10-Q 1 syy2017q110-q.htm 10-Q Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
________________ 
Form 10-Q
 
(Mark One)

þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period ended October 1, 2016

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6544 
________________ 
 syy-logoa03.jpg
Sysco Corporation 
(Exact name of registrant as specified in its charter) 
Delaware
74-1648137
(State or other jurisdiction of
(IRS employer
incorporation or organization)
identification number)
1390 Enclave Parkway
77077-2099
Houston, Texas
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s Telephone Number, Including Area Code: 
(281) 584-1390 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
Yes ☑    No ☐ 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
Yes  ☑    No ☐ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer  ☑
Accelerated Filer  ☐
Non-accelerated Filer   ☐    (Do not check if a smaller reporting company)
Smaller Reporting Company   ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes ☐     No ☑ 
 
546,931,309 shares of common stock were outstanding as of October 21, 2016.





TABLE OF CONTENTS 
 




PART I – FINANCIAL INFORMATION 
Item 1.    Financial Statements
Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED BALANCE SHEETS 
(In thousands, except for share data)
 
Oct. 1, 2016
 
Jul. 2, 2016
 
Sep. 26, 2015
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
759,898

 
$
3,919,300

 
$
388,256

Accounts and notes receivable, less allowances of
$41,246, $37,880, and $46,470
4,191,460

 
3,380,971

 
3,531,105

Inventories
3,025,811

 
2,639,174

 
2,841,361

Deferred income taxes

 

 
85,416

Prepaid expenses and other current assets
158,301

 
114,454

 
93,015

Prepaid income taxes

 

 
88,807

Total current assets
8,135,470

 
10,053,899

 
7,027,960

Plant and equipment at cost, less depreciation
4,418,524

 
3,880,442

 
3,961,299

Other long-term assets
 

 
 

 
 

Goodwill
3,815,674

 
2,121,661

 
1,981,390

Intangibles, less amortization
1,203,888

 
207,461

 
168,541

Deferred income taxes
198,867

 
207,320

 

Other assets
252,387

 
251,021

 
232,361

Total other long-term assets
5,470,816

 
2,787,463

 
2,382,292

Total assets
$
18,024,810

 
$
16,721,804

 
$
13,371,551

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
6,834

 
$
89,563

 
$
51,806

Accounts payable
3,716,517

 
2,935,982

 
2,887,863

Accrued expenses
1,381,300

 
1,289,312

 
999,337

Accrued income taxes
252,681

 
110,690

 

Current maturities of long-term debt
9,218

 
8,909

 
31,810

Total current liabilities
5,366,550

 
4,434,456

 
3,970,816

Long-term liabilities
 

 
 

 
 

Long-term debt
7,843,517

 
7,336,930

 
3,004,618

Deferred income taxes
218,414

 
26,942

 
160,688

Other long-term liabilities
1,498,680

 
1,368,482

 
885,501

Total long-term liabilities
9,560,611

 
8,732,354

 
4,050,807

Commitments and contingencies


 


 


Noncontrolling interest
76,863

 
75,386

 
44,243

Shareholders' equity
 

 
 

 
 

Preferred stock, par value $1 per share
    Authorized 1,500,000 shares, issued none

 

 

Common stock, par value $1 per share
    Authorized 2,000,000,000 shares, issued 765,174,900 shares
765,175

 
765,175

 
765,175

Paid-in capital
1,313,245

 
1,281,140

 
1,231,506

Retained earnings
9,159,866

 
9,006,138

 
8,816,245

Accumulated other comprehensive loss
(1,434,940
)
 
(1,358,118
)
 
(1,007,539
)
Treasury stock at cost, 216,182,601,
    205,577,484 and 169,052,528 shares
(6,782,560
)
 
(6,214,727
)
 
(4,499,702
)
Total shareholders' equity
3,020,786

 
3,479,608

 
5,305,685

Total liabilities and shareholders' equity
$
18,024,810

 
$
16,721,804

 
$
13,371,551

Note: The July 2, 2016 balance sheet has been derived from the audited financial statements at that date. 
See Notes to Consolidated Financial Statements

1



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)  
(In thousands, except for share and per share data)
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
Sales
$
13,968,654

 
$
12,562,611

Cost of sales
11,276,735

 
10,324,616

Gross profit
2,691,919

 
2,237,995

Operating expenses
2,125,086

 
1,744,521

Operating income
566,833

 
493,474

Interest expense
73,623

 
126,907

Other expense (income), net
(7,216
)
 
(15,240
)
Earnings before income taxes
500,426

 
381,807

Income taxes
176,539

 
137,387

Net earnings
$
323,887

 
$
244,420

 
 
 
 
Net earnings:
 

 
 

Basic earnings per share
$
0.58

 
$
0.41

Diluted earnings per share
0.58

 
0.41

 
 
