10-K 1 syy201610-k.htm 10-K Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-K
(Mark One)
þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2016
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6544
________________
syscoa01.jpg
Sysco Corporation
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
1390 Enclave Parkway
Houston, Texas
(Address of principal executive offices)
 
74-1648137
(I.R.S. Employer Identification No.)
77077-2099
(Zip Code)
Registrant's Telephone Number, Including Area Code:
(281) 584-1390
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of each exchange on which registered
 
 
Common Stock, $1.00 Par Value
 
New York Stock Exchange
 
 
1.25% Notes due June 2023
 
New York Stock Exchange
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☑    No ☐
 
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐    No ☑
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐
 
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 ☑

The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $21,547,520,392 as of December 26, 2015 (based on the closing sales price on the New York Stock Exchange Composite Tape on December 24, 2015, as reported by The Wall Street Journal (Southwest Edition)).  As of August 12, 2016, the registrant had issued and outstanding an aggregate of 555,133,162 shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the company’s 2016 Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K are incorporated by reference into Part III.





TABLE OF CONTENTS 
 
 
 
Page No.
 
PART I
 
 
 
 
 
 
 
 




PART I

Item 1.  Business
Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-K refer to Sysco Corporation together with its consolidated subsidiaries and divisions. 
 
Overview
Sysco Corporation, acting through its subsidiaries and divisions, is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. Historically, prior to the Brakes Acquisition, we provided products and related services to approximately 425,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers.
Founded in 1969, Sysco commenced operations as a public company in March 1970 when the stockholders of nine companies exchanged their stock for Sysco common stock. Since our formation, we have grown from $115 million to $50.4 billion in annual sales, both through internal expansion of existing operations and through acquisitions.
Sysco’s fiscal year ends on the Saturday nearest to June 30th.  This resulted in a 53-week year ending July 2, 2016 for fiscal 2016, and a 52 week year ending June 27, 2015 and June 28, 2014 for fiscal 2015 and fiscal 2014, respectively. We will have a 52-week year ending July 1, 2017 for fiscal 2017.
Sysco Corporation is organized under the laws of Delaware. The address and telephone number of our executive offices are 1390 Enclave Parkway, Houston, Texas 77077-2099, (281) 584-1390. This annual report on Form 10-K, as well as all other reports filed or furnished by Sysco pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on Sysco’s website at www.sysco.com as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission.

Acquisition of Brakes Group

In February 2016, Sysco entered into a share sale and purchase agreement (the Purchase Agreement) to acquire Cucina Lux Investments Limited, the parent holding company of the Brakes Group (the Brakes Acquisition). On July 5, 2016, following the end of fiscal year 2016, Sysco closed the Brakes Acquisition. The consideration paid by Sysco in connection with the Brakes Acquisition was approximately £2.3 billion (approximately $3.1 billion based on exchange rates on July 5, 2016), and included the repayment of approximately $2.3 billion of the Brakes Group's then outstanding debt. The purchase price was paid primarily in cash using the proceeds from recent debt issuances and other cash on hand, and is subject to certain adjustments as provided in the Purchase Agreement. The Brakes Group is now wholly owned by Sysco.

The Brakes Group is a leading European foodservice business by revenue, supplying fresh, refrigerated and frozen food products, as well as non-food products and supplies, to more than 50,000 foodservice customers ranging from large customers, including leisure, pub, restaurant, hotel and contract catering groups, to smaller customers, including independent restaurants, hotels, fast food outlets, schools and hospitals. The Brakes Group has leading market positions in the U.K., France, and Sweden, in addition to a presence in Ireland, Belgium, Spain, and Luxembourg. The Brakes Acquisition significantly strengthens Sysco's position as the world's leading foodservice distributor and offers attractive opportunities for organic growth and future expansion in European markets.

The Brakes Group supplies more than 50,000 products, including a portfolio of more than 4,000 own-brand products. Brakes' products are generally delivered through its distribution networks, consisting of central distribution hubs, satellite depots and a fleet of over 2,000 delivery vehicles. The Brakes Group also has separate divisions specializing in catering supplies and equipment. Brakes Group companies include: Brakes, Brakes Catering Equipment, Brake France, Country Choice, Davigel, Fresh Direct, Freshfayre, M&J Seafood, Menigo Foodservice, Pauley's, Wild Harvest and Woodward Foodservice.

In light of the recent closing of the Brakes Acquisition, we are in the early stages of the onboarding process with respect to the Brakes Group. Accordingly, for purposes of Part I, Item 1 of this Form 10-K, the remaining discussion of our business refers to the legacy Sysco business, excluding the impact of the Brakes Acquisition, except as otherwise noted.

Operating Segments
Sysco provides food and related products to the foodservice or food-away-from-home industry. Under the accounting provisions related to disclosures about segments of an enterprise, we have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined by accounting standards. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to their customers. SYGMA operating

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companies distribute a full line of food products and a wide variety of non-food products to chain restaurant customer locations. Our other segments include our specialty produce companies, custom-cut meat companies, lodging industry products companies, a company that distributes specialty imported products, a company that distributes to international customers and the company’s Sysco Ventures platform, a suite of technology solutions that help support the business needs of Sysco’s customers.  Specialty produce companies distribute fresh produce and, on a limited basis, other foodservice products.  Our specialty meat companies distribute custom-cut fresh steaks, other meat, seafood and poultry. Our lodging industry products companies distribute personal care guest amenities, equipment, housekeeping supplies, room accessories and textiles to the lodging industry.  Selected financial data for each of our reportable segments, as well as financial information concerning geographic areas, can be found in Note 21, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 8.
In fiscal 2017, our segment reporting will change due to the inclusion of the Brakes Group; however, at this time, we have not determined how the segments will change.
 
Customers and Products
Sysco’s customers in the foodservice industry include restaurants, hospitals and nursing homes, schools and colleges, hotels and motels, industrial caterers and other similar venues where foodservice products are served. Services to our customers are supported by similar physical facilities, vehicles, material handling equipment and techniques, and administrative and operating staffs.
 
The products we distribute include:
a full line of frozen foods, such as meats, seafood, fully prepared entrees, fruits, vegetables and desserts;
a full line of canned and dry foods;
fresh meats and seafood;
dairy products;
beverage products;
imported specialties; and
fresh produce.
We also supply a wide variety of non-food items, including:
paper products such as disposable napkins, plates and cups;
tableware such as china and silverware;
cookware such as pots, pans and utensils;
restaurant and kitchen equipment and supplies; and
cleaning supplies.
A comparison of the sales mix in the principal product categories during the last three years is presented below:
Principal product categories
 
2016
 
2015
 
2014
Fresh and frozen meats
 
20
%
 
21
%
 
19
%
Canned and dry products
 
17

 
16

 
18

Frozen fruits, vegetables, bakery and other
 
13

 
13

 
13

Dairy products
 
11

 
11

 
11

Poultry
 
11

 
11

 
10

Fresh produce
 
8

 
8

 
8

Paper and disposables
 
7

 
7

 
7

Seafood
 
5

 
5

 
5

Beverage products
 
4

 
4

 
4

Janitorial products
 
2

 
2

 
2

Equipment and smallwares
 
1

 
1

 
2

Medical supplies
 
1

 
1

 
1

Totals
 
100
%
 
100
%
 
100
%
    
Our distribution centers, which we refer to as operating companies, distribute nationally-branded merchandise, as well as products packaged under our private brands. Products packaged under our private brands have been manufactured for Sysco according to specifications that have been developed by our quality assurance team. In addition, our quality assurance team certifies

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the manufacturing and processing plants where these products are packaged, enforces our quality control standards and identifies supply sources that satisfy our requirements.
We believe that prompt and accurate delivery of orders, competitive pricing, close contact with customers and the ability to provide a full array of products and services to assist customers in their foodservice operations are of primary importance in the marketing and distribution of foodservice products to our customers. Our operating companies offer daily delivery to certain customer locations and have the capability of delivering special orders on short notice. Through our approximately 12,800 sales and marketing representatives and support staff of Sysco and our operating companies, we stay informed of the needs of our customers and acquaint them with new products and services. Our operating companies also provide ancillary services relating to foodservice distribution, such as providing customers with product usage reports and other data, menu-planning advice, food safety training and assistance in inventory control, as well as access to various third party services designed to add value to our customers’ businesses.
No single customer accounted for 10% or more of Sysco’s total sales for the fiscal year ended July 2, 2016.
 
We estimate that our sales by type of customer during the past three fiscal years were as follows: 
Type of Customer
2016
 
2015
 
2014
Restaurants
63
%
 
64
%
 
62
%
Healthcare
9

 
9

 
9

Education, government
8

 
8

 
9

Travel, leisure, retail
8

 
8

 
8

Other (1)
12

 
11

 
12

Totals
100
%
 
100
%
 
100
%
(1) Other includes cafeterias that are not stand alone restaurants, bakeries, caterers, churches, civic and fraternal organizations, vending distributors, other distributors and international exports.  None of these types of customers, as a group, exceeded 5% of total sales in any of the years for which information is presented.
 
Sources of Supply
We purchase from thousands of suppliers, both domestic and international, none of which individually accounts for more than 10% of our purchases. These suppliers consist generally of large corporations selling brand name and private label merchandise, as well as independent regional brand and private label processors and packers. Purchasing is generally carried out through both centrally developed purchasing programs, both domestically and internationally, and direct purchasing programs established by our various operating companies.
We administer a consolidated product procurement program designed to develop, obtain and ensure consistent quality food and non-food products. The program covers the purchasing and marketing of Sysco Brand merchandise, as well as products from a number of national brand suppliers, encompassing substantially all product lines. Some of our products are purchased internationally within global procurement centers in order to build strategic relationships with international suppliers and to optimize our supply chain network. Sysco’s operating companies purchase product from the suppliers participating in these consolidated programs and from other suppliers, although Sysco Brand products are only available to the operating companies through these consolidated programs. We also focus on increasing profitability by lowering operating costs and by lowering aggregate inventory levels, which reduces future facility expansion needs at our Broadline operating companies, while providing greater value to our suppliers and customers. This includes the operation of regional distribution centers (RDCs), which aggregate inventory demand to optimize the supply chain activities for certain products for all Sysco Broadline operating companies in the region. Currently, we have two RDCs in operation, one in Virginia and one in Florida.
 
Working Capital Practices
Our growth is funded through a combination of cash flow from operations, commercial paper issuances and long-term borrowings.  See the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” in Item 7 regarding our liquidity, financial position and sources and uses of funds.
Credit terms we extend to our customers can vary from cash on delivery to 30 days or more based on our assessment of each customer’s credit worthiness. We monitor each customer’s account and will suspend shipments if necessary.
A majority of our sales orders are filled within 24 hours of when customer orders are placed. We generally maintain inventory on hand to be able to meet customer demand. The level of inventory on hand will vary by product depending on shelf-life, supplier order fulfillment lead times and customer demand. We also make purchases of additional volumes of certain products based on supply or pricing opportunities.

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We take advantage of suppliers’ cash discounts where appropriate and otherwise generally receive payment terms from our suppliers ranging from weekly to 45 days or more.
 
Corporate Headquarters and Shared Services Center
 
Our corporate staff makes available a number of services to our operating companies and our shared services center performs support services for employees, suppliers and customers. Members of these groups possess experience and expertise in, among other areas, customer and vendor contract administration, vendor payments, procurement and maintenance support, invoicing, cash application, accounting and finance, treasury, credit services, legal, cash management, information technology, employee benefits, engineering, real estate and construction, risk management and insurance, sales and marketing, payroll, human resources, training and development, strategy, and tax compliance services, including sales and use tax administration. The corporate office also makes available warehousing and distribution services, which provide assistance in operational best practices including space utilization, energy conservation, fleet management and work flow.
 
Capital Improvements
During fiscal 2016, 2015 and 2014, approximately $527.3 million, $542.8 million and $523.2 million, respectively, were invested in delivery fleet, facilities, technology and other capital asset enhancements. From time to time, we dispose of assets in the normal course of business; we consider proceeds from these asset sales to be an offset to capital expenditures. During fiscal 2016, 2015 and 2014, capital expenditures, net of proceeds from sales of assets, were $503.8 million, $518.4 million and $497.4 million, respectively. We estimate our capital expenditures, net of proceeds from sales of assets, in fiscal 2017 should be approximately 1% of sales. This estimate includes the impact of the Brakes Acquisition. During the three years ended July 2, 2016, capital expenditures were financed primarily by internally generated funds, our commercial paper program and bank and other borrowings. We expect to finance our fiscal 2017 capital expenditures from the same sources.
 
Employees
As of July 2, 2016, we had approximately 51,900 employees, approximately 18% of whom were represented by unions, primarily the International Brotherhood of Teamsters. Contract negotiations are handled by each individual operating company. Approximately 20% of our union employees who are covered by collective bargaining agreements have or will have expired contracts during fiscal 2017 and are subject to renegotiation. Since July 2, 2016, there have been no contract renegotiations.  We consider our labor relations to be satisfactory. The Brakes Group employs approximately 14,500 employees, approximately 41% of whom were represented by unions, primarily in France and Sweden.
 
