10-Q 1 syy2016q310-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 March 26, 2016

¨    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 ☑ 
 
563,515,990 shares of common stock were outstanding as of April 23, 2016.





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)
 
Mar. 26, 2016
 
June 27, 2015
 
Mar. 28, 2015
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
610,838

 
$
5,130,044

 
$
5,084,704

Accounts and notes receivable, less allowances of
$66,066, $41,720, and $75,969
3,509,438

 
3,353,381

 
3,496,254

Inventories
2,703,635

 
2,691,823

 
2,649,752

Deferred income taxes

 
135,254

 
140,284

Prepaid expenses and other current assets
119,408

 
93,039

 
80,965

Prepaid income taxes
16,714

 
90,763

 
69,348

Total current assets
6,960,033

 
11,494,304

 
11,521,307

Plant and equipment at cost, less depreciation
3,900,470

 
3,982,143

 
3,970,261

Long-term assets
 

 
 

 
 

Goodwill
2,079,529

 
1,959,817

 
1,933,385

Intangibles, less amortization
193,672

 
154,809

 
154,277

Restricted cash

 
168,274

 
166,208

Other assets
217,390

 
229,934

 
198,707

Total other assets
2,490,591

 
2,512,834

 
2,452,577

Total assets
$
13,351,094

 
$
17,989,281

 
$
17,944,145

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
79,836

 
$
70,751

 
$
79,620

Accounts payable
2,906,651

 
2,881,953

 
2,836,430

Accrued expenses
1,118,410

 
1,467,610

 
1,109,887

Current maturities of long-term debt
7,175

 
4,979,301

 
313,919

Total current liabilities
4,112,072

 
9,399,615

 
4,339,856

Long-term liabilities
 

 
 

 
 

Long-term debt
4,274,884

 
2,271,825

 
7,235,941

Deferred income taxes
107,136

 
81,591

 
117,674

Other long-term liabilities
810,642

 
934,722

 
898,062

Total other liabilities
5,192,662

 
3,288,138

 
8,251,677

Commitments and contingencies


 


 


Noncontrolling interest
76,929

 
41,304

 
39,729

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
1,039,236

 
1,213,999

 
1,185,012

Retained earnings
8,964,542

 
8,751,985

 
8,857,277

Accumulated other comprehensive loss
(988,101
)
 
(923,197
)
 
(920,140
)
Treasury stock at cost, 200,223,397,
    170,857,231 and 171,860,470 shares
(5,811,421
)
 
(4,547,738
)
 
(4,574,441
)
Total shareholders' equity
3,969,431

 
5,260,224

 
5,312,883

Total liabilities and shareholders' equity
$
13,351,094

 
$
17,989,281

 
$
17,944,145

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
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
Sales
$
12,002,791

 
$
11,746,659

 
$
36,719,028

 
$
36,278,814

Cost of sales
9,859,966

 
9,689,161

 
30,181,394

 
29,947,462

Gross profit
2,142,825

 
2,057,498

 
6,537,634

 
6,331,352

Operating expenses
1,765,207

 
1,730,190

 
5,233,959

 
5,222,985

Operating income
377,618

 
327,308

 
1,303,675

 
1,108,367

Interest expense
57,699

 
69,550

 
231,841

 
177,526

Other expense (income), net
(6,952
)
 
(8,577
)
 
(29,956
)
 
(8,558
)
Earnings before income taxes
326,871

 
266,335

 
1,101,790

 
939,399

Income taxes
109,735

 
89,380

 
367,835

 
325,652

Net earnings
$
217,136

 
$
176,955

 
$
733,955

 
$
613,747

 
 
 
 
 
 
 
 
Net earnings:
 

 
 

 
 
 
 
Basic earnings per share
$
0.38

 
$
0.30

 
$
1.27

 
$
1.04

Diluted earnings per share
0.38

 
0.30

 
1.26

 
1.03

 
 
 
 
 
 
 
 
Average shares outstanding
566,487,516

 
594,030,427

 
576,651,249

 
591,009,787

Diluted shares outstanding
570,814,798

 
598,921,070

 
580,980,865

 
596,047,008

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.31

 
$
0.30

 
$
0.92

 
$
0.89

 
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
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
Net earnings
$
217,136

 
$
176,955

 
$
733,955

 
$
613,747

Other comprehensive (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
50,373

 
(97,890
)
 
(81,309
)
 