 
 
Average shares outstanding
555,437,764

 
596,698,935

Diluted shares outstanding
560,954,068

 
600,789,913

 
 
 
 
Dividends declared per common share
$
0.31

 
$
0.30

 
See Notes to Consolidated Financial Statements

2



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 
(In thousands)
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
Net earnings
$
323,887

 
$
244,420

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustment
(89,553
)
 
(87,229
)
Items presented net of tax:
 

 
 

Gains and losses on cash flow hedges
1,770

 
1,676

Change in fair value of cash flow hedges
(319
)
 
(3,778
)
Amortization of prior service cost
1,752

 
1,715

Amortization of actuarial loss, net
8,790

 
3,275

Prior service cost arising in current year
738

 

Total other comprehensive income (loss)
(76,822
)
 
(84,341
)
Comprehensive income
$
247,065

 
$
160,079

 
See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED CASH FLOWS (Unaudited) 
(In thousands)
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
Cash flows from operating activities:
 

 
 

Net earnings
$
323,887

 
$
244,420

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

 
 

Share-based compensation expense
25,127

 
11,636

Depreciation and amortization
211,685

 
135,961

Amortization of debt issuance and other debt-related costs
6,560

 
6,161

Loss on extinguishment of debt

 
86,460

Deferred income taxes
11,374

 
124,631

Provision for losses on receivables
(440
)
 
1,546

Other non-cash items
(6,829
)
 
(4,511
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

(Increase) in receivables
(136,097
)
 
(211,035
)
(Increase) in inventories
(149,759
)
 
(162,867
)
(Increase) decrease in prepaid expenses and other current assets
(12,657
)
 
165

Increase in accounts payable
110,914

 
23,580

(Decrease) in accrued expenses
(259,698
)
 
(470,409
)
Increase in accrued income taxes
145,601

 
5,833

(Increase) in other assets
(17,066
)
 
(10,354
)
Increase (decrease) in other long-term liabilities
1,340

 
(38,419
)
Excess tax benefits from share-based compensation arrangements
(5,268
)
 
(4,280
)
Net cash provided by (used for) operating activities
248,674

 
(261,482
)
Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(142,255
)
 
(121,243
)
Proceeds from sales of plant and equipment
4,261

 
1,506

Acquisition of businesses, net of cash acquired
(2,910,461
)
 
(83,598
)
Decrease in restricted cash

 
168,274

Net cash used for investing activities
(3,048,455
)
 
(35,061
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net
442,777

 
717,600

Other debt borrowings
1,201

 
4,148

Other debt repayments
(94,935
)
 
(3,659
)
Redemption of senior notes

 
(5,050,000
)
Debt issuance costs
(2,846
)
 

Cash received from termination of interest rate swap agreements

 
14,496

Proceeds from stock option exercises
32,307

 
54,768

Treasury stock purchases
(600,139
)
 

Dividends paid
(173,292
)
 
(179,037
)
Excess tax benefits from share-based compensation arrangements
5,268

 
4,280

Net cash used for financing activities
(389,659
)
 
(4,437,404
)
Effect of exchange rates on cash and cash equivalents
30,038

 
(7,841
)
Net decrease in cash and cash equivalents
(3,159,402
)
 
(4,741,788
)
Cash and cash equivalents at beginning of period
3,919,300

 
5,130,044

Cash and cash equivalents at end of period
$
759,898

 
$
388,256

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
118,426

 
$
93,976

Income taxes
24,406

 
13,298

 
See Notes to Consolidated Financial Statements

4



Sysco Corporation and its Consolidated Subsidiaries  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 
 
Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.
 
 
1.   BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the company, without audit, with the exception of the July 2, 2016 consolidated balance sheet, which was derived from the audited consolidated financial statements included in the company's fiscal 2016 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.
On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group. This is further described in Note 4, "Acquisitions". This acquisition, combined with a change in how the chief operating decision maker assesses performance and allocates resources, resulted in a change in the company's segment reporting. This is further described in Note 13, "Business Segment Information".
Deferred taxes within the consolidated balance sheet for October 1, 2016, have been classified as long-term due to the adoption of an accounting pronouncement related to simplification in the presentation of deferred taxes. See Note 2, "Changes in Accounting" for additional information on these changes.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company's fiscal 2016 Annual Report on Form 10-K. Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.
The interim financial information herein has been reviewed by Ernst & Young LLP, independent registered public accounting firm, in accordance with established professional standards and procedures for such a review. A Review Report of Independent Registered Public Accounting Firm has been issued by Ernst & Young LLP and is included as Exhibit 15.1 to this Form 10-Q.

