Fair Value Measurements

3 Months Ended

Oct. 01, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows: 

• Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets; 

• Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and 

• Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. 

Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds. Any derivative instruments described below are discussed further in Note 6, "Derivative Financial Instruments"

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:

• Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value.  These are included within cash equivalents as a Level 2 measurement in the tables below. 

• Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange.  These are included within cash equivalents and restricted cash as Level 1 measurements in the tables below. 

• The interest rate swap agreements are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates.  These are included as Level 2 measurements in the tables below.

• The foreign currency swap agreements are valued using a swap valuation model that utilizes an income approach applying observable market inputs including interest rates, LIBOR swap rates for U.S. dollars, pound sterling and Euro currencies, and credit default swap rates.  These are included as Level 2 measurements in the tables below.

• Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. These are included as Level 2 measurements in the tables below.

• Fuel hedges are valued based on observable market transactions of forward commodity prices. These are included as Level 2 measurements in the tables below.

• Contingent consideration in the form of earnout agreements relating to acquisitions is determined utilizing a discounted cash flow approach using various probability-weighted scenarios. The significant unobservable inputs used in calculating the fair value of the contingent consideration includes financial performance scenarios, the probability of achieving those scenarios and the discount rate. These are included in contingent consideration liabilities as Level 3 measurements in the table below. For additional information, see Note 4, "Acquisitions".

The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of October 1, 2016, July 2, 2016 and September 26, 2015:  

	Assets and Liabilities Measured at Fair Value as of Oct. 1, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents
Cash equivalents	$	9,176	$	43,270	$	—	$	52,446
Other assets
Interest rate swap agreements	—		18,935		—		18,935
Foreign currency swaps	—		3,979		—		3,979
Foreign currency forwards	—		873		—		873
Total assets at fair value	$	9,176	$	67,057	$	—	$	76,233
Liabilities:
Contingent consideration	$	—	$	—	$	6,659	$	6,659
Other long-term liabilities
Cross-currency swaps	—		3,184		—		3,184
Foreign currency swaps	—		10,695		—		10,695
Fuel hedges	—		618		—		618
Total liabilities at fair value	$	—	$	14,497	$	6,659	$	21,156

	Assets and Liabilities Measured at Fair Value as of Jul. 2, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents
Cash equivalents	$	634,230	$	43,270	$	—	$	677,500
Other assets
Interest rate swap agreements	—		36,805		—		36,805
Total assets at fair value	$	634,230	$	80,075	$	—	$	714,305
Liabilities:
Contingent consideration	$	—	$	—	$	16,439	$	16,439
Total liabilities at fair value	$	—	$	—	$	16,439	$	16,439

	Assets and Liabilities Measured at Fair Value as of Sep. 26, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Assets:
Cash and cash equivalents
Cash equivalents	$	102,508	$	62,131	$	—	$	164,639
Other assets
Interest rate swap agreement	—		8,219		—		8,219
Total assets at fair value	$	102,508	$	70,350	$	—	$	172,858
Liabilities:
Contingent consideration	$	—	$	—	$	28,722	$	28,722
Total liabilities at fair value	$	—	$	—	$	28,722	$	28,722

The significant unobservable inputs used in the fair value measurements of our Level 3 contingent consideration liabilities related to earnout agreements were as follows:

	13-Week Period Ended
	Oct. 1, 2016		Sep. 26, 2015
Unobservable Inputs:	(Weighted Average)
Probability of achieving payout targets	92.1	%	93.2	%
Discount Rate	8.3	%	11.5	%

A decrease in probabilities of achieving the targets or an increase in the discount rates would result in a lower fair value measurement. The fair value of contingent consideration for earnout agreements is reassessed quarterly, including an analysis of the significant inputs used in the valuation, as well as the accretion of the present value discount. Changes are reflected within Operating expense in the consolidated results of operations.

The following table provides the changes in fair value of the contingent consideration for earnout liabilities for the periods presented (in thousands):

	13-Week Period Ended
	Oct. 1, 2016			Sep. 26, 2015
Balance at the beginning of year	$	16,439		$	28,644
Contingent consideration liabilities recorded for business acquisitions	(142		)	(125		)
Payments	(9,537		)	(75		)
Currency translation	(101		)	278
Balance as of the end of the quarter	$	6,659		$	28,722

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement. The fair value of total debt approximated$8.4 billion, $7.9 billion and $3.1 billion as of October 1, 2016, July 2, 2016 and September 26, 2015, respectively. The carrying value of total debt was $7.8 billion, $7.4 billion and $2.9 billion as of October 1, 2016, July 2, 2016 and September 26, 2015, respectively.