10-Q 1 syy2018q310-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 March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
 syy-logoa11.jpg
Sysco Corporation
(Exact name of registrant as specified in its charter)
Delaware
74-1648137
(State or other jurisdiction of incorporation or organization)
(IRS employer identification number)
 
 
1390 Enclave Parkway
 
Houston, Texas
77077-2099
(Address of principal executive offices)
(Zip Code)

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  þ
 
Accelerated Filer ¨
Non-accelerated Filer ¨
 
Smaller Reporting Company ¨
(Do not check if a 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 ☑

520,988,380 shares of common stock were outstanding as of April 20, 2018.





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)
 
Mar. 31, 2018
 
Jul. 1, 2017
 
Apr. 1, 2017
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
901,551

 
$
869,502

 
$
855,133

Accounts and notes receivable, less allowances of
$65,647, $31,059, and $56,525
4,227,743

 
4,012,393

 
4,282,038

Inventories, net
3,259,771

 
2,995,598

 
2,944,327

Prepaid expenses and other current assets
231,064

 
139,185

 
139,298

Income tax receivable
95,742

 
16,760

 
104,765

Total current assets
8,715,871

 
8,033,438

 
8,325,561

Plant and equipment at cost, less depreciation
4,392,158

 
4,377,302

 
4,271,707

Other long-term assets
 
 
 
 
 
Goodwill
4,066,186

 
3,916,128

 
3,767,906

Intangibles, less amortization
1,056,068

 
1,037,511

 
1,085,946

Deferred income taxes
4,289

 
142,472

 
190,145

Other assets
394,570

 
249,804

 
279,635

Total other long-term assets
5,521,113

 
5,345,915

 
5,323,632

Total assets
$
18,629,142

 
$
17,756,655

 
$
17,920,900

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
6,606

 
$
3,938

 
$
24,676

Accounts payable
4,235,856

 
3,971,112

 
3,849,670

Accrued expenses
1,515,682

 
1,576,221

 
1,328,773

Accrued income taxes

 
14,540

 

Current maturities of long-term debt
288,055

 
530,075

 
526,691

Total current liabilities
6,046,199

 
6,095,886

 
5,729,810

Long-term liabilities
 

 
 

 
 

Long-term debt
8,835,156

 
7,660,877

 
8,026,617

Deferred income taxes
161,193

 
161,715

 
185,178

Other long-term liabilities
1,199,472

 
1,373,822

 
1,568,523

Total long-term liabilities
10,195,821

 
9,196,414

 
9,780,318

Commitments and contingencies


 


 


Noncontrolling interests
35,909

 
82,839

 
80,244

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
1,357,399

 
1,327,366

 
1,307,914

Retained earnings
9,850,739

 
9,447,755

 
9,317,377

Accumulated other comprehensive loss
(1,075,484
)
 
(1,262,737
)
 
(1,505,437
)
Treasury stock at cost, 244,419,011,
    235,135,699 and 229,075,540 shares
(8,546,616
)
 
(7,896,043
)
 
(7,554,501
)
Total shareholders' equity
2,351,213

 
2,381,516

 
2,330,528

Total liabilities and shareholders' equity
$
18,629,142

 
$
17,756,655

 
$
17,920,900

Note: The July 1, 2017 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
 
Mar. 31, 2018
 
Apr. 1, 2017
 
Mar. 31, 2018
 
Apr. 1, 2017
Sales
$
14,349,504

 
$
13,524,172

 
$
43,411,418

 
$
40,950,094

Cost of sales
11,673,876

 
10,990,037

 
35,242,736

 
33,152,177

Gross profit
2,675,628

 
2,534,135

 
8,168,682

 
7,797,917

Operating expenses
2,189,695

 
2,098,173

 
6,527,375

 
6,302,705

Operating income
485,933

 
435,962

 
1,641,307

 
1,495,212

Interest expense
136,145

 
81,004

 
303,015

 
226,858

Other expense (income), net
(15,096
)
 
(4,815
)
 
(24,776
)
 
(14,351
)
Earnings before income taxes
364,884

 
359,773

 
1,363,068

 
1,282,705

Income taxes
34,799

 
121,495

 
381,230

 
445,373

Net earnings
$
330,085

 
$
238,278

 
$
981,838

 
$
837,332

  
 
 
 
 
 
 
 
Net earnings:
 

 
 

 
 
 
 
Basic earnings per share
$
0.63

 
$
0.44

 
$
1.88

 
$
1.53

Diluted earnings per share
0.63

 
0.44

 
1.85

 
1.52

 
 
 
 
 
 
 
 
Average shares outstanding
521,832,671

 
539,291,561

 
523,468,845

 
546,619,776

Diluted shares outstanding
527,990,563

 
544,068,915

 
529,434,527

 
551,797,431

Dividends declared per common share
$
0.36

 
$
0.33

 
$
1.05

 
$
0.97


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
 
Mar. 31, 2018
 
Apr. 1, 2017
 
Mar. 31, 2018
 
Apr. 1, 2017
Net earnings
$
330,085

 
$
238,278

 
$
981,838

 
$
837,332

Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustment
72,010

 
89,799

 
212,594

 
(189,884
)
Items presented net of tax:
 

 
 

 
 

 
 

Amortization of cash flow hedges
2,155

 
1,770

 
6,080

 
5,310

Change in net investment hedges
(31,526
)
 
(16,464
)
 
(47,703
)
 
8,797

Change in cash flow hedges
(10,473
)
 
(4,711
)
 
(7,355
)
 
