10-Q 1 syy2017q210-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 December 31, 2016

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6544 
________________ 
 syy-logoa04.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 ☑ 
 
540,212,068 shares of common stock were outstanding as of January 20, 2017.





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)
 
Dec. 31, 2016
 
Jul. 2, 2016
 
Dec. 26, 2015
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
847,292

 
$
3,919,300

 
$
595,602

Accounts and notes receivable, less allowances of
$48,612, $37,880, and $57,631
3,963,458

 
3,380,971

 
3,353,453

Inventories
3,031,548

 
2,639,174

 
2,736,382

Prepaid expenses and other current assets
142,319

 
114,454

 
83,263

Prepaid income taxes
26,589

 

 
10,326

Total current assets
8,011,206

 
10,053,899

 
6,779,026

Long-term assets
 

 
 

 
 

Plant and equipment at cost, less depreciation
4,331,129

 
3,880,442

 
3,936,612

Goodwill
3,714,355

 
2,121,661

 
1,977,921

Intangibles, less amortization
1,094,927

 
207,461

 
163,089

Deferred income taxes
193,663

 
207,320

 

Other assets
284,786

 
251,021

 
232,820

Total long-term assets
9,618,860

 
6,667,905

 
6,310,442

Total assets
$
17,630,066

 
$
16,721,804

 
$
13,089,468

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
22,600

 
$
89,563

 
$
83,037

Accounts payable
3,549,554

 
2,935,982

 
2,710,469

Accrued expenses
1,471,195

 
1,289,312

 
1,071,632

Accrued income taxes

 
110,690

 

Current maturities of long-term debt
8,937

 
8,909

 
7,076

Total current liabilities
5,052,286

 
4,434,456

 
3,872,214

Long-term liabilities
 

 
 

 
 

Long-term debt
8,313,651

 
7,336,930

 
4,265,857

Deferred income taxes
175,795

 
26,942

 
111,822

Other long-term liabilities
1,533,390

 
1,368,482

 
852,655

Total long-term liabilities
10,022,836

 
8,732,354

 
5,230,334

Commitments and contingencies


 


 


Noncontrolling interest
78,905

 
75,386

 
45,493

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
1,320,068

 
1,281,140

 
1,022,816

Retained earnings
9,256,137

 
9,006,138

 
8,922,498

Accumulated other comprehensive loss
(1,582,596
)
 
(1,358,118
)
 
(1,045,177
)
Treasury stock at cost, 224,792,348
    205,577,484 and 198,552,842 shares
(7,282,745
)
 
(6,214,727
)
 
(5,723,885
)
Total shareholders' equity
2,476,039

 
3,479,608

 
3,941,427

Total liabilities and shareholders' equity
$
17,630,066

 
$
16,721,804

 
$
13,089,468

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
 
26-Week Period Ended
 
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Sales
$
13,457,268

 
$
12,153,626

 
$
27,425,922

 
$
24,716,237

 
Cost of sales
10,885,405

 
9,996,812

 
22,162,140

 
20,321,428

 
Gross profit
2,571,863

 
2,156,814

 
5,263,782

 
4,394,809

 
Operating expenses
2,079,446

 
1,724,231

 
4,204,532

 
3,468,752

 
Operating income
492,417

 
432,583

 
1,059,250

 
926,057

 
Interest expense
72,231

 
47,235

 
145,854

 
174,142

 
Other expense (income), net
(2,320
)
 
(7,764
)
 
(9,536
)
 
(23,004
)
 
Earnings before income taxes
422,506

 
393,112

 
922,932

 
774,919

 
Income taxes
147,339

 
120,713

 
323,878

 
258,100

 
Net earnings
$
275,167

 
$
272,399

 
$
599,054

 
$
516,819

 
  
 
 
 
 
 
 
 
 
Net earnings:
 

 
 

 
 
 
 
 
Basic earnings per share
$
0.50

 
$
0.48

 
$
1.09

 
$
0.89

 
Diluted earnings per share
0.50

 
0.48

 
1.08

 
0.88

 
 
