10-Q 1 syy2019q110-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 September 29, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
 syy-logoa14.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 ☑

519,787,613 shares of common stock were outstanding as of October 12, 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)
 
Sep. 29, 2018
 
Jun. 30, 2018
 
Sep. 30, 2017
 
(unaudited)
 
 
 
(unaudited)
ASSETS
Current assets
 
 
 
 
 
Cash and cash equivalents
$
790,304

 
$
552,325

 
$
909,203

Accounts and notes receivable, less allowances of $26,373, $25,768 and $41,184
4,242,419

 
4,073,723

 
4,333,704

Inventories, net
3,354,458

 
3,125,413

 
3,180,631

Prepaid expenses and other current assets
215,714

 
187,880

 
173,464

Income tax receivable
39,361

 
64,112

 

Total current assets
8,642,256

 
8,003,453

 
8,597,002

Plant and equipment at cost, less depreciation
4,466,903

 
4,521,660

 
4,388,299

Other long-term assets
 
 
 
 
 
Goodwill
3,936,961

 
3,955,485

 
3,970,617

Intangibles, less amortization
944,525

 
979,812

 
1,052,704

Deferred income taxes
59,003

 
83,666

 
149,932

Other assets
492,434

 
526,328

 
260,036

Total other long-term assets
5,432,923

 
5,545,291

 
5,433,289

Total assets
$
18,542,082

 
$
18,070,404

 
$
18,418,590

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
 
 
 
 
 
Notes payable
$
4,414

 
$
4,176

 
$
4,513

Accounts payable
4,217,833

 
4,136,482

 
3,951,205

Accrued expenses
1,502,794

 
1,608,966

 
1,502,021

Accrued income taxes
132,910

 
56,793

 
148,902

Current maturities of long-term debt
783,001

 
782,329

 
533,641

Total current liabilities
6,640,952

 
6,588,746

 
6,140,282

Long-term liabilities
 
 
 
 
 
Long-term debt
7,914,344

 
7,540,765

 
8,426,359

Deferred income taxes
277,036

 
319,124

 
165,622

Other long-term liabilities
1,034,289

 
1,077,163

 
1,367,965

Total long-term liabilities
9,225,669

 
8,937,052

 
9,959,946

Commitments and contingencies


 


 


Noncontrolling interest
36,887

 
37,649

 
83,108

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
1,438,097

 
1,383,619

 
1,348,349

Retained earnings
10,592,490

 
10,348,628

 
9,638,386

Accumulated other comprehensive loss
(1,450,843
)
 
(1,409,269
)
 
(1,142,578
)
Treasury stock at cost, 245,025,271,
244,533,248 and 243,513,095 shares
(8,706,345
)
 
(8,581,196
)
 
(8,374,078
)
Total shareholders’ equity
2,638,574

 
2,506,957

 
2,235,254

Total liabilities and shareholders' equity
$
18,542,082

 
$
18,070,404

 
$
18,418,590

Note: The June 30, 2018 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
 
Sep. 29, 2018
 
Sep. 30, 2017
Sales
$
15,215,279

 
$
14,650,424

Cost of sales
12,311,494

 
11,856,756

Gross profit
2,903,785

 
2,793,668

Operating expenses
2,275,645

 
2,174,303

Operating income
628,140

 
619,365

Interest expense
89,016

 
80,884

Other expense (income), net
1,132

 
(7,975
)
Earnings before income taxes
537,992

 
546,456

Income taxes
106,950

 
178,816

Net earnings
$
431,042

 
$
367,640

  
 
 
 
Net earnings:
 

 
 

Basic earnings per share
$
0.83

 
$
0.70

Diluted earnings per share
0.81

 
0.69

 
 
 
 
Average shares outstanding
520,856,599

 
527,289,675

Diluted shares outstanding
529,034,470

 
533,063,426


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
 
Sep. 29, 2018
 
Sep. 30, 2017
Net earnings
$
431,042

 
$
367,640

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
(24,927
)
 
121,329

Items presented net of tax:
 
 
 
Amortization of cash flow hedges
2,155

 
1,770

Change in net investment hedges
8,588

 
(12,024
)
Change in cash flow hedges
(3,008
)
 
2,203

Amortization of prior service cost
1,600

 
1,484

Amortization of actuarial loss, net
6,529

 
5,397

Actuarial loss, net
(32,511
)
 

Total other comprehensive (loss) income
(41,574
)
 
120,159

Comprehensive income
$
389,468

 
$
487,799


See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 
13-Week Period Ended
 
Sep. 29, 2018
 
Sep. 30, 2017
Cash flows from operating activities:
 
