10-Q 1 syy2017q310-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 April 1, 2017

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6544 
________________ 
 syy-logoa05.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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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   ☐
 
Emerging growth company   ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes ☐     No ☑ 
 
535,197,556 shares of common stock were outstanding as of April 21, 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)
 
Apr. 1, 2017
 
Jul. 2, 2016
 
Mar. 26, 2016
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
855,133

 
$
3,919,300

 
$
610,838

Accounts and notes receivable, less allowances of
$56,525, $37,880, and $66,066
4,282,038

 
3,380,971

 
3,509,438

Inventories
2,944,327

 
2,639,174

 
2,703,635

Prepaid expenses and other current assets
139,298

 
114,454

 
119,408

Prepaid income taxes
104,765

 

 
16,714

Total current assets
8,325,561

 
10,053,899

 
6,960,033

Long-term assets
 

 
 

 
 

Plant and equipment at cost, less depreciation
4,271,707

 
3,880,442

 
3,900,470

Goodwill
3,767,906

 
2,121,661

 
2,079,529

Intangibles, less amortization
1,085,946

 
207,461

 
193,672

Deferred income taxes
190,145

 
207,320

 

Other assets
279,635

 
251,021

 
217,390

Total long-term assets
9,595,339

 
6,667,905

 
6,391,061

Total assets
$
17,920,900

 
$
16,721,804

 
$
13,351,094

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
24,676

 
$
89,563

 
$
79,836

Accounts payable
3,849,670

 
2,935,982

 
2,906,651

Accrued expenses
1,328,773

 
1,289,312

 
1,118,410

Accrued income taxes

 
110,690

 

Current maturities of long-term debt
526,691

 
8,909

 
7,175

Total current liabilities
5,729,810

 
4,434,456

 
4,112,072

Long-term liabilities
 

 
 

 
 

Long-term debt
8,026,617

 
7,336,930

 
4,274,884

Deferred income taxes
185,178

 
26,942

 
107,136

Other long-term liabilities
1,568,523

 
1,368,482

 
810,642

Total long-term liabilities
9,780,318

 
8,732,354

 
5,192,662

Commitments and contingencies


 


 


Noncontrolling interest
80,244

 
75,386

 
76,929

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
1,307,914

 
1,281,140

 
1,039,236

Retained earnings
9,317,377

 
9,006,138

 
8,964,542

Accumulated other comprehensive loss
(1,505,437
)
 
(1,358,118
)
 
(988,101
)
Treasury stock at cost, 229,075,540,
    205,577,484 and 200,223,397 shares
(7,554,501
)
 
(6,214,727
)
 
(5,811,421
)
Total shareholders' equity
2,330,528

 
3,479,608

 
3,969,431

Total liabilities and shareholders' equity
$
17,920,900

 
$
16,721,804

 
$
13,351,094

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
 
39-Week Period Ended
 
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Sales
$
13,524,172

 
$
12,002,791

 
$
40,950,094

 
$
36,719,028

 
Cost of sales
10,990,037

 
9,859,966

 
33,152,177

 
30,181,394

 
Gross profit
2,534,135

 
2,142,825

 
7,797,917

 
6,537,634

 
Operating expenses
2,098,173

 
1,765,207

 
6,302,705

 
5,233,959

 
Operating income
435,962

 
377,618

 
1,495,212

 
1,303,675

 
Interest expense
81,004

 
57,699

 
226,858

 
231,841

 
Other expense (income), net
(4,815
)
 
(6,952
)
 
(14,351
)
 
(29,956
)
 
Earnings before income taxes
359,773

 
326,871

 
1,282,705

 
1,101,790

 
Income taxes
121,495

 
109,735

 
445,373

 
367,835

 
Net earnings
$
238,278

 
$
217,136

 
$
837,332

 
$
733,955

 
  
 
 
 
 
 
 
 
 
Net earnings:
 

 
 

 
 
 
 
 
Basic earnings per share
$
0.44

 
$
0.38

 
$
1.53

 
$
1.27

 
Diluted earnings per share
0.44

 
0.38

 
1.52

 
1.26

 
 
 
 
 
 
 
 
 
 