 
 
 
 
 
 
 
 
Average shares outstanding
545,132,762

 
566,881,538

 
550,285,268

 
581,790,230

 
Diluted shares outstanding
550,372,067

 
571,452,124

 
555,663,073

 
586,121,013

 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.33

 
$
0.31

 
$
0.64

 
$
0.61

 
 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
 
26-Week Period Ended
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Dec. 31, 2016
 
Dec. 26, 2015
Net earnings
$
275,167

 
$
272,399

 
$
599,054

 
$
516,819

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
(202,195
)
 
(44,453
)
 
(279,683
)
 
(131,682
)
     Items presented net of tax:
 

 
 

 
 

 
 

Changes in cash flow hedges
9,643

 
1,825

 
11,094

 
(278
)
Change in net investment hedge
37,326

 

 
25,261

 

Amortization of prior service cost
1,752

 
1,715

 
3,504

 
3,430

Amortization of actuarial loss, net
5,818

 
3,275

 
15,346

 
6,550

Total other comprehensive loss
(147,656
)
 
(37,638
)
 
(224,478
)
 
(121,980
)
Comprehensive income
$
127,511

 
$
234,761

 
$
374,576

 
$
394,839

 See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED CASH FLOWS (Unaudited) 
(In thousands)
 
26-Week Period Ended
 
Dec. 31, 2016
 
Dec. 26, 2015
Cash flows from operating activities:
 

 
 

Net earnings
$
599,054

 
$
516,819

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

 
 

Share-based compensation expense
42,758

 
44,045

Depreciation and amortization
448,959

 
281,400

Amortization of debt issuance and other debt-related costs
13,143

 
13,637

Loss on extinguishment of debt

 
86,460

Deferred income taxes
(18,313
)
 
153,423

Provision for losses on receivables
7,840

 
10,093

Other non-cash items
663

 
(15,468
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

Decrease (increase) in receivables
24,605

 
(50,853
)
(Increase) in inventories
(175,184
)
 
(69,370
)
Decrease in prepaid expenses and other current assets
1,491

 
9,812

(Decrease) in accounts payable
(51,381
)
 
(140,499
)
(Decrease) in accrued expenses
(145,644
)
 
(388,667
)
(Decrease) increase in accrued income taxes
(116,560
)
 
92,638

(Increase) in other assets
(32,751
)
 
(9,556
)
Increase (decrease) in other long-term liabilities
27,425

 
(52,942
)
Excess tax benefits from share-based compensation arrangements
(21,181
)
 
(12,091
)
Net cash provided by operating activities
604,924

 
468,881

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(285,692
)
 
(248,233
)
Proceeds from sales of plant and equipment
11,639

 
10,827

Acquisition of businesses, net of cash acquired
(2,910,461
)
 
(98,154
)
Decrease in restricted cash

 
168,274

Net cash used for investing activities
(3,184,514
)
 
(167,286
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net
999,579

 

Other debt borrowings
30,939

 
2,012,353

Other debt repayments
(118,631
)
 
(19,155
)
Redemption of senior notes

 
(5,050,000
)
Debt issuance costs
(5,094
)
 
(20,881
)
Cash paid for settlement of cash flow hedge

 
(6,134
)
Cash received from termination of interest rate swap agreements

 
14,496

Proceeds from stock option exercises
113,921

 
131,969

Treasury stock purchases
(1,180,313
)
 
(1,521,638
)
Dividends paid
(343,385
)
 
(348,436
)
Excess tax benefits from share-based compensation arrangements
21,181

 
12,091

Net cash used for financing activities
(481,803
)
 
(4,795,335
)
Effect of exchange rates on cash and cash equivalents
(10,613
)
 
(40,702
)
Net decrease in cash and cash equivalents
(3,072,008
)
 
(4,534,442
)
Cash and cash equivalents at beginning of period
3,919,300

 
5,130,044

Cash and cash equivalents at end of period
$
847,292

 
$
595,602

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
128,887

 
$
106,600

Income taxes
459,681

 
33,156

 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, as recast by the Current Report on Form 8-K filed on February 6, 2017. 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 3, "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 12, "Business Segment Information".
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.  NEW ACCOUNTING STANDARDS 
Guidance in Presentation of Cash Flows
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 annual periods beginning after December 15, 2017 and interim periods within those annual periods, which is the first quarter of fiscal 2019 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.