 
 
Net earnings
$
431,042

 
$
367,640

Adjustments to reconcile net earnings to cash provided by operating activities:
 
 
 
Share-based compensation expense
29,193

 
27,955

Depreciation and amortization
187,627

 
179,662

Amortization of debt issuance and other debt-related costs
6,170

 
7,192

Deferred income taxes
(20,249
)
 
(3,706
)
Provision for losses on receivables
10,464

 
8,999

Other non-cash items
(3,695
)
 
6,849

Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 
 
 
(Increase) in receivables
(182,233
)
 
(294,989
)
(Increase) in inventories
(229,100
)
 
(166,992
)
(Increase) in prepaid expenses and other current assets
(23,540
)
 
(28,312
)
Increase (decrease) in accounts payable
78,112

 
(57,368
)
(Decrease) in accrued expenses
(111,309
)
 
(83,883
)
Increase in accrued income taxes
100,868

 
165,944

(Increase) in other assets
(4,261
)
 
(13,616
)
Increase (decrease) in other long-term liabilities
2,056

 
(32,600
)
Net cash provided by operating activities
271,145

 
82,775

Cash flows from investing activities:
 
 
 
Additions to plant and equipment
(104,322
)
 
(136,261
)
Proceeds from sales of plant and equipment
3,839

 
1,722

Other investing activities
912

 

Net cash (used for) investing activities
(99,571
)
 
(134,539
)
Cash flows from financing activities:
 
 
 
Bank and commercial paper borrowings, net

 
745,100

Other debt borrowings
386,142

 
1,512

Other debt repayments
(8,078
)
 
(5,186
)
Proceeds from stock option exercises
84,393

 
57,075

Treasury stock purchases
(204,640
)
 
(550,098
)
Dividends paid
(187,229
)
 
(174,864
)
Other financing activities
(2,200
)
 
(644
)
Net cash provided by financing activities
68,388

 
72,895

Effect of exchange rates on cash, cash equivalents and restricted cash
(2,435
)
 
18,570

Net increase in cash, cash equivalents and restricted cash
237,527

 
39,701

Cash, cash equivalents and restricted cash at beginning of period
715,844

 
869,502

Cash, cash equivalents and restricted cash at end of period
$
953,371

 
$
909,203

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
81,392

 
$
72,057

Income taxes
70,675

 
28,714


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 June 30, 2018 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 June 30, 2018 (our 2018 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 2018 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.

These financial statements and related notes have been presented in compliance with the Securities and Exchange Commission’s (SEC) Final Rule Release No. 33-10532, Disclosure Update and Simplification, effective for all filings made on or after November 5, 2018. Sysco has adopted all relevant disclosure requirements, with the exception of adding the changes in stockholders’ equity disclosures for interim periods, which is allowed to be adopted in a future interim period.

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:
 
Sep. 29, 2018
 
Sep. 30, 2017
 
(In thousands)
Cash and cash equivalents
$
790,304

 
$
909,203

Restricted cash (1)
163,067

 

Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows
$
953,371

 
$
909,203


(1) 
Restricted cash as of September 29, 2018 primarily represents cash and cash equivalents of Sysco’s wholly owned captive insurance subsidiary, restricted for use to secure the insurer’s obligations for workers’ compensation, general liability and auto liability programs. Restricted cash is located within other assets in the consolidated balance sheet as of September 29, 2018.

2. CHANGES IN ACCOUNTING

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and has issued subsequent amendments to this guidance. This new standard superseded existing revenue recognition standards and eliminated all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Sysco adopted the new standard effective July 1, 2018 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on Sysco’s consolidated balance sheet or consolidated results of operations as of the adoption date or for the period ended September 29, 2018.


5



Guidance in Presentation of Cash Flows - Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Invitees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. The company adopted this ASU retrospectively, effective July 1, 2018. The adoption of ASU 2016-15 did not have a material effect on the company’s cash flow statement.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued 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 company adopted this ASU effective July 1, 2018, resulting in net cost of $8.9 million for the first quarter of fiscal 2019 being reported in other expense (income) that would have previously been included in operating expense. The ASU was applied retrospectively, resulting in net benefit of $3.7 million for the first quarter of fiscal 2018 being reported in other expense (income).

3.  NEW ACCOUNTING STANDARDS

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.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The guidance amends Accounting Standards Codification (ASC) 350 to include in its scope implementation costs of a cloud computing arrangement that is a service contract and clarifies that a customer should apply ASC 350 to determine which implementation costs should be capitalized in such a cloud computing arrangement. This guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which is the first quarter of fiscal 2021 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.