Average shares outstanding
539,291,561

 
566,487,516

 
546,619,776

 
576,651,249

 
Diluted shares outstanding
544,068,915

 
570,814,798

 
551,797,431

 
580,980,865

 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.33

 
$
0.31

 
$
0.97

 
$
0.92

 
 See Notes to Consolidated Financial Statements

2



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 
(In thousands)
 
13-Week Period Ended
 
39-Week Period Ended
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Apr. 1, 2017
 
Mar. 26, 2016
Net earnings
$
238,278

 
$
217,136

 
$
837,332

 
$
733,955

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
89,799

 
50,373

 
(189,884
)
 
(81,309
)
     Items presented net of tax:
 

 
 

 
 

 
 

Changes in cash flow hedges
(2,941
)
 
1,769

 
8,153

 
1,435

Change in net investment hedge
(16,464
)
 

 
8,797

 

Amortization of prior service cost
1,752

 
1,715

 
5,256

 
5,145

Amortization of actuarial loss, net
5,013

 
3,275

 
20,359

 
9,825

Total other comprehensive income (loss)
77,159

 
57,132

 
(147,319
)
 
(64,904
)
Comprehensive income
$
315,437

 
$
274,268

 
$
690,013

 
$
669,051

 See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries 
CONSOLIDATED CASH FLOWS (Unaudited) 
(In thousands)
 
39-Week Period Ended
 
Apr. 1, 2017
 
Mar. 26, 2016
Cash flows from operating activities:
 

 
 

Net earnings
$
837,332

 
$
733,955

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

 
 

Share-based compensation expense
65,560

 
66,333

Depreciation and amortization
667,275

 
460,664

Amortization of debt issuance and other debt-related costs
25,156

 
36,088

Loss on extinguishment of debt

 
86,460

Deferred income taxes
(40,286
)
 
125,527

Provision for losses on receivables
14,483

 
15,596

Other non-cash items
(338
)
 
(18,918
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

(Increase) in receivables
(287,758
)
 
(174,826
)
(Increase) in inventories
(80,660
)
 
(6,825
)
Decrease in prepaid expenses and other current assets
5,827

 
20,530

Increase in accounts payable
318,760

 
11,358

(Decrease) in accrued expenses
(253,577
)
 
(357,503
)
(Decrease) increase in accrued income taxes
(182,089
)
 
93,601

(Increase) decrease in other assets
(42,669
)
 
4,954

Increase (decrease) in other long-term liabilities
11,756

 
(84,076
)
Excess tax benefits from share-based compensation arrangements
(33,997
)
 
(23,937
)
Net cash provided by operating activities
1,024,775

 
988,981

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(413,776
)
 
(360,883
)
Proceeds from sales of plant and equipment
19,091

 
12,623

Acquisition of businesses, net of cash acquired
(2,910,461
)
 
(167,701
)
Decrease in restricted cash

 
168,274

   Purchase of foreign currency options

 
(34,648
)
Net cash used for investing activities
(3,305,146
)
 
(382,335
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net
1,286,452

 

Other debt borrowings
2,010

 
2,028,639

Other debt repayments
(146,780
)
 
(77,842
)
Redemption of senior notes

 
(5,050,000
)
Debt issuance costs
(5,094
)
 
(20,491
)
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
175,332

 
222,798

Treasury stock purchases
(1,531,074
)
 
(1,711,481
)
Dividends paid
(521,806
)
 
(523,665
)
Excess tax benefits from share-based compensation arrangements
33,997

 
23,937

Net cash used for financing activities
(706,963
)
 
(5,099,743
)
Effect of exchange rates on cash and cash equivalents
(76,833
)
 
(26,109
)
Net decrease in cash and cash equivalents
(3,064,167
)
 
(4,519,206
)
Cash and cash equivalents at beginning of period
3,919,300

 
5,130,044

Cash and cash equivalents at end of period
$
855,133

 
$
610,838

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
263,421

 
$
158,957

Income taxes
673,076

 
165,904

 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, as recast by the Current Report on Form 8-K filed on February 6, 2017. 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 
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requiring that an employer report the service cost component of pension and postretirement benefits in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations. In addition, only the service cost component will be eligible for capitalization as applicable. 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.

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 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

5



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.