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


5



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.

3.  ACQUISITIONS
During the first 26 weeks of fiscal 2017, the company paid cash of $2.9 billion for acquisitions, net of cash acquired. Certain prior year acquisitions involved contingent consideration that included earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of December 31, 2016, aggregate contingent consideration outstanding was $19.9 million, of which $3.9 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 were 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):
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



6



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
595,322

Other assets
10,002

Goodwill and other intangibles (1)
2,779,356

Total assets
4,352,764

Accounts payable
(736,881
)
Accrued expenses
(240,436
)
Deferred tax liabilities
(186,971
)
Other liabilities
(277,934
)
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 $897.8 million with a weighted average life of 12 years and trademarks and trade names of $140.6 million that are indefinite lived assets. Amortization expense is recognized on a straight line basis and was $38.0 million for the first 26 weeks of fiscal 2017.
The 26 week period ended December 31, 2016 includes the results of operations of the Brakes Group for the period from July 5, 2016 to December 31, 2016. The consolidated statement of operations for the second quarter of fiscal 2017 includes $1.3 billion of sales and $31.9 million of net earnings attributable to the Brakes Group. The consolidated statement of operations for the 26 week period ended December 31, 2016 includes $2.6 billion of sales and $50.7 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 second quarter and 26 week period ended December 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 each period presented (in thousands, except per share data).
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 26, 2015
 
Dec. 26, 2015
 
 
 
 
Sales
$
13,615,369

 
$
27,604,567

Income before taxes
317,397

 
686,602

Net earnings
218,277

 
454,130

 
 
 
 
Net earnings:
 

 
 
Basic earnings per common share
$
0.39

 
$
0.78

Diluted earnings per common share
0.38

 
0.77

The pro forma results 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.
(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, the first day of fiscal 2016.
(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

7



Acquisition.
(vi)
The elimination of minority interests in the Brakes Group entities, as the majority of the interests were repurchased before the Acquisition.
The unaudited pro forma results do not include any operating efficiencies, cost reductions or revenue enhancements 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.

4.  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 5, "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 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, including cross-currency swaps, 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 swap contracts are valued based on observable market transactions of forward commodity prices. These are included as Level 2 measurements in the tables below.


8



The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016July 2, 2016 and December 26, 2015:
 
Assets and Liabilities Measured at Fair Value as of Dec. 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
11,500

 
$
43,270

 
$

 
$
54,770

Other assets
 

 
 

 
 

 
 

Interest rate swap agreements

 
1,149

 

 
1,149

Cross-currency swaps
 
 
9,027

 
 
 
9,027

Foreign currency swaps

 
28,395

 

 
28,395

Fuel swaps

 
3,950

 

 
3,950

Total assets at fair value
$
11,500

 
$
85,791

 
$

 
$
97,291

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
3,900

 
$
3,900

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swap agreements

 
25,391

 

 
25,391

Foreign currency swaps

 
15,915

 

 
15,915

Foreign currency forwards

 
1,048

 

 
1,048

Total liabilities at fair value
$

 
$
42,354

 
$
3,900

 
$
46,254


 
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 Dec. 26, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash equivalents
$
234,161

 
$
61,473

 
$

 
$
295,634

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
3,936

 

 
3,936

Total assets at fair value
$
234,161

 
$
65,409

 
$

 
$
299,570

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
20,687

 
$
20,687

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swap agreement

 
6,575

 

 
6,575

Total liabilities at fair value
$

 
$
6,575

 
$
20,687

 
$
27,262

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 $8.6 billion, $7.9 billion and $3.3 billion as of December 31, 2016, July 2, 2016 and December 26, 2015, respectively. The carrying value of total debt was $8.3 billion, $7.4 billion and $3.1 billion as of December 31, 2016July 2, 2016 and December 26, 2015, respectively.