(260,997
)
Items presented net of tax:
 

 
 

 
 

 
 

Amortization of cash flow hedges
1,769

 
1,676

 
5,214

 
3,441

Change in fair value of cash flow hedges

 

 
(3,779
)
 
(34,111
)
Amortization of prior service cost
1,715

 
1,737

 
5,145

 
5,211

Amortization of actuarial loss, net
3,275

 
2,993

 
9,825

 
8,979

Total other comprehensive income (loss)
57,132

 
(91,484
)
 
(64,904
)
 
(277,477
)
Comprehensive income
$
274,268

 
$
85,471

 
$
669,051

 
$
336,270

 
See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED CASH FLOWS (Unaudited) 
(In thousands)
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
Cash flows from operating activities:
 

 
 

Net earnings
$
733,955

 
$
613,747

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

 
 

Share-based compensation expense
66,333

 
61,698

Depreciation and amortization
460,664

 
411,842

Amortization of debt issuance and other debt-related costs
36,088

 
24,057

Loss on extinguishment of debt
86,460

 

Deferred income taxes
125,527

 
5,237

Provision for losses on receivables
15,596

 
17,256

Other non-cash items
(18,918
)
 
(10,177
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

(Increase) in receivables
(174,826
)
 
(177,018
)
(Increase) in inventories
(6,825
)
 
(97,389
)
Decrease in prepaid expenses and other current assets
20,530

 
1,540

Increase in accounts payable
11,358

 
37,239

(Decrease) increase in accrued expenses
(357,503
)
 
100,921

Increase (decrease) in accrued income taxes
93,601

 
(13,323
)
Decrease (increase) in other assets
4,954

 
(4,396
)
(Decrease) in other long-term liabilities
(84,076
)
 
(96,838
)
Excess tax benefits from share-based compensation arrangements
(23,937
)
 
(13,897
)
Net cash provided by operating activities
988,981

 
860,499

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(360,883
)
 
(437,286
)
Proceeds from sales of plant and equipment
12,623

 
15,404

Acquisition of businesses, net of cash acquired
(167,701
)
 
(29,177
)
Decrease (increase) in restricted cash
168,274

 
(20,796
)
Purchase of foreign currency options
(34,648
)
 

Net cash used for investing activities
(382,335
)
 
(471,855
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net

 
(129,999
)
Other debt borrowings including senior notes
2,028,639

 
5,045,345

Other debt repayments
(77,842
)
 
(34,184
)
Redemption of senior notes
(5,050,000
)
 

Debt issuance costs
(20,491
)
 
(30,980
)
Cash paid for settlement of cash flow hedge
(6,134
)
 
(188,840
)
Cash received from termination of interest rate swap agreements
14,496

 

Proceeds from stock option exercises
222,798

 
201,764

Accelerated share and treasury stock purchases
(1,711,481
)
 

Dividends paid
(523,665
)
 
(516,540
)
Excess tax benefits from share-based compensation arrangements
23,937

 
13,897

Net cash (used for) provided by financing activities
(5,099,743
)
 
4,360,463

Effect of exchange rates on cash and cash equivalents
(26,109
)
 
(77,449
)
Net (decrease) increase in cash and cash equivalents
(4,519,206
)
 
4,671,658

Cash and cash equivalents at beginning of period
5,130,044

 
413,046

Cash and cash equivalents at end of period
$
610,838

 
$
5,084,704

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
158,957

 
$
115,969

Income taxes
165,904

 
345,624

 
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. 
The company adopted Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs in fiscal 2015. 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. This guidance requires retrospective application; therefore, prior year amounts within the consolidated balance sheets have been reclassified to conform to the current year presentation.
Deferred taxes within the consolidated balance sheet for March 26, 2016, have been classified as long-term due to the adoption of an accounting pronouncement related to simplification in the presentation of deferred taxes. 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.
In the fourth quarter of fiscal 2015, Sysco acquired a 50% interest in a foodservice company in Mexico and accounted for this interest using the equity-method of accounting. In the third quarter of fiscal 2016, Sysco obtained control of the board of this company and began consolidating these operations; therefore, the financial position, results of operations and cash flows for this company have been included in Sysco’s consolidated financial statements. The value of the 50% noncontrolling interest is considered redeemable due to certain features of the investment agreement and has been presented as mezzanine equity, which is outside of permanent equity, in the consolidated balance sheets. The income attributable to the noncontrolling interest is located within Other expense (income), net, in the consolidated results of operations, as this amount is not material. The non-cash add back for the change in the value of the noncontrolling interest is located within Other non-cash items on the consolidated cash flows.
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 
Simplification of Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, as part of its simplification initiative, which is the FASB's effort to reduce the cost and complexity of certain aspects of U.S. GAAP. This guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The guidance does not change the existing requirement that only permits offsetting of deferred tax assets and deferred tax liabilities within a jurisdiction. The company early adopted this standard in the second quarter of fiscal 2016 on a prospective basis, as permitted by the ASU.