3.  ACQUISITIONS
During the first 39 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 April 1, 2017, aggregate contingent consideration outstanding was $18.2 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
595,321

Other assets
10,002

Goodwill and other intangibles (1)
2,796,470

Total assets
4,369,877

Accounts payable
(736,881
)
Accrued expenses
(242,743
)
Deferred tax liabilities
(201,777
)
Other liabilities
(277,934
)
Total consideration, net of cash acquired
$
2,910,542


(1) 
The excess purchase price of $1.8 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 $56.6 million for the first 39 weeks of fiscal 2017.
The 39 week period ended April 1, 2017 includes the results of operations of the Brakes Group for the period from July 5, 2016 to April 1, 2017. The consolidated statement of operations for the third quarter of fiscal 2017 includes $1.2 billion of sales and $3.0 million of net earnings attributable to the Brakes Group. The consolidated statement of operations for the 39 week period ended April 1, 2017 includes $3.9 billion of sales and $53.7 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 third quarter and 39 week period ended March 26, 2016. 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
 
39-Week Period Ended
 
Mar. 26, 2016
 
Mar. 26, 2016
Sales
$
13,291,621

 
$
41,029,626

Income before taxes
284,869

 
958,893

Net earnings
185,165

 
626,717

 
 
 
 
Net earnings:
 

 
 
Basic earnings per common share
$
0.33

 
$
1.09

Diluted earnings per common share
0.32

 
1.08

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 Acquisition.

7



(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 April 1, 2017July 2, 2016 and March 26, 2016:
 
Assets and Liabilities Measured at Fair Value as of Apr. 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
91

 
$
44,270

 
$

 
$
44,361

Other assets
 

 
 

 
 

 
 

Interest rate swap agreements

 
659

 

 
659

Cross-currency swaps

 
4,211

 

 
4,211

Foreign currency swaps

 
26,691

 

 
26,691

Fuel swaps

 
831

 

 
831

Total assets at fair value
$
91

 
$
76,662

 
$

 
$
76,753

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
3,871

 
$
3,871

Other long-term liabilities
 
 
 
 
 
 
 
Interest rate swap agreements

 
28,062

 

 
28,062

Foreign currency swaps

 
22,693

 

 
22,693

Foreign currency forwards

 
431

 

 
431

Total liabilities at fair value
$

 
$
51,186

 
$
3,871

 
$
55,057


 
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 Mar. 26, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash equivalents
$
134,925

 
$
34,050

 
$

 
$
168,975

Prepaid expenses and other current assets
 
 
 
 
 
 
 
  Foreign exchange option contracts

 
37,244

 

 
37,244

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
11,801

 

 
11,801

Total assets at fair value
$
134,925

 
$
83,095

 
$

 
$
218,020

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
19,965

 
$
19,965

Total liabilities at fair value
$

 
$

 
$
19,965

 
$
19,965

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 $8.9 billion, $7.9 billion and $3.4 billion as of April 1, 2017, July 2, 2016 and March 26, 2016, respectively. The carrying value of total debt was $8.6 billion, $7.4 billion and $3.1 billion as of April 1, 2017July 2, 2016 and March 26, 2016, 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 April 1, 2017 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 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 $70 million, have maturity dates extending into June 2018 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 April 1, 2017, July 2, 2016 and March 26, 2016 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Apr. 1, 2017
 
Jul. 2, 2016
 
Mar. 26, 2016
 
 
 
(In thousands)
 Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
$
659

 
$

 
$

Interest rate swaps
Other assets
 
 
 
36,805

 
11,801

Interest rate swaps
Other long-term liabilities
 
28,062

 

 

 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Fuel swaps
Other assets
 
$
831

 
$

 
$

Cross currency swaps
Other assets
 
4,211

 

 

Foreign currency forwards
Other long-term liabilities
 
431

 

 

 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
26,691

 
$

 
$

Foreign currency swaps
Other long-term liabilities
 
22,693

 

 



11



The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended April 1, 2017 and March 26, 2016, presented on a pretax basis, are as follows:
 
Location of (Gain)
or Loss Recognized
 
Amount of (Gain)
or Loss Recognized
 
 
 
13-Week Period Ended
 
 
 
Apr. 1, 2017
 
Mar. 26, 2016
 
 
 