2.  CHANGES IN ACCOUNTING 
Simplification of Balance Sheet Classification of Deferred Taxes
In November 2015, the Financial Accounting Standard Board (FASB) issued Accounting Standard Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, as part of its simplification initiative, which is the FASB's effort to reduce the cost and complexity of certain aspects of U.S. GAAP. This guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. The guidance does not change the existing requirement that only permits offsetting of deferred tax assets and deferred tax liabilities within a jurisdiction. The company early adopted this standard in the second quarter of fiscal 2016 on a prospective basis, as permitted by the ASU.

3.  NEW ACCOUNTING STANDARDS 
Guidance in Presentation of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Invitees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. The guidance is effective for interim and annual periods beginning after December 15, 2017, which is fiscal 2019 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.


5



Leases

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

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The collective guidance is effective for interim and annual periods beginning after December 15, 2017, which is fiscal 2019 for Sysco, and could be early adopted in fiscal 2018. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The company has not selected a transition method and is currently evaluating the impact of the pending adoption of this ASU on its ongoing financial reporting.

4.  ACQUISITIONS
During the first 13 weeks of fiscal 2017, the company paid cash of $2.9 billion for acquisitions, net of cash acquired. Certain current year and prior year acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of October 1, 2016, aggregate contingent consideration outstanding was $20.7 million, of which $6.7 million was recorded as earnout liabilities.
Brakes Group
On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group, pursuant to an agreement for the sale and purchase of securities in the capital of the Brakes Group, dated as of February 19, 2016 (the Purchase Agreement), by and among Sysco, entities affiliated with Bain Capital Investors, LLC, and members of management of the Brakes Group (the Acquisition). Following the closing of the Acquisition, the Brakes Group became a wholly-owned subsidiary of 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. Brakes Group businesses 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. 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 principal reasons for the Acquisition was the ability to expand Sysco's footprint and infrastructure in Europe and profitably grow Sysco's business. These contributed to a purchase price that resulted in recognition of goodwill.
The assets, liabilities and operating results of the Brakes Group are reflected in the company’s consolidated financial statements in accordance with ASC Topic No. 805, Business Combinations, commencing from the acquisition date. In certain circumstances, the purchase price allocations may be based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision until Sysco receives final information and other analysis during the measurement period. These include items such as finalizing valuation of acquired tangible and intangible assets and related tax attributes.
Total consideration has been determined to be as follows (in thousands):

6



Cash consideration paid, net of cash acquired
$
626,442

Payment for Brakes outstanding financial debt
2,284,100

Total consideration paid, net of cash acquired
$
2,910,542


The purchase price was allocated based on the company’s preliminary estimated fair value of the assets acquired and liabilities assumed, as follows (in thousands):
 
Preliminary Purchase Price
Allocation
Accounts receivable
$
720,053

Inventory
248,031

Plant and equipment
540,928

Other assets
9,842

Goodwill and other intangibles (1)
2,860,179

Total assets
4,379,033

Accounts payable
(736,881
)
Accrued expenses
(240,436
)
Deferred tax liabilities
(213,614
)
Other liabilities
(277,560
)
Total consideration, net of cash acquired
$
2,910,542


(1) 
The excess purchase price of $1.7 billion was assigned to goodwill, none of which is deductible for income tax purposes. This goodwill has been assigned to the International Foodservice Operations reportable segment. Intangible assets added include customer relationships of $917.6 million with a weighted average life of 12 years and trademarks and trade names of $140.6 million that are indefinite lives assets. Amortization expense is being recognized on a straight line basis and for the first quarter of fiscal 2017 was $19.1 million.

The quarter ended October 1, 2016 includes the results of operations of the Brakes Group for the period from July 5, 2016 to October 1, 2016. The consolidated statement of operations for the quarter ended October 1, 2016 includes $1.3 billion of sales and $18.9 million of net earnings attributable to the Brakes Group. Sysco incurred debt in order to fund the Acquisition; however, the interest expense on that debt is not reflected within the earnings from operations attributable to the Brakes Group.
Unaudited Pro forma Results
The following table presents the company’s pro forma consolidated sales, earnings before income taxes, and net earnings for the quarter ended September 26, 2015. The unaudited pro forma results include the historical statements of operations information of the company and of Brakes Group, giving effect to the Acquisition and related financing as if they had occurred at the beginning of the period presented (in thousands, except per share data).
 
13-Week Period Ended
 
Sep. 26, 2015
 
 
Sales
$
13,992,188

Income before Taxes
$
369,579

Net Earnings
$
236,091

 
 
Net earnings:
 

Basic earnings per common share
$
0.40

Diluted earnings per common share
$
0.39

The pro forma results, prepared in accordance with U.S. GAAP, include the following pro forma adjustments related to the Acquisition.

(i)
Additional amortization expense related to the fair value of intangible assets acquired.
(ii)
Additional depreciation expense related to the fair value of property and equipment acquired.