Competition
We believe there are a large number of companies engaged in the distribution of food and non-food products to the foodservice industry in the U.S. Our customers may also choose to purchase products directly from wholesale or retail outlets, including club, cash and carry and grocery stores, or negotiate prices directly with our suppliers. Online retailers and e-commerce companies are also participants in the foodservice industry. While we compete primarily in the U.S. with local and regional distributors, some organizations compete with us on a multi-region basis. In addition, these local, regional and multi-regional distributors can create purchasing cooperatives and marketing groups to enhance their competitive abilities by expanding their product mix, improving purchasing power and extending their geographic capabilities. We believe that the principal competitive factors in the foodservice industry are effective customer contacts, the ability to deliver a wide range of quality products and related services on a timely and dependable basis and competitive prices. Our customers are accustomed to purchasing from multiple suppliers and channels concurrently. Product needs, service requirements and price are just a few of the factors they evaluate when deciding where to purchase. Customers can choose from many Broadline foodservice distributors, specialty distributors that focus on specific categories such as produce, meat or seafood, other wholesale channels, club stores, cash and carry stores, grocery stores and numerous online retailers. Since switching costs are very low, customers can make supplier and channel changes very quickly. There are few barriers to market entry. Existing foodservice competitors can extend their shipping distances and add truck routes and warehouses relatively quickly to serve new markets or customers.
We consider our primary market to be the foodservice market in the U.S., Canada and Ireland and estimate that we serve about 16.4% of this approximately $295 billion annual market based on a measurement as of the end of calendar 2015. We believe, based upon industry trade data, that our sales to the U.S. and Canada food-away-from-home industry were the highest of any foodservice distributor during fiscal 2016. While adequate industry statistics are not available, we believe that, in most instances, our operations in the U.S. and Canada are among the leading distributors of food and related non-food products to foodservice customers in those trading areas.  We believe our competitive advantages include our more than 7,600 marketing associates, our diversified product base, which includes a differentiated group of high quality Sysco brand products, the diversity in the types of customers we serve, our economies of scale and our multi-region portfolio in the U.S. and Canada, which mitigates some of the impact of regional economic declines that may occur over time. We believe our liquidity and access to capital provides us the ability to continuously invest in business improvements.  There is small number of companies competing in the food-away-from-h

4



ome industry in the U.S. with publicly traded equity. While our public company status provides us with some advantages over many of our competitors, including access to capital, we believe it also provides us with some disadvantages that most of them do not have in terms of additional costs related to complying with regulatory requirements.

Following completion of our acquisition of Brakes Group, we are also a leading distributor of food and non-food products to the foodservice sector in Europe. Our largest businesses in Europe are in the UK, France, Sweden and Ireland. Foodservice distribution is highly competitive in the different European countries. Across Europe, we face competition from other national broadline distributors, as well as a large number of regional, local and specialty distributors. We also compete against cash and carry stores, grocery stores, online retailers and logistics companies that offer foodservice distribution to our customers.
 
Government Regulation
Our company is required to comply, and it is our policy to comply, with all applicable laws in the numerous countries throughout the world in which we do business. In many jurisdictions, compliance with competition laws is of special importance to us, and our operations may come under special scrutiny by competition law authorities due to our competitive position in those jurisdictions. In general, competition laws are designed to protect businesses and consumers from anti-competitive behavior.
In the U.S., as a marketer and distributor of food products, we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (FDA). The FDA regulates food safety and quality through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point (HACCP) requirements for certain foods, and the food and color additive approval process. The agency also specifies the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the U.S. Department of Agriculture (USDA) to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program. The USDA reviews and approves the labeling of these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption.
The recently published and pending rules under the FDA Food Safety Modernization Act (FSMA) will significantly expand our food safety requirements. Among other things, we will be required to establish and maintain comprehensive, prevention-based controls across the food supply chain that are both verified and validated. The FSMA further regulates food products imported into the United States and provides the FDA with mandatory recall authority. In particular, the final rule on the sanitary transportation of food, which will become effective for Sysco in the fourth quarter of fiscal 2017, will require us to enhance certain of our systems to ensure that we meet the rule’s new standards for maintaining the safety of food during transportation.
We and our products are also subject to state and local regulation through such measures as the licensing of our facilities; enforcement by state and local health agencies of state and local standards for our products; and regulation of our trade practices in connection with the sale of our products.  Our facilities are subject to regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor.  These regulations require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents and to establish hazard communication programs to transmit information on the hazards of certain chemicals present in products we distribute.
Our processing and distribution facilities must be registered with the FDA biennially and are subject to periodic government agency inspections. Our facilities are generally inspected at least annually by federal and/or state authorities. We also must establish communication programs to transmit information about the hazards of certain chemicals present in some of the products we distribute.
Our customers include several departments of the federal government, including the Department of Defense and Department of Veterans Affairs facilities, as well as certain state and local entities. These customer relationships subject us to additional regulations applicable to government contractors.
We are also subject to regulation by numerous federal, state and local regulatory agencies, including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. Department of Transportation, which regulates transportation of perishable and hazardous materials and waste, and similar state, provincial and local agencies.  In addition, we are also subject to the U.S. False Claims Act, and similar state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments.

5



The U.S. Foreign Corrupt Practices Act (FCPA) prohibits bribery of public officials to obtain or retain business in foreign jurisdictions.  The FCPA also requires us to keep accurate books and records and to maintain internal accounting controls to detect and prevent bribery and to ensure that transactions are properly authorized.  We have implemented and continue to develop a robust anti-corruption compliance program applicable to our global operations to detect and prevent bribery and to comply with these and other anti-corruption laws in countries where we operate.
The U.S. Department of Transportation and its agencies, the Surface Transportation Board, the Federal Highway Administration, the Federal Motor Carrier Safety Administration, and the National Highway Traffic Safety Administration regulate our trucking operations through the regulation of operations, safety, insurance and hazardous materials. We must comply with the safety and fitness regulations promulgated by the Federal Motor Carrier Safety Administration, including those relating to drug and alcohol testing and hours-of service. Such matters as weight and dimension of equipment also fall under federal and state regulations.
Outside the U.S., our business is subject to numerous similar statutes and regulations, as well as other legal and regulatory requirements. For example, as a result of our acquisition of the Brakes Group on July 5, 2016, we became subject to legal and regulatory requirements of the principal regions where Brakes conducts its business (including in the United Kingdom, France and Sweden (the Brakes Principal Regions)), as well as of the European Union, which requirements relate to, among other things, competition, product composition, packaging, labelling, advertisement and the safety of food products, as well as the health, safety and working conditions of employees. In addition, following the acquisition of the Brakes Group, our business became subject to the U.K. Modern Slavery Act 2015, which requires certain companies that operate in the U.K. to prepare a report describing steps taken to ensure that slavery and human trafficking is not taking place in its supply chain or business, as well as the U.K. Bribery Act 2010, an anti-corruption law that restricts the offer or payment of anything of value to both government officials as well as to other non-governmental persons with the intent of gaining favorable government action, business or an advantage.

All of our company's facilities and other operations in the U.S. and elsewhere around the world are subject to various environmental protection statutes and regulations, including those in the U.S., the European Union and the Brakes Principal Regions, relating to: (1) the use of water resources and the discharge of wastewater; (2) the discharge of pollutants into the air, including vehicle emissions; (3) proper handling, treatment and disposing of solid and hazardous wastes; and (4) protecting against and appropriately investigating and remediating spills and releases.  Further, most of our distribution facilities have ammonia-based refrigeration systems and tanks for the storage of diesel fuel and other petroleum products which are subject to laws regulating such systems and storage tanks (including the investigation and remediation of soil and groundwater contamination associated with the use of underground storage tanks).  Certain of these laws and regulations in the European Union and the Brakes Principal Regions may impose liability for costs (which could be material) of investigation or remediation of contamination regardless of fault or the legality of the original disposal, and even if such contamination was present prior to the commencement of Brakes’ operations at the site and was not caused by its activities. In addition, many of our facilities have propane and battery powered forklifts. Proposed or recently enacted legal requirements, such as those requiring the phase-out of certain ozone-depleting substances, and proposals for the regulation of greenhouse gas emissions, may require us to upgrade or replace equipment, or may increase our transportation or other operating costs. Our policy is to comply with all such legal requirements. We are subject to other federal, state, provincial and local provisions relating to the protection of the environment or the discharge of materials; however, these provisions do not materially impact the use or operation of our facilities.

General
We have numerous trademarks that are of significant importance, including the SYSCO® trademark and our privately-branded product trademarks that include the SYSCO® trademark. These trademarks and the private brands on which they are used are widely recognized within the foodservice industry. Approximately half of our privately-branded sales are from products labeled with our SYSCO® trademark without any other trademark. We believe the loss of the SYSCO® trademark would have a material adverse effect on our results of operations. Our U.S. trademarks are effective for a ten-year period and the company generally renews its trademarks before their expiration dates unless a particular trademark is no longer in use.  The company does not have any material patents or licenses. 
We are not engaged in material research and development activities relating to the development of new products or the improvement of existing products. 
Our sales do not generally fluctuate significantly on a seasonal basis; therefore, the business of the company is not deemed to be seasonal.
As of July 2, 2016, we operated 199 distribution facilities throughout the U.S., Bahamas, Canada, and Ireland. We have 50% interests in operations in Costa Rica and Mexico.


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Item 1A.  Risk Factors 
 
The following discussion of “risk factors” identifies the most significant factors that may adversely affect our business, operations, financial position or future financial performance.  This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes contained in this report.  The following discussion of risks is not all inclusive, but is designed to highlight what we believe are the most significant factors to consider when evaluating our business.  These factors could cause our future results to differ from our expectations expressed in the forward-looking statements identified within "Management's Discussion and Analysis of Financial Condition and Results of Operations," and from historical trends.

Industry and General Economic Risks

Periods of significant or prolonged inflation or deflation affect our product costs and may negatively impact our profitability.

Volatile food costs have a direct impact on our industry.  Periods of product cost inflation may have a negative impact on our results of operations to the extent that we are unable to pass on all or a portion of such product cost increases to our customers.  In addition, periods of rapidly increasing inflation may negatively impact our business due to the timing needed to pass on such increases, the impact of such inflation on discretionary spending by consumers and our limited ability to increase prices in the current, highly competitive environment.  Conversely, our business may be adversely impacted by periods of product cost deflation, because we make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage margin.  As a result, our results of operations may be negatively impacted during periods of product cost deflation, even though our gross profit percentage may remain relatively constant.

Unfavorable macroeconomic conditions in the U.S., Canada and Europe, as well as unfavorable conditions in particular local markets, may adversely affect our results of operations and financial condition.

     The foodservice distribution industry, which is characterized by relatively low profit margins with limited demand growth expected in the near-term, is especially susceptible to negative trends and economic uncertainty.  North America and Europe have each experienced an uneven economic environment over the past several years.  In addition, our results of operations are substantially affected by regional operating and economic conditions, which can vary substantially by market.  Economic conditions can affect us in the following ways:

Unfavorable conditions can depress sales and/or gross margins in a given market.
Food cost and fuel cost inflation experienced by the consumer can lead to reductions in the frequency of dining
out and the amount spent by consumers for food-away-from-home purchases, which could negatively impact our business by reducing demand for our products. 
Heightened uncertainty in the financial markets negatively affects consumer confidence and discretionary
spending, which can cause disruptions with our customers and suppliers.
Liquidity issues and the inability of our customers, vendors and suppliers to consistently access credit markets
to obtain cash to support operations can cause temporary interruptions in our ability to conduct day-to-day
transactions involving the collection of funds from our customers, vendors and suppliers.

The uncertainty in the economic environment has adversely affected the rate of improvement in both business and consumer confidence and spending, and uncertainty about the long-term investment environment could further depress capital investment and economic activity. 

Economic and political instability and potential unfavorable changes in laws and regulations resulting from the UK’s exit from the European Union could adversely affect our results of operations and financial condition.

The results of the referendum on June 23, 2016 in the United Kingdom (the UK) to exit the European Union (the EU) and to potentially otherwise significantly change its relationship with the EU and its laws and regulations impacting business conducted between the UK and EU countries could disrupt the overall stability of the EU given the diverse economic and political circumstances of individual EU countries and otherwise negatively impact our European operations, including the Brakes Group. If changes occur in laws and regulations impacting the flow of goods, services and workers between the UK and the EU, our European operations could also be negatively impacted. If a country within the EU were to default on its debt or withdraw from the euro currency, or if the euro currency were to be dissolved entirely, the impact on markets around the world could be material. The completion of the UK’s exit from the EU could have less severe, but still significant, implications. Such exit could adversely

7



affect the value of our euro- and pound-denominated assets and obligations. In addition, such exit could cause financial and capital markets within and outside the EU to constrict, thereby negatively impacting our ability to finance our business, and also could cause a substantial dip in consumer confidence and spending that could negatively impact the foodservice distribution industry. Any one of these impacts could have an adverse effect on our financial condition and results of operations.

Competition in our industry may adversely impact our margins and our ability to retain customers, and makes it difficult for us to maintain our market share, growth rate and profitability.

The foodservice distribution industry is fragmented and highly competitive, with local, regional, multi-regional distributors and specialty competitors.  Local and regional companies often align themselves with other smaller distributors through purchasing cooperatives and marketing groups, with the goal of enhancing their geographic reach, private label offerings, overall purchasing power, cost efficiencies, and ability to meet customer distribution requirements. These suppliers may also rely on local presence as a source of competitive advantage, and they may have lower costs and other competitive advantages due to geographic proximity. Furthermore, barriers to entry by new competitors, or geographic or product line expansion by existing competitors, are low.  Additionally, increased competition from non-traditional sources (such as club stores and commercial wholesale outlets with lower cost structures), cash and carry operations and group purchasing organizations have served to further increase pressure on the industry’s profit margins, and continued margin pressure within the industry may have a material adverse effect on our results of operations.   We also experience competition from online direct food wholesalers. Finally, demand for food-away-from-home products is volatile and price sensitive, imposing limits on our customers’ ability to absorb cost increases.  New and increasing competitive sources may result in increased focus on pricing and on limiting price increases, or may require increased discounting.  Such competition or other industry pressures may result in margin erosion and/or make it difficult for us to attract and retain customers.