5.  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 December 31, 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.

10



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 designated its Euro-denominated debt of €500 million issued in June 2016 as a net investment hedge. Sysco also designated its cross currency swap contracts entered into in August 2016 as a net investment hedge, mitigating the risk in foreign operations, with a total notional value of €534 million. 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.

Hedging of fuel price risk
In the second quarter of fiscal 2017, Sysco began utilizing fuel commodity swaps to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps, with a total notional value of $32.4 million, have maturity dates extending into November 2017 and have been designated as cash flow hedges. These swap contracts are recorded at fair value on the balance sheet and the effective portion of any derivative gain or loss is initially recorded in 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 consumed.
The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of December 31, 2016, July 2, 2016 and December 26, 2015 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Dec. 31, 2016
 
Jul. 2, 2016
 
Dec. 26, 2015
 
 
 
(In thousands)
 Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate swap agreements
Other assets
 
$
1,149

 
$
36,805

 
$
3,936

Interest rate swap agreements
Other long-term liabilities
 
25,391

 

 
6,575

 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Foreign currency forward swap contracts
Other long-term liabilities
 
$
1,048

 
$

 
$

Fuel swaps
Other assets
 
3,950

 

 

Cross currency swaps
Other assets
 
9,027

 

 

 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
28,395

 
$

 
$

Foreign currency swaps
Other long-term liabilities
 
15,915

 

 



11



The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended December 31, 2016 and December 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
 
 
 
Dec. 31, 2016
 
Dec. 26, 2015
 
 
 
(In thousands)
Fair Value Hedge Relationship:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$
(2,449
)
 
$

Cash Flow Hedge Relationships:
 
 
 
 
 
Forward starting interest rate swap agreements (1)
Interest expense
 
$
2,873

 
$
2,962

Fuel swaps
Other comprehensive income
 
(3,564
)
 

Foreign currency forward swap contracts
Other comprehensive income
 
1,887

 

Cross currency swaps
Other comprehensive income
 
(12,211
)
 

Net Investment Hedge Relationships:
 
 
 
 
 
Foreign currency swaps
Other comprehensive income
 
$
(19,195
)
 
$

(1) Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.
The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 26-week periods ended December 31, 2016 and December 26, 2015 presented on a pretax basis are as follows:
 
Location of (Gain) or Loss
Recognized
 
Amount of (Gain) or Loss
Recognized
 
 
 
26-Week Period Ended
 
 
 
Dec. 31, 2016
 
Dec. 26, 2015
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swap agreements
Interest expense
 
$
(5,849
)
 
$

Cash Flow Hedge Relationships:
 
 
 
 
 
Forward starting interest rate swap agreements (1)

Other comprehensive income
 
$

 
$
6,134

Forward starting interest rate swap agreements (1)
Interest expense
 
5,746

 
5,682

Fuel swaps
Other comprehensive income
 
(3,950
)
 

Foreign currency forward swap contracts
Other comprehensive income
 
2,416

 

Cross currency swaps
Other comprehensive income
 
(9,027
)
 

Net Investment Hedge Relationships:
 
 
 
 
 
Foreign currency swaps
Other comprehensive income
 
$
(12,480
)
 
$

(1) Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.
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 second quarter and first 26 weeks of fiscal 2017 and 2016. None of the instruments contain credit-risk-related contingent features.

6.  DEBT 
In November 2016, the company's then-current 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, subject to extension.
Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $2.0 billion. As of December 31, 2016, there was $1.0 billion in outstanding commercial paper classified as long-

12



term debt due to the underlying long-term revolving credit facility. During the first 26 weeks of 2017, aggregate outstanding commercial paper and short-term bank borrowings ranged from zero to approximately $1.2 billion.