7



(iii)
The elimination of interest expense assuming the long-term debt paid off on behalf of the Brakes Group as of the Acquisition date had been retired as of June 28, 2015.
(iv)
The addition of interest expense incurred by Sysco due to the Acquisition of the Brakes Group.
(v)
The elimination of interest income from related party debt instruments issued to the Brakes Group prior to the Acquisition.
(vi)
The elimination of Brakes' minority interests, as the majority of the interests were repurchased before the Acquisition.

The unaudited pro forma results do not include any sales or cost reductions that may be achieved through the business combination, or the impact of non-recurring items directly related to the business combination or the nature and amount of any material, nonrecurring pro forma adjustments.
The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined companies.
5.  FAIR VALUE MEASUREMENTS 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows: 
Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets; 
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and 
Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. 
Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds. 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".

8



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

 


9



 
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, 2016July 2, 2016 and September 26, 2015, respectively.


10



6.  DERIVATIVE FINANCIAL INSTRUMENTS 
Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes.

Hedging of interest rate risk
Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. Details of outstanding swap agreements as of October 1, 2016 are below:
Maturity Date of Swap
 
Notional Value
(in millions)
 
Fixed Coupon Rate on Hedged Debt
 
Floating Interest Rate on Swap
 
Floating Rate Reset Terms
February 12, 2018
 
$
500

 
5.25
%
 
Six-month LIBOR
 
Every six months in arrears
April 1, 2019
 
$
500

 
1.90
%
 
Three-month LIBOR
 
Every three months in advance
October 1, 2020
 
$
750

 
2.60
%
 
Three-month LIBOR
 
Every three months in advance
July 15, 2021
 
$
500

 
2.50
%
 
Three-month LIBOR
 
Every three months in advance

Hedging of foreign currency risk
In the first quarter of fiscal 2017, Sysco entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain pound sterling-denominated intercompany loans with a total notional value of £234.2 million. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates, which are recorded in other expense (income), net in the consolidated results of operations. The company recognizes the difference between the U.S. dollar interest payments received from the swap counterparty and the U.S. dollar equivalent of the pound sterling interest payments made to the swap counterparty in other expense (income), net on the consolidated results of operations. This difference varies over time and is driven by a number of market factors, including relevant interest rate differentials and foreign exchange rates. These swaps have been designated as cash flow hedges and mature in July 2021, at the same time as the related loans. There are no credit-risk-related contingent features associated with these swaps.
The company also entered into cross currency swap contracts to hedge the foreign currency exposure of our net investment in certain foreign operations. The effective portion of the derivative gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to earnings when the hedged net investment is either sold or substantially liquidated. Sysco also designated its Euro-denominated debt of €500 million issued in June 2016 as a net-investment hedge. The remeasurement gain or loss is recorded in accumulated other comprehensive income and will be subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated.
Sysco's operations in the United Kingdom and Sweden have inventory purchases denominated in currencies other than their functional currency such as Euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of these entities and these currencies. The company enters into foreign currency forward "swap" contracts to sell the applicable entity's functional currency and buy currencies matching the inventory purchase, which operate as cash flow hedges of the company's foreign currency-denominated inventory purchases. These swap contracts are recorded at fair value on the balance sheet and within accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions affect earnings, which is the period in which the company recognizes the sales associated with the specified foreign currency-denominated inventory purchases.


11



Hedging of fuel price risk
As a result of the Acquisition, Sysco acquired the Brakes Group fuel commodity swaps used to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have maturity dates extending into June 2017 and have been designated as cash flow hedges. These swap contracts are recorded at fair value on the balance sheet and within accumulated other comprehensive income. The amount of ineffectiveness, if any, is recorded in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transactions occur, which is when the fuel is expected to be procured.
The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of October 1, 2016, July 2, 2016 and September 26, 2015 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Oct. 1, 2016
 
Sep. 26, 2015
 
Jul. 2, 2016
 
 
 
(In thousands)
 Fair value hedges:
 
 
 
 
 
 
 
Interest rate swap agreements
Other assets
 
$
18,935

 
$
8,219

 
$
36,805

 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Foreign currency forwards
Other assets
 
$
873

 
$

 
$

Fuel hedges
Other long-term liabilities
 
618

 

 

Cross currency swaps
Other long-term liabilities
 
3,184

 

 

 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
3,979

 
$

 
$

Foreign currency swaps
Other long-term liabilities
 
10,695

 

 


The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended October 1, 2016 and September 26, 2015 presented on a pretax basis are as follows:
 
Location of (Gain)
or Loss Recognized
 
Amount of (Gain)
or Loss Recognized
 
 
 
13-Week Period Ended
 
 
 
Oct. 1, 2016
 
Sep. 26, 2015
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$
(3,400
)
 
$
(1,997
)
Amounts related to cash flow hedge relationships were not material. For fair value hedges of interest rate risk, hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate. For cash flow hedges, hedge ineffectiveness is the lesser of the change in the fair value of the derivative compared to the change in the hedged transaction. Hedge ineffectiveness is recorded directly in earnings within interest expense for interest rate swaps, other income and expense, net for hedging of the foreign exchange risk on intercompany loans, cost of sales for foreign exchange risk on inventory purchases and operating expense for fuel hedging. All amounts were immaterial for the first quarter of fiscal 2017 and 2016. None of the instruments contain credit-risk-related contingent features.