2,843

Amortization of prior service cost
1,807

 
1,752

 
5,098

 
5,256

Amortization of actuarial loss, net
6,571

 
5,013

 
18,539

 
20,359

Total other comprehensive income (loss)
40,544

 
77,159

 
187,253

 
(147,319
)
Comprehensive income
$
370,629

 
$
315,437

 
$
1,169,091

 
$
690,013


See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 
39-Week Period Ended
 
Mar. 31, 2018
 
Apr. 1, 2017
Cash flows from operating activities:
 

 
 

Net earnings
$
981,838

 
$
837,332

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

 
 

Share-based compensation expense
72,742

 
65,560

Depreciation and amortization
563,732

 
667,275

Amortization of debt issuance and other debt-related costs
21,095

 
25,156

Loss on extinguishment of debt
53,104

 

Deferred income taxes
142,242

 
(40,286
)
Provision for losses on receivables
32,387

 
19,255

Other non-cash items
3,325

 
(338
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

(Increase) in receivables
(157,355
)
 
(292,530
)
(Increase) in inventories
(202,779
)
 
(80,660
)
(Increase) decrease in prepaid expenses and other current assets
(27,301
)
 
5,827

Increase in accounts payable
111,888

 
318,760

(Decrease) in accrued expenses
(65,993
)
 
(229,925
)
(Decrease) in accrued income taxes
(100,131
)
 
(182,089
)
(Increase) in other assets
(46,671
)
 
(42,669
)
(Decrease) increase in other long-term liabilities
(257,936
)
 
11,756

Net cash provided by operating activities
1,124,187

 
1,082,424

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(372,612
)
 
(413,776
)
Proceeds from sales of plant and equipment
16,910

 
19,091

Acquisition of businesses, net of cash acquired
(203,608
)
 
(2,910,461
)
Net cash (used for) investing activities
(559,310
)
 
(3,305,146
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings, net
638,300

 
1,286,452

Other debt borrowings
1,005,490

 
2,010

Other debt repayments
(538,967
)
 
(146,780
)
Tender and redemption premiums for senior notes
(281,762
)
 

Debt issuance costs
(7,081
)
 
(5,094
)
Proceeds from stock option exercises
238,392

 
175,332

Cash paid for shares withheld to cover taxes
(20,664
)
 
(23,652
)
Treasury stock purchases
(910,966
)
 
(1,531,074
)
Dividends paid
(534,741
)
 
(521,806
)
Net cash (used for) financing activities
(411,999
)
 
(764,612
)
Effect of exchange rates on cash, cash equivalents and restricted cash
24,745

 
(76,833
)
Net increase (decrease) in cash, cash equivalents and restricted cash
177,623

 
(3,064,167
)
Cash, cash equivalents and restricted cash at beginning of period
869,502

 
3,919,300

Cash, cash equivalents and restricted cash at end of period
$
1,047,125

 
$
855,133

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
226,882

 
$
263,421

Income taxes
218,059

 
673,076


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 1, 2017 consolidated balance sheet, which was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 1, 2017 (our 2017 Form 10-K). The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows.  In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2017 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.

Reclassifications

Prior year amounts have been reclassified to conform to the current year presentation.

Supplemental Cash Flow Information

The following table sets forth the company’s reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Statement of Cash Flows that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:
 
Mar. 31, 2018
 
Apr. 1, 2017
 
(In thousands)
Cash and cash equivalents
$
901,551

 
$
855,133

Restricted cash (1)
145,574

 

Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows
$
1,047,125

 
$
855,133


(1) Restricted cash as of March 31, 2018 primarily represents cash and cash equivalents of Sysco’s wholly owned captive insurance subsidiary, formed in the second quarter of fiscal 2018, restricted for use to secure the insurer’s obligations for workers’ compensation, general liability and auto liability programs. In addition, the restricted cash balance includes cash related to acquisitions that is held in escrow until certain obligations are met. Restricted cash is primarily located within other assets in the consolidated balance sheet as of March 31, 2018, with a lesser amount reported in other current assets.

2. CHANGES IN ACCOUNTING

Income Tax Accounting Implications of the Tax Cuts and Jobs Act

On December 22, 2017, the United States (U.S.) government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code that will affect the company’s fiscal year ending June 30, 2018. The Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, “Income Taxes” (ASC 740). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in the financial statements,

5



it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. Sysco has implemented SAB 118 and has provided required disclosures in Note 11, “Income Taxes.”

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Sysco has early adopted the standard using the modified retrospective approach to existing hedging relationships as of the second quarter of fiscal 2018, rather than in fiscal 2020 as required by the ASU. Sysco believes that an early adoption of the hedging standard will provide a better alignment between risk management activities and hedge accounting, and reduce total cost of ownership of the risk management program. All transition requirements have been applied to hedging relationships existing on the date of adoption and the effect of the adoption is reflected as of the beginning of fiscal 2018. The cumulative effect of the accounting change on the opening balance of retained earnings was immaterial to Sysco’s consolidated balance sheet. All required disclosures under ASU 2017-12 have been made in Note 6, “Derivative Financial Instruments.”

Restricted Cash

In August 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230). The ASU clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling between the beginning and ending cash balances on the statement of cash flows. We retrospectively adopted the standard in the second quarter of fiscal 2018, which was one year earlier than required. The adoption increases the ending cash balance within our statement of cash flows by the aggregate amount of our restricted cash balances and requires a new disclosure to reconcile the cash balances within our statement of cash flows to the balance sheets. See Supplemental Cash Flow Information within Note 1, “Basis of Presentation.” There were no material restricted cash balances in prior periods, and, therefore, there is no material impact to amounts reported for prior periods due to the retrospective adoption of this ASU.