3.  NEW ACCOUNTING STANDARDS 
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its initiative to reduce complexity in accounting standards. The areas for simplification involve several aspects of the accounting for employee share-based payment transactions, including the income tax

5



consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The guidance is effective for interim and annual periods beginning after December 15, 2016, which is fiscal 2018 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.

Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), specifying the accounting for leases, which supersedes the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting is largely unchanged from the previous accounting standard. In addition, Topic 842 expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which is fiscal 2020 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.

Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), which requires the following: (1) all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee); (2) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (3) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The guidance is effective for interim and annual periods beginning after December 15, 2017, which is fiscal 2019 for Sysco. The company is currently reviewing the provisions of the new standard.

Business Combinations
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), which requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendment will be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier adoption permitted.

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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The collective 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.


6



4.  ACQUISITIONS
During the first 39 weeks of fiscal 2016, the company paid cash of $167.7 million for acquisitions. The acquisitions did not have a material effect on operating results, cash flows or financial position. Certain current year and prior year acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of March 26, 2016, aggregate contingent consideration outstanding was $25.6 million, of which $17.3 million was recorded as earnout liabilities.
During the third quarter of fiscal 2016, the company entered into a share sale and purchase agreement (the Purchase Agreement) to acquire Cucina Lux Investments Limited, a parent holding company of the Brakes Group (the Brakes Acquisition). The Brakes Group is a leading European foodservice business with operations in the United Kingdom, France, Sweden, Ireland, Spain, Belgium and Luxembourg. The aggregate enterprise value to be paid by Sysco in the Brakes Acquisition is approximately £2.2 billion (approximately $3.1 billion based on the applicable exchange rates as of March 26, 2016), and includes the repayment of approximately $2.3 billion of the Brakes Group’s outstanding financial debt. The purchase price will be paid entirely in cash and is subject to certain adjustments as provided in the Purchase Agreement. Following the closing of the Brakes Acquisition, the Brakes Group will be wholly owned by Sysco. The company entered into foreign currency option contracts with maturities of less than three months to protect Sysco from a decrease in the foreign exchange rate between the U.S. dollar and the pound sterling on a notional amount of £1.1 billion (approximately $1.5 billion based on the applicable exchange rates as of March 26, 2016). The completion of the Brakes Acquisition is subject only to conditions relating to required antitrust approvals, and the Purchase Agreement generally requires each party to use its reasonable best endeavors to obtain such approvals and to consummate the Brakes Acquisition. The Purchase Agreement contains limited termination rights, including the automatic termination of the Purchase Agreement if the conditions have not been satisfied by November 27, 2016. The Purchase Agreement does not require payment of fees by or to either party in the event of termination of the Brakes Acquisition. The company currently expects the acquisition to close in June or July 2016.
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 7, "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 other assets and other long-term liabilities as Level 2 measurements in the tables below.
Foreign exchange option contracts, discussed further in Note 7, "Derivative Financial Instruments" are valued using a standard industry valuation model that projects future cash flows and discounts the future amounts to a present value using market-based observable inputs including foreign exchange rates, credit risk and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments held; accordingly, the company classifies these valuation techniques as Level 2 measurements in the tables below.