If we are unable to effectively differentiate ourselves from our competitors, our results of operations could be adversely impacted. In addition, even if we are able to effectively differentiate ourselves, we may only be able to do so through increased expenditures or decreased prices, which could also adversely impact our results of operations.

We may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs.

Volatile fuel prices have a direct impact on our industry.  We require significant quantities of fuel for our delivery vehicles and are exposed to the risk associated with fluctuations in the market price for fuel.  The price and supply of fuel can fluctuate significantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns.  The cost of fuel affects the price paid by us for products, as well as the costs we incur to deliver products to our customers.  Although we have been able to pass along a portion of increased fuel costs to our customers in the past, there is no guarantee that we will be able to do so in the future.  If fuel costs increase in the future, we may experience difficulties in passing all or a portion of these costs along to our customers, which may have a negative impact on our results of operations.  

We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at prices equal to the then-current forward price for diesel.   In the future, we may also enter into other fuel hedging arrangements, including fuel derivatives, to hedge our exposure to volatile fuel prices. There can be no assurance that our fuel hedging transactions will be effective to protect us from changes in fuel prices, and if fuel prices decrease significantly, these hedging arrangements would result in our paying higher than market costs for a portion of our diesel fuel. In addition, our future use of fuel derivatives would expose us to the risk that one of our counterparties fails to perform its obligations, whether due to its insolvency or otherwise, which could result in financial losses.

Business and Operational Risks

Conditions beyond our control can interrupt our supplies and increase our product costs.

We obtain substantially all of our foodservice and related products from third-party suppliers. Although our purchasing volume can provide benefits when dealing with suppliers, suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices requested. We are also subject to delays caused by interruptions in production and increases

8



in product costs based on conditions outside of our control. These conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather conditions or more prolonged climate change, crop and other agricultural conditions, water shortages, animal disease outbreaks, transportation interruptions, unavailability of fuel or increases in fuel costs, product recalls, competitive demands and natural disasters or other catastrophic events (including, but not limited to food-borne illnesses). Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Our inability to obtain adequate supplies of foodservice and related products as a result of any of the foregoing factors or otherwise could mean that we could not fulfill our obligations to customers, and customers may turn to other distributors.

Adverse publicity about us or lack of confidence in our products could negatively impact our reputation and reduce earnings.

Maintaining a good reputation and public confidence in the safety of the products we distribute is critical to our business.  Sysco’s brand names, trademarks and logos and our reputation are powerful sales and marketing tools, and we devote significant resources to promoting and protecting them.  Anything that damages our reputation or public confidence in our products, whether or not justified, including adverse publicity about the quality, safety, sustainability or integrity of our products or relating to activities by our operations, employees, suppliers or agents could tarnish our reputation and diminish the value of our brand, which could adversely affect our results of operations.

Reports, whether true or not, of food-borne illnesses (such as e-coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis, salmonella, listeria or swine flu) or injuries caused by food tampering could also severely injure our reputation or negatively impact public confidence in our products.  If patrons of our restaurant customers become ill from food-borne illnesses, our customers could be forced to temporarily close restaurant locations and our sales and profitability would be correspondingly decreased.  In addition, instances of food-borne illnesses or food tampering or other health concerns (even those unrelated to the use of Sysco products) or public concern regarding the safety of our products, can result in negative publicity about the food service distribution industry and cause our results of operations to decrease dramatically.

Damage to our reputation and loss of brand equity could reduce demand for our products and services.  This reduction in demand, together with the dedication of time and expense necessary to defend our reputation, would have an adverse effect on our financial condition and results of operations, as well as require additional resources to rebuild our reputation and restore the value of our brand.  Our business prospects, financial condition and results of operations could be adversely affected if our public image or reputation were to be tarnished by negative publicity, including dissemination via print, broadcast or social media, or other forms of Internet-based communications.  Adverse publicity about regulatory or legal action against us could damage our reputation and image, undermine our customers’ confidence and reduce short-term or long-term demand for our products and services, even if the regulatory or legal action is unfounded or not material to our operations.  Any of these events could have a material adverse effect on our results of operations and financial condition.

Unfavorable changes to the mix of locally-managed customers versus corporate-managed customers could have a material adverse effect on our results of operations and financial condition.

Gross margin from our corporate-managed customers is generally lower than that of our locally-managed customers because we typically sell higher volumes of products to these customers and provide a relatively lower level of value-added services than we do to locally-managed customers.  If sales to our locally-managed customers do not grow at the same or a greater rate as sales to our corporate-managed customers, our operating margins may decline.

Moreover, if sales to our corporate-managed customers increase at a faster pace of growth than sales to our locally-managed customers, we will become more dependent on corporate-managed customers as they begin to represent a greater proportion of our total sales.  Additionally, the loss of sales to the larger of these corporate-managed customers could have a material negative impact on our results of operations and financial condition.  Additionally, as a result of our greater dependence on these customers, we could be pressured by them to lower our prices and/or offer expanded or additional services at the same prices.  In that event, if we were unable to achieve additional cost savings to offset these price reductions and/or cost increases, our results of operations could be materially adversely affected.  We may be unable to change our cost structure and pricing practices rapidly enough to successfully compete in such an environment.

We may not be able to achieve our three-year financial targets by the end of fiscal year 2018.

9




In fiscal 2016, we set new three-year financial targets to grow operating income, accelerate earnings per share growth faster than operating income growth and improve return on invested capital. Our ability to meet these financial targets depends largely on our successful execution of our business plan including various related initiatives. There are various risks related to these efforts, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Our intentions and expectations with regard to the execution of our business plan, and the timing of any related initiatives, are subject to change at any time based on management’s subjective evaluation of our overall business needs. If we are unable to successfully execute our business plan, whether due to our failure to realize the anticipated benefits from our various business initiatives in the anticipated time frame or otherwise, we may be unable to achieve our three-year financial targets.

Expanding into international markets and complementary lines of business presents unique challenges, and our expansion efforts with respect to international operations and complementary lines of business may not be successful.

An element of our strategy includes the possibility of further expansion of operations into international markets and the establishment of international procurement organizations.  Our ability to successfully operate in international markets may be adversely affected by political, economic and social conditions beyond our control, local laws and customs, and legal and regulatory constraints, including compliance with applicable anti-corruption and currency laws and regulations, of the countries or regions in which we currently operate or intend to operate in the future.  Risks inherent in our existing and future international operations also include, among others, the costs and difficulties of managing international operations, difficulties in identifying and gaining access to local suppliers, suffering possible adverse tax consequences, maintaining product quality and greater difficulty in enforcing intellectual property rights.  Additionally, foreign currency exchange rates and fluctuations thereof may have an adverse effect on the financial results of our international operations.

Another element of our strategy includes the possibility of expansion into businesses that are closely related or complementary to, but not currently part of, our core foodservice distribution business.  Our ability to successfully operate in these complementary business markets may be adversely affected by legal and regulatory constraints, including compliance with regulatory programs to which we become subject.  Risks inherent in branching out into such complementary markets also include the costs and difficulties of managing operations outside of our core business, which may require additional skills and competencies, as well as difficulties in identifying and gaining access to suppliers or customers in new markets.

If the products distributed by us are alleged to have caused injury or illness, or to have failed to comply with governmental regulations, we may need to recall our products and may experience product liability claims.

We, like any other foodservice distributor, may be subject to product recalls, including voluntary recalls or withdrawals, if the products we distribute are alleged to have caused injury or illness, to have been mislabeled, misbranded, or adulterated or to otherwise have violated applicable governmental regulations. We may also choose to voluntarily recall or withdraw products that we determine do not satisfy our quality standards, whether for taste, appearance, or otherwise, in order to protect our brand and reputation. Any future product recall or withdrawal that results in substantial and unexpected expenditures, destruction of product inventory, damage to our reputation, and/or lost sales due to the unavailability of the product for a period of time, could materially adversely affect our results of operations and financial condition.

We also face the risk of exposure to product liability claims in the event that the use of products sold by Sysco are alleged to have caused injury or illness.  We cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters.  Further, even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.  With respect to product liability claims, we believe we have sufficient primary or excess umbrella liability insurance.  However, this insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all of our liabilities.  We generally seek contractual indemnification and insurance coverage from parties supplying our products, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers.  If Sysco does not have adequate insurance or contractual indemnification available, product liability relating to defective products could materially adversely affect our results of operations and financial condition.


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If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could significantly and adversely affect our business.

We are subject to governmental regulation at the federal, state, international, national, provincial and local levels in many areas of our business, such as food safety and sanitation, transportation, minimum wage, overtime, wage payment, wage and hour and employment discrimination, immigration, human health and safety, and due to the services we provide in connection with governmentally funded entitlement programs. For a detailed discussion of the laws and regulations to which our business is subject, please refer to “Business - Government Regulation” in Part I, Item 1 of this Annual Report on Form 10-K.

From time to time, both federal and state governmental agencies have conducted audits of our billing practices as part of investigations of providers of services under governmental contracts, or otherwise. We also receive requests for information from governmental agencies in connection with these audits. While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations.

If we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, prohibitions on exporting, or seizures or debarments from contracting with the government. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require us to incur substantial increases in costs in order to comply with such laws and regulations.

We may incur significant costs to comply with environmental laws and regulations, and we may be subject to substantial fines, penalties or third-party claims for non-compliance.

Our operations are subject to various federal, state, and local laws and regulations relating to the protection of the environment, including those governing:

the discharge of pollutants into the air, soil, and water;
the management and disposal of solid and hazardous materials and wastes;
employee exposure to hazards in the workplace; and
the investigation and remediation of contamination resulting from releases of petroleum products and other regulated materials.

In the course of our operations, we operate, maintain, and fuel fleet vehicles; store fuel in on-site above and underground storage tanks; operate refrigeration systems, and use and dispose of hazardous substances and food wastes. We could incur substantial costs, including fines or penalties and third-party claims for property damage or personal injury, as a result of any violations of environmental or workplace safety laws and regulations or releases of regulated materials into the environment. In addition, we could incur investigation, remediation or other costs related to environmental conditions at our currently or formerly owned or operated properties.

We must finance and integrate acquired businesses effectively.

Historically, a portion of our growth has come through acquisitions.  If we are unable to integrate acquired businesses successfully or realize anticipated economic, operational and other benefits and synergies in a timely manner, our earnings per share may be materially adversely affected.   Integration of an acquired business may be more difficult when we acquire a business in a market in which we have limited expertise, or with a culture different from Sysco’s. A significant expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and operational resources.  Significant acquisitions may also require the issuance of material additional amounts of debt or equity, which could materially alter our debt-to-equity ratio, increase our interest expense and decrease earnings per share, and make it difficult for us to obtain favorable financing for other acquisitions or capital investments.


11



We need access to borrowed funds to grow, and any default by us under our indebtedness could have a material adverse effect on our cash flow and liquidity.

A substantial part of our growth historically has been the result of acquisitions and capital expansion.  We anticipate additional acquisitions and capital expansion in the future. As a result, our inability to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to expand.  Moreover, any default under the documents governing our indebtedness could have a significant adverse effect on our cash flows, as well as the market value of our common stock.
  
 Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position.
 
As described in Note 11, “Debt and Other Financing Arrangements,” as of July 2, 2016, we had approximately $7.4 billion of total indebtedness which included a commercial paper program allowing us to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion; a revolving credit facility supporting our United States and Canadian commercial paper programs in the amount of $1.5 billion scheduled to expire on December 29, 2018, and various other smaller bank facilities.
Our substantial amount of debt could have important consequences for us, including:
 
limiting our ability to obtain additional financing, if needed, for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;
increasing our vulnerability to adverse economic, industry or competitive developments;
limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and
placing us at a competitive disadvantage compared to our competitors that have less debt.

Our indebtedness may further increase from time to time for various reasons, including fluctuations in operating results, working capital needs, capital expenditures, potential acquisitions or joint ventures, and we expect to incur additional indebtedness to fund the repurchase of up to $1.5 billion in Sysco common stock under the $3 billion share repurchase program announced in June 2015.  Our increased level of indebtedness and the ultimate cost of such indebtedness could have a negative impact on our liquidity, cost of future debt financing and financial results, and our credit ratings may be adversely affected as a result of the incurrence of additional indebtedness.  In the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our debt, and any alternative financing measures available may not be successful and may not permit us to meet our scheduled debt service obligations. 
 
We rely on technology in our business and any technology disruption or delay in implementing new technology could have a material negative impact on our business.

Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the reliability of our technology network.  We use software and other technology systems, among other things, to generate and select orders, to load and route trucks, to make purchases, to manage our warehouses and to monitor and manage our business on a day-to-day basis. These systems are vulnerable to disruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber attacks, and viruses. Any such disruption to these software and other technology systems, or the failure of these systems to otherwise perform as anticipated, could adversely affect our customer service, decrease the volume of our business and result in increased costs and lower profits. While Sysco has invested and continues to invest in technology security initiatives and disaster recovery plans, these measures cannot fully insulate us from technology disruption that could result in adverse effects on our results of operations. Additionally, information technology systems continue to evolve and, in order to remain competitive, we must implement new technologies in a timely and efficient manner. If our competitors implement new technologies more quickly or successfully than we do, such competitors may be able to provide lower cost or enhanced services of superior quality compared to those we provide, which could have an adverse effect on our results of operations.