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). The ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The company elected to maintain the current policy to estimate forfeitures expected to occur to determine stock-based compensation expense. Further, the company adopted the provisions that have changed its accounting for excess tax benefits, or detriments. Excess tax benefits, or detriments, were previously included within additional paid-in capital in the consolidated balance sheet and were a part of the diluted share calculation. With the adoption of ASU 2016-09 on a prospective basis, excess tax benefits, or detriments, are included within income tax expense in the consolidated results of operations and are no longer a part of the diluted share calculation. In the third quarter and the first 39 weeks of fiscal 2018, the company recognized excess tax benefits of $14.9 million and $45.7 million from stock option exercises and restricted stock unit vestings that occurred during the respective periods.

The standard also requires several presentation changes with regard to the statement of cash flows. Cash flows related to excess tax benefits or detriments are included in net cash provided by operating activities, rather than as a financing activity. Sysco chose a retrospective application of this provision; therefore, amounts presented for fiscal 2017 reflect the guidance required by this ASU. The standard further requires that cash paid by an employer, when directly withholding shares for tax withholding purposes, should be classified as a financing activity and applied retrospectively. Cash payments of $20.7 million and $23.7 million to tax authorities in connection with shares withheld to meet statutory income tax withholding requirements are presented as a financing activity in the consolidated statement of cash flows for fiscal 2018 and fiscal 2017, respectively.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has

6



the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The company early adopted this ASU in the first quarter of fiscal 2018.

3.  NEW ACCOUNTING STANDARDS

Reporting Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The amendments in this update eliminate the stranded tax effects resulting from the Tax Act; however, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, 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), and has issued subsequent amendments to this guidance. This new standard will replace all current 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. The guidance is effective for interim and annual periods within new fiscal years beginning after December 15, 2017, which is fiscal 2019 for Sysco. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.

As of the end of the third quarter of fiscal 2018, the company was nearing the completion of its assessment of the accounting required under Topic 606 and is completing its documentation of these conclusions. Based on the work completed to date, Sysco does not expect that the implementation of the new standard will have a material effect on the company’s financial statements. The company will continue its assessment and will adopt the standard in the first quarter of fiscal 2019 and expects to use the modified retrospective method. Enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition, are required.

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. Topic 842 currently requires lessees and lessors to 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.

4.  ACQUISITIONS

During the first 39 weeks of fiscal 2018, the company paid cash of $203.6 million for acquisitions. These acquisitions did not have a material effect on the company’s operating results, cash flows or financial position. Certain acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved.  As of March 31, 2018, aggregate contingent consideration outstanding was $13.1 million, of which $9.7 million was recorded as earnout liabilities.

Brakes Group

On July 5, 2016, Sysco consummated its acquisition of Cucina Lux Investments Limited (a private company limited by shares organized under the laws of England and Wales), a holding company of the Brakes Group, pursuant to an agreement for the sale and purchase of securities in the capital of the Brakes Group, dated as of February 19, 2016, by and among Sysco, entities

7



affiliated with Bain Capital Investors, LLC, and members of management of the Brakes Group (the Brakes Acquisition). The company paid cash of $2.9 billion, net of cash acquired, for the Brakes Acquisition. Following the closing of the Brakes Acquisition, the Brakes Group became a wholly owned subsidiary of Sysco.

The Brakes Group is a large European foodservice business supplying fresh, refrigerated and frozen food products, as well as non-food products and supplies, to 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’s largest businesses are in the United Kingdom (U.K.), France, and Sweden, in addition to a presence in Ireland, Belgium, Spain and Luxembourg.

5.  FAIR VALUE MEASUREMENTS

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

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and
Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

Sysco’s policy is to invest in only high-quality investments.  Cash equivalents primarily include cash deposits, 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.

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

Cash deposits included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 1 measurement in the tables below.
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.
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.
Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments.
Fuel swap contracts are valued based on observable market transactions of forward commodity prices.

The fair value of the company’s derivative instruments are all measured using inputs that are considered a Level 2 measurement, as they are not actively traded and are valued using pricing models that use observable market quotations. The location and the fair value of derivative assets and liabilities designated as hedges in the consolidated balance sheet are disclosed in Note 6, “Derivative Financial Instruments.”


8



The following tables present the company’s assets measured at fair value on a recurring basis as of March 31, 2018July 1, 2017 and April 1, 2017:
 
Assets Measured at Fair Value as of Mar. 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
384,528

 
$
49,190

 
$

 
$
433,718

Prepaid expenses and other current assets (1)
43,364

 

 

 
43,364

Other assets (1)
102,211

 

 

 
102,211

Total assets at fair value
$
530,103

 
$
49,190

 
$

 
$
579,293


(1) Represents restricted cash balances recorded within other current assets and other assets in the consolidated balance sheet.
 
Assets Measured at Fair Value as of Jul. 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
238,954

 
$
49,430

 
$

 
$
288,384

Total assets at fair value
$
238,954

 
$
49,430

 
$

 
$
288,384

 

 
Assets Measured at Fair Value as of Apr. 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 

 
 

 
 

 
 

Cash and cash equivalents
$
91

 
$
44,270

 
$

 
$
44,361

Total assets at fair value
$
91

 
$
44,270

 
$

 
$
44,361


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 issues or on the current rates offered to the company for new debt with the same maturities as existing debt, and is considered a Level 2 measurement.  The fair value of total debt was approximately $9.3 billion, $8.6 billion and $8.9 billion as of March 31, 2018, July 1, 2017 and April 1, 2017, respectively.  The carrying value of total debt was $9.1 billion, $8.2 billion and $8.6 billion as of March 31, 2018July 1, 2017 and April 1, 2017, respectively.

6.  DERIVATIVE FINANCIAL INSTRUMENTS

Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes. Hedging strategies are used to manage interest rate risk, foreign currency risk and fuel price risk.