4. REVENUE

Adoption of ASC Topic 606, “Revenues from Contracts with Customers”

On July 1, 2018, Sysco adopted ASC Topic 606 with no significant impact to its financial position or results of operations, using the modified retrospective method. There were no contracts which were not completed as of July 1, 2018. Results for reporting periods beginning after July 1, 2018 are presented under Topic 606, while prior period amounts have not been restated and continue to be reported in accordance with our historic accounting under Topic 605. Sysco had no adjustment to opening

6



retained earnings as of July 1, 2018 as a result of adopting ASC Topic 606. There was no impact to revenues for the quarter ended September 29, 2018 as a result of applying ASC Topic 606.

Revenue Recognition

The company recognizes revenues when the performance obligation is satisfied, which is the point at which control of the promised goods or services are transferred to its customers, in an amount that reflects the consideration Sysco expects to be entitled to receive in exchange for those goods or services. For the majority of Sysco’s customer arrangements, control transfers to customers at a point-in-time when goods have been delivered, as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. The timing of satisfaction of the performance obligation is not subject to significant judgment. While certain additional services may be identified within a contract, we have concluded that those services are individually immaterial in the context of the contract with the customer, and therefore, not assessed as performance obligations.

Sales tax collected from customers is not included in revenue, but rather recorded as a liability due to the respective taxing authorities. Shipping and handling costs include costs associated with the selection of products and delivery to customers and are included within operating expenses.

Product Sales Revenues

Sysco generates revenue primarily from the distribution and sale of food and related products to its customers. Substantially all revenue is recognized at the point in time in which the product is delivered to the customer. The company grants certain customers sales incentives, such as rebates or discounts, which are accounted for as variable consideration. The variable consideration is based on amounts known at the time the performance obligation is satisfied and, therefore, requires minimal judgment.

Contract Balances

After completion of Sysco’s performance obligations, the company has an unconditional right to consideration as outlined in its contracts with customers. Sysco’s customer receivables will generally be collected in less than 30 days in accordance with the underlying payment terms. Customer receivables, which are included in Accounts and notes receivable, less allowances in the consolidated balance sheet, were $4.0 billion and $3.8 billion as of September 29, 2018 and June 30, 2018, respectively.

Sysco has certain customer contracts in which upfront monies are paid to its customers. These payments have become industry practice and are not related to financing of the customer’s business. They are not associated with any distinct good or service to be received from the customer and, therefore, are treated as a reduction of transaction prices. All upfront payments are capitalized in Other Assets and amortized over the life of the contract or the expected life of the relationship with the customer on a straight-line basis. As of September 29, 2018, Sysco’s contract assets were immaterial. Sysco has no material commissions paid that are directly attributable to obtaining a particular contract.


7



Disaggregation of Revenues

The following tables present our revenues disaggregated by reportable segment and sales mix for the company’s principal product categories for the periods presented:

 
 
13-Week Period Ended Sep. 29, 2018
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
2,121,517

 
$
420,456

 
$
372,334

 
$

 
$
2,914,307

Canned and dry products
 
1,852,168

 
611,470

 
77,621

 

 
2,541,259

Frozen fruits, vegetables, bakery and other
 
1,423,386

 
628,559

 
291,864

 

 
2,343,809

Dairy products
 
1,086,404

 
318,347

 
154,806

 

 
1,559,557

Poultry
 
1,026,936

 
215,582

 
272,061

 

 
1,514,579

Fresh produce
 
937,580

 
257,544

 
64,849

 

 
1,259,973

Paper and disposables
 
710,759

 
104,539

 
188,616

 
16,409

 
1,020,323

Seafood
 
661,687

 
188,436

 
25,385

 

 
875,508

Beverage products
 
290,571

 
52,069

 
147,294

 
23,180

 
513,114

Other (1)
 
288,403

 
123,948

 
26,627

 
233,872

 
672,850

Total Revenue
 
$
10,399,411

 
$
2,920,950

 
$
1,621,457

 
$
273,461

 
$
15,215,279


(1) 
Other revenue relates to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription revenues for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.