(In thousands)
Fair Value Hedge Relationship:
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
(1,661
)
 
$

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

 
$
2,872

Fuel swaps
Other comprehensive income
 
2,893

 

Foreign currency forwards
Other comprehensive income
 
(607
)
 

Cross currency swaps
Other comprehensive income
 
8,323

 

Net Investment Hedge Relationships:
 
 
 
 
 
Foreign currency swaps
Other comprehensive income
 
$
8,482

 
$

(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 39-week periods ended April 1, 2017 and March 26, 2016 presented on a pretax basis are as follows:
 
Location of (Gain) or Loss
Recognized
 
Amount of (Gain) or Loss
Recognized
 
 
 
39-Week Period Ended
 
 
 
Apr. 1, 2017
 
Mar. 26, 2016
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
(7,510
)
 
$

Cash Flow Hedge Relationships:
 
 
 
 
 
Forward starting interest rate swaps (1)
Interest expense
 
8,619

 
8,463

Fuel swaps
Other comprehensive income
 
831

 

Foreign currency forwards
Other comprehensive income
 
1,788

 

Cross currency swaps
Other comprehensive income
 
4,211

 

Net Investment Hedge Relationships:
 
 
 
 
 
Foreign currency swaps
Other comprehensive income
 
$
(3,998
)
 
$

(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 third quarter and first 39 weeks of fiscal 2017 and 2016. None of the instruments contain credit-risk-related contingent features.

6.  DEBT 
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 April 1, 2017, there was $1.3 billion in outstanding commercial paper classified as long-term debt due to the underlying long-term revolving credit facility. During the first 39 weeks of 2017, aggregate outstanding commercial paper and short-term bank borrowings ranged from zero to approximately $1.5 billion.


12



7.  EARNINGS PER SHARE 
The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
39-Week Period Ended
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Apr. 1, 2017
 
Mar. 26, 2016
 
(In thousands, except for share
and per share data)
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
 
 
 
 
Net earnings
$
238,278

 
$
217,136

 
$
837,332

 
$
733,955

Denominator:
 

 
 

 
 
 
 
Weighted-average basic shares outstanding
539,291,561

 
566,487,516

 
546,619,776

 
576,651,249

Dilutive effect of share-based awards
4,777,354

 
4,327,282

 
5,177,655

 
4,329,616

Weighted-average diluted shares outstanding
544,068,915

 
570,814,798

 
551,797,431

 
580,980,865

Basic earnings per share
$
0.44

 
$
0.38

 
$
1.53

 
$
1.27

Diluted earnings per share
$
0.44

 
$
0.38

 
$
1.52

 
$
1.26

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 3,065,000 and 3,100,000 for the third 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 3,349,000 and 4,300,000 for the first 39 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 $315.4 million and $274.3 million for the third quarter of fiscal 2017 and fiscal 2016, respectively. Comprehensive income was $690 million and $669.1 million for the first 39 weeks of fiscal 2017 and fiscal 2016, respectively.


13



A summary of the components of other comprehensive (loss) income and the related tax effects for each of the periods presented is as follows:
 
 
 
13-Week Period Ended Apr. 1, 2017
 
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
 
8,944

 
3,931

 
5,013

Total reclassification adjustments
 
 
11,788

 
5,023

 
6,765

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
89,799

 

 
89,799

Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Gains on cash flow hedges
Interest expense
 
(4,774
)
 
(1,833
)
 
(2,941
)
Change in net investment hedge
N/A
 
(12,775
)
 
3,689

 
(16,464
)
Total other comprehensive income
 
 
$
84,038

 
$
6,879

 
$
77,159

 
 
 
 
13-Week Period Ended Mar. 26, 2016
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,784

 
$
1,069

 
$
1,715

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

 
2,042

 
3,275

Total reclassification adjustments
 
 
8,101

 
3,111

 
4,990

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
50,373

 

 
50,373

Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Losses on cash flow hedges
Interest expense
 
2,872

 
1,103

 
1,769

Change in fair value of cash flow hedges
N/A
 

 

 

Total other comprehensive income
 
 
$
61,346

 
$
4,214

 
$
57,132


14



 
 