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. In March 2018, the company entered into an interest rate swap agreement that effectively converted $500.0 million of fixed rate debt maturing in 2025 to floating rate debt.


9



Hedging of foreign currency risk

In fiscal 2017, Sysco entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain pound sterling-denominated intercompany loans. There are no credit-risk related contingent features associated with these swaps, which have been designated as cash flow hedges. The company has also entered into cross-currency swap contracts and Euro-bond denominated debt that hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in the U.K. and Sweden have inventory purchases denominated in currencies other than their functional currency, such as the Euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of each entity 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.

Sysco uses certain foreign currency contracts to hedge the effects of fluctuations in exchange rates on outstanding intercompany loans. The company does not formally designate and document such derivative instruments as hedging instruments; however, the instruments are an effective economic hedge of the underlying foreign currency exposure. Both the gain or loss on the derivative instrument and the offsetting gain or loss on the underlying intercompany loans are recognized in earnings immediately, thereby eliminating or reducing the impact of foreign currency exchange rate fluctuations on net earnings.

Hedging of fuel price risk

In fiscal 2017, Sysco began utilizing fuel commodity swap contracts to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have been designated as cash flow hedges.

None of these hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of March 31, 2018 are below:
Maturity Date of the Hedging Instrument
 
Currency / Unit of Measure
 
Notional Value
 
 
 
 
(In millions)
Hedging of interest rate risk
 
 
 
 
April 2019
 
U.S. Dollar
 
500

October 2020
 
U.S. Dollar
 
750

July 2021
 
U.S. Dollar
 
500

March 2025
 
U.S. Dollar
 
500

 
 
 
 
 
Hedging of foreign currency risk (1)
 
 
 
 
July 2021
 
British Pound Sterling
 
234

August 2021
 
British Pound Sterling

 
466

June 2023
 
Euro
 
500

 
 
 
 
 
Hedging of fuel risk
 
 
 
 
Various (April 2018 to January 2019)
 
Gallons
 
41


(1) 
Foreign currency forward contracts used to hedge against foreign exchange exposures related to inventory purchases are not material to Sysco’s overall hedging portfolio.

10




The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of March 31, 2018, July 1, 2017 and April 1, 2017 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Mar. 31, 2018
 
Jul. 1, 2017
 
Apr. 1, 2017
 
 
 
(In thousands)
Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
$

 
$
707

 
$
659

Interest rate swaps
Other assets
 
1,800

 

 

Interest rate swaps
Other long-term liabilities
 
49,256

 
21,390

 
28,062

 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Fuel swaps
Other current assets
 
$
12,381

 
$
717

 
$

Foreign currency forwards
Other current assets
 
533

 

 

Fuel swaps
Other assets
 

 

 
831

Cross currency swaps
Other assets
 

 

 
4,211

Fuel swaps
Other current liabilities
 

 
6,160

 

Foreign currency forwards
Other current liabilities
 
88

 
154

 

Foreign currency forwards
Other long-term liabilities
 

 

 
431

Fuel swaps
Other long-term liabilities
 

 
160

 

Cross currency swaps
Other long-term liabilities
 
34,690

 
5,816

 

 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
7,946

 
$

 
$
26,691

Foreign currency swaps
Other long-term liabilities
 
71,784

 
12,308

 
22,693

Foreign denominated debt
Long-term debt
 
616,450

 
571,450

 
532,750



11



The location and amount of gains or losses recognized in the consolidated results of operations for fair value and cash flow hedging relationships for each of the periods, presented on a pretax basis, are as follows:

 
 
13-Week Period Ended Mar. 31, 2018
 
 
Cost of Goods Sold
 
Operating Expense
 
Interest Expense
 
 
(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded
 
$
11,673,876

 
$
2,189,695

 
$
136,145

Gain or (loss) on fair value hedging relationships:
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
Hedged items (1)
 
$

 
$

 
$
419

Derivatives designated as hedging instruments
 

 

 
(15,740
)
Gain or (loss) on cash flow hedging relationships:
 
 
 
 
 
 
Fuel swaps:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income
 
$

 
$
4,438

 
$

Foreign currency contracts:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income
 
$
348

 
$

 
$

Interest rate swaps:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income (2)
 
$

 
$

 
$
(2,873
)

(1) 
The hedged total includes interest expense of $13.6 million and change in fair value of debt of $14.1 million.
(2) 
Losses reclassified from AOCI into income represent amortization of losses on forward starting interest rate swap agreements that were previously settled.
 
 
39-Week Period Ended Mar. 31, 2018
 
 
Cost of Goods Sold
 
Operating Expense
 
Interest Expense
 
 
(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value or cash flow hedges are recorded
 
$
35,242,736

 
$
6,527,375

 
$
303,015

Gain or (loss) on fair value hedging relationships:
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
Hedged items (1)
 
$

 
$

 
$
(22,325
)
Derivatives designated as hedging instruments
 

 

 
(26,729
)
Gain or (loss) on cash flow hedging relationships:
 
 
 
 
 
 
Fuel swaps:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income
 
$

 
$
5,679

 
$

Foreign currency contracts:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income
 
$
1,178

 
$

 
$

Interest contracts:
 
 
 
 
 
 
Gain or (loss) reclassified from AOCI into income (2)
 
$

 
$

 
$
(8,619
)

(1) 
The hedged total includes interest expense of $47.8 million and change in fair value of debt of $25.5 million.
(2) 
Losses reclassified from AOCI into income represent amortization of losses on forward starting interest rate swap agreements that were previously settled.