A cybersecurity incident and other technology disruptions could negatively affect our business and our relationships with customers.

We use technology in substantially all aspects of our business operations.  We also use mobile devices, social networking and other online activities to connect with our employees, suppliers, business partners and our customers.  Such uses give rise to

12



cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information.  Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers' personal information, private information about employees, and financial and strategic information about the company and its business partners.  Further, as the company pursues its strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, the company is also expanding and improving its information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk.  If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks.  Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective.  The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage.

 
We may be required to pay material amounts under multiemployer defined benefit pension plans.
 
We contribute to several multiemployer defined benefit pension plans based on obligations arising under collective bargaining agreements covering union-represented employees.  Approximately 9% of our current employees are participants in such multiemployer plans.  In fiscal 2016, our total contributions to these plans were approximately $41.0 million and there were no payments for withdrawal liabilities.  The costs of providing benefits through such plans have increased in recent years.  The amount of any increase or decrease in our required contributions to these multiemployer plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability if we choose to exit.  Based upon the information available to us from plan administrators, we believe that several of these multiemployer plans are underfunded.  The unfunded liabilities of these plans may result in increased future payments by us and the other participating employers.  Underfunded multiemployer pension plans may impose a surcharge requiring additional pension contributions.  Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan.  Based on the latest information available from plan administrators, we estimate our share of the aggregate withdrawal liability on the multiemployer plans in which we participate could have been as much as $225 million as of July 2, 2016.  A significant increase to funding requirements could adversely affect the company’s financial condition, results of operations or cash flows.
 
Our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines.
 
At the end of fiscal 2012, we decided to freeze future benefit accruals under the company-sponsored qualified pension plan (Retirement Plan) as of December 31, 2012 for all U.S. based salaried and non-union hourly employees.  Effective January 1, 2013, these employees were eligible for additional contributions under an enhanced, defined contribution plan.  While these actions will serve to limit future growth in our pension liabilities, we had a sizable pension obligation of $3.8 billion as of July 2, 2016; therefore, financial market factors could impact our funding requirements.  Although recent pension funding relief legislation has served to defer some required funding, additional contributions may be required if our plan is not fully funded when the provisions that provided the relief are phased out.  See Note 14, “Company-Sponsored Employee Benefit Plans” to the Consolidated Financial Statements in Item 8 for a discussion of the funded status of the Retirement Plan.    

The amount of our annual contribution to the Retirement Plan is dependent upon, among other things, the returns on the Retirement Plan’s assets and discount rates used to calculate the plan’s liability.  Our Retirement Plan holds investments in both equity and fixed income securities.  Fluctuations in asset values can cause the amount of our anticipated future contributions to the plan to increase.  The projected liability of the Retirement Plan will be impacted by the fluctuations of interest rates on high quality bonds in the public markets as these are inputs in determining our minimum funding requirements.  Specifically, decreases in these interest rates may have an adverse effect on our funding obligations.  To the extent financial markets experience future declines similar to those experienced in fiscal 2008 through the beginning of fiscal 2010, and/or interest rates on high quality bonds in the public markets decline, our required contributions may increase for future years as our funded status decreases, which could have an adverse effect on our financial condition. 
 
Failure to successfully renegotiate union contracts could result in work stoppages.
 
As of July 2, 2016, approximately 8,953 employees at 50 operating companies were members of 52 different local unions associated with the International Brotherhood of Teamsters and other labor organizations.  In fiscal 2017, 13 agreements covering approximately 1,800 employees have expired or will expire.  Failure of our operating companies to effectively renegotiate these

13



contracts could result in work stoppages.  Although our operating subsidiaries have not experienced any significant labor disputes or work stoppages to date, and we believe they have satisfactory relationships with their unions, a work stoppage due to failure of multiple operating subsidiaries to renegotiate union contracts could have a material adverse effect on us.
 
A shortage of qualified labor could negatively affect our business and materially reduce earnings.
 
The future success of our operations, including the achievement of our strategic objectives, depends on our ability to identify, recruit, develop and retain qualified and talented individuals, and any shortage of qualified labor could significantly affect our business.  Our employee recruitment, development and retention efforts may not be successful, resulting in a shortage of qualified individuals in future periods.  Any such shortage would decrease Sysco’s ability to effectively serve our customers and achieve our strategic objectives.  Such a shortage would also likely lead to higher wages for employees and a corresponding reduction in our results of operations.

Our authorized preferred stock provides anti-takeover benefits that may not be viewed as beneficial to stockholders.

Under our Restated Certificate of Incorporation, Sysco’s Board of Directors is authorized to issue up to 1,500,000 shares of preferred stock without stockholder approval.  Issuance of these shares could make it more difficult for anyone to acquire Sysco without approval of the Board of Directors, depending on the rights and preferences of the stock issued.  In addition, if anyone attempts to acquire Sysco without approval of the Board of Directors of Sysco, the existence of this undesignated preferred stock could allow the Board of Directors to adopt a shareholder rights plan without obtaining stockholder approval, which could result in substantial dilution to a potential acquirer.  As a result, hostile takeover attempts that might result in an acquisition of Sysco, which could otherwise have been financially beneficial to our stockholders, could be deterred.

Item 1B.  Unresolved Staff Comments
 
None.

Item 2.  Properties
 
The table below shows the number of distribution facilities occupied by Sysco in each state, province or country and the aggregate square footage devoted to cold and dry storage as of July 2, 2016
Location
Number of Facilities
 
Cold Storage
(Square Feet in thousands)
 
Dry Storage
(Square Feet in thousands)
 
Segment Served*
Alabama
2

 
185

 
131

 
BL
Alaska
2

 
57

 
28

 
BL
Arizona
1

 
228

 
140

 
BL
Arkansas
2

 
130

 
88

 
BL, O
California
17

 
1,436

 
1,260

 
BL, S, O
Colorado
4

 
275

 
216

 
BL, S, O
Connecticut
3

 
156

 
110

 
BL, O
District of Columbia
1

 
46

 
35

 
O
Florida
18

 
1,246

 
1,017

 
BL, S, O
Georgia
5

 
267

 
435

 
BL, S, O
Idaho
2

 
85

 
88

 
BL
Illinois
6

 
410

 
411

 
BL, S, O
Indiana
2

 
100

 
360

 
BL, O
Iowa
1

 
93

 
95

 
BL
Kansas
1

 
177

 
171

 
BL
Kentucky
1

 
91

 
106

 
BL
Louisiana
1

 
134

 
113

 
BL
Maine
1

 
58

 
50

 
BL
Maryland
2

 
318

 
255

 
BL
Massachusetts
1

 
218

 
188

 
BL
Michigan
3

 
320

 
368

 
BL, S
Minnesota
3

 
238

 
196

 
BL

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Location
Number of Facilities
 
Cold Storage
(Square Feet in thousands)
 
Dry Storage
(Square Feet in thousands)
 
Segment Served*
Mississippi
1

 
95

 
69

 
BL
Missouri
2

 
106

 
95

 
BL, S
Montana
1

 
121

 
121

 
BL
Nebraska
1

 
144

 
129

 
BL
Nevada
3

 
199

 
154

 
BL, O
New Jersey
5

 
143

 
515

 
BL, O
New Mexico
1

 
121

 
108

 
BL
New York
4

 
417

 
361

 
BL, O
North Carolina
6

 
337

 
316

 
BL, S, O
North Dakota
1

 
46

 
59

 
BL
Ohio
7

 
409

 
492

 
BL, S, O
Oklahoma
3

 
189

 
152

 
BL, S, O
Oregon
3

 
176

 
156

 
BL, S, O
Pennsylvania
5

 
515

 
422

 
BL, S
Rhode Island
1

 
2

 

 
O
South Carolina
1

 
191

 
98

 
BL
Tennessee
5

 
406

 
426

 
BL, O
Texas
17

 
1,131

 
1,296

 
BL, S, O
Utah
1

 
161

 
107

 
BL
Virginia
3

 
628

 
396

 
BL
Washington
1

 
134

 
92

 
BL
Wisconsin
3

 
287

 
299

 
BL, O
Bahamas
1

 
90

 
23

 
O
Alberta, Canada
3

 
207

 
199

 
BL, O
British Columbia, Canada
8

 
309

 
279

 
BL, O
Manitoba, Canada
1

 
79

 
74

 
BL
New Brunswick, Canada
2

 
57

 
46

 
BL
Newfoundland, Canada
1

 
33

 
41

 
BL
Nova Scotia, Canada
1

 
39

 
47

 
BL
Ontario, Canada
12

 
602

 
525

 
BL, O
Quebec, Canada
7

 
129

 
245

 
BL, O
Saskatchewan, Canada
1

 
40

 
54

 
BL
Ireland
6

 
230

 
149

 
O
Northern Ireland
1

 
2

 
8

 
O
Puerto Rico
1

 
8

 

 
O
Totals
199

 
14,051

 
13,414

 
 
 
* Segments served include Broadline (BL), SYGMA (S), and Other (O).
 
We own approximately 22,298,000 square feet of our distribution facilities (or 81.2% of the total square feet), and the remainder is occupied under leases expiring at various dates from fiscal 2017 to fiscal 2031, exclusive of renewal options. 
 
We own our approximately 625,000 square foot headquarters office complex in Houston, Texas.  In addition, we own our approximately 669,000 square foot shared services complex in Cypress, Texas.
 
We are currently constructing a replacement facility in Texas whose fiscal 2016 sales were approximately 0.3% of fiscal 2016 sales.
 
As of July 2, 2016, our fleet of approximately 10,200 delivery vehicles consisted of tractor and trailer combinations, vans and panel trucks, most of which are either wholly or partially refrigerated for the transportation of frozen or perishable foods.  We own approximately 95% of these vehicles and lease the remainder.


15



Item 3.  Legal Proceedings

None.

Item 4.  Mine Safety Disclosures 
 
Not applicable.

PART II – FINANCIAL INFORMATION 
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities
 
The principal market for Sysco’s common stock (SYY) is the New York Stock Exchange.  The table below sets forth the high and low sales prices per share for our common stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared for the periods indicated.
 
 
 
 
 
 
Dividends
 
 
Common Stock Prices
 
Declared
 
 
High
 
Low
 
Per Share
Fiscal 2015:
 
 
 
 
 
 
First Quarter
 
$
38.85

 
$
35.50

 
$
0.29

Second Quarter
 
41.16

 
35.82

 
0.30

Third Quarter
 
41.45

 
37.81

 
0.30

Fourth Quarter
 
38.99

 
35.84

 
0.30

Fiscal 2016:
 
 
 
 
 
 
First Quarter
 
$
41.87

 
$
35.45

 
$
0.30

Second Quarter
 
42.03

 
38.34

 
0.31

Third Quarter
 
46.69

 
38.84

 
0.31

Fourth Quarter
 
50.94

 
45.19

 
0.31

 
The number of record owners of Sysco’s common stock as of August 12, 2016 was 10,329.
    
We made the following share repurchases during the fourth quarter of fiscal 2016:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a) Total Number of Shares Purchased (1)
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1
 
 
 
 
 
 
 
 
March 27 – April 23
 
2,375,313

 
$
46.69

 
2,375,313

 
13,152,682

Month #2
 
 
 
 
 
 
 
 
April 24 – May 21
 
1,943,726

 
48.30

 
1,925,554

 
11,227,128

Month #3
 
 
 
 
 
 
 
 
May 22 – July 2
 
1,112,225

 
48.68

 
1,111,628

 
10,115,500

Total
 
5,431,264

 
$
47.67

 
5,412,495

 
10,115,500

 
 (1) The total number of shares purchased includes zero, 18,172, and 597 shares tendered by individuals in connection with stock option exercised in month #1, month #2, and month #3, respectively. All other shares were purchased pursuant to the publicly announced program described below.
 
In June 2015, our Board of Directors approved a repurchase program to repurchase from time to time in the open market, through an accelerated share repurchase program or through privately negotiated transactions, shares of the company's common stock in an amount not to exceed $3.0 billion during the two year period ending July 1, 2017, including $1.5 billion through an accelerated share repurchase that commenced in the second quarter of fiscal 2016, in addition to amounts normally repurchased to offset benefit plan and stock option dilution. Our accelerated share repurchase program was approved using a dollar value limit and, therefore, is not included in the table above for "Maximum Number of Shares that May Yet Be Purchased Under the Plans

16



or Programs." We repurchased 34,716,180 shares under this plan in fiscal 2016. In addition to this share repurchase program approved in June, in August 2015, our Board of Directors approved the repurchase of up to 20,000,000 shares for an aggregate purchase price not to exceed $800 million.  The authorization expires on August 21, 2017.  Pursuant to the repurchase program, shares may be acquired in the open market or in privately negotiated transactions at the company’s discretion, subject to market conditions and other factors. We purchased 10,000,000 shares under this authorization in fiscal 2016 and purchased an additional 5,607,003 shares through August 12, 2016.

The Board of Directors has authorized us to enter into agreements from time to time to extend our ongoing repurchase program to include repurchases during company announced “blackout periods” of such securities in compliance with Rule 10b5-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act).
 
Stock Performance Graph
 
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that Sysco specifically incorporates such information by reference into such filing.
 