7.  DEBT 
Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. As of October 1, 2016, there was $442.8 million in outstanding commercial paper classified as long-term debt due to the underlying long-term revolving credit facility. This facility, in the amount of $1.5 billion, expired on December 29, 2018, but was subject to extension. During the first 13 weeks of 2017, aggregate outstanding commercial paper and short-term bank borrowings ranged from zero to approximately $694.3 million.

12




On November 2, 2016, the company's existing long-term revolving credit facility was terminated and a new facility in the amount of $2.0 billion was established. The new facility expires on November 2, 2021, but is subject to extension.

8.  EARNINGS PER SHARE 
The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
Net earnings
$
323,887

 
$
244,420

Denominator:
 

 
 

Weighted-average basic shares outstanding
555,437,764

 
596,698,935

Dilutive effect of share-based awards
5,516,304

 
4,090,978

Weighted-average diluted shares outstanding
560,954,068

 
600,789,913

Basic earnings per share
$
0.58

 
$
0.41

Diluted earnings per share
$
0.58

 
$
0.41

The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 2,056,000 and 4,500,000 for the first quarter of fiscal 2017 and fiscal 2016, respectively.


13



9.  OTHER COMPREHENSIVE INCOME
Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, amounts related to cash flow hedging arrangements and certain amounts related to pension and other postretirement plans. Comprehensive income was $247.1 million and $160.1 million for the first quarter of fiscal 2017 and fiscal 2016, respectively. 
A summary of the components of other comprehensive income (loss) and the related tax effects for each of the periods presented is as follows:
 
 
 
13-Week Period Ended Oct. 1, 2016
 
Location of Expense
(Income) Recognized
in Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,844

 
$
1,092

 
$
1,752

Amortization of actuarial loss (gain), net
Operating expenses
 
12,721

 
3,931

 
8,790

Prior service cost arising in current year
Operating expenses
 
738

 

 
738

Total reclassification adjustments
 
 
16,303

 
5,023

 
11,280

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before
    reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(89,553
)
 

 
(89,553
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Gains and losses on cash flow hedges
Interest expense
 
2,873

 
1,103

 
1,770

Change in fair value of cash flow hedge
N/A
 
(319
)
 

 
(319
)
Total other comprehensive (loss) income
 
 
$
(70,696
)
 
$
6,126

 
$
(76,822
)
 
 
 
 
 
13-Week Period Ended Sep. 26, 2015
 
Location of Expense
(Income) Recognized
in Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,784

 
$
1,069

 
$
1,715

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

 
2,042

 
3,275

Total reclassification adjustments
 
 
8,101

 
3,111

 
4,990

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

 
(87,229
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Gains and losses on cash flow hedges
Interest expense
 
2,720

 
1,044

 
1,676

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

 
$
(84,341
)
 
 

14



The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
13-Week Period Ended Oct. 1, 2016
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Interest Rate Swaps,
net of tax
 
Total
 
(In thousands)
Balance as of Jul. 2, 2016
$
(1,104,484
)
 
$
(136,813
)
 
$
(116,821
)
 
$
(1,358,118
)
Equity adjustment from foreign currency translation

 
(89,553
)
 

 
(89,553
)
Other comprehensive income before
    reclassification adjustments

 

 

 

Gains and losses on cash flow hedges

 

 
1,770

 
1,770

Change in fair value of cash flow hedges

 

 
(319
)
 
(319
)
Prior service cost arising in current year
738

 

 

 
738

Amortization of unrecognized prior service cost
1,752

 

 

 
1,752

Amortization of unrecognized net actuarial losses
8,790

 

 

 
8,790

Balance as of Oct. 1, 2016
$
(1,093,204
)
 
$
(226,366
)
 
$
(115,370
)
 
$
(1,434,940
)
 
 
13-Week Period Ended Sep. 26, 2015
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Interest Rate Swaps,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 27, 2015
$
(705,311
)
 
$
(97,733
)
 
$
(120,153
)
 
$
(923,197
)
Other comprehensive income before
    reclassification adjustments

 
(87,229
)
 

 
(87,229
)
Gains and losses on cash flow hedges

 

 
1,676

 
1,676

Change in fair value of cash flow hedges

 

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

 

 

 
1,715

Amortization of unrecognized net actuarial losses
3,274

 

 

 
3,274

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

10.  SHARE-BASED COMPENSATION  
Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employee Stock Purchase Plan (ESPP), and various non-employee director plans. 