12



The location and effect of derivatives not designated as hedging instruments on the consolidated results of operations for the 13-week period ended March 31, 2018, presented on a pretax basis, are as follows:
 
13-Week Period Ended Mar. 31, 2018
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments:
(In thousands)
Foreign currency contracts
Other expense (income)
 
$
(6,743
)

The location and effect of derivatives not designated as hedging instruments on the consolidated results of operations for the 39-week period ended March 31, 2018, presented on a pretax basis, are as follows:
 
39-Week Period Ended Mar. 31, 2018
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments:
(In thousands)
Foreign currency contracts
Other expense (income)
 
$
(8,859
)

The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 13-week period ended March 31, 2018, presented on a pretax basis, are as follows:
 
13-Week Period Ended Mar. 31, 2018
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income

(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
(1,195
)
 
Operating income
 
$
4,438

Foreign currency contracts
(12,875
)
 
Cost of goods sold
 
348

Total
$
(14,070
)
 
 
 
$
4,786

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
(24,420
)
 
Other expense (income)
 
$

Foreign denominated debt
(16,400
)
 
Other expense (income)
 

Total
$
(40,820
)
 
 
 
$



13



The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 39-week period ended March 31, 2018, presented on a pretax basis, are as follows:
 
39-Week Period Ended Mar. 31, 2018
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income

(In thousands)
 
 
 
(In thousands)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Fuel swaps
$
18,855

 
Operating income
 
$
5,679

Foreign currency contracts
(27,450
)
 
Cost of goods sold
 
1,178

Total
$
(8,595
)
 
 
 
$
6,857

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
(56,580
)
 
Other expense (income)
 
$

Foreign denominated debt
(45,000
)
 
Other expense (income)
 

Total
$
(101,580
)
 
 
 
$


The location and carrying amount of hedged liabilities in the consolidated balance sheet as of March 31, 2018 are as follows:
 
Mar. 31, 2018
 
Mar. 31, 2018
 
Carrying Amount of Hedged Assets (Liabilities)
 
Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
 
(In thousands)
Balance sheet location:
 
 
 
Long-term debt
$
(2,242,904
)
 
$
45,030


As of March 31, 2018, the total notional amount of Sysco’s pay-fixed/receivable-variable interest rate swaps was $2.3 billion.    

The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week period ending March 31, 2018, presented on a pretax basis, are as follows:
 
13-Week Period Ended Mar. 31, 2018
 
Location of (Gain) or Loss
Recognized
(1)
 
Amount of (Gain) or Loss
Recognized
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
Interest rate swap agreements (1)
Interest expense
 
$
1,690


(1) 
The effect of derivative instruments and related hedged items that are recorded in other comprehensive income (loss) are disclosed in Note 9, “Other Comprehensive Income.”


14



The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 39-week period ending March 31, 2018, presented on a pretax basis, are as follows:
 
39-Week Period Ended Mar. 31, 2018
 
Location of (Gain) or Loss
Recognized
(1)
 
Amount of (Gain) or Loss
Recognized
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
Interest rate swap agreements (1)
Interest expense
 
$
1,268


(1) 
The effect of derivative instruments and related hedged items that are recorded in other comprehensive income (loss) are disclosed in Note 9, “Other Comprehensive Income.”

7.  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 March 31, 2018, there was $758.0 million in commercial paper issuances outstanding. Any outstanding amounts are classified within long-term debt, as the program is supported by a long-term revolving credit facility. During the first 39 weeks of 2018, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from $254.5 million to approximately $1.5 billion.

Senior notes offering

On March 19, 2018, Sysco issued senior notes (the Notes) totaling $1.0 billion. Details of the Notes are as follows:
Maturity Date
 
Par Value
(in millions)
 
Coupon Rate
 
Pricing
(percentage of par)
March 15, 2025 (the 2025 Notes)
 
$
500

 
3.55
%
 
99.480
%
March 15, 2048 (the 2048 Notes)
 
500

 
4.45

 
99.378


The Notes initially are fully and unconditionally guaranteed by Sysco’s direct and indirect wholly owned subsidiaries that guarantee Sysco’s other senior notes issued under the indenture governing the Notes or any of Sysco’s other indebtedness. Interest on the Notes will be paid semi-annually on March 15 and September 15, beginning September 15, 2018. At Sysco’s option, any or all of the Notes may be redeemed, in whole or in part, at any time prior to maturity. If Sysco elects to redeem (i) the 2025 Notes before the date that is two months prior to the maturity date or (ii) the 2048 Notes before the date that is 6 months prior to the maturity date, Sysco will pay an amount equal to the greater of 100% of the principal amount of the Notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed. If Sysco elects to redeem a series of Notes on or after the applicable date described in the preceding sentence, Sysco will pay an amount equal to 100% of the principal amount of the Notes to be redeemed. Sysco will pay accrued and unpaid interest on the Notes redeemed to the redemption date.

Sysco used $330 million of the net proceeds from the offering to fund its company-sponsored tax-qualified U.S. pension plan (the Pension Plan). The Pension Plan’s funded status allows Sysco to set an investment strategy that more closely aligns the duration of the Pension Plan’s assets with the duration of its liabilities. The strategy will result in an asset portfolio that more closely matches the behavior of the liability, thereby reducing the volatility of the Pension Plan’s funded status.

Senior notes and debentures redemption related to the tender offer

Sysco used a portion of the net proceeds of the offering to fund the purchase, pursuant to a tender offer, of $230.5 million in combined aggregate principal amount of the following securities: its 7.160% debentures due 2027, its 6.500% debentures due 2028, its 5.375% senior notes due 2035 and its 6.625% senior notes due 2039. Holders of securities received an early tender payment of $50 per $1,000 principal amount of securities. Holders of such securities also received accrued and unpaid interest from, and including, the last interest payment date for their tendered securities, but not including, the early settlement date, which was March 23, 2018. The tender offer transaction was considered to be a debt extinguishment. As such, Sysco recognized a loss on extinguishment of $53.1 million, which was recorded as a component of interest expense in the accompanying consolidated results of operations. Of this loss, $51.2 million was attributable to the purchase premium paid to the lenders, $1.1 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed debentures and notes, and $0.8 million was attributable to an accelerated charge on the debt discount related to these debentures and notes.