The following stock performance graph compares the performance of Sysco’s Common Stock to the S&P 500 Index and to the S&P 500 Food/Staple Retail Index for Sysco’s last five fiscal years.
 
The graph assumes that the value of the investment in our Common Stock, the S&P 500 Index, and the S&P 500 Food/Staple Retail Index was $100 on the last trading day of fiscal 2011, and that all dividends were reinvested.  Performance data for Sysco, the S&P 500 Index and the S&P 500 Food/Staple Retail Index is provided as of the last trading day of each of our last five fiscal years.
syy201610-k_chartx05414.jpg

17



 
7/2/2011
6/30/2012
6/29/2013
6/28/2014
6/27/2015
7/2/2016
Sysco Corporation
$100
$98
$116
$133
$139
$190
S&P 500
100
104
125
156
171
175
S&P 500 Food/Staple Retail Index
100
115
140
168
200
203

Item 6.  Selected Financial Data
 
 
Fiscal Year
 
 
2016 (1), (2)
 
2015 (1)
 
2014 (1)
 
2013
 
2012
 
 
(In thousands except for per share data)
Sales
 
$
50,366,919

 
$
48,680,752

 
$
46,516,712

 
$
44,411,233

 
$
42,380,939

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
1,850,500

 
1,229,362

 
1,587,122

 
1,658,478

 
1,890,632

 
 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
 
1,433,007

 
1,008,147

 
1,475,624

 
1,547,455

 
1,784,002

Income taxes
 
483,385

 
321,374

 
544,091

 
555,028

 
662,417

Net earnings
 
$
949,622

 
$
686,773

 
$
931,533

 
$
992,427

 
$
1,121,585

 
 
 
 
 
 
 
 
 
 
 
Net earnings:
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.66

 
$
1.16

 
$
1.59

 
$
1.68

 
$
1.91

Diluted earnings per share
 
1.64

 
1.15

 
1.58

 
1.67

 
1.90

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
1.23

 
$
1.19

 
$
1.15

 
$
1.11

 
$
1.07

 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
16,721,804

 
$
17,989,281

 
$
13,141,113

 
$
12,678,208

 
$
12,137,207

Capital expenditures
 
527,346

 
542,830

 
523,206

 
511,862

 
784,501

 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt (3)
 
$
8,909

 
$
4,979,301

 
$
304,777

 
$
207,301

 
$
254,650

Long-term debt
 
7,336,930

 
2,271,825

 
2,357,330

 
2,627,544

 
2,749,304

Total long-term debt
 
7,345,839

 
7,251,126

 
2,662,107

 
2,834,845

 
3,003,954

Shareholders’ equity
 
3,479,608

 
5,260,224

 
5,266,695

 
5,191,810

 
4,685,040

Total capitalization
 
$
10,825,447

 
$
12,511,350

 
$
7,928,802

 
$
8,026,655

 
$
7,688,994

Ratio of long-term debt to
capitalization
(3)
 
67.9
%
 
58.0
%
 
33.6
%
 
35.3
%
 
39.1
%

(1) Our results of operations are impacted by Certain Items that have resulted in reduced earnings on a GAAP basis. See “Non-GAAP Reconciliations,” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, for our results on an adjusted basis that exclude Certain Items.

(2) Sysco’s fiscal year ends on the Saturday nearest to June 30th.  This resulted in a 53-week year ending July 2, 2016 for fiscal 2016.

(3) Specific to fiscal 2015, as discussed in Note 11, "Debt and Other Financing Arrangements," our current maturities of long-term debt include senior notes issued for the proposed merger with US Foods that were required to be redeemed due to the termination of the merger agreement. We redeemed these notes in July 2015.
    
Our financial results are impacted by accounting changes and the adoption of various accounting standards. See Note 2, "Changes in Accounting" to the Consolidated Financial Statements in Item 8 for further discussion.


18



Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations 

Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from restructuring charges, consisting of (1) severance charges, (2) facility closing costs, (3) professional fees incurred related to our three-year strategic plan and (4) expenses associated with the revised business technology strategy announced in fiscal 2016. It will also exclude acquisition-related expense resulting from (1) merger and integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods, Inc. (US Foods) and (2) transaction costs in connection with the acquisition of the parent holding company for the Brakes Group (the Brakes Acquisition), as well as the financing costs related to these acquisitions. Any costs related to the proposed merger with US Foods were applicable to us in our first quarter of fiscal 2016 and prior periods. These fiscal 2016 and fiscal 2015 items are collectively referred to as "Certain Items." Our US Foods financing costs related to senior notes that were issued in fiscal 2015 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. 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.

Sysco’s fiscal year ends on the Saturday nearest to June 30th.  This resulted in a 53-week year ending July 2, 2016 for fiscal 2016, and a 52 week year ending June 27, 2015 and June 28, 2014 for fiscal 2015 and fiscal 2014, respectively. Because fiscal 2016 contained an additional week as compared to fiscal 2015, our Consolidated Results of Operations for fiscal 2016 are not directly comparable to the prior year. Management believes that adjusting the fiscal 2016 Consolidated Results of Operations for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis. Sysco's results of operations and related metrics within this section will be disclosed on both a 53-week and 52-week basis for fiscal 2016 as compared to fiscal 2015. This is calculated by taking one-fourteenth of the total metric for the fourth quarter of fiscal 2016.

Any metric within this section referred to as "adjusted" will reflect the applicable impact of both Certain Items and the extra week in fiscal 2016. 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, 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.

We consider our primary market to be the foodservice market in the U.S., Canada and Ireland and estimate that we serve about 16.4% of this approximately $295 billion annual market based on a measurement as of the end of calendar 2015.  We use industry data obtained from various sources including Technomic, Inc., the Canadian Restaurant and Foodservices Association and the Irish Food Board to calculate this measurement.  From time to time, these industry sources can revise the methodology used to calculate the size of the foodservice market and as result, our percentage can change not only from our sales results, but also from revisions. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 49% of the total dollars spent on food purchases made at the consumer level in the U.S. as of the end of calendar 2015.
 
Industry sources estimate the total foodservice market in the U.S. experienced a real sales increase of approximately 2.3% in calendar year 2015 and 0.7% in calendar year 2014.  Real sales changes do not include the impact of inflation or deflation.
 
Acquisition of Brakes Group

In February 2016, Sysco entered into a share sale and purchase agreement (the Purchase Agreement) to acquire Cucina Lux Investments Limited, the parent holding company of the Brakes Group (the "Brakes Acquisition"). On July 5, 2016, following the end of fiscal year 2016, Sysco closed the Brakes Acquisition. The consideration paid by Sysco in connection with the Brakes Acquisition was approximately £2.3 billion (approximately $3.1 billion based on exchange rates on July 5, 2016), and included the repayment of approximately $2.3 billion of the Brakes Group's then outstanding debt. The purchase price was paid primarily in cash using the proceeds from recent debt issuances and other cash on hand, and is subject to certain adjustments as provided in the Purchase Agreement. The Brakes Group is now wholly owned by Sysco.


19



The Brakes Group is a leading European foodservice business by revenue, supplying fresh, refrigerated and frozen food products, as well as non-food products and supplies, to more than 50,000 foodservice customers. The Brakes Group has leading market positions in the U.K., France, and Sweden, in addition to a presence in Ireland, Belgium, Spain, and Luxembourg. The Brakes Acquisition significantly strengthens Sysco's position as the world's leading foodservice distributor and offers attractive opportunities for organic growth and future expansion in European markets.

In the twelve months ended December 31, 2015, the Brakes Group’s sales were nearly $5 billion (£3.3 billion based on the weighted average exchange rate for the twelve months ended December 31, 2015), a 6.5% increase (in pounds sterling) from its previous fiscal year. The combined companies are expected to generate annualized sales of approximately $55 billion. We believe this acquisition will provide a solid platform for further acquisitions in Europe. The Brakes Acquisition is expected to be immediately accretive to Sysco’s earnings per share in fiscal 2017 contributing low to mid-single-digit percentage growth. In light of the recent closing of the Brakes Acquisition, we are in the early stages of the onboarding process with respect to the Brakes Group. Accordingly, for purposes of Part II, Item 7 of this Form 10-K, the remaining discussion refers to the legacy Sysco business, excluding the impact of the Brakes Acquisition, except as otherwise noted.
 
Highlights    
The general foodservice market environment since the beginning of fiscal 2016 has been uneven, with a combination of both favorable and unfavorable trends reflected in the relevant data. As compared to a few years ago, consumer confidence and unemployment data points were favorable through fiscal 2016 and the beginning of fiscal 2017, while consumer spending on meals away from home has trended slightly downward towards the end of the fiscal year following gains throughout most of fiscal 2016. Spending at restaurants was generally improved, but customer traffic levels were generally unchanged during fiscal 2016 and are beginning to decline, together with an overall moderation in spend. Amid these conditions, throughout fiscal 2016 we provided our customers with excellent service, growing our business with locally managed customers, improving our gross margins and managing expenses. These are all important steps towards achieving our three-year plan financial objectives.  
Comparison of results from fiscal 2016 to fiscal 2015:
Sales increased 3.5%, or $1.7 billion, to $50.4 billion; on a comparable 52-week basis, adjusted sales improved 1.5%;
Operating income increased 50.5%, or $621.1 million, to $1.9 billion;
Adjusted operating income increased 12.1%, or $217 million, to $2 billion; on a comparable 52-week basis, adjusted operating income increased 9.6%;
Net earnings increased 38.3%, or $262.8 million, to $949.6 million
Adjusted net earnings increased 10.4%, or $114 million, to $1.2 billion; on a comparable 52-week basis, adjusted net earnings increased 8.0%;
Basic earnings per share and diluted earnings per share in fiscal 2016 were $1.66 and $1.64, respectively, a 43.1% and 42.6% increase from the comparable prior year amount of $1.16 and $1.15 per share; and
Adjusted diluted earnings per share were $2.10 in fiscal 2016, a 14.1% increase from the comparable prior year amount of $1.84 per share; on a comparable 52-week basis, adjusted diluted earnings per share were $2.06 in fiscal 2016, a 12.0% increase.
See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures. 
 
Trends 

General economic conditions can affect consumer confidence and the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales.  Lower fuel prices likely contributed to incremental consumer spending benefits and reduced our delivery costs; however, we experienced some demand softness in certain markets disproportionately impacted by the downturn in the energy industry in parts of Texas, Montana, North Dakota and Alberta, Canada. Restaurant industry data reflects mixed trends with uneven sales during fiscal 2016. Current sentiment for consumer spending on meals away from home has trended slightly downward recently. Spending at restaurants was generally improved, but customer traffic levels were generally unchanged and are beginning to decline along with an overall moderation in spend. Due to softening conditions for the restaurant environment, we expect modest case volume growth during the first half of fiscal 2017.
 
Our sales and gross profit performance can be influenced by multiple factors including price, volume and product mix. 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 continued focus, our locally managed case volume growth has accelerated. Our sales to corporate-

20



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 solid, but competitive pricing pressure has constrained our gross margins. We offer an assortment of Sysco-branded products that we can differentiate from nationally-branded products, which enables us to achieve higher gross profits. As a result, we focus on growing these products especially with locally-managed customers. 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 deflation at a rate of 0.7% for fiscal 2016. Deflation in fiscal 2016 has occurred primarily in the meat, seafood, dairy and poultry categories for both periods, partially offset by modest inflation in other categories. This is a significant decline from inflation of 3.7% experienced in fiscal 2015.  We expect deflation to persist at least through the end of calendar 2016. Rapid decreases in prices can make it challenging to leverage our fixed costs; however, the rate of deflation in fiscal 2016 was moderate. Our focus on sales of Sysco branded items and our category management efforts have helped us to manage our gross margin performance in response to several of these factors. 

The strong U.S. dollar has unfavorably impacted our foreign sales, operating income, and net earnings, as we convert them to U.S. dollars, primarily from our Canadian operations.  This trend has been present each quarter over the last year; therefore, the negative impact that we have been experiencing on a comparative basis is lessening as we begin to compare against prior year periods where the relative value of our foreign currencies becomes increasingly similar to current exchange rates.
 
We have experienced higher operating expenses in fiscal 2016, as compared to fiscal 2015, that are attributable to higher case volumes and increased management incentive accruals. Some of 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 fiscal 2016, resulting in higher accruals for these awards. While these costs are increasing, certain of our expenses are declining, including indirect spend and fuel costs. Indirect spend includes costs such as fleet maintenance and supplies. An additional favorable impact resulted from the strong U.S. dollar, which is reducing our operating expenses as we convert foreign operating expenses to U.S. dollars. We are also incurring Certain Items in fiscal 2016 for restructuring costs, currently consisting of severance charges, professional fees incurred related to our three-year strategic plan and the impact of changes to our business technology strategy. These Certain Items are contributing to our operating expenses in fiscal 2016 and are likely to continue to contribute to our expenses in the near-term, as we review all aspects of our business for additional cost savings opportunities.
 
Interest expense for fiscal 2016 increased $51.3 million as compared to fiscal 2015. The increase was primarily due to the redemption of the senior notes issued in fiscal 2015 to fund the merger that had been proposed with US Foods, partially offset by lower average debt levels in fiscal 2016 as compared to fiscal 2015. 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 reduced our share count in fiscal 2016. In the fourth quarter of fiscal 2016, we issued $2.5 billion in senior notes and €500 million in senior notes to fund the Brakes Acquisition. Sysco treated such interest expense incurred under these notes as a Certain Item because the use of the proceeds was for the Brakes Acquisition, which did not close until fiscal 2017. Unless our borrowing needs change materially, we do not anticipate a similar level of increase in our interest expense in fiscal 2017 as compared to fiscal 2016. On an adjusted basis, interest expense will increase because the debt incurred in connection with the Brakes Acquisition will no longer be treated as a Certain Item in fiscal 2017.