 
 
13-Week Period Ended Sep. 30, 2017
 
 
US Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Total
 
 
(In thousands)
Principal Product Categories
 
 
 
 
 
 
 
 
 
 
Fresh and frozen meats
 
$
2,031,141

 
$
434,639

 
$
386,248

 
$

 
$
2,852,028

Canned and dry products
 
1,738,677

 
593,354

 
77,485

 

 
2,409,516

Frozen fruits, vegetables, bakery and other
 
1,266,732

 
626,065

 
272,592

 

 
2,165,389

Poultry
 
1,046,686

 
207,465

 
296,899

 

 
1,551,050

Dairy products
 
1,017,661

 
315,654

 
166,688

 

 
1,500,003

Fresh produce
 
923,792

 
265,583

 
65,546

 

 
1,254,921

Paper and disposables
 
656,309

 
104,110

 
181,829

 
15,390

 
957,638

Seafood
 
620,321

 
183,272

 
23,774

 

 
827,367

Beverage products
 
275,130

 
51,059

 
145,074

 
23,011

 
494,274

Other (1)
 
272,493

 
122,054

 
24,536

 
219,155

 
638,238

Total Revenue
 
$
9,848,942

 
$
2,903,255

 
$
1,640,671

 
$
257,556

 
$
14,650,424


(1) 
Other revenue relates to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription revenues for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.


8



5.  ACQUISITIONS

There were no new acquisitions in fiscal 2019. 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 September 29, 2018, aggregate contingent consideration outstanding was $14.6 million, of which $9.8 million was recorded as earnout liabilities.

6.  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, Canadian 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 7, “Derivative Financial Instruments.”


9



The following tables present the company’s assets measured at fair value on a recurring basis as of September 29, 2018June 30, 2018 and September 30, 2017:
 
Assets and Liabilities Measured at Fair Value as of Sep. 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
366,173

 
$
200

 
$

 
$
366,373

Other assets (1)
163,067

 

 

 
163,067

Total assets at fair value
$
529,240

 
$
200

 
$

 
$
529,440


(1) 
Represents restricted cash balance recorded within other assets in the consolidated balance sheet.
 
Assets and Liabilities Measured at Fair Value as of Jun. 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
169,214

 
$
30,190

 
$

 
$
199,404

Other assets (1)
163,519

 

 

 
163,519

Total assets at fair value
$
332,733

 
$
30,190

 
$

 
$
362,923


(1) 
Represents restricted cash balance recorded within other assets in the consolidated balance sheet.

 
Assets and Liabilities Measured at Fair Value as of Sep. 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Cash and cash equivalents
$
287,203

 
$
43,191

 
$

 
$
330,394

Total assets at fair value
$
287,203

 
$
43,191

 
$

 
$
330,394


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 $8.8 billion, $8.4 billion and $9.4 billion as of September 29, 2018, June 30, 2018 and September 30, 2017, respectively. The carrying value of total debt was $8.7 billion, $8.3 billion and $9.0 billion as of September 29, 2018June 30, 2018 and September 30, 2017, respectively.

7.  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.


10



Hedging of foreign currency risk

Sysco enters into cross-currency swap contracts to hedge the foreign currency transaction risk of certain intercompany loans. There are no credit-risk related contingent features associated with these swaps, which have been designated as cash flow hedges. The company also uses cross-currency swap contracts and euro-bond denominated debt to hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in Europe 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.

Hedging of fuel price risk

Sysco uses 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 the Company’s hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of September 29, 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)
 
 
 
 
Various (November 2018 to January 2019)
 
Swedish Krona
 
203
Various (October 2018 to June 2019)
 
U.S. Dollar
 
2
Various (November 2018 to October 2019)
 
British Pound Sterling
 
24
June 2021
 
U.S. Dollar
 
44
June 2021
 
Canadian Dollar
 
330
July 2021
 
British Pound Sterling
 
234
August 2021
 
British Pound Sterling
 
466
June 2023
 
Euro
 
500
 
 
 
 
 
Hedging of fuel risk
 
 
 
 
Various (September 30, 2018 to August 2019)
 
Gallons
 
49

(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.

11




The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 29, 2018 and June 30, 2018 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Sep. 29, 2018
 
Jun. 30, 2018
 
 
 
(In thousands)
Fair Value Hedges:
 
 
 
 
 
Interest rate swaps
Other current liabilities
 
$
6,797

 
$
6,820

Interest rate swaps
Other long-term liabilities
 
57,263

 
49,734

 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
Fuel Swaps
Other current assets
 
$
16,578

 
$
15,316

Foreign currency forwards
Other current assets
 
198

 
693

Cross currency swaps
Other current assets
 

 
4,284

Cross currency swaps
Other assets
 

 
3,454

Foreign currency forwards
Other current liabilities
 
589

 
71

Cross currency swaps
Other long-term liabilities
 
10,658

 
14,201

 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
13,268

 
$
10,709

Foreign currency swaps
Other long-term liabilities
 
36,230

 
39,690



12



Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are immaterial for each of the periods presented. The location and amount of gains or losses recognized in the consolidated results of operations for fair value hedging relationships for each of the periods, presented on a pretax basis, are as follows:
 
 
13-Week Period Ended Sep. 29, 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
 
$
12,311,494

 
$
2,275,645

 
$
89,016

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

 
$

 
$
(8,588
)
Derivatives designated as hedging instruments
 

 

 
(10,859
)

(1) 
The hedged total includes interest expense of $15.1 million and change in fair value of debt of $6.5 million.