15




Details of the debentures and senior notes purchased are as follows:
Maturity Date
 
Par Value
 
Coupon Rate
 
Principal amount tendered
 
Remaining Par Value after tender offer
 
Cash amount paid (including interest)
 
 
(Dollars in millions)
April 15, 2027
 
$
50

 
7.160
%
 
$
5.7

 
$
44.3

 
$
7.4

August 1, 2028
 
225

 
6.500

 
61.9

 
163.1

 
77.3

September 21, 2035
 
500

 
5.375

 
115.9

 
384.1

 
134.3

March 17, 2039
 
250

 
6.625

 
47.0

 
203.0

 
63.7


The remaining net proceeds from the offering were used to repay outstanding borrowings under Sysco’s commercial paper program and for other general corporate purposes.

In February 2018, Sysco repaid 5.25% senior notes totaling $500.0 million at maturity utilizing commercial paper borrowings.

8.  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
 
Mar. 31, 2018
 
Apr. 1, 2017
 
Mar. 31, 2018
 
Apr. 1, 2017
 
(In thousands, except for share
and per share data)
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
 
 
 
 
Net earnings
$
330,085

 
$
238,278

 
$
981,838

 
$
837,332

Denominator:
 

 
 

 
 
 
 
Weighted-average basic shares outstanding
521,832,671

 
539,291,561

 
523,468,845

 
546,619,776

Dilutive effect of share-based awards
6,157,892

 
4,777,354

 
5,965,682

 
5,177,655

Weighted-average diluted shares outstanding
527,990,563

 
544,068,915

 
529,434,527

 
551,797,431

Basic earnings per share
$
0.63

 
$
0.44

 
$
1.88

 
$
1.53

Diluted earnings per share
$
0.63

 
$
0.44

 
$
1.85

 
$
1.52


The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 25,000 and 3,065,000 for the third quarter of fiscal 2018 and fiscal 2017, respectively. The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 3,071,000 and 3,349,000 for the first 39 weeks of fiscal 2018 and fiscal 2017, respectively.

9.  OTHER COMPREHENSIVE INCOME

Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, amounts related to cash flow hedging arrangements and certain amounts related to pension and other postretirement plans.  Comprehensive income was $370.6 million and $315.4 million for the third quarter of fiscal 2018 and fiscal 2017, respectively. Comprehensive income was $1.2 billion and $690.0 million for the first 39 weeks of fiscal 2018 and fiscal 2017, respectively.


16



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 Mar. 31, 2018
 
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
 
$
2,409

 
$
602

 
$
1,807

Amortization of actuarial loss (gain), net
Operating expenses
 
8,761

 
2,190

 
6,571

Total reclassification adjustments
 
 
11,170

 
2,792

 
8,378

Foreign currency translation:
 
 
 

 
 

 
 

Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
72,010

 

 
72,010

Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
N/A
 
(14,070
)
 
(3,597
)
 
(10,473
)
Change in net investment hedges
N/A
 
(40,820
)
 
(9,294
)
 
(31,526
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(54,890
)
 
(12,891
)
 
(41,999
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
718

 
2,155

Total other comprehensive income (loss)
 
 
$
31,163

 
$
(9,381
)
 
$
40,544



17



 
 
 
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 (loss) before
   reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
89,799

 

 
89,799

Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Interest expense
 
(7,647
)
 
(2,936
)
 
(4,711
)
Change in net investment hedges
N/A
 
(12,775
)
 
3,689

 
(16,464
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(20,422
)
 
753

 
(21,175
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
1,103

 
1,770

Total other comprehensive income
 
 
$
84,038

 
$
6,879

 
$
77,159



18



 
 
 
39-Week Period Ended Mar. 31, 2018
 
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
 
$
7,227

 
$
2,129

 
$
5,098

Amortization of actuarial loss (gain), net
Operating expenses
 
26,283

 
7,744

 
18,539

Total reclassification adjustments
 
 
33,510

 
9,873

 
23,637

Foreign currency translation:
 
 
 

 
 

 
 

Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
212,594

 

 
212,594

Hedging instruments:
 
 
 

 
 

 
 

Other comprehensive income (loss) before
reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
N/A
 
(7,720
)
 
(365
)
 
(7,355
)
Change in net investment hedge
N/A
 
(70,739
)
 
(23,036
)
 
(47,703
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(78,459
)
 
(23,401
)
 
(55,058
)
Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of cash flow hedges
Interest expense
 
8,619

 
2,539

 
6,080

Total other comprehensive income (loss)
 
 
$
176,264

 
$
(10,989
)
 
$
187,253



19



 
 
 
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
 
 
40,684

 
15,069

 
25,615

Foreign currency translation:
 
 
 

 
 

 
 

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

 
(189,884
)
Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before
reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Interest expense
 
4,092

 
1,249

 
2,843

Change in net investment hedge
N/A
 
30,604

 
21,807

 
8,797

Total other comprehensive income (loss) before reclassification adjustments
 
 
34,696

 
23,056

 
11,640

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
8,619

 
3,309

 
5,310

Total other comprehensive (loss) income
 
 
$
(105,885
)
 
$
41,434

 
$
(147,319
)

The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
39-Week Period Ended Mar. 31, 2018
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging,
net of tax
 
Total
 
(In thousands)
Balance as of Jul. 1, 2017
$
(974,232
)
 
$
(148,056
)
 
$
(140,449
)
 