 
39-Week Period Ended Apr. 1, 2017
 
Location of
Expense (Income)
Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
8,532

 
$
3,276

 
$
5,256

Amortization of actuarial loss (gain), net
Operating expenses
 
32,152

 
11,793

 
20,359

Total reclassification adjustments
 
 
40,685

 
15,069

 
25,615

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(189,884
)
 

 
(189,884
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Losses on cash flow hedges
Interest expense
 
12,711

 
4,558

 
8,153

Change in net investment hedge
N/A
 
30,604

 
21,807

 
8,797

Total other comprehensive (loss) income
 
 
$
(105,884
)
 
$
41,435

 
$
(147,319
)
 
 
 
39-Week Period Ended Mar. 26, 2016
 
Location of
Expense (Income)
Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
8,352

 
$
3,207

 
$
5,145

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

 
6,126

 
9,825

Total reclassification adjustments
 
 
24,303

 
9,333

 
14,970

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

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

 
3,249

 
5,214

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

 
$
(64,904
)


 
 

15



The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
39-Week Period Ended Apr. 1, 2017
 
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

 
(189,884
)
 

 
(189,884
)
Other comprehensive income before reclassification adjustments

 

 

 

Losses on cash flow hedges

 

 
8,153

 
8,153

Change in net investment hedge

 

 
8,797

 
8,797

Amortization of unrecognized prior service cost
5,256

 

 

 
5,256

Amortization of unrecognized net actuarial losses
20,359

 

 

 
20,359

Balance as of Apr. 1, 2017
$
(1,078,869
)
 
$
(326,697
)
 
$
(99,871
)
 
$
(1,505,437
)
 
39-Week Period Ended Mar. 26, 2016
 
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

 
(81,309
)
 

 
(81,309
)
Losses on cash flow hedges

 

 
5,214

 
5,214

Change in fair value of cash flow hedges

 

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

 

 

 
5,145

Amortization of unrecognized net actuarial losses
9,825

 

 

 
9,825

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

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 39 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 39 weeks of fiscal 2017 was $6.05.
In the first 39 weeks of fiscal 2017, 824,958 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 39 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 39 weeks of fiscal 2017, expense was recognized assuming on-target performance will be achieved.
In the first 39 weeks of fiscal 2017, 623,240 restricted stock units were granted to employees. The weighted average grant-date fair value per restricted stock unit granted during the first 39 weeks of fiscal 2017 was $50.04.

16



Employee Stock Purchase Plan
Plan participants purchased 838,609 shares of common stock under the Sysco ESPP during the first 39 weeks of fiscal 2017.
The weighted average fair value per right of employee stock purchase rights issued pursuant to the ESPP was $7.71 during the first 39 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 $65.6 million and $66.3 million for the first 39 weeks of fiscal 2017 and fiscal 2016, respectively.
As of April 1, 2017, there was $107.7 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.26 years.

10.  INCOME TAXES 
Uncertain Tax Positions 
As of April 1, 2017, the gross amount of unrecognized tax benefit and related accrued interest was $11.1 million and $11.5 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 the third quarter of fiscal 2017 of 33.77% and the first 39 weeks of fiscal 2017 of 34.72% was favorably impacted by an increase in earnings in foreign jurisdictions due to the acquisition of the Brakes Group. For the third quarter of fiscal 2017, changes in deferred taxes also impacted these tax rates, with a favorable impact in our European deferred taxes being partially offset by an unfavorable impact from U.S. deferred taxes. For the first 39 weeks of fiscal 2017, factors favorably impacting the tax rate included changes in European deferred taxes and U.S. tax credits. These were partially offset by one-time tax expenses related to the acquisition of the Brakes Group, primarily from non-deductible transaction costs and changes to U.S. deferred taxes. The effective tax rate for the third quarter of fiscal 2016 was 33.57% and the tax rate for the first 39 weeks of fiscal 2016 was 33.39%. Both periods of fiscal 2016 reflected benefits from favorable resolutions of tax contingencies.