7.  EARNINGS PER SHARE 
The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Dec. 31, 2016
 
Dec. 26, 2015
 
(In thousands, except for share
and per share data)
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
 
 
 
 
Net earnings
$
275,167

 
$
272,399

 
$
599,054

 
$
516,819

Denominator:
 

 
 

 
 
 
 
Weighted-average basic shares outstanding
545,132,762

 
566,881,538

 
550,285,268

 
581,790,230

Dilutive effect of share-based awards
5,239,305

 
4,570,586

 
5,377,805

 
4,330,783

Weighted-average diluted shares outstanding
550,372,067

 
571,452,124

 
555,663,073

 
586,121,013

Basic earnings per share
$
0.50

 
$
0.48

 
$
1.09

 
$
0.89

Diluted earnings per share
$
0.50

 
$
0.48

 
$
1.08

 
$
0.88

The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 4,900,000 and 4,000,000 for the second quarter of fiscal 2017 and fiscal 2016, respectively. The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,500,000 and 4,300,000 for the first 26 weeks of fiscal 2017 and fiscal 2016, respectively.

8.  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 $127.5 million and $234.8 million for the second quarter of fiscal 2017 and fiscal 2016, respectively. Comprehensive income was $374.6 million and $394.8 million for the first 26 weeks of fiscal 2017 and fiscal 2016, respectively.


13



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 Dec. 31, 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
 
9,749

 
3,931

 
5,818

Total reclassification adjustments
 
 
12,593

 
5,023

 
7,570

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(202,195
)
 

 
(202,195
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Changes in cash flow hedges
Interest expense
 
14,931

 
5,288

 
9,643

Change in net investment hedge
N/A
 
55,445

 
18,119

 
37,326

Total other comprehensive (loss) income
 
 
$
(119,226
)
 
$
28,430

 
$
(147,656
)
 
 
 
 
13-Week Period Ended Dec. 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
 
(44,453
)
 

 
(44,453
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Gains and losses on cash flow hedges
Interest expense
 
2,962

 
1,137

 
1,825

Change in fair value of cash flow hedges
N/A
 

 

 

Total other comprehensive (loss) income
 
 
$
(33,390
)
 
$
4,248

 
$
(37,638
)

14



 
 
 
26-Week Period Ended Dec. 31, 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
 
$
5,688

 
$
2,184

 
$
3,504

Amortization of actuarial loss (gain), net
Operating expenses
 
23,209

 
7,862

 
15,347

Total reclassification adjustments
 
 
28,897

 
10,046

 
18,851

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(279,683
)
 

 
(279,683
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Changes in cash flow hedges
Interest expense
 
17,485

 
6,391

 
11,094

Change in net investment hedge
N/A
 
43,379

 
18,119

 
25,260

Total other comprehensive (loss) income
 
 
$
(189,922
)
 
$
34,556

 
$
(224,478
)
 
 
 
26-Week Period Ended Dec. 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
 
$
5,568

 
$
2,138

 
$
3,430

Amortization of actuarial loss (gain), net
Operating expenses
 
10,634

 
4,084

 
6,550

Total reclassification adjustments
 
 
16,202

 
6,222

 
9,980

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(131,682
)
 

 
(131,682
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Gains and losses on cash flow hedges
Interest expense
 
5,682

 
2,181

 
3,501

Change in fair value of cash flow hedges
N/A
 
(6,134
)
 
(2,355
)
 
(3,779
)
Total other comprehensive (loss) income
 
 
$
(115,932
)
 
$
6,048

 
$
(121,980
)


 
 

15



The following tables provide a summary of the changes in accumulated other comprehensive income (loss) for the periods presented:
 
26-Week Period Ended Dec. 31, 2016
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging Arrangements,
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

 
(279,683
)
 

 
(279,683
)
Other comprehensive income before reclassification adjustments

 

 

 

Changes in cash flow hedges

 

 
11,094

 
11,094

Change in net investment hedge

 

 
25,261

 
25,261

Amortization of unrecognized prior service cost
3,504

 

 

 
3,504

Amortization of unrecognized net actuarial losses
15,346

 