7



The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of March 26, 2016June 27, 2015 and March 28, 2015:  
 
Assets and Liabilities Measured at Fair Value as of Mar. 26, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
134,925

 
$
34,050

 
$

 
$
168,975

Prepaid expenses and other current assets
 
 
 
 
 
 
 
   Foreign exchange option contracts

 
37,244

 

 
37,244

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
11,801

 

 
11,801

Total assets at fair value
$
134,925

 
$
83,095

 
$

 
$
218,020

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Long-term debt
$

 
$
1,293,507

 
$

 
$
1,293,507

Total liabilities at fair value
$

 
$
1,293,507

 
$

 
$
1,293,507


 
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:
 

 
 

 
 

 
 

Current maturities 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

 


8



 
Assets and Liabilities Measured at Fair Value as of Mar. 28, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash equivalents
$
4,760,760

 
$
63,213

 
$

 
$
4,823,973

Restricted cash
166,208

 

 

 
166,208

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
23,295

 

 
23,295

Total assets at fair value
$
4,926,968

 
$
86,508

 
$

 
$
5,013,476

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Long-term debt
$

 
$
1,770,798

 
$

 
$
1,770,798

Total liabilities at fair value
$

 
$
1,770,798

 
$

 
$
1,770,798

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar 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 $3.4 billion, $5.6 billion and $7.7 billion as of March 26, 2016, June 27, 2015 and March 28, 2015, respectively. The carrying value of total non-hedged debt was $3.1 billion, $5.4 billion and $7.2 billion as of March 26, 2016June 27, 2015 and March 28, 2015, respectively.

6. ENTERPRISE RESOURCE PLANNING ASSETS
In the third quarter of fiscal 2016, Sysco announced its revised business technology strategy focused on improving the customer experience. In refocusing its technology approach, Sysco created plans to modernize and add new capability and functionality to its existing SUS Enterprise Resource Planning (ERP) system. In connection with this strategy, Sysco created plans to remove the SAP ERP platform currently used by 12 of its operating companies by the end of fiscal 2017. At the time of the decision, the company had $31.6 million recorded as construction in progress for incomplete projects for the SAP ERP platform and $251.1 million in net book value for internal use software for the SAP ERP platform, with the majority having a remaining life of three years. Sysco concluded that the projects under development would not be completed and expensed the $31.6 million in construction in progress in the third quarter of fiscal 2016. The company tested the internal use software currently amortizing for the SAP ERP platform on an undiscounted cash flow basis and concluded that those cash flows would be sufficient to recover the full asset value for the remaining period the asset is planned to be in use. Sysco shortened the remaining life of the internal use assets to fully amortize by the end of fiscal 2017, concurrent with the expected time frame to fully migrate Sysco's 12 operating companies to the SUS ERP system. In the third quarter of fiscal 2016, Sysco recognized an additional $11.0 million in amortization expense as a result of shortening the useful lives of these assets.

7.  DERIVATIVE FINANCIAL INSTRUMENTS 
Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. The proposed Brakes Acquisition requires payment for the purchase price in pound sterling. Sysco chose to economically hedge this foreign currency exposure. The company does not use derivative financial instruments for trading or speculative purposes. 

Hedging of debt portfolio
In October 2015, Sysco issued senior notes totaling $2.0 billion to fund $1.5 billion in repurchases of outstanding shares of its common stock pursuant to its $1.5 billion accelerated share repurchase program, to repay approximately $500 million of its outstanding commercial paper and for general corporate purposes. Concurrent with the offering of these senior notes, 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 benchmark interest rates.

9



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 the forecasted 10-year debt due to changes in the benchmark interest rates on debt the company issued in October 2015. Concurrent with this debt offering, Sysco terminated the swaps and paid $6.1 million. The loss was recorded in accumulated other comprehensive income (loss) and will be amortized to interest expense over the term of the originally hedged fixed-rate interest rate payments.
In October 2014, Sysco obtained long-term financing for its proposed merger with US Foods, Inc. (US Foods) by completing a six-part senior notes offering totaling $5.0 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, the company 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 until the expected issuance of the debt. 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 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 hedged fixed-rate interest rate payments, as those payments are anticipated to remain within Sysco's capital structure. The interest payments included in Sysco's originally hedged amount were 60 semiannual interest cash flows on $1.0 billion in aggregate principal amount of fixed rate debt and 20 semiannual interest cash flows on $1.0 billion in aggregate principal amount of fixed rate debt. Amortization commenced in October 2014 when those interest payments began affecting earnings.
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.