The number of our outstanding shares has decreased as a result of our $1.5 billion accelerated share repurchase program. This represented half of our previously announced $3.0 billion share repurchase program. This generated an approximate $0.05 per share benefit for fiscal 2016. We intend to execute the remaining $1.5 billion in share repurchases in fiscal 2017 through open market purchases, an accelerated share repurchase or otherwise and believe this will provide an earnings per share benefit of approximately $0.03 to $0.04 per share in fiscal 2017, driven by a reduction in average shares outstanding.

Strategy
 
We are focused on optimizing our core foodservice business with a customer centric approach, while continuing to explore appropriate opportunities to profitably grow our market share in established markets, expand our core business to new geographical regions and markets and create shareholder value by expanding beyond our core business.  We are executing on our strategy by expanding our operational reach in Europe through the Brakes Acquisition. Day-to-day, our business decisions are driven by our mission to market and deliver quality 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 as follows:
Partnership - Profoundly enrich the experience of doing business with Sysco:  Our primary focus is to help our customers succeed.  We believe that by building on our current competitive advantages, we will be able to further differentiate our offering to customers.  Our competitive advantages include our sales force of over 7,600 marketing

21



associates; our diversified product base, which includes quality-assured Sysco brand products; the suite of services we provide to our customers such as business reviews and menu analysis; and our multi-regional presence in the U.S. and Canada.  In addition, we have a portfolio of businesses spanning Broadline, chain restaurant distribution, specialty produce, specialty meat, hotel amenities, specialty import and export which serves our customers’ needs across a wide array of business segments.  Through our Sysco Ventures platform, we are developing a suite of technology solutions that help support the administrative needs of our customers.  We believe this strategy of enriching the experience of doing business with Sysco will increase customer retention and profitably accelerate sales growth with both existing and new customers.
Productivity - Continuously improve productivity in all areas of our business:  We continually strive to improve productivity and reduce costs.  From modernizing software systems to leveraging the power of our end-to-end supply chain, we continue to look for ways to improve our service to our customers and lower costs. 
Products - Enhance our portfolio of products and services by initiating a customer-centric innovation program:  We continually explore opportunities to provide new and improved products, technologies and services to our customers.  
People - Leverage talent, structure, and culture to drive performance:  Our ability to drive results and grow our business is directly linked to having the best talent in the industry.  We are committed to the continued enhancement of our talent management programs in terms of how we recruit, select, train and develop our associates throughout Sysco, as well as succession planning.  Our ultimate objective is to provide our associates with outstanding opportunities for professional growth and career development.  
Portfolio - Explore, assess and pursue new businesses and markets: This strategy is focused on identifying opportunities to expand the core business through growth in new international markets and in adjacent areas that complement our core foodservice distribution business.  As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions, joint ventures and sales of assets and businesses.

In fiscal 2016, we set three-year financial targets to be achieved by the end of fiscal 2018:

Improve operating income by at least $500 million;
Grow earnings per share faster than operating income; and
Achieve 15% in return on invested capital improvement for existing businesses.        

The key levers to achieve these goals include an emphasis on accelerating locally managed customer case growth, improve margins, leverage supply chain costs and reduce administrative costs. We do not expect our improvements to occur evenly on a quarterly basis. We exceeded our 20% to 30% of our adjusted operating income improvement goal in fiscal 2016 and in fiscal 2017, our goal is to achieve 50% to 60% of our cumulative adjusted operating income target. 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 financial targets include reinvesting in our business, moderate growth in our dividend, reducing diluted shares outstanding through our previously announced $3.0 billion share buyback program, half of which has been completed and the other half is expected to occur in fiscal 2017, and repurchasing shares to offset any new share issuances from employee equity compensation and pursuing investments through acquisitions.

During fiscal 2016, we delivered the following results against these objectives as compared to fiscal 2015:

Total cases grew 5.0% in our Broadline business, and local cases grew 4.7%; 3.0% and 2.7% on a comparable 52-week basis, respectively;
We grew gross profit by $489.0 million, expanded gross margin by 38 basis points, and gross profit grew faster than total operating expenses;
Operating income grew by 50.5% and adjusted operating income grew by 9.6%; and 
Diluted earnings per share grew 42.6% and adjusted diluted earnings per share grew 12.0%.     

See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures. 

Revised Technology Strategy
In fiscal 2016, Sysco announced its revised business technology strategy focused on improving the customer experience. In refocusing its technology approach, Sysco is modernizing and adding new capability and functionality to its existing SUS Enterprise Resource Planning (ERP) system. In connection with this strategy, Sysco plans to remove the SAP ERP platform

22



currently used by 12 of its operating companies by the end of fiscal 2017. We believe this new approach to our business technology strategy enables us to achieve our original business transformation objectives sooner, at a lower cost, with less risk, and provides a better user experience for our customers and operating companies. Our technology efforts going forward are expected to be increasingly directed toward developing customer-facing tools and systems, such as a digital ordering platform, that add value to our customers’ overall experience with Sysco. Additionally, we will continue to develop integrated systems that enable the use of shared services across the enterprise. Sysco expects to realize significant technology cost savings once the conversion to the SUS ERP is completed in fiscal 2017. A portion of these savings will be reinvested in optimizing the company’s technology platform to better serve customers. In addition, the company incurred expenses of approximately $78.5 million in fiscal 2016 related to write-offs, accelerated depreciation and conversion costs resulting from the changes in technology strategy. Incremental depreciation expenses, recognized in fiscal 2016 were $73.5 million, consisted of $31.6 million of unfinished projects previously capitalized on the consolidated balance sheet within construction in progress and $41.9 million in accelerated depreciation. We expect to incur expenses of approximately $130 million in fiscal 2017 primarily from accelerated depreciation and conversion costs.

General and Administrative Productivity Plan
In fiscal 2016, Sysco began a productivity plan that includes a reduction in its workforce by approximately 2%, or 1,200 positions, by the end of fiscal 2017. The primary focus of this reduction is on administrative, non-customer-facing roles. Sysco expects to record charges for severance and related benefit costs of $25 million to $30 million through the end of fiscal 2017. Charges recognized in fiscal 2016 were $17.0 million. We also designed a new market structure for our U.S. Broadline operations that reduced the number of markets from eight to six effective at the beginning of fiscal 2017. This change builds on our functional expertise and further improves the effectiveness of each team, while reducing administrative costs, improving efficiency through standardization of processes and improving execution of our three-year financial plan.

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:
 
2016
 
2015
 
2014
 
Sales
100
%
 
100.0
 %
 
100.0
 %
 
Cost of sales
82.1

 
82.4

 
82.4

 
Gross profit
17.9

 
17.6

 
17.6

 
Operating expenses
14.3

 
15.0

 
14.2

 
Operating income
3.7

 
2.5

 
3.4

 
Interest expense
0.6

 
0.5

 
0.3

 
Other expense (income), net
0.2

 
(0.1
)
 

 
Earnings before income taxes
2.8

 
2.1

 
3.2

 
Income taxes
1.0

 
0.7

 
1.2

 
Net earnings
1.9
%
 
1.4
 %
 
2.0
 %
 
 

23



The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:
 
2016
 
2015
 
Sales
3.5
 %
 
4.7
 %
 
Cost of sales
3.0

 
4.7

 
Gross profit
5.7

 
4.5

 
Operating expenses
(1.8
)
 
11.0

 
Operating income
50.5

 
(22.5
)
 
Interest expense
20.1

 
105.9

 
Other expense (income), net (1)
(431.5
)
(1) 
174.4

(2) 
Earnings before income taxes
42.1

 
(31.7
)
 
Income taxes
50.4

 
(40.9
)
 
Net earnings
38.3
 %
 
(26.3
)%
 
Basic earnings per share
43.1
 %
 
(27.0
)%
 
Diluted earnings per share
42.6

 
(27.2
)
 
Average shares outstanding
(3.2
)
 
1.0

 
Diluted shares outstanding
(3.3
)
 
1.1

 
 

(1) Other expense (income), net was expense of $111.3 million in fiscal 2016 and income of $33.6 million in fiscal 2015.

Sales 
 
The following table sets forth the percentage and dollar value increase or decrease in sales over the comparable prior year period in order to demonstrate the cause and magnitude of change.

 
Increase (Decrease)
 
Increase (Decrease)
 
 
2016
 
2015
 
 
(in millions)
Cause of change
Percentage
Dollars
 
Percentage
Dollars
 
Case volume
4.0
 %
$
1,926.0

 
2.4
 %
$
1,093.4

 
Acquisitions
0.7

348.1

 
0.6

272.5

 
Foreign currency
(1.3
)
(628.4
)
 
(1.0
)
(486.6
)
 
Other (including extra week applicable for 2016)
0.1

40.5

 
2.7

1,284.7

 
Total sales increase
3.5
 %
$
1,686.2

 
4.7
 %
$
2,164.0

 

Sales for fiscal 2016 were 3.5% higher than fiscal 2015, respectively.  The largest drivers of the increases were the extra week that was applicable in fiscal 2016, case volume growth and sales from acquisitions that occurred within the last 12 months. We estimate that the extra week contributed 2.0% of the 3.5% sales growth.  Case volumes for the company's U.S. Broadline operations improved 5.3% in fiscal 2016 compared to fiscal 2015 and included a 4.7% improvement in locally managed customer case growth. We estimate that the extra week contributed 2.0% to both the U.S. Broadline operations and locally managed customer case growth. Partially offsetting this growth were unfavorable changes in exchange rates used to translate our foreign sales into U.S. dollars.  Other items impacting the change in sales, but to a lesser extent, were pricing management of product cost deflation and product mix.

Sales for fiscal 2015 were 4.7% higher than fiscal 2014.  The largest drivers of the increases were case volume growth and inflation, which is included in "Other" in the table above. Changes in product costs, an internal measure of inflation or deflation, were estimated as inflation of 3.7% during fiscal 2015, driven mainly by inflation in the meat, seafood and dairy categories.  Case volumes including acquisitions within the last 12 months improved 2.6% in fiscal 2015.  Case volumes excluding acquisitions within the last 12 months improved 2.4% in fiscal 2015.  Our case volumes represent our results from our Broadline

24



and SYGMA segments combined.  The changes in the exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 1.0% in fiscal 2015
 
Operating Income
 
Cost of sales primarily includes our product costs, net of vendor consideration, and includes in-bound freight.  Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities.  Fuel surcharges are reflected within sales and gross profit; fuel costs are reflected within operating expenses.
 

Fiscal 2016 vs. Fiscal 2015
 
The following table sets forth the change in the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
 
2016
 
2015
 
Change in Dollars
 
% Change
 
(In thousands)
Gross profit
$
9,040,472

 
$
8,551,516

 
$
488,956

 
5.7
 %
Operating expenses
7,189,972

 
7,322,154

 
(132,182
)
 
(1.8
)%
Operating income
$
1,850,500

 
$
1,229,362

 
$
621,138

 
50.5
 %
 
 
 
 
 
 
 
 
Adjusted Gross profit (Non-GAAP)
$
8,861,698

 
$
8,551,516

 
$
310,182

 
3.6
 %
Adjusted operating expenses (Non-GAAP)
6,897,325

 
6,759,686

 
137,639

 
2.0
 %
Adjusted operating income (Non-GAAP)
$
1,964,373

 
$
1,791,830

 
$
172,543

 
9.6
 %

The increase in operating income and adjusted operating income for fiscal 2016 was impacted by gross profit growth exceeding operating expense growth. The increase in operating income during fiscal 2016 also reflected a lower amount of Certain Items as compared to fiscal 2015. An additional unfavorable impact resulted from the strengthening U.S. dollar, which reduced our foreign operating income as we converted those amounts to U.S. dollars. More information on the rationale for the use of these adjusted measures and reconciliations can be found under “Non-GAAP Reconciliations.”

Gross profit dollars increased in fiscal 2016, as compared to fiscal 2015, primarily due to the extra week in fiscal 2016, higher sales volumes, including a more beneficial mix of local customer case growth, higher sales of Sysco branded products to local customers, benefits of category management and revenue management and effective management of deflation. We estimate that the extra week contributed 2.1% of the 5.7% gross profit growth.  Our focus on center of plate categories, such as beef, pork and poultry, and our emphasis on fresh produce helped drive gross profit growth. Gross margin, which is gross profit as a percentage of sales, was 17.95% in fiscal 2016, an improvement of 38 basis points from the gross margin of 17.57% in fiscal 2015. Our case growth for Sysco brand sales to local customers increased 82 basis points for fiscal 2016. The change in product costs, an internal measure of inflation or deflation, was estimated as deflation of 0.7% for fiscal 2016. Of those amounts, our U.S. Broadline operations experienced deflation of 0.9%. Deflation in these fiscal 2016 periods has occurred primarily in the meat, seafood, dairy and poultry categories for both periods, partially offset by modest inflation in other categories.    
 