Stock Incentive Plans 
In the first quarter of fiscal 2017, options to purchase 4,923,481 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first quarter of fiscal 2017 was $6.04.
In the first quarter of fiscal 2017, 802,854 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per performance share unit granted during the first quarter of fiscal 2017 was $52.19. The PSUs will convert into shares of Sysco common stock at the end of the performance period based on financial performance targets consisting of Sysco's earnings per share compound annual growth rate and adjusted return on invested capital. In the first quarter of fiscal 2017, expense was recognized assuming on-target performance will be achieved.

15




Employee Stock Purchase Plan 
Plan participants purchased 264,900 shares of common stock under the Sysco ESPP during the first quarter of fiscal 2017
The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employee Stock Purchase Plan was $7.61 during the first quarter of fiscal 2017. The fair value of the stock purchase rights is estimated as the difference between the stock price and the employee purchase price. 

All Share-Based Payment Arrangements
The total share-based compensation cost that has been recognized in results of operations was $25.1 million and $11.6 million for the first quarter of fiscal 2017 and fiscal 2016, respectively. 
As of October 1, 2016, there was $113.4 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.51 years. 

11.  INCOME TAXES 
Uncertain Tax Positions 
As of October 1, 2016, the gross amount of unrecognized tax benefit and related accrued interest was $23.5 million and $14.4 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months, either because Sysco prevails on positions challenged upon audit or because the company agrees to the disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in numerous states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made. 

Effective Tax Rate 
Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. The effective tax rates for the first quarter of fiscal 2017 and fiscal 2016 were 35.28% and 35.98%, respectively. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rate in both periods. The Acquisition contributed to a lower effective tax rate in the first quarter of fiscal 2017, as the Brakes Group's operations are taxed at a lower rate than Sysco's historical U.S. operations.  In the first quarter of fiscal 2017, Sysco experienced a reduction in the effective tax rate due to tax credits and lower tax rates from new tax laws in the United Kingdom. These were largely offset by one-time tax expenses related to the Acquisition primarily from non-deductible transaction costs.
Other 
The determination of the company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.  

12.  COMMITMENTS AND CONTINGENCIES 
 
Legal Proceedings  
 
Sysco is engaged in various legal proceedings that have arisen, but have not been fully adjudicated.  The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable.  When probable and reasonably estimable, the losses have been accrued.  Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company.  However, the final results of legal proceedings cannot be predicted with certainty and, if the company failed to prevail in one or more of these legal matters, and the associated realized losses were to exceed the company’s current estimates of the range of potential losses, the company’s consolidated financial position or results of operations could be materially adversely affected in future periods.


16



13.  BUSINESS SEGMENT INFORMATION 
The Acquisition, combined with a change in how the chief operating decision maker assesses performance and allocates resources, resulted in a change in Sysco's segment reporting. Sysco has aggregated certain of its operating companies into three reportable segments. "Other" financial information is attributable to the company's other operating segments that have not been aggregated into one of the three reporting segments.
U.S. Foodservice Operations - primarily includes U.S. broadline operations, custom-cut meat companies, FreshPoint (our specialty produce companies) and European Imports (a specialty import company);
International Foodservice Operations - includes broadline operations in Canada and Europe, including the Brakes Group, Bahamas, Mexico, Costa Rica and Panama, as well as a company that distributes to international customers;
SYGMA - our chain restaurant distribution subsidiary; and
Other - primarily our hotel supply operations and our Sysco Ventures platform, which includes our suite of technology solutions that help support the business needs of our customers.
Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. 
The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements.  Management evaluates the performance of each of our operating segments based on its respective operating income results. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared services center. These also include all share-based compensation costs. While a segment’s operating income may be impacted in the short-term by increases or decreases in gross profits, expenses, or a combination thereof, over the long-term each business segment is expected to increase its operating income at a greater rate than sales growth. This is consistent with our long-term goal of leveraging earnings growth at a greater rate than sales growth. 
The following tables set forth certain financial information for Sysco’s business segments. Prior year amounts have been reclassified to conform to the current year presentation and include the impact of a change in allocation between corporate and these segments that is not material but is consistent with management's assessment of segment performance in fiscal 2017.
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
Sales:
(In thousands)
U.S. Foodservice Operations
$
9,481,115

 
$
9,407,923

International Foodservice Operations
2,728,360

 
1,390,259

SYGMA
1,504,692

 
1,445,904

Other
254,487

 
318,525

Total
$
13,968,654

 
$
12,562,611

 
 
 
 
 
13-Week Period Ended
 
Oct. 1, 2016
 
Sep. 26, 2015
Operating income:
(In thousands)
U.S. Foodservice Operations
$
745,231