Hedging of foreign currency exposure
The company's proposed Brakes Acquisition requires payment of the purchase price in pounds sterling. The company entered into foreign currency option contracts with maturities of less than three months to protect Sysco from a decrease in the foreign exchange rate between the U.S. dollar and the pound sterling. Such contracts are considered economic hedges and do not qualify for hedge accounting. Sysco recognizes gains or losses on these contracts within operating expense on its consolidated statements of operations. As of March 26, 2016, the total net unrealized gain on our economic hedge foreign exchange forward contracts was $2.6 million. As these amounts do not qualify for hedge accounting, changes in the fair value are recorded directly to earnings. As of March 26, 2016, the notional values of our foreign exchange option contracts that do not qualify for hedge accounting were £1.1 billion (approximately $1.5 billion based on the applicable exchange rate as of March 26, 2016). The premiums for these contracts totalled $34.6 million and the fair value of these contracts at March 26, 2016 was $37.2 million. The fair value is located within Prepaid expenses and other current assets on the company's consolidated balance sheet.
The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of March 26, 2016, June 27, 2015 and March 28, 2015 are as follows:
 
Asset Derivatives
 
Balance Sheet Location
 
Fair Value
 
(In thousands)
Interest rate swap agreements:
 
 
 
Mar. 26, 2016
Other assets
 
$
11,801

Jun. 27, 2015
Other assets
 
12,597

Mar. 28, 2015
Other assets
 
23,295


10



The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended March 26, 2016 and March 28, 2015 presented on a pretax basis are as follows:
 
Location of (Gain)
or Loss Recognized
 
Amount of (Gain)
or Loss Recognized
 
 
 
13-Week Period Ended
 
 
 
Mar. 26, 2016
 
Mar. 28, 2015
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$

 
$
(6,451
)
Cash Flow Hedge Relationships:
 
 
 
 
 
Interest rate contracts
Interest expense
 
$
2,872

 
$
2,720

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week periods ended March 26, 2016 and March 28, 2015 presented on a pretax basis are as follows:
 
Location of (Gain)
or Loss Recognized
 
Amount of (Gain)
or Loss Recognized
 
 
 
39-Week Period Ended
 
 
 
Mar. 26, 2016
 
Mar. 28, 2015
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$

 
$
(16
)
Cash Flow Hedge Relationships:
 
 
 
 
 
Interest rate swap contracts
Interest expense
 
$
8,463

 
$
5,585

 
 
 
 
 
 
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 not applicable for the third quarter of fiscal 2016 and immaterial for the 39-week periods ended March 26, 2016 and March 28, 2015. The interest rate swaps do not contain credit-risk-related contingent features.

8.  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 March 26, 2016, there were no commercial paper issuances outstanding. Any outstanding amounts are classified within long-term debt, as the program is supported by a long-term revolving credit facility. During the first 39 weeks of 2016, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from zero to approximately $1.0 billion.

Senior Notes Redemption
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 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.

11



Interest expense for the first 39 weeks of fiscal 2016 includes the following amounts from these transactions:
 
 
 

39-Week Period Ended March 26, 2016

 
 
 
 
(In thousands)
Redemption Premium 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


Senior Notes Offering
On September 28, 2015, 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

 
100.000

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 $1.5 billion accelerated share repurchase program, to repay approximately $500 million of its outstanding commercial paper and for general corporate purposes. The notes 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.

Bridge Term Loan Agreement
In March 2016, Sysco entered into a £1,725 million bridge term loan agreement (the Bridge Term Loan Agreement) (approximately $2,440 million based on the applicable exchange rate as of March 26, 2016) to fund the proposed Brakes Acquisition. Subject to certain terms and conditions, Sysco would have been allowed to borrow up to £1,725 million as a term loan upon, or substantially contemporaneously with, the closing of the Brakes Acquisition to fund the Brakes Acquisition, refinance certain indebtedness of the Target and pay related fees and expenses.
Loans made under the Bridge Term Loan Agreement would have incurred interest at the applicable London Interbank Offered Rate for deposits in the lawful currency of the United Kingdom, plus an applicable rate of 75 to 212.5 basis points based on Sysco’s debt rating and the duration of the loans outstanding under the Bridge Term Loan Agreement. Sysco was also required to pay certain customary fees in connection with the Bridge Facility, including upfront, duration and ticking fees. The availability of loans under the Bridge Term Loan Agreement was conditioned on, among other things and subject to certain exceptions, the consummation of the Brakes Acquisition pursuant to the Purchase Agreement.
The Bridge Term Loan Agreement was terminated by Sysco in April 2016 following the closing of the offering of $2.5 billion in aggregate principal amount of new senior notes. See Note 18, "Subsequent Events" for additional information on this senior notes offering and other recent developments involving the company's debt.