 

 
15,346

Balance as of Dec. 31, 2016
$
(1,085,634
)
 
$
(416,496
)
 
$
(80,466
)
 
$
(1,582,596
)
 
26-Week Period Ended Dec. 26, 2015
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging Arrangements,
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

 
(131,682
)
 

 
(131,682
)
Gains and losses on cash flow hedges

 

 
3,501

 
3,501

Change in fair value of cash flow hedges

 

 
(3,779
)
 
(3,779
)
Amortization of unrecognized prior service cost
3,430

 

 

 
3,430

Amortization of unrecognized net actuarial losses
6,550

 

 

 
6,550

Balance as of Dec. 26, 2015
$
(695,331
)
 
$
(229,415
)
 
$
(120,431
)
 
$
(1,045,177
)

9.  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 26 weeks of fiscal 2017, options to purchase 4,990,396 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 26 weeks of fiscal 2017 was $6.05.
In the first 26 weeks of fiscal 2017, 820,138 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 26 weeks of fiscal 2017 was $52.17. 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 26 weeks of fiscal 2017, expense was recognized assuming on-target performance will be achieved.


16



Employee Stock Purchase Plan
Plan participants purchased 598,112 shares of common stock under the Sysco ESPP during the first 26 weeks of fiscal 2017.
The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employee Stock Purchase Plan was $7.47 during the first 26 weeks 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 $42.8 million and $44.0 million for the first 26 weeks of fiscal 2017 and fiscal 2016, respectively.
As of December 31, 2016, there was $100.5 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 2.31 years.

10.  INCOME TAXES 
Uncertain Tax Positions 
As of December 31, 2016, the gross amount of unrecognized tax benefit and related accrued interest was $20.8 million and $12.7 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. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rates. The effective tax rate for each of the second quarter of fiscal 2017 of 34.87% and the first 26 weeks of fiscal 2017 of 35.09% was favorably impacted by an increase in earnings in foreign jurisdictions due to the Acquisition of Brakes Group. The effective tax rate for each of the second quarter of fiscal 2016 of 30.71% and the first 26 weeks of fiscal 2016 of 33.31% was favorably impacted by the resolution of a tax contingency in the second quarter of fiscal 2016. The effective tax rate for the first 26 weeks of fiscal 2017 of 35.09% was favorably impacted primarily due to an increase in earnings in foreign jurisdictions due to the Acquisition of the Brakes Group, which contributed to a lower effective tax rate in the first 26 weeks of fiscal 2017. The effective tax rate for the first 26 weeks of fiscal 2016 of 33.31% was favorably impacted by the resolution of a tax contingency in the second quarter of fiscal 2016. The tax benefit from the contingency resolution experienced in the fiscal 2016 periods totaled $20.8 million.

Other 
The determination of the company’s provision for income taxes requires 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.  

11.  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.

17




12.  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 in the first quarter of fiscal 2017. 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 do not meet the quantitative disclosure thresholds.
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 - primarily includes broadline operations in Canada and Europe (including the Brakes Group, which was acquired in fiscal 2017), Bahamas, Mexico, Costa Rica and Panama, as well as a company that distributes to international customers;
SYGMA - our customized 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.

18



 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Dec. 31, 2016
 
Dec. 26, 2015
Sales:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
9,085,565

 
$
9,135,326

 
$
18,566,681

 
$
18,543,249

International Foodservice Operations
2,625,949

 
1,280,775

 
5,354,310

 
2,671,034

SYGMA
1,520,182

 
1,506,836

 
3,024,874

 
2,952,741

Other
225,572

 
230,689

 
480,057

 
549,213

Total
$
13,457,268

 
$
12,153,626

 
$
27,425,922

 
$
24,716,237

 
 
 
 
 
 
 
 
 
13-Week Period Ended
 
26-Week Period Ended
 
Dec. 31, 2016
 
Dec. 26, 2015
 
Dec. 31, 2016
 
Dec. 26, 2015
Operating income:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
681,321