 
 
13-Week Period Ended Sep. 30, 2017
 
 
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
 
$
11,856,756

 
$
2,174,303

 
$
80,884

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

 
$

 
$
(15,230
)
Derivatives designated as hedging instruments
 

 

 
(1,047
)

(1) 
The hedged total includes interest expense of $17.1 million and change in fair value of debt of $1.8 million.

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 September 29, 2018, presented on a pretax basis, are as follows:
 
13-Week Period Ended Sep. 29, 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
$
1,026

 
Operating expense
 
$
4,353

Foreign currency contracts
(4,803
)
 
Cost of goods sold
 
483

Total
$
(3,777
)
 
 
 
$
4,836

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
7,228

 
N/A
 
$

Foreign denominated debt
3,950

 
N/A
 

Total
$
11,178

 
 
 
$



13



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 September 30, 2017, presented on a pretax basis, are as follows:
 
13-Week Period Ended Sep. 30, 2017
 
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
$
11,201

 
Operating expense
 
$
(156
)
Foreign currency contracts
(21,793
)
 
Cost of goods sold
 
309

Total
$
(10,592
)
 
 
 
$
153

 
 
 
 
 
 
Derivatives in net investment hedging relationships:
 
 
 
 
 
Foreign currency contracts
$
(15,894
)
 
N/A
 
$

Foreign denominated debt
(19,150
)
 
N/A
 

Total
$
(35,044
)
 
 
 
$


The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 29, 2018 are as follows:
 
Sep. 29, 2018
 
Sep. 29, 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:
 
 
 
Current maturities of long-term debt
$
(499,739
)
 
$
3,609

Long-term debt
(1,744,043
)
 
55,569


The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 30, 2017, are as follows:
 
Sep. 30, 2017
 
Sep. 30, 2017
 
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:
 
 
 
Current maturities of long-term debt
$
(499,874
)
 
$
(223
)
Long-term debt
(1,746,904
)
 
22,259


8. 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 September 29, 2018, there were no 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 13 weeks of fiscal 2019, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from zero to approximately $669.0 million.

14




Senior notes offering

On September 25, 2018, Sysco issued senior notes totaling CDN $500.0 million (USD $384.6 million). The senior notes were issued in Canada with a coupon rate of 3.65% and pricing, as a percentage of par, of 99.962%. Net proceeds from the offering were used to repay internal debt that was created in fiscal 2018 when the company repatriated earnings from its Canadian operations back to Sysco Corporation, and to repay outstanding borrowings under Sysco’s commercial paper program, along with other general corporate purposes. Interest on the senior notes will be paid semi-annually on April 25 and October 25, beginning April 25, 2019. At Sysco’s option, any or all of the senior notes may be redeemed, in whole or in part, at any time prior to maturity. If Sysco elects to redeem the senior notes before the date that is two months prior to the maturity date, Sysco will pay an amount equal to the greater of (1) 100% of the principal amount of the senior notes to be redeemed; or (2) the applicable yield price, plus in either case, any accrued and unpaid interest on the senior notes to be redeemed to the date of redemption. If Sysco elects to redeem a series of senior 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 senior notes to be redeemed plus accrued and unpaid interest on the senior notes redeemed to the redemption date.

9.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
Sep. 29, 2018
 
Sep. 30, 2017
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
Net earnings
$
431,042

 
$
367,640

Denominator:
 
 
 
Weighted-average basic shares outstanding
520,856,599

 
527,289,675

Dilutive effect of share-based awards
8,177,871

 
5,773,751

Weighted-average diluted shares outstanding
529,034,470

 
533,063,426

Basic earnings per share
$
0.83

 
$
0.70

Diluted earnings per share
$
0.81

 
$
0.69

 
 
 
 
Dividends declared per common share
$
0.36

 
$
0.33


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 1,067,000 and 6,438,000 for the first quarter of fiscal 2019 and fiscal 2018, respectively.

10.  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 $389.5 million and $487.8 million for the first quarter of fiscal 2019 and fiscal 2018, respectively.