12



9.  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 third quarter and first 39 weeks of fiscal 2016 and fiscal 2015 are as follows:
 
Pension Benefits
 
Other Postretirement Plans
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
 
(In thousands)
Service cost
$
2,902

 
$
2,815

 
$
134

 
$
134

Interest cost
42,833

 
42,779

 
153

 
148

Expected return on plan assets
(53,202
)
 
(57,156
)
 

 

Amortization of prior service cost
2,743

 
2,778

 
41

 
42

Amortization of actuarial loss (gain)
5,435

 
4,968

 
(118
)
 
(109
)
Net periodic costs (benefits)
$
711

 
$
(3,816
)
 
$
210

 
$
215

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement Plans
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
 
(In thousands)
Service cost
$
8,705

 
$
8,445

 
$
403

 
$
402

Interest cost
128,498

 
128,338

 
458

 
444

Expected return on plan assets
(159,606
)
 
(171,468
)
 

 

Amortization of prior service cost
8,228

 
8,332

 
124

 
126

Amortization of actuarial loss (gain)
16,305

 
14,904

 
(354
)
 
(327
)
Net periodic costs (benefits)
$
2,130

 
$
(11,449
)
 
$
631

 
$
645

      Sysco’s contributions to its company-sponsored defined benefit plans were $50.6 million and $68.8 million during the first 39 weeks of fiscal 2016 and 2015, respectively. 

10. SHAREHOLDERS' EQUITY
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. All purchases under the ASR Program will 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 initial receipt of 32,319,392 shares is included in Treasury Stock and reduced the company's weighted average common shares outstanding for the third quarter and first 39 weeks of fiscal 2016. The adjustment feature, which is based on the volume-weighted average share price, is considered a forward contract indexed to Sysco's own common stock and meets all of the applicable criteria for equity classification and, therefore, is not accounted for as a derivative instrument.


13



11.  EARNINGS PER SHARE 
The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
 
(In thousands, except for share
and per share data)
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
 
 
 
 
Net earnings
$
217,136

 
$
176,955

 
$
733,955

 
$
613,747

Denominator:
 

 
 

 
 
 
 
Weighted-average basic shares outstanding
566,487,516

 
594,030,427

 
576,651,249

 
591,009,787

Dilutive effect of share-based awards
4,327,282

 
4,890,643

 
4,329,616

 
5,037,221

Weighted-average diluted shares outstanding
570,814,798

 
598,921,070

 
580,980,865

 
596,047,008

Basic earnings per share
$
0.38

 
$
0.30

 
$
1.27

 
$
1.04

Diluted earnings per share
$
0.38

 
$
0.30

 
$
1.26

 
$
1.03

     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 3,100,000 and 2,600,000 for the third quarter of fiscal 2016 and fiscal 2015, respectively. 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 4,300,000 and 1,700,000 for the first 39 weeks of 2016 and 2015, respectively.

12.  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 $274.3 million and $85.5 million for the third quarter of fiscal 2016 and fiscal 2015, respectively. Comprehensive income was $669.1 million and $336.3 million for the first 39 weeks of fiscal 2016 and 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 Mar. 26, 2016
 
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
 
50,373

 

 
50,373

Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,872

 
1,103

 
1,769

Total other comprehensive (loss) income
 
 
$
61,346

 
$
4,214

 
$
57,132

 
 

14



 
 
 
13-Week Period Ended Mar. 28, 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
 
$
2,819

 
$
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
 
(97,890
)
 

 
(97,890
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,720

 
1,044

 
1,676

Total other comprehensive (loss) income
 
 
$
(87,492
)
 
$
3,992

 
$
(91,484
)
 
 
 
 
39-Week Period Ended Mar. 26, 2016
 
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
 
$
8,352

 
$
3,207

 
$
5,145

Amortization of actuarial loss (gain), net
Operating expenses
 
15,951

 
6,126

 
9,825

Total reclassification adjustments
 
 
24,303

 
9,333

 
14,970

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before
    reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(81,309
)
 

 
(81,309
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
8,463

 
3,249

 
5,214

Change in fair value of cash flow hedge
N/A
 
(6,134
)
 
(2,355
)
 
(3,779
)
Total other comprehensive (loss) income
 
 
$
(54,677
)
 
$
10,227

 
$
(64,904
)
 

15



 
 
 
39-Week Period Ended Mar. 28, 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
 
