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SYSCO CORP - Quarter Report: 2017 September (Form 10-Q)




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 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
 syy-logoa07.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 ☑

521,056,320 shares of common stock were outstanding as of October 13, 2017.





TABLE OF CONTENTS

 
 
 
 
PART I – FINANCIAL INFORMATION
Page No.
 
PART II – OTHER INFORMATION
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 
Sep. 30, 2017
 
Jul. 1, 2017
 
Oct. 1, 2016
 
(unaudited)
 
 

 
(unaudited)
ASSETS
Current assets
 

 
 

 
 

Cash and cash equivalents
$
909,203

 
$
869,502

 
$
759,898

Accounts and notes receivable, less allowances of
$41,184, $31,059, and $41,246
4,333,704

 
4,012,393

 
4,191,460

Inventories, net
3,180,631

 
2,995,598

 
3,025,811

Prepaid expenses and other current assets
173,464

 
139,185

 
158,301

Income tax receivable

 
16,760

 

Total current assets
8,597,002

 
8,033,438

 
8,135,470

Plant and equipment at