15



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 Sep. 29, 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:
 
 
 

 
 

 
 

Other comprehensive income before
reclassification adjustments:
 
 
 
 
 
 
 
Net actuarial loss
 
 
$
(36,891
)
 
$
(4,380
)
 
$
(32,511
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of prior service cost
Other expense, net
 
2,133

 
533

 
1,600

Amortization of actuarial loss (gain), net
Other expense, net
 
8,706

 
2,177

 
6,529

Total reclassification adjustments
 
 
10,839

 
2,710

 
8,129

Foreign currency translation:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
(24,927
)
 

 
(24,927
)
Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (1)
 
(3,777
)
 
(769
)
 
(3,008
)
Change in net investment hedges
N/A
 
11,178

 
2,590

 
8,588

Total other comprehensive income (loss) before reclassification adjustments
 
 
7,401

 
1,821

 
5,580

Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
718

 
2,155

Total other comprehensive income (loss)
 
 
$
(40,705
)
 
$
869

 
$
(41,574
)

(1) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.

16



 
 
 
13-Week Period Ended Sep. 30, 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
Other expense, net
 
$
2,409

 
$
925

 
$
1,484

Amortization of actuarial loss (gain), net
Other expense, net
 
8,761

 
3,364

 
5,397

Total reclassification adjustments
 
 
11,170

 
4,289

 
6,881

Foreign currency translation:
 
 
 
 
 
 
 
Foreign currency translation adjustment
N/A
 
121,329

 

 
121,329

Hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
Operating expenses (1)
 
3,406

 
1,203

 
2,203

Change in net investment hedges
N/A
 
(23,376
)
 
(11,352
)
 
(12,024
)
Total other comprehensive income (loss) before reclassification adjustments
 
 
(19,970
)
 
(10,149
)
 
(9,821
)
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
1,103

 
1,770

Total other comprehensive income (loss)
 
 
$
115,402

 
$
(4,757
)
 
$
120,159


(1) 
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.

The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
13-Week Period Ended Sep. 29, 2018
 
Pension and Other Postretirement Benefit Plans,
net of tax
 
Foreign Currency Translation
 
Hedging,
net of tax
 
Total
 
(In thousands)
Balance as of Jun. 30, 2018
$
(1,095,059
)
 
$
(171,043
)
 
$
(143,167
)
 
$
(1,409,269
)
Equity adjustment from foreign currency translation

 
(24,927
)
 

 
(24,927
)
Amortization of cash flow hedges

 

 
2,155

 
2,155

Change in net investment hedges

 

 
8,588

 
8,588

Change in cash flow hedge

 

 
(3,008
)
 
(3,008
)
Net actuarial loss
(32,511
)
 

 

 
(32,511
)
Amortization of unrecognized prior service cost
1,600

 

 

 
1,600

Amortization of unrecognized net actuarial losses
6,529

 

 

 
6,529

Balance as of Balance as of Sep. 29, 2018
$
(1,119,441
)
 
$
(195,970
)
 
$
(135,432
)
 
$
(1,450,843
)


17



 
13-Week Period Ended Sep. 30, 2017
 
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

 
121,329

 

 
121,329

Amortization of cash flow hedges

 

 
1,770

 
1,770

Change in cash flow hedges

 

 
2,203

 
2,203

Change in net investment hedges

 

 
(12,024
)
 
(12,024
)
Amortization of unrecognized prior service cost
1,484

 

 

 
1,484

Amortization of unrecognized net actuarial losses
5,397

 

 

 
5,397

Balance as of Balance as of Sep. 30, 2017
$
(967,351
)
 
$
(26,727
)
 
$
(148,500
)
 
$
(1,142,578
)

11.  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 quarter of fiscal 2019, options to purchase 2,550,939 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first quarter of fiscal 2019 was $11.71.

In the first quarter of fiscal 2019, 558,639 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per performance share unit granted during the first quarter of fiscal 2019 was $75.08. 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.

Employee Stock Purchase Plan

Plan participants purchased 227,012 shares of common stock under the Sysco ESPP during the first quarter of fiscal 2019.

The weighted average fair value per right of employee stock purchase rights issued pursuant to the ESPP was $10.24 during the first quarter of fiscal 2019. 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 $29.2 million and $28.0 million for the first quarter of fiscal 2019 and fiscal 2018, respectively.

As of September 29, 2018, there was $159.1 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 2.06 years.

