focused efforts, our locally-managed case volume growth has accelerated. Our sales to corporate-managed customers, including chain restaurants and multi-locational restaurants, also comprise a significant portion of our overall volumes. Gross margin on sales to our corporate-managed customers is generally lower than on sales to other types of customers due to the higher volumes we sell to these customers. Case growth for our corporate-managed customers remained strong, but competitive pricing pressure has constrained our gross margins. Inflation is a factor that contributes to the level of sales and gross profit growth and can be a factor that contributes to gross margin pressure. We experienced a small amount of deflation in the first quarter of fiscal 2016 at a rate of 0.2%, a significant decline from inflation of 4.9% experienced in the first quarter of fiscal 2015. A deflationary environment has occurred only two times over the past 10 years, each lasting three to nine months. While we cannot predict whether deflation will continue at current levels, rapid decreases in prices can make it challenging to leverage our fixed costs. Our category management efforts and focus on our Sysco branded items have helped us to manage our gross margin performance in response to several of these factors. Lastly, changes in foreign exchange rates are having a larger impact on our sales results compared to our previous fiscal quarters. The strengthening

20



U.S. dollar is depressing our foreign sales as we convert them to U.S. dollars, primarily from our Canadian operations. The 2.0% year-over-year decrease to sales growth from currency translation experienced in the first quarter had the highest impact in the past three years. Foreign currency translation has also negatively impacted our operating income, net earnings and earnings per share. We expect both deflation and foreign currency translation to be factors that impact our results for the next few months.    
 
We have experienced higher operating expenses in the first quarter of fiscal 2016 as compared to the first quarter of fiscal 2015 that are attributable to higher case volumes, with payroll and compensation costs contributing to a lesser extent. Higher management incentive accruals for long-term incentives also impacted our operating expenses. These incentives are based on Sysco's total shareholder return as compared to the S&P 500. Sysco's stock performance improved relative to the S&P 500 in the first quarter of fiscal 2016. Investments in technology projects that provide key support to achieving our financial targets over the next three years also contributed to expense increases.
 
Interest expense for the first quarter of fiscal 2016 increased $96.0 million, as compared to the first quarter of fiscal 2015, primarily due to the redemption of the senior notes issued in fiscal 2015, to fund the merger that had been proposed with US Foods. The redemption resulted in the payment of a redemption fee, write-offs for unamortized debt issuance costs and discounts associated with these senior notes and a gain on interest rate swap agreements that had been used to hedge these senior notes. In the second quarter of fiscal 2016, Sysco issued $2.0 billion in senior notes and proceeds of $1.5 billion were used to fund our accelerated share repurchase that will lower our share count over the remainder of fiscal 2016. We believe our accelerated share repurchase will provide an expected earnings per share benefit of approximately $0.03 to $0.04 per share in fiscal 2016, driven by a 4% to 5% reduction in average shares outstanding, partially offset by higher interest expense from the new debt issuance.

Strategy
 
We are focused on optimizing our core broadline business in the U.S., Bahamas, Canada, Costa Rica, Ireland and Mexico, with a customer centric approach, while continuing to explore appropriate opportunities to profitably grow our market share and create shareholder value by expanding beyond our core business. Day-to-day, our business decisions are driven by our mission to market and deliver great products to our customers with exceptional service, with the aspirational vision of becoming our customers’ most valued and trusted business partner. 
 
We have identified five components of our strategy to help us achieve our mission and vision:

Partnership - Profoundly enrich the experience of doing business with Sysco;

Productivity - Continuously improve productivity in all areas of our business;

Products - Enhance offerings through a customer-centric innovation program;

People - Implement enterprise-wide talent management process; and 

Expansion - Explore, assess and pursue new businesses and markets.

In the first quarter of fiscal 2016, we set new three-year financial targets that placed emphasis on accelerating locally-managed customer case growth, managing our operating and administrative costs, growing operating income and return on invested capital. Our key goals are to grow our operating income by at least $400 million by the end of fiscal 2018, and improve our adjusted return on invested capital. We do not expect our improvements to occur evenly on a quarterly basis; however, we are targeting to achieve 20% to 30% of our operating income improvement goal in fiscal 2016. In accomplishing these goals, we believe we could achieve a diluted earnings per share result in the range of $2.40 to $2.50 in fiscal 2018. Return on invested capital improvements include goals to improve our working capital by four days through improved management of working capital, specifically from the combined impact of accounts receivables, inventory and accounts payable. Our underlying assumptions in achieving these goals include moderate growth in our dividend, pursuing investments through acquisitions and reducing diluted shares outstanding through a $3.0 billion share buyback program over the next two years, approximately half of which has been completed, and repurchasing shares to offset any new share issuances from employee equity compensation.

21



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. 26, 2015
 
Sep. 27, 2014
Sales
100.0
 %
 
100.0
%
Cost of sales
82.2

 
82.4

Gross profit
17.8

 
17.6

Operating expenses
13.9

 
13.9

Operating income
3.9

 
3.7

Interest expense
1.0

 
0.2

Other expense (income), net
(0.1
)
 

Earnings before income taxes
3.0

 
3.5

Income taxes
1.1