$
8,458

 
$
3,247

 
$
5,211

Amortization of actuarial loss (gain), net
Operating expenses
 
14,577

 
5,598

 
8,979

Total reclassification adjustments
 
 
23,035

 
8,845

 
14,190

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before
    reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(260,997
)
 

 
(260,997
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
5,585

 
2,144

 
3,441

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
 
 
$
(287,751
)
 
$
(10,274
)
 
$
(277,477
)
The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
39-Week Period Ended Mar. 26, 2016
 
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

 
(81,309
)
 

 
(81,309
)
Amortization of cash flow hedges

 

 
5,214

 
5,214

Change in fair value of cash flow hedges

 

 
(3,779
)
 
(3,779
)
Amortization of unrecognized prior service cost
5,145

 

 

 
5,145

Amortization of unrecognized net actuarial losses
9,825

 

 

 
9,825

Balance as of Mar. 26, 2016
$
(690,341
)
 
$
(179,042
)
 
$
(118,718
)
 
$
(988,101
)
 

16



 
39-Week Period Ended Mar. 28, 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. 28, 2014
$
(685,957
)
 
$
134,452

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

 
(260,997
)
 

 
(260,997
)
Amortization of cash flow hedges

 

 
3,441

 
3,441

Change in fair value of cash flow hedges

 

 
(34,111
)
 
(34,111
)
Amortization of unrecognized prior service cost
5,211

 

 

 
5,211

Amortization of unrecognized net actuarial losses
8,979

 

 

 
8,979

Balance as of Mar. 28, 2015
$
(671,767
)
 
$
(126,545
)
 
$
(121,828
)
 
$
(920,140
)

13.  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 (ESPP), and various non-employee director plans. 
 
Stock Incentive Plans 
In the first 39 weeks of fiscal 2016, options to purchase 4,367,764 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first 39 weeks of fiscal 2016 was $5.99.
In the first 39 weeks of fiscal 2016, 1,243,709 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 39 weeks of fiscal 2016 was $42.72

Employee Stock Purchase Plan 
     Plan participants purchased 1,021,767 shares of common stock under the ESPP during the first 39 weeks of fiscal 2016
     The weighted average fair value per share of employee stock purchase rights issued pursuant to the ESPP was $5.75 during the first 39 weeks 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 $66.3 million and $61.7 million for the first 39 weeks of fiscal 2016 and fiscal 2015, respectively. 
     As of March 26, 2016, there was $81.7 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 2.55 years. 

14.  INCOME TAXES 
Uncertain Tax Positions 
     As of March 26, 2016, the gross amount of unrecognized tax benefits was $25.6 million, and the gross amount of liability for accrued interest related to unrecognized tax benefits was $14.3 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 challenged upon audit or because the company agrees to the 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. 

17



 
Effective Tax Rate 
Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. In the third quarter of fiscal 2016, the company favorably resolved tax contingencies resulting in tax benefits of $7.7 million. In the third quarter of fiscal 2015, the tax rate was impacted by a tax contingency reversal of $5.0 million and reduced state taxes from legal restructuring. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rate in both periods. The effective tax rates for the third quarter of fiscal 2016 and fiscal 2015 were 33.57% and 33.56%, respectively. 
The effective tax rate for the first 39 weeks of fiscal 2016 was favorably impacted by the resolution of tax contingencies. The effective tax rate for the first 39 weeks of fiscal 2015 was favorably impacted by lower state taxes from legal restructuring and a reduction of uncertain tax position accruals. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rate in both periods. The effective tax rate for the first 39 weeks of fiscal 2016 and fiscal 2015 were 33.39% and 34.67%, 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.  

15.  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.

16.  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 broadline segments located in the Bahamas, Canada, Costa Rica, Ireland, Mexico and the United States. 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 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. 