$
(1,262,737
)
Equity adjustment from foreign currency translation

 
212,594

 

 
212,594

Amortization of cash flow hedges

 

 
6,080

 
6,080

Change in net investment hedges

 

 
(47,703
)
 
(47,703
)
Change in cash flow hedge

 

 
(7,355
)
 
(7,355
)
Amortization of unrecognized prior service cost
5,098

 

 

 
5,098

Amortization of unrecognized net actuarial losses
18,539

 

 

 
18,539

Balance as of Mar. 31, 2018
$
(950,595
)
 
$
64,538

 
$
(189,427
)
 
$
(1,075,484
)


20



 
39-Week Period Ended Apr. 1, 2017
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging,
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
)
Amortization of cash flow hedges

 

 
5,310

 
5,310

Change in cash flow hedges

 

 
2,843

 
2,843

Change in net investment hedges

 

 
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
)

10.  SHARE-BASED COMPENSATION

Sysco provides compensation benefits to employees under several share-based payment arrangements, including various long-term employee stock incentive plans and the 2015 Employee Stock Purchase Plan (ESPP).

Stock Incentive Plans

In the first 39 weeks of fiscal 2018, options to purchase 4,042,415 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 2018 was $7.08.

In the first 39 weeks of fiscal 2018, 872,325 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 2018 was $51.11.  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 2018, 649,039 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 2018 was $55.72.

Employee Stock Purchase Plan

Plan participants purchased 827,073 shares of common stock under the Sysco ESPP during the first 39 weeks of fiscal 2018.

The weighted average fair value per right of employee stock purchase rights issued pursuant to the ESPP was $8.20 during the first 39 weeks of fiscal 2018.  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 $72.7 million and $65.6 million for the first 39 weeks of fiscal 2018 and fiscal 2017, respectively.

As of March 31, 2018, there was $142.0 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 1.98 years.


21



11.  INCOME TAXES

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that will affect the company’s fiscal year ending June 30, 2018, including, but not limited to: (1) reducing the U.S. federal corporate tax rate; (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over 8 years; and (3) bonus depreciation that will allow for full expensing of qualified property placed in service after September 27, 2017. The Tax Act also establishes new tax laws that could affect Sysco in future fiscal years, including, but not limited to (1) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (2) a new provision designed to tax global intangible low-taxed income (GILTI); (3) creation of the base erosion anti-abuse tax (BEAT), a new minimum tax; (4) a new limitation on deductible interest; (5) repeal of the domestic production activity deduction; and (6) increased limitations on the deductibility of certain executive compensation.

The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. See Note 2, “Changes in Accounting” for a description of SAB 118.

Our accounting for the following elements of the Tax Act is incomplete. However, the company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments of $35.8 million in the second quarter financials, which is our initial estimate of the following impacts of the Tax Act:

Reduction of U.S. federal corporate tax rate: As a result of enactment of the Tax Act, the company revised its estimated annual effective tax rate to reflect a change in the U.S. statutory tax rate. As noted above, the Tax Act reduces the U.S. federal corporate tax rate to 21% in our fiscal year; however, Section 15 of the Internal Revenue Code stipulates that the reduction in the corporate tax rate is applied to fiscal year taxpayers by computing a blended tax rate, based on the applicable tax rates before and after the effective date of the change in the statutory rate. When applied to Sysco’s fiscal year, this blended rate is estimated as 28% for fiscal 2018, a benefit of $64.7 million was recorded in the second quarter of fiscal 2018 due to the retroactive application of this lower rate to the beginning of the company’s fiscal year. In addition, the company has recorded a provisional tax benefit of $14.5 million attributable to remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets.

Transition Tax: In the second quarter of fiscal 2018, the company recorded a discrete tax expense of $115.0 million attributable to the provisional impact of the transition tax. The transition tax is payable in eight annual installments beginning in our first quarter of fiscal 2019. As a result of the 8 year payment period, approximately $95.0 million attributable to the portion of the provisional transition tax not due within 12 months is located within other long-term liabilities in the consolidated balance sheet as of March 31, 2018.

Our accounting for the following elements of the Tax Act is incomplete, and we were not able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.

GILTI: The Tax Act creates a new requirement that certain income earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. Sysco will not be subject to the GILTI provisions until fiscal 2019.

Because of the complexity of the new GILTI tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Sysco’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether the company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether Sysco expects to have future U.S. inclusions in taxable income related to GILTI depends not only on our current structure and estimated future results of global operations but also the company’s intent and ability to modify its structure and/or its business, Sysco is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.


22



Executive Compensation Limitation: The Tax Act expands the definition under Section 162(m) of the Internal Revenue Code (“Section 162(m)”) of covered employee and provides that, for specified employees, status as a covered employee continues for all subsequent tax years, including years after the death of the individual, and, among other modifications, repeals the exception for performance-based compensation and commissions from the $1 million deduction limitation. In addition, the Tax Act provides for transitional guidance that will allow certain payments made under written and binding agreements entered into prior to November 2, 2017 to be treated as if they were made under the provisions of Section 162(m) that were in effect prior to enactment of the Tax Act. The company is in the process of gathering information on existing compensation arrangements for covered employees as well as assessing the impact of transitional guidance on the realizability of existing deferred tax assets related to compensation arrangements of its covered employees. As a result, the company has not made any adjustments related to impacts of the new executive compensation limitations in its financial statements.

Indefinite Reinvestment Assertion: The company is in the process of assessing the impact of the Tax Act on its indefinite reinvestment assertion and the company’s plans to determine any associated impact on the financial statements. Therefore, no adjustments have been made in its financial statements with respect to its indefinite reinvestment assertion.