Operating expenses for fiscal 2016 decreased 1.8%, or $132.2 million, over fiscal 2015. Adjusted operating expenses for fiscal 2016 increased 2.0%, or $137.6 million, over fiscal 2015.  Both operating expenses and adjusted operating expenses were increased by the additional week in fiscal 2016. We estimate that the extra week contributed 2.0% to these operating expense metrics.  The decrease in operating expenses was primarily due to a lower level of Certain Items primarily from lower acquisition-related costs. The increase in adjusted operating expenses for fiscal 2016 resulted primarily from expenses attributable to higher case volumes and increased management incentive accruals. These increases were partially offset by reduced expenses in indirect spend and fuel costs and administrative expense. Indirect spend includes costs such as fleet maintenance and supplies. An additional favorable impact resulted from the strengthening U.S. dollar, which is reducing our operating expenses as we convert foreign operating expenses to U.S. dollars.
 

25



Operating Expenses Impacting Adjusted Operating Income
 
Pay-related expenses represent a significant portion of our operating costs, and can increase due to volume growth, increased incentive expenses, acquisitions and pay increases, among other factors. These expenses increased by $199.5 million in fiscal 2016 as compared to fiscal 2015 due primarily to case volume increases and companies acquired within the last 12 months. Our pay-related expenses increased $131.7 million primarily due to improved case volumes for fiscal 2016. Long-term incentive accruals increased $38.5 million. Some of these incentives are based on Sysco's total shareholder return as compared to the S&P 500 and Sysco's stock performance improved relative to the S&P 500 in fiscal 2016, which increased the expense associated with these awards. Our expense related to management incentive accruals will vary based on how the company’s performance compares to incentive targets. Acquired companies added $29.4 million to the pay-related expense totals for fiscal 2016 as compared to fiscal 2015.
 
Several factors contributed to reductions in operating expenses, including reduced indirect spending, reduced fuel costs and foreign exchange translation. Total fuel costs decreased by $68.0 million in fiscal 2016 as compared to fiscal 2015. The decrease was primarily due to lower prices for diesel. We do not expect this level of decrease in fiscal 2017 due to pricing we have locked with fixed forward contracts. Due to a stronger U.S. dollar, foreign exchange translation aided in the year over year comparison of operating expenses by $86.9 million.

Cost per case is an important metric management uses to measure our expense performance. This metric is calculated by dividing the total operating expense of our U.S. Broadline companies by the number of cases sold. Adjusted cost per case is calculated similarly; however, the operating expense component excludes restructuring costs consisting of severance charges, which are the Certain Items applicable to these companies, divided by the number of cases sold.  Our corporate expenses are not included in the cost per case metrics because the metric is a measure of efficiency in our operations. Our U.S. Broadline operations represented approximately 70% of Sysco's sales and nearly 65% of our operating expenses prior to corporate expenses in both fiscal 2016 and fiscal 2015. We seek to grow our sales and reduce our costs on a per case basis. Our cost per case and adjusted cost per case decreased $0.04 per case fiscal 2016 as compared to the corresponding periods of fiscal 2015.  The decrease reflects progress in productivity improvements and cost reductions in our supply chain including reduced fuel costs and indirect spend. The decrease attributable to lower fuel prices was $0.04 benefit per case. Adjustments to operating expenses were not large enough to produce a different result on an adjusted cost per case basis for fiscal 2016. Additionally, the extra week in fiscal 2016 was not large enough to produce a different result on a 52-week basis.  

Certain Items within Operating Expenses
 
Sysco’s operating expenses are impacted by Certain Items, which are expenses that can be difficult to predict, can be unanticipated or do not represent core operating expenses. More information on the rationale for the use of adjusted measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” Certain Item costs totaled $158.7 million in fiscal 2016. Certain Items for fiscal 2016 consisted of restructuring costs related to our revised business technology strategy, severance charges, professional fees incurred related to our three-year strategic plan, and acquisition-related costs and loss on foreign currency remeasurement and hedging. Costs associated with our revised business technology strategy were $73.5 million, consisting of $31.6 million of unfinished projects previously capitalized on the consolidated balance sheet and $41.9 million in accelerated depreciation. Professional fees and severance largely related to our three-year strategic plan totaled $43.3 million in fiscal 2016. Loss on foreign currency remeasurement and hedging related to the Brakes Acquisition totaled $147.0 million. Certain of these types of expenses, such as restructuring costs, are likely to continue in the near-term as we review all aspects of our business for additional cost savings opportunities. Additionally, we will incur additional costs to onboard the Brakes Group into our operations.
    
Certain Items for fiscal 2015 related primarily to integration planning and transaction costs incurred in connection with the merger that had been proposed with US Foods, including merger termination costs. Certain Item costs totaled $562.5 million for fiscal 2015.

Interest Expense

Interest expense increased $51.3 million for fiscal 2016, as compared to 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. These senior notes were redeemed in the first quarter of fiscal 2016 and triggered a redemption loss of $86.5 million. This increase was partially offset by lower average debt levels in fiscal 2016 as compared to fiscal 2015. We incurred interest costs from financing the Brakes Acquisition in the last half of fiscal 2016. In fiscal 2015, we incurred interest costs related to the proposed merger with US Foods. Interest costs related to these proposed acquisitions as well and the redemption costs noted above are considered Certain Items. Our interest

26



expense, excluding Certain Items, increased $61.8 million as compared to fiscal 2015, due to higher borrowing levels from senior notes that were issued in fiscal 2016 primarily for our accelerated share repurchase program.

Other Income and Expense, Net

Other income and expense, net increased $144.9 million for fiscal 2016, as compared to fiscal 2015, primarily from the remeasurement of foreign denominated cash and losses of foreign currency option contracts. Both of these related to our purchase price for the acquisition of the Brakes Group, which closed shortly after our fiscal year end.

Fiscal 2015 vs. Fiscal 2014
 
The following table sets forth the change in the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year:
 
 
2015
 
2014
 
Change in Dollars
 
% Change
 
(Dollars in thousands)
Gross profit
$
8,551,516

 
$
8,181,035

 
$
370,481

 
4.5
 %
Operating expenses
7,322,154

 
6,593,913

 
728,241

 
11.0

Operating income
1,229,362

 
1,587,122

 
(357,760
)
 
(22.5
)
 
 
 
 
 
 
 
 
Gross profit
8,551,516

 
8,181,035

 
370,481

 
4.5

Adjusted operating expenses (Non-GAAP)
6,759,686

 
6,447,405

 
312,282

 

Adjusted operating income (Non-GAAP)
$
1,791,830

 
$
1,733,630

 
$
58,199

 
3.4
 %
 
The decrease in operating income was impacted by an increase of $416.0 million in operating expenses attributable to Certain Items.  Adjusted operating income increased due to gross profit dollar growth partially offset by increased expenses from greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profit, investment in administrative support capabilities and acquired operations.

Gross profit dollars increased in fiscal 2015 as compared to fiscal 2014 primarily due to increased sales volumes, stronger relative mix of sales to our locally-managed customers and benefits from category management.  Gross margin, which is gross profit as a percentage of sales, was 17.57% in fiscal 2015, a decline of 2 basis points from the gross margin of 17.59% in fiscal 2014.  Increased competition resulting from a slow-growth market and volatile inflation has pressured our gross margins; however, sales and mix, as well as our category management initiative helped us stabilize our gross margin performance.  Inflation in fiscal 2015 was 3.7%, an increase from 2.1% experienced in fiscal 2014. Our inflation rates were higher in the first half of fiscal 2015, reaching 6.0% at the mid-point of the fiscal year and dropping to 0.1% by the end of the fiscal year. Fiscal 2015 inflation was seen primarily in the meat, dairy and poultry categories. 
 
Operating expenses for fiscal 2015 increased 11.0%, or $728.2 million, over fiscal 2014.  Adjusted operating expenses for fiscal 2015 increased 4.9%, or $315.6 million, over fiscal 2014.  These increases in adjusted operating expenses were primarily due to increased expenses from greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profit, investment in administrative support capabilities and acquired operations. Partially offsetting this increase, was a reduction in fuel costs and provisions for losses on receivables. Sysco’s operating expenses were impacted by Certain Items, which resulted in an increase in operating expenses of $416 million in fiscal 2015 as compared to fiscal 2014.  More information on the rationale of the use of adjusted operating expense and adjusted operating income and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” 
 
Operating Expenses Impacting Adjusted Operating Income
 
Our operating expenses increased in fiscal 2015 as compared to fiscal 2014 partially due to greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profit, investment in administrative support capabilities and acquired operations.  Pay-related expenses, which represent a significant portion of our operating costs, increased by $349.3 million in fiscal 2015 over fiscal 2014.  Factors contributing to the increase in 2015 include increase in expense related to management incentive accruals of $103.5 million, higher pay in our sales organization largely as a result of higher gross profits, higher costs due to investment in new administrative support capabilities and companies acquired in the last 12 months. The amounts for companies acquired within the last 12 months include our new, consolidated joint ventures, such as our 50% interest

27



in a foodservice company in Costa Rica. Sales and gross profit growth partially contributed to an increase in sales pay-related expenses due to increases in sales commissions and bonuses. In addition, we had increased our marketing associate headcount in certain markets in order to invest in future sales growth. Our fiscal 2015 financial performance trended more favorably relative to the applicable management incentive targets as compared to fiscal 2014. Consequently, expense is higher period over period.
    
Our U.S. Broadline cost per case and adjusted cost per case increased $0.08 per case in fiscal 2015 as compared to fiscal 2014.  The increase occurred primarily from increased pay-related expenses.  Adjustments to operating expenses were not large enough to produce a different result on an adjusted cost per case basis for fiscal 2015. 
 
Certain Items within Operating Expenses
 
Sysco’s operating expenses are impacted by Certain Items, which are expenses that can be difficult to predict, can be unanticipated or do not represent core operating expenses.  More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.”   Our significant Certain Items applicable for fiscal 2015 included costs related to integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods.  Our significant Certain Items applicable for fiscal 2014 related to costs in connection with the then proposed merger with US Foods, a change in estimate of our self-insurance reserve and a liability for a settlement.
 
We incurred costs in connection with the proposed merger with US Foods announced in the second quarter of fiscal 2014 primarily from integration planning, litigation costs and termination costs.  These costs totaled $554.7 million in fiscal 2015 and $90.6 million in fiscal 2014.

Our self-insurance program covers portions of workers’ compensation, general and vehicle liability and property insurance costs.  The amounts in excess of the self-insured levels are fully insured by third party insurers.  Liabilities associated with these risks are estimated in part by considering historical claims experience, medical cost trends, demographic factors, severity factors and other actuarial assumptions.  In the second quarter of fiscal 2014, based on the historical trends of increased costs primarily attributable to our workers' compensation claims, we increased our estimates of our self-insurance reserve to a higher point in an estimated range of liability as opposed to our past position at the lower end of the range.  This resulted in a charge of $23.8 million in fiscal 2014
 
During the first quarter of fiscal 2014, Sysco was made aware of certain alleged violations of California law relating to its use of remote storage units in the delivery of products.  These are commonly referred to as drop sites.  As of June 28, 2014, we recorded a liability for a settlement of $20 million.  In July 2014, Sysco agreed to a $19.4 million settlement, which includes a payment of $15.0 million in penalties, $3.3 million to fund four California Department of Public Health investigator positions for five years, a $1.0 million donation to food banks across California, and $0.1 million in legal fees.  In the first quarter of fiscal 2014, we eliminated the use of drop sites across Sysco.  During fiscal 2014, we introduced mandatory, annual food safety training for all employees across Sysco.  

 Net Earnings 
 
Net earnings increased 38.3% in fiscal 2016 from fiscal 2015 due primarily to the items noted above and the beneficial impact from the favorable resolution of tax contingencies. Items impacting our income taxes from effective tax rates are discussed in Note 20, "Income Taxes".  Adjusted net earnings increased 8.0% in fiscal 2016 primarily from gross profit growth, strong expense management and the favorable resolutions of tax contingencies. Our tax rate can be positively or negatively influenced by events such as the occurrence or resolution of tax contingencies; however, we expect a normalized tax rate of 35% to 36% for the remainder of fiscal 2017, which represents a decrease due to the recent Brakes Acquisition. An additional unfavorable impact on our net earnings and adjusted net earnings resulted from the strengthening U.S. dollar, which reduced both amounts by $11.5 million for fiscal 2016 as we converted foreign earnings to U.S. dollars.

Net earnings decreased 26.3% in fiscal 2015 from fiscal 2014 due primarily to the changes in operating income discussed above, including the impact of Certain Items, which included increased interest expense of $131.6 million in fiscal 2015 that related to the financing of our proposed merger with US Foods.  These amounts include the write off of unamortized debt issuance costs when our bridge acquisition facility was terminated upon the issuance of our senior notes in October 2014 and interest expense on those senior notes. Excluding this interest expense, adjusted interest expense decreased by $0.6 million. Adjusted net earnings increased $66.3 million, or 6.4%, during fiscal 2015.  Items impacting our income taxes from effective tax rates are discussed in Note 20, "Income Taxes"
    

28



Earnings Per Share 
 
Basic earnings per share in fiscal 2016 were $1.66, a 43.1% increase from the fiscal 2015 amount of $1.16 per share. Diluted earnings per share in fiscal 2016 were $1.64, a 42.6% increase from the fiscal 2015 amount of $1.15. Adjusted diluted earnings per share in fiscal 2016 were $2.06, a 12.0% increase from the fiscal 2015 amount of $1.84. These results were primarily due to the factors discussed above related to net earnings and a decrease in outstanding shares that resulted from our accelerated share repurchase program, which generated and an approximate five cent per share benefit for fiscal 2016.