12.  INCOME TAXES

Effective Tax Rate

The effective tax rates for the first quarters of fiscal 2019 and 2018 were 19.88% and 32.72%, respectively. The lower effective tax rate for the first quarter of fiscal 2019 is primarily due to lower tax rates enacted from the Tax Cuts and Job Act (Tax Act), the favorable impact of excess tax benefits of equity-based compensation that totaled $14.3 million and the release of certain

18



tax contingencies due to the lapse of statutes of limitations. In the first quarter of fiscal 2018, lower U.S. tax rates from the Tax Act were not yet applicable. The effective tax rate for the first quarter of fiscal 2018 reflects the favorable impact of the excess tax benefits of equity-based compensation that totaled $16.0 million.

In accordance with SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Job Act, the company recognized the provisional impacts related to re-measurement of deferred tax assets and liabilities and the one-time transition tax in its results for the annual period ended June 30, 2018. As of the first quarter of fiscal 2019, the company has not completed its accounting for all aspects of the Tax Act. The company will continue to gather data and evaluate the impact of the Tax Act after the company has considered additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, state tax authorities and other standard-setting bodies. The company is in the process of completing accounting for the income tax effects of the Tax Act, and will finalize its accounting for the Tax Act in the second quarter of fiscal 2019.

Uncertain Tax Positions

As of September 29, 2018, the gross amount of unrecognized tax benefit and related accrued interest was $6.6 million and $4.3 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. 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.

13.  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. Although the final results of legal proceedings cannot be predicted with certainty, 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.

14.  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 consist of operations in the United Kingdom (U.K.), 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. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared services center. These also include all share-based compensation costs.

19




The following tables set forth certain financial information for Sysco’s reportable business segments. Sysco reclassified prior year amounts to conform to the current year presentation of net periodic pension and postretirement benefit costs in accordance with ASU 2017-07.

 
13-Week Period Ended
 
Sep. 29, 2018
 
Sep. 30, 2017
Sales:
(In thousands)
U.S. Foodservice Operations
$
10,399,411

 
$
9,848,942

International Foodservice Operations
2,920,950

 
2,903,255

SYGMA
1,621,457

 
1,640,671

Other
273,461

 
257,556

Total
$
15,215,279

 
$
14,650,424

 
 
 
 
 
13-Week Period Ended
 
Sep. 29, 2018
 
Sep. 30, 2017
Operating income:
(In thousands)
U.S. Foodservice Operations
$
815,758

 
$
782,076

International Foodservice Operations
66,772

 
76,804

SYGMA
2,431

 
4,845

Other
10,335

 
6,932

Total segments
895,296

 
870,657

Corporate
(267,156
)
 
(251,292
)
Total operating income
628,140

 
619,365

Interest expense
89,016

 
80,884

Other expense (income), net
1,132

 
(7,975
)
Earnings before income taxes
$
537,992

 
$
546,456


15.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES

On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation at that time 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 September 29, 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.

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.

20



 
Condensed Consolidated Balance Sheet
 
Sep. 29, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
370,826

 
$
4,299,713

 
$
3,971,717

 
$

 
$
8,642,256

Intercompany receivables
6,861,262

 
83,000

 
6,301,987

 
(13,246,249
)
 

Investment in subsidiaries
5,472,246

 

 
1,082,550

 
(6,554,796
)
 

Plant and equipment, net
278,439

 
2,150,263

 
2,038,201

 

 
4,466,903

Other assets
747,638

 
669,256

 
4,536,366

 
(520,337
)
 
5,432,923

Total assets
$
13,730,411

 
$
7,202,232

 
$
17,930,821

 
$
(20,321,382
)
 
$
18,542,082

Current liabilities
$
1,263,290

 
$
904,086

 
$
4,473,576

 
$

 
$
6,640,952

Intercompany payables
1,757,839

 
3,264,045

 
8,224,365

 
(13,246,249
)
 

Long-term debt
7,460,238

 
10,765

 
443,341

 

 
7,914,344

Other liabilities
610,469

 
550,171

 
671,022

 
(520,337
)
 
1,311,325

Noncontrolling interest

 

 
36,887

 

 
36,887

Shareholders’ equity
2,638,575

 
2,473,165

 
4,081,630

 
(6,554,796
)
 
2,638,574

Total liabilities and shareholders’ equity
$
13,730,411

 
$
7,202,232

 
$
17,930,821

 
$
(20,321,382
)
 
$
18,542,082


 
Condensed Consolidated Balance Sheet
 
Jun. 30, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
157,994

 
$
4,018,444

 
$
3,827,015

 
$

 
$
8,003,453

Intercompany receivables
6,621,438

 
270,748

 
5,793,352

 
(12,685,538
)
 