Effective Tax Rate

Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. The effective tax rates for the third quarter and first 39 weeks of fiscal 2018 were 9.54% and 27.97%, respectively. The effective tax rate for the first 39 weeks of fiscal 2018 was negatively impacted by the transition tax described above resulting from the Tax Act. This effective tax rate was impacted favorably by a net tax benefit attributable to the change in the federal statutory tax rate as a result of the Tax Act, along with the tax benefit of $44.4 million attributable to a contribution to the Pension Plan, and excess tax benefits of equity-based compensation that totaled $14.9 million for the third quarter and $45.7 million for the first 39 weeks of fiscal 2018. Sysco began recognizing these excess tax benefits within income tax expense in the first quarter of fiscal 2018 due to the adoption of ASU 2016-09. 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.

Uncertain Tax Positions

As of March 31, 2018, the gross amount of unrecognized tax benefit and related accrued interest was $16.2 million and $12.0 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.

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.

12.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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


23



13.  BUSINESS SEGMENT INFORMATION

The company has aggregated certain of its operating segments 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, which distribute a full line of food products including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products;
International Foodservice Operations - includes operations in the Americas and Europe, which distribute a full line of food products and a wide variety of non-food products. The Americas primarily consists of operations in Canada, Bahamas, Mexico, Costa Rica and Panama, as well as our operations that distribute to international customers. Our European operations primarily consists of operations in the United Kingdom, France, Ireland and Sweden;
SYGMA - our U.S. customized distribution subsidiary; and
Other - primarily our hotel supply operations and Sysco Labs, which includes our suite of technology solutions that help support the business needs of our customers and provide support for some of our business technology needs.

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.

The following tables set forth certain financial information for Sysco’s business segments.

 
13-Week Period Ended
 
39-Week Period Ended
 
Mar. 31, 2018
 
Apr. 1, 2017
 
Mar. 31, 2018
 
Apr. 1, 2017
Sales:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
9,704,495

 
$
9,233,048

 
$
29,234,662

 
$
27,799,728

International Foodservice Operations
2,799,251

 
2,528,485

 
8,571,549

 
7,882,796

SYGMA
1,605,753

 
1,535,550

 
4,879,569

 
4,560,424

Other
240,005

 
227,089

 
725,638

 
707,146

Total
$
14,349,504

 
$
13,524,172

 
$
43,411,418

 
$
40,950,094

 
 
 
 
 
 
 
 
 
13-Week Period Ended
 
39-Week Period Ended
 
Mar. 31, 2018
 
Apr. 1, 2017
 
Mar. 31, 2018
 
Apr. 1, 2017
Operating income:
(In thousands)
 
(In thousands)
U.S. Foodservice Operations
$
695,464

 
$
689,210

 
$
2,182,708

 
$
2,115,762

International Foodservice Operations
19,319

 
16,076

 
148,403

 
180,324

SYGMA
4,477

 
7,344

 
12,675

 
15,407

Other
5,945

 
6,078

 
13,181

 
17,873

Total segments
725,205

 
718,708

 
2,356,967

 
2,329,366

Corporate
(239,272
)
 
(282,746
)
 
(715,660
)
 
(834,154
)
Total operating income
485,933

 
435,962

 
1,641,307

 
1,495,212

Interest expense
136,145

 
81,004

 
303,015

 
226,858

Other expense (income), net
(15,096
)
 
(4,815
)
 
(24,776
)
 
(14,351
)
Earnings before income taxes
$
364,884

 
$
359,773

 
$
1,363,068

 
$
1,282,705



24



 
Mar. 31, 2018
 
Jul. 1, 2017
 
Apr. 1, 2017
Assets:
(In thousands)
U.S. Foodservice Operations
$
7,171,671

 
$
6,675,543

 
$
7,001,351

International Foodservice Operations
6,772,834

 
6,433,815

 
6,003,449

SYGMA
674,800

 
625,653

 
600,823

Other
772,351

 
448,885

 
443,813

Total segments
15,391,656

 
14,183,896

 
14,049,436

Corporate
3,237,486

 
3,572,759

 
3,871,464

Total
$
18,629,142

 
$
17,756,655

 
$
17,920,900


14.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES

On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation.  All subsequent issuances of senior notes and debentures have also been guaranteed by these subsidiaries. As of March 31, 2018, Sysco had a total of $8.3 billion in senior notes and debentures 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.

In conjunction with the preparation of our September 30, 2017 condensed consolidating financial statements, the company identified certain wholly owned U.S. Broadline subsidiaries that are guarantors of the outstanding senior notes and debentures of Sysco Corporation that were presented within Other Non-Guarantor Subsidiaries during fiscal 2017. The fiscal 2017 Condensed Consolidating Balance Sheet and Statements of Comprehensive Income and Cash Flows included herein have been revised to present such U.S. Broadline subsidiaries as guarantor subsidiaries.   The company assessed the materiality of the incorrect guarantor disclosures and concluded that the misstatement was not material to the financial statements as a whole, but has provided revised information below for the sake of consistency with the current period disclosures.

The following condensed consolidating financial statements present separately the financial position, comprehensive income and cash flows of the parent issuer (Sysco Corporation), the guarantors (certain of the company’s U.S. Broadline subsidiaries), and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.

25



 
Condensed Consolidating Balance Sheet
 
Mar. 31, 2018
 
Sysco
 
Certain U.S.
Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
273,948

 
$
4,093,321

 
$
4,348,602

 
$

 
$
8,715,871

Intercompany receivables
3,344,142

 
590,025

 

 
(3,934,167
)
 

Investment in subsidiaries
7,771,987

 

 

 
(7,771,987
)
 

Plant and equipment, net
263,472

 
2,047,608

 
2,081,078

 

 
4,392,158