18




The following tables set forth certain financial information for Sysco’s business segments:
 
13-Week Period Ended
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
Sales:
(In thousands)
 
(In thousands)
Broadline
$
9,466,912

 
$
9,262,260

 
$
29,100,718

 
$
28,782,482

SYGMA
1,497,366

 
1,506,352

 
4,450,106

 
4,607,827

Other
1,392,254

 
1,295,287

 
4,285,191

 
3,852,182

Intersegment sales
(354,741
)
 
(317,240
)
 
(1,116,987
)
 
(963,677
)
Total
$
12,002,791

 
$
11,746,659

 
$
36,719,028

 
$
36,278,814

 
 
 
 
 
 
 
 
 
13-Week Period Ended
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 28, 2015
 
Mar. 26, 2016
 
Mar. 28, 2015
Operating income:
(In thousands)
 
(In thousands)
Broadline
$
636,169

 
$
574,688

 
$
1,996,331

 
$
1,843,664

SYGMA
9,153

 
5,157

 
20,330

 
18,110

Other
45,889

 
31,241

 
109,262

 
102,661

Total segments
691,211

 
611,086

 
2,125,923

 
1,964,435

Corporate expenses
(313,593
)
 
(283,778
)
 
(822,248
)
 
(856,068
)
Total operating income
377,618

 
327,308

 
1,303,675

 
1,108,367

Interest expense
57,699

 
69,550

 
231,841

 
177,526

Other expense (income), net
(6,952
)
 
(8,577
)
 
(29,956
)
 
(8,558
)
Earnings before income taxes
$
326,871

 
$
266,335

 
$
1,101,790

 
$
939,399

 
 
Mar. 26, 2016
 
June 27, 2015
 
Mar. 28, 2015
Assets:
(In thousands)
Broadline
$
7,812,125

 
$
7,730,239

 
$
7,801,756

SYGMA
558,612

 
512,044

 
529,783

Other
1,557,881

 
1,415,038

 
1,402,466

Total segments
9,928,618

 
9,657,321

 
9,734,005

Corporate
3,422,476

 
8,331,960

 
8,210,140

Total
$
13,351,094

 
$
17,989,281

 
$
17,944,145



19



17.  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 March 26, 2016, Sysco had a total of $4.4 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
 
Mar. 26, 2016
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
271,185

 
$
3,995,180

 
$
2,693,668

 
$

 
$
6,960,033

Investment in subsidiaries
9,989,219

 
249,270

 
(429,592
)
 
(9,808,897
)
 

Plant and equipment,  net
460,989

 
1,607,870

 
1,831,611

 

 
3,900,470

Other assets
1,638

 
590,248

 
1,898,705

 

 
2,490,591

Total assets
$
10,723,031

 
$
6,442,568

 
$
5,994,392

 
$
(9,808,897
)
 
$
13,351,094

Current liabilities
$
553,741

 
$
(209,098
)
 
$
3,767,429

 
$

 
$
4,112,072

Intercompany payables (receivables)
1,530,408

 
(766,374
)
 
(764,034
)
 

 

Long-term debt
4,080,728

 
69,426

 
124,730

 

 
4,274,884

Other liabilities
610,479

 
265,785

 
41,514

 

 
917,778

Noncontrolling interest

 

 
76,929

 

 
76,929

Shareholders’ equity  
3,947,675

 
7,082,829

 
2,747,824

 
(9,808,897
)
 
3,969,431

Total liabilities and  shareholders’ equity
$
10,723,031

 
$
6,442,568

 
$
5,994,392

 
$
(9,808,897
)
 
$
13,351,094

 
 
Condensed Consolidating Balance Sheet
 
June 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


20



 
Condensed Consolidating Balance Sheet
 
Mar. 28, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
4,853,790

 
$
4,139,132

 
$
2,528,385

 
$

 
$
11,521,307

Investment in subsidiaries
8,412,290

 

 

 
(8,412,290
)
 

Plant and equipment,  net
499,446

 
1,712,902

 
1,757,913

 

 
3,970,261

Other assets
353,870

 
520,816

 
1,577,891

 

 
2,452,577

Total assets
$
14,119,396

 
$
6,372,850

 
$
5,864,189

 
$
(8,412,290
)
 
$
17,944,145

Current liabilities
$
866,116

 
$
946,754

 
$
2,526,986

 
$

 
$
4,339,856

Intercompany payables (receivables)
193,947

 
(566,285
)
 
372,338

 

 

Long-term debt
7,135,765

 
16,630

 
83,546

 

 
7,235,941

Other liabilities
610,682

 
303,901

 
101,153

 

 
1,015,736

Noncontrolling interest

 

 
39,729

 

 
39,729

Shareholders’ equity  
5,312,886

 
5,671,850

 
2,740,437

 
(8,412,290
)
 
5,312,883

Total liabilities and  shareholders’ equity
$
14,119,396

 
$
6,372,850

 
$
5,864,189

 
$
(8,412,290
)
 
$
17,944,145