Basic earnings per share in fiscal 2015 were $1.16, a 27.0% decrease from the fiscal 2014 amount of $1.59 per share.  Diluted earnings per share in fiscal 2015 were $1.15, a 27.2% decrease from the fiscal 2014 amount of $1.58 per share.  This decrease was primarily the result of the factors discussed above and due to greater shares outstanding during fiscal 2015 as compared to fiscal 2014. As discussed below in “liquidity and capital resources - financing activities,” we chose not to repurchase any shares in fiscal 2015 due to the proposed US Foods merger. Our shares outstanding had increased primarily as a result of stock option exercises and restricted stock unit grants to employees. This resulted in lowering our earnings per share amounts by $0.02 per share in fiscal 2015. Adjusted diluted earnings per share in fiscal 2015 were $1.84, an increase of 5.1% from the comparable prior year period amount of $1.75.

As noted in our Trends discussion above, our accelerated share repurchases that occurred in the second quarter of fiscal 2016 favorably impacted our fiscal 2016 earnings per share.  We intend to execute the remaining $1.5 billion in share repurchases in fiscal 2017 through open market purchases, an accelerated share repurchase or otherwise and believe this will provide an earnings per share benefit of approximately $0.03 to $0.04 per share in fiscal 2017, driven by a reduction in average shares outstanding.  

Non-GAAP Reconciliations

Sysco’s consolidated results of operations are impacted by certain items which include restructuring charges, consisting of (1) severance charges, (2) facility closing costs, (3) professional fees incurred related to our three-year strategic plan and (4) expenses associated with the revised business technology strategy announced in fiscal 2016. It will also exclude acquisition-related expense resulting from (1) merger and integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods, Inc. (US Foods) and (2) transaction costs in connection with the acquisition of the parent holding company for the Brakes Group (the Brakes Acquisition), as well as the financing costs related to these acquisitions. Any costs related to the proposed merger with US Foods were applicable to us in our first quarter of fiscal 2016 and prior periods. These fiscal 2016 and fiscal 2015 items are collectively referred to as "Certain Items." Management believes that adjusting its operating expenses, operating income, interest expense, net earnings and diluted earnings per share to remove these Certain Items provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company's underlying operations and facilitates comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated, and which as a result, are difficult to include in analysts' financial models and our investors' expectations with any degree of specificity.

Sysco’s fiscal year ends on the Saturday nearest to June 30th. This resulted in a 53-week year ending July 2, 2016 for fiscal 2016 and 52-week year ending June 27, 2015 for fiscal 2015. Because the fourth quarter of fiscal 2016 contained an additional week as compared to fiscal 2015, our consolidated results of operations for fiscal 2016 are not directly comparable to the prior year. Management believes that adjusting the fiscal 2016 consolidated results of operations for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis. As a result, the metrics from the consolidated results of operations for fiscal 2016 presented in the table below are adjusted by one-fourteenth of the total metric for the fourth quarter. Failure to make these adjustments causes the year-over-year changes in certain metrics such as sales, operating expenses, operating income, net earnings and diluted earnings per share to be overstated, whereas in certain cases, a metric may actually have declined on a more comparable year-over-year basis.

The company uses these non-GAAP measures when evaluating its financial results, as well as for internal planning and forecasting purposes. These financial measures should not be used as a substitute for GAAP measures in assessing the company’s results of operations for periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. As a result, in the table below, each period presented is adjusted for the impact described above.  In the table below, individual components of diluted earnings per share may not add to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. 


29



 
2016
 
2015
 
Change in Dollars
 
% Change
 
(In thousands, except for share and per share data)
Sales
$
50,366,919

 
$
48,680,752

 
$
1,686,167

 
3.5
 %
Less 1 week fourth quarter sales
(974,849
)
 

 
(974,849
)
 
NM

Comparable sales using a 52 week basis
49,392,070

 
48,680,752

 
711,318

 
1.5

Gross profit
9,040,472

 
8,551,516

 
488,956

 
5.7

Less 1 week fourth quarter gross profit
(178,774
)
 

 
(178,774
)
 
NM

Comparable gross profit using a 52 week basis
$
8,861,698

 
$
8,551,516

 
$
310,182

 
3.6
 %
Gross margin using a 52 week basis
17.9
%
 
17.6
%
 
 
 
0.38
 %
 
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
7,189,972

 
$
7,322,154

 
$
(132,182
)
 
(1.8
)%
Impact of restructuring costs (1)
(123,134
)
 
(7,801
)
 
(115,333
)
 
NM

Impact of acquisition-related costs (2)
(35,614
)
 
(554,667
)
 
519,053

 
(93.6
)
Subtotal - Operating expenses adjusted for certain items (Non-GAAP)
7,031,224

 
6,759,686

 
271,537

 
4.0

Less 1 week fourth quarter operating expenses
(133,899
)
 

 
(133,899
)
 
NM

Operating expenses adjusted for certain items and extra week (Non-GAAP)
$
6,897,325

 
$
6,759,686

 
$
137,639

 
2.0
 %
Operating income (GAAP)
$
1,850,500

 
$
1,229,362

 
$
621,138

 
50.5
 %
Impact of restructuring costs (1)
123,134

 
7,801

 
115,333

 
NM

Impact of acquisition-related costs (2)
35,614

 
554,667

 
(519,053
)
 
(93.6
)
Subtotal - Operating income adjusted for certain items (Non-GAAP)
2,009,248

 
1,791,830

 
217,419

 
12.1

Less 1 week fourth quarter operating income
(44,876
)
 

 
(44,876
)
 
NM

Operating income adjusted for certain items and extra week (Non-GAAP)
$
1,964,372

 
$
1,791,830

 
$
172,543

 
9.6
 %
 
 
 
 
 
 
 
 
Operating margin (GAAP)
3.67
%
 
2.53
%
 
1.15
%
 
45.5
 %
Operating margin (non-GAAP)
3.99
%
 
3.68
%
 
0.31
%
 
8.4
 %
Operating margin adjusted for 52 weeks (Non-GAAP)
3.98
%
 
3.68
%
 
0.30
%
 
8.1
 %
 
 
 
 
 
 
 
 
Interest expense (GAAP)
$
306,146

 
$
254,807

 
$
51,339

 
20.1
 %
Impact of acquisition financing costs (3)
(123,990
)
 
(138,422
)
 
14,432

 
(10.4
)
Subtotal - Adjusted interest expense (Non-GAAP)
182,156

 
116,385

 
65,771

 
56.5

Less 1 week fourth quarter other (income) expense
(3,975
)
 

 
(3,975
)
 
NM

Interest expenses adjusted for certain items and extra week (Non-GAAP)
$
178,181

 
$
116,385

 
$
61,797

 
53.1
 %
Other (income) expense
111,347

 
(33,592
)
 
144,939

 
NM

Impact of foreign currency re-measurement and hedging
(146,950
)
 

 
(146,950
)
 
NM

Subtotal - Other (income) expense (Non-GAAP)
(35,603
)
 
(33,592
)
 
(2,011
)
 
6.0

Less 1 week fourth quarter other (income) expense
403

 

 
403

 
NM

Other (income) expense adjusted for certain items and extra week (Non-GAAP)
$
(35,200
)
 
$
(33,592
)
 
$
(1,608
)
 
4.8
 %
Net earnings (GAAP)
$
949,622

 
$
686,773

 
$
262,849

 
38.3
 %
Impact of restructuring costs (1)
123,134

 
7,801

 
115,333

 
NM

Impact of acquisition-related costs (2)
35,614

 
554,667

 
(519,053
)
 
(93.6
)
Impact of acquisition financing costs (3)
123,990

 
138,422

 
(14,432
)
 
(10.4
)
Impact of foreign currency re-measurement and hedging
146,950

 

 
146,950

 
NM

Tax impact of restructuring costs (4)
(47,333
)
 
(3,200
)
 
(44,133
)
 
NM


30



Tax impact of acquisition-related costs (4)
(13,690
)
 
(227,518
)
 
213,828

 
(94.0
)
Tax impact of acquisition financing costs (4)
(47,662
)
 
(56,779
)
 
9,117

 
(16.1
)
Tax impact of foreign currency re-measurement and hedging
(56,488
)
 

 
(56,488
)
 
(100.0
)
Sub-total - Earnings excluding certain items
1,214,137

 
1,100,166

 
113,971

 
10.4

Less 1 week fourth quarter net earnings
(26,119
)
 

 
(26,119
)
 
NM

Net earnings adjusted for certain items and extra week
$
1,188,018

 
$
1,100,166

 
$
87,852

 
8.0
 %
Diluted earnings per share (GAAP) (1)
$
1.64

 
$
1.15

 
$
0.49

 
42.6
 %
Impact of restructuring costs(1)
0.21

 

 
0.21

 
NM

Impact of acquisition-related costs (2)
0.06

 
0.93

 
(0.87
)
 
(93.5
)
Impact of acquisition financing costs (3)
0.21

 
0.24

 
(0.03
)
 
(12.5
)
Impact of foreign currency re-measurement and hedging
0.25

 

 
0.25

 
NM

Tax impact of restructuring costs (4)
(0.08
)
 

 
(0.08
)
 
NM

Tax impact of acquisition-related costs (4)
(0.02
)
 
(0.38
)
 
0.36

 
(94.7
)
Tax impact of acquisition financing costs (4)
(0.08
)
 
(0.10
)
 
0.02

 
(20.0
)
Tax impact of foreign currency re-measurement and hedging (4)
(0.10
)
 

 
(0.10
)
 
NM

Diluted EPS excluding certain items
2.10

 
1.84

 
0.26

 
14.1

Less 1 week impact of fourth quarter diluted earnings per share
(0.05
)
 

 
(0.05
)
 
NM

Diluted EPS adjusted for certain items and extra week(Non-GAAP) (5)
$
2.06

 
$
1.84

 
$
0.22

 
12.0
 %
Diluted shares outstanding
577,391,406

 
596,849,034

 
 

 
 

 
 
(1) Includes severance charges, professional fees on 3 year financial objectives, facility closure costs and costs associated with our revised business technology strategy.

(2) Includes US Foods merger and integration planning and transaction costs (first quarter 2016 and fiscal 2015 only) and Brakes Acquisition transaction costs (third and fourth quarter fiscal 2016 only).

(3) Includes US Foods financing costs (first quarter 2016 and fiscal 2015 only) and Brakes Acquisition financing costs (third and fourth quarter fiscal 2016 only).

(4) The tax impact of adjustments for Certain Items are calculated based on jurisdiction by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction. As a result, the effective rate for each Certain Item may differ based on the jurisdiction where the Certain Item was incurred.

(5) Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.

NM represent that the percentage change was not meaningful.



31



 
2015
 
2014
 
Change in Dollars
 
% Change
 
(In thousands, except for share and per share data)
Operating expenses (GAAP)
$
7,322,154

 
$
6,593,913

 
$
728,241

 
11.0
 %
Impact of MEPP charge

 
(1,451
)
 
1,451

 
NM

Impact of severance charges
(5,598
)
 
(7,202
)
 
1,604

 
(22.3
)
Impact of US foods merger costs
(554,667
)
 
(90,571
)
 
(464,096
)
 
512.4

Impact of change in estimate of self-insurance

 
(23,841
)
 
23,841

 
NM

Impact of contingency accrual

 
(20,000
)
 
20,000

 
NM

Impact of facility closure charges
(2,203
)
 
(3,443
)
 
1,240

 
(36.0
)
Impact of Certain Items on operating expenses
(562,468
)
 
(146,508
)
 
(415,960
)
 
NM

Operating expenses adjusted for certain items (Non-GAAP)
$
6,759,686

 
$
6,447,405

 
$
312,281

 
4.8
 %
Operating income (GAAP)
$
1,229,362

 
$
1,587,122

 
$
(357,760
)
 
(22.5
)%
Impact of Certain Items on operating expenses
562,468

 
146,508

 
415,960

 
NM

Operating income adjusted for certain items (Non-GAAP)
$
1,791,830

 
$
1,733,630

 
$
58,200

 
3.4
 %
Interest expense (GAAP)
$
254,807

 
$
123,741

 
$
131,066

 
105.9
 %
Impact of US Foods financing costs
(138,422
)
 
(6,790
)
 
(131,632
)
 
NM

Adjusted interest expense (Non-GAAP)
$
116,385

 
$
116,951

 
$
(566
)
 
(0.5
)%
Net earnings (GAAP) (1)
$
686,773

 
$
931,533

 
$
(244,760
)
 
(26.3
)%
Impact of MEPP charge

 
1,451

 
(1,451
)
 
NM

Impact of severance charge
5,598

 
7,202

 
(1,604
)
 
(22.3
)
Impact of US Foods merger costs
554,667

 
90,571

 
464,096

 
NM

Impact of change in estimate of self-insurance

 
23,841

 
(23,841
)
 
NM

Impact of contingency accrual

 
20,000

 
(20,000
)
 
NM

Impact of facility closure charges
2,203

 
3,443

 
(1,240
)
 
(36.0
)
Impact of acquisition financing costs
138,422

 
6,790

 
131,632

 
NM

Tax impact of MEPP charge

 
(535
)
 
535

 
NM

Tax impact of severance charge
(2,296
)
 
(2,656
)
 
360

 
(13.6
)
Tax impact of US Foods merger
(227,518
)
 
(33,395
)
 
(194,123
)
 
NM

Tax impact of change in estimate of self-insurance

 
(8,791
)
 
8,791

 
NM

Tax impact of contingency accrual

 
(1,844
)
 
1,844

 
NM

Tax impact of facility closure charges
(904
)
 
(1,270
)
 
366

 
(28.8