 
$
686,669

International Foodservice Operations
79,435

 
51,920

SYGMA
4,908

 
5,123

Other
8,001

 
10,770

Total segments
837,575

 
754,482

Corporate expenses
(270,742
)
 
(261,008
)
Total operating income
566,833

 
493,474

Interest expense
73,623

 
126,907

Other expense (income), net
(7,216
)
 
(15,240
)
Earnings before income taxes
$
500,426

 
$
381,807


17



 
 
Oct. 1, 2016
 
July 2, 2016
 
Sep. 26, 2015
Assets:
(In thousands)
U.S. Foodservice Operations
$
6,988,148

 
$
6,870,159

 
$
7,263,246

International Foodservice Operations
6,410,354

 
2,030,917

 
1,812,094

SYGMA
583,106

 
541,796

 
508,403

Other
433,895

 
469,830

 
429,226

Total segments
14,415,503

 
9,912,702

 
10,012,969

Corporate
3,609,307

 
6,809,102

 
3,358,582

Total
$
18,024,810

 
$
16,721,804

 
$
13,371,551



18



14.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES 
On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. Borrowings under the company’s revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs are also covered under these guarantees. As of October 1, 2016, Sysco had a total of $7.8 billion in senior notes, debentures and commercial paper outstanding that was covered by these guarantees.  
All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional and all guarantees are joint and several, except that the guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances. If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series.  Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable subsidiary guarantor shall consolidate with or merge into Sysco Corporation or any successor of Sysco Corporation or (2) Sysco Corporation or any successor of Sysco Corporation consolidates with or merges into the applicable subsidiary guarantor. 
The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (the majority of the company’s U.S. Broadline subsidiaries), and all other non‑guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.
 
Condensed Consolidating Balance Sheet
 
Oct. 1, 2016
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
227,329

 
$
4,043,517

 
$
3,864,624

 
$

 
$
8,135,470

Investment in subsidiaries
7,324,607

 
260,252

 
758,353

 
(8,343,212
)
 

Plant and equipment,  net
394,254

 
1,566,905

 
2,457,365

 

 
4,418,524

Other assets
199,918

 
566,954

 
4,703,944

 

 
5,470,816

Total assets
$
8,146,108

 
$
6,437,628

 
$
11,784,286

 
$
(8,343,212
)
 
$
18,024,810

Current liabilities
$
433,751

 
$
2,138,099

 
$
2,794,700

 
$

 
$
5,366,550

Intercompany payables (receivables)
(4,182,835
)
 
(474,685
)
 
4,657,520

 

 

Long-term debt
7,607,826

 
61,663

 
174,028

 

 
7,843,517

Other liabilities
1,032,296

 
156,272

 
528,526

 

 
1,717,094

Noncontrolling interest

 

 
76,863

 

 
76,863

Shareholders’ equity  
3,255,070

 
4,556,279

 
3,552,649

 
(8,343,212
)
 
3,020,786

Total liabilities and  shareholders’ equity
$
8,146,108

 
$
6,437,628

 
$
11,784,286

 
$
(8,343,212
)
 
$
18,024,810

 
 
Condensed Consolidating Balance Sheet
 
July 2, 2016
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
3,440,206

 
$
3,813,524

 
$
2,800,169

 
$

 
$
10,053,899

Investment in subsidiaries
6,484,258

 
224,138

 
(306,219
)
 
(6,402,177
)
 

Plant and equipment,  net
429,890

 
1,587,702

 
1,862,850

 

 
3,880,442

Other assets
213,186

 
642,525

 
1,931,752

 

 
2,787,463

Total assets
$
10,567,540

 
$
6,267,889

 
$
6,288,552

 
$
(6,402,177
)
 
$
16,721,804

Current liabilities
$
621,925

 
$
111,728

 
$
3,700,803

 
$

 
$
4,434,456

Intercompany payables (receivables)
(1,348,425
)
 
2,097,508

 
(749,083
)
 

 

Long-term debt
7,145,955

 
62,387

 
128,588

 

 
7,336,930

Other liabilities
878,834

 
248,493

 
268,097

 

 
1,395,424

Noncontrolling interest

 

 
75,386

 

 
75,386

Shareholders’ equity  
3,269,251

 
3,747,773

 
2,864,761

 
(6,402,177
)
 
3,479,608

Total liabilities and  shareholders’ equity
$
10,567,540

 
$
6,267,889

 
$
6,288,552

 
$
(6,402,177
)
 
$
16,721,804


19



 
Condensed Consolidating Balance Sheet
 
Sep. 26, 2015
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
237,758

 
$
4,252,595

 
$
2,537,607

 
$

 
$
7,027,960

Investment in subsidiaries
9,473,425

 