Investment in subsidiaries
4,896,004

 

 
983,625

 
(5,879,629
)
 

Plant and equipment, net
278,855

 
2,181,576

 
2,061,229

 

 
4,521,660

Other assets
788,473

 
611,004

 
4,593,537

 
(447,723
)
 
5,545,291

Total assets
$
12,742,764

 
$
7,081,772

 
$
17,258,758

 
$
(19,012,890
)
 
$
18,070,404

Current liabilities
$
1,233,541

 
$
886,305

 
$
4,468,900

 
$

 
$
6,588,746

Intercompany payables
882,487

 
3,798,134

 
8,004,917

 
(12,685,538
)
 

Long-term debt
7,470,334

 
8,285

 
62,146

 

 
7,540,765

Other liabilities
649,445

 
508,387

 
686,178

 
(447,723
)
 
1,396,287

Noncontrolling interest

 

 
37,649

 

 
37,649

Shareholders’ equity
2,506,957

 
1,880,661

 
3,998,968

 
(5,879,629
)
 
2,506,957

Total liabilities and shareholders’ equity
$
12,742,764

 
$
7,081,772

 
$
17,258,758

 
$
(19,012,890
)
 
$
18,070,404



21



 
Condensed Consolidated Balance Sheet
 
Sep. 30, 2017
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
200,583

 
$
4,228,854

 
$
4,167,565

 
$

 
$
8,597,002

Intercompany receivables
4,275,051

 
966,873

 

 
(5,241,924
)
 

Investment in subsidiaries
7,138,247

 

 

 
(7,138,247
)
 

Plant and equipment, net
261,906

 
2,032,227

 
2,094,166

 

 
4,388,299

Other assets
151,031

 
514,392

 
4,767,866

 

 
5,433,289

Total assets
$
12,026,818

 
$
7,742,346

 
$
11,029,597

 
$
(12,380,171
)
 
$
18,418,590

Current liabilities
$
360,586

 
$
4,859,882

 
$
919,814

 
$

 
$
6,140,282

Intercompany payables

 

 
5,241,924

 
(5,241,924
)
 

Long-term debt
8,352,110

 
7,191

 
67,058

 

 
8,426,359

Other liabilities
1,078,868

 
20,268

 
434,451

 

 
1,533,587

Noncontrolling interest

 

 
83,108

 

 
83,108

Shareholders’ equity
2,235,254

 
2,855,005

 
4,283,242

 
(7,138,247
)
 
2,235,254

Total liabilities and shareholders’ equity
$
12,026,818

 
$
7,742,346

 
$
11,029,597

 
$
(12,380,171
)
 
$
18,418,590


 
Condensed Consolidated Statement of Comprehensive Income
 
For the 13-Week Period Ended Sep. 29, 2018
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
9,479,806

 
$
6,234,158

 
$
(498,685
)
 
$
15,215,279

Cost of sales

 
7,660,101

 
5,150,078

 
(498,685
)
 
12,311,494

Gross profit

 
1,819,705

 
1,084,080

 

 
2,903,785

Operating expenses
220,281

 
1,052,350

 
1,003,014

 

 
2,275,645

Operating income (loss)
(220,281
)
 
767,355

 
81,066

 

 
628,140

Interest expense (income) (1)
41,413

 
(21,538
)
 
69,141

 

 
89,016

Other expense (income), net
6,600

 
(54
)
 
(5,414
)
 

 
1,132

Earnings (losses) before income taxes
(268,294
)
 
788,947

 
17,339

 

 
537,992

Income tax (benefit) provision
(93,587
)
 
196,445

 
4,092

 

 
106,950

Equity in earnings of subsidiaries
605,750

 

 
94,341

 
(700,091
)
 

Net earnings
431,043

 
592,502

 
107,588

 
(700,091
)
 
431,042

Other comprehensive income (loss)
(41,574
)
 

 
(24,927
)
 
24,927

 
(41,574
)
Comprehensive income
$
389,469

 
$
592,502

 
$
82,661

 
$
(675,164
)
 
$
389,468

 

(1) 
Interest expense (income) includes $21.5 million of intercompany interest income, net, for certain of the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation for the first quarter ended September 29, 2018. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.


22



 
Condensed Consolidated Statement of Comprehensive Income
 
For the 13-Week Period Ended Sep. 30, 2017
 
Sysco
 
Certain U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
9,021,657

 
$
6,120,313

 
$
(491,546
)
 
$
14,650,424

Cost of sales

 
7,275,423

 
5,072,879

 
(491,546
)
 
11,856,756

Gross profit