 
$
625,216

 
$
1,426,552

 
$
1,311,885

International Foodservice Operations
84,814

 
42,212

 
164,249

 
94,132

SYGMA
3,155

 
5,659

 
8,062

 
10,782

Other
3,793

 
6,380

 
11,794

 
17,150

Total segments
773,083

 
679,467

 
1,610,657

 
1,433,949

Corporate expenses
(280,666
)
 
(246,884
)
 
(551,407
)
 
(507,892
)
Total operating income
492,417

 
432,583

 
1,059,250

 
926,057

Interest expense
72,231

 
47,235

 
145,854

 
174,142

Other expense (income), net
(2,320
)
 
(7,764
)
 
(9,536
)
 
(23,004
)
Earnings before income taxes
$
422,506

 
$
393,112

 
$
922,932

 
$
774,919

 
 
Dec. 31, 2016
 
July 2, 2016
 
Dec. 26, 2015
Assets:
(In thousands)
U.S. Foodservice Operations
$
6,791,846

 
$
6,870,159

 
$
6,988,257

International Foodservice Operations
6,143,372

 
2,030,917

 
1,849,886

SYGMA
603,167

 
541,796

 
556,480

Other
438,196

 
469,830

 
424,778

Total segments
13,976,581

 
9,912,702

 
9,819,401

Corporate
3,653,485

 
6,809,102

 
3,270,067

Total
$
17,630,066

 
$
16,721,804

 
$
13,089,468



19



13.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES 
The wholly owned U.S. Broadline subsidiaries of Sysco Corporation have 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. commercial paper program are also covered under these guarantees. As of December 31, 2016, Sysco had a total of $8.3 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 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
 
Dec. 31, 2016
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
206,476

 
$
3,119,177

 
$
4,685,553

 
$

 
$
8,011,206

Investment in subsidiaries
9,611,180

 
239,903

 
10,338,929

 
(20,190,012
)
 

Plant and equipment, net
364,717

 
1,277,881

 
2,688,531

 

 
4,331,129

Other assets
185,437

 
509,301

 
4,592,993

 

 
5,287,731

Total assets
$
10,367,810

 
$
5,146,262

 
$
22,306,006

 
$
(20,190,012
)
 
$
17,630,066

Current liabilities
$
527,836

 
$
1,738,202

 
$
2,786,248

 
$

 
$
5,052,286

Intercompany payables (receivables)
(3,007,585
)
 
574,043

 
2,433,542

 

 

Long-term debt
8,056,499

 
6,688

 
250,464

 

 
8,313,651

Other liabilities
1,032,328

 
163,640

 
513,217

 

 
1,709,185

Noncontrolling interest

 

 
78,905

 

 
78,905

Shareholders’ equity  
3,758,732

 
2,663,689

 
16,243,630

 
(20,190,012
)
 
2,476,039

Total liabilities and shareholders’ equity
$
10,367,810

 
$
5,146,262

 
$
22,306,006

 
$
(20,190,012
)
 
$
17,630,066


20



 
Condensed Consolidating Balance Sheet
 
July 2, 2016
 
Sysco
 
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

 
Condensed Consolidating Balance Sheet
 
Dec. 26, 2015
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
279,596

 
$
3,944,472

 
$
2,554,958

 
$

 
$
6,779,026

Investment in subsidiaries
9,787,777

 
241,561

 
(355,335
)
 
(9,674,003
)
 

Plant and equipment, net
501,514

 
1,632,601

 
1,802,497

 

 
3,936,612

Other assets
258,216

 
273,324

 
1,842,290

 

 
2,373,830

Total assets
$
10,827,103

 
$
6,091,958

 
$
5,844,410

 
$
(9,674,003
)
 
$
13,089,468

Current liabilities
$
602,058

 
$
731,474

 
$
2,538,682

 
$

 
$
3,872,214

Intercompany payables (receivables)
1,576,888

 
(2,274,556
)
 
697,668

 

 

Long-term debt
4,079,396

 
9,350

 
177,111