 

 
(9,473,425
)
 

Plant and equipment,  net
512,397

 
1,662,227

 
1,786,675

 

 
3,961,299

Other assets
203,535

 
525,372

 
1,653,385

 

 
2,382,292

Total assets
$
10,427,115

 
$
6,440,194

 
$
5,977,667

 
$
(9,473,425
)
 
$
13,371,551

Current liabilities
$
478,158

 
$
1,105,347

 
$
2,387,311

 
$

 
$
3,970,816

Intercompany payables (receivables)
1,041,230

 
(1,670,713
)
 
629,483

 

 

Long-term debt
2,884,581

 
9,337

 
110,700

 

 
3,004,618

Other liabilities
715,169

 
271,194

 
59,826

 

 
1,046,189

Noncontrolling interest

 

 
44,243

 

 
44,243

Shareholders’ equity  
5,307,977

 
6,725,029

 
2,746,104

 
(9,473,425
)
 
5,305,685

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

 
$
6,440,194

 
$
5,977,667

 
$
(9,473,425
)
 
$
13,371,551

 
 
Condensed Consolidating Statement of Comprehensive Income
 
For the 13-Week Period Ended Oct. 1, 2016
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
8,532,859

 
$
5,880,712

 
$
(444,917
)
 
$
13,968,654

Cost of sales

 
6,874,182

 
4,847,470

 
(444,917
)
 
11,276,735

Gross profit

 
1,658,677

 
1,033,242

 

 
2,691,919

Operating expenses
217,903

 
957,964

 
949,219

 

 
2,125,086

Operating income (loss)
(217,903
)
 
700,713

 
84,023

 

 
566,833

Interest expense (income)
68,889

 
(25,034
)
 
29,768

 

 
73,623

Other expense (income), net
(14,891
)
 
(224
)
 
7,899

 

 
(7,216
)
Earnings (losses) before income taxes
(271,901
)
 
725,971

 
46,356

 

 
500,426

Income tax (benefit) provision
(95,921
)
 
256,107

 
16,353

 

 
176,539

Equity in earnings of subsidiaries
499,868

 

 

 
(499,868
)
 

Net earnings
323,888

 
469,864

 
30,003

 
(499,868
)
 
323,887

Other comprehensive income (loss)
(76,822
)
 

 
(214,625
)
 
214,625

 
(76,822
)
Comprehensive income
$
247,066

 
$
469,864

 
$
(184,622
)
 
$
(285,243
)
 
$
247,065

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

 
$
8,524,550

 
$
4,426,998

 
$
(388,937
)
 
$
12,562,611

Cost of sales

 
6,912,169

 
3,801,384

 
(388,937
)
 
10,324,616

Gross profit

 
1,612,381

 
625,614

 

 
2,237,995

Operating expenses
199,375

 
956,915

 
588,231

 

 
1,744,521

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

 
37,383

 

 
493,474

Interest expense (income)
146,097

 
(39,983
)
 
20,793

 

 
126,907

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

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

 
26,276

 

 
381,807

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

 
9,454

 

 
137,387

Equity in earnings of subsidiaries
462,331

 

 

 
(462,331
)
 

Net earnings
244,420

 
445,509

 
16,822

 
(462,331
)
 
244,420

Other comprehensive income (loss)
(84,341
)
 

 
(183,185
)
 
183,185

 
(84,341
)
Comprehensive income
$
160,079

 
$
445,509

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



20



 
Condensed Consolidating Cash Flows
 
For the 13-Week Period Ended Oct. 1, 2016
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
Operating activities
$
(163,444
)
 
$
2,236,758

 
$
(1,824,640
)
 
$
248,674

Investing activities
(22,729
)
 
(19,426
)
 
(3,006,300
)
 
(3,048,455
)
Financing activities
(225,668
)
 
(7,492
)
 
(156,499
)
 
(389,659
)
Effect of exchange rates on cash

 

 
30,038

 
30,038

Intercompany activity
(2,833,759
)
 
(2,206,407
)
 
5,040,166

 

Net increase (decrease) in cash and cash equivalents
(3,245,600
)
 
3,433

 
82,765

 
(3,159,402
)
Cash and cash equivalents at the beginning of period
3,376,412

 
34,072

 
508,816

 
3,919,300

Cash and cash equivalents at the end of period
$
130,812

 
$
37,505

 
$
591,581

 
$
759,898

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

 
$
(261,482
)
Investing activities
138,186

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

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

 

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

 
329,064

 
(388,467
)
 

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

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

 
26,377

 
252,593

 
5,130,044

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

 
$
24,365

 
$
286,361

 
$
388,256



Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 
This discussion should be read in conjunction with our consolidated financial statements as of July 2, 2016, and the fiscal year then ended, and Management’s Discussion and Analysis of Financial