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
 
39-Week Period Ended
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Apr. 1, 2017
 
Mar. 26, 2016
Sales:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
9,233,048

 
$
9,037,417

 
$
27,799,728

 
$
27,580,667

International Foodservice Operations
2,528,485

 
1,251,815

 
7,882,796

 
3,922,848

SYGMA
1,535,550

 
1,497,365

 
4,560,424

 
4,450,106

Other
227,089

 
216,194

 
707,146

 
765,407

Total
$
13,524,172

 
$
12,002,791

 
$
40,950,094

 
$
36,719,028

 
 
 
 
 
 
 
 
 
13-Week Period Ended
 
39-Week Period Ended
 
Apr. 1, 2017
 
Mar. 26, 2016
 
Apr. 1, 2017
 
Mar. 26, 2016
Operating income:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
689,210

 
$
643,326

 
$
2,115,762

 
$
1,955,211

International Foodservice Operations
16,076

 
33,021

 
180,324

 
127,153

SYGMA
7,344

 
9,344

 
15,407

 
20,126

Other
6,078

 
6,616

 
17,873

 
23,766

Total segments
718,708

 
692,307

 
2,329,366

 
2,126,256

Corporate expenses
(282,746
)
 
(314,689
)
 
(834,154
)
 
(822,581
)
Total operating income
435,962

 
377,618

 
1,495,212

 
1,303,675

Interest expense
81,004

 
57,699

 
226,858

 
231,841

Other expense (income), net
(4,815
)
 
(6,952
)
 
(14,351
)
 
(29,956
)
Earnings before income taxes
$
359,773

 
$
326,871

 
$
1,282,705

 
$
1,101,790

 
 
Apr. 1, 2017
 
July 2, 2016
 
Mar. 26, 2016
Assets:
(In thousands)
U.S. Foodservice Operations
$
7,001,351

 
$
6,870,159

 
$
7,017,455

International Foodservice Operations
6,003,449

 
2,030,917

 
1,904,436

SYGMA
600,823

 
541,796

 
558,612

Other
443,813

 
469,830

 
448,115

Total segments
14,049,436

 
9,912,702

 
9,928,618

Corporate
3,871,464

 
6,809,102

 
3,422,476

Total
$
17,920,900

 
$
16,721,804

 
$
13,351,094



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 April 1, 2017, Sysco had a total of $8.6 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
 
Apr. 1, 2017
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
172,105

 
$
3,333,647

 
$
4,819,809

 
$

 
$
8,325,561

Investment in subsidiaries
8,794,103

 
303,876

 
10,361,078

 
(19,459,057
)
 

Plant and equipment, net
323,763

 
1,261,167

 
2,686,777

 

 
4,271,707

Other assets
438

 
509,645

 
4,813,549

 

 
5,323,632

Total assets
$
9,290,409

 
$
5,408,335

 
$
22,681,213

 
$
(19,459,057
)
 
$
17,920,900

Current liabilities
$
2,039,368

 
$
2,027,763

 
$
1,662,679

 
$

 
$
5,729,810

Intercompany payables (receivables)
(3,811,509
)
 
666,597

 
3,144,912

 

 

Long-term debt
7,943,640

 
6,122

 
76,855

 

 
8,026,617

Other liabilities
1,023,651

 
144,031

 
586,019

 

 
1,753,701

Noncontrolling interest

 

 
80,244

 

 
80,244

Shareholders’ equity  
2,095,259

 
2,563,822

 
17,130,504

 
(19,459,057
)
 
2,330,528

Total liabilities and shareholders’ equity
$
9,290,409

 
$
5,408,335

 
$
22,681,213

 
$
(19,459,057
)
 
$
17,920,900


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
 
Mar. 26, 2016
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
271,185

 
$
3,995,180

 
$
2,693,668

 
$

 
$
6,960,033

Investment in subsidiaries
9,989,219

 
249,270

 
(429,592
)
 
(9,808,897
)
 

Plant and equipment, net
460,989

 
1,607,870

 
1,831,611

 

 
3,900,470

Other assets
1,638

 
590,248

 
1,898,705

 

 
2,490,591

Total assets
$
10,723,031

 
$
6,442,568

 
$
5,994,392

 
$
(9,808,897
)
 
$
13,351,094

Current liabilities
$
553,741

 
$
(209,098
)
 
$
3,767,429

 
$

 
$
4,112,072

Intercompany payables (receivables)
1,530,408

 
(766,374
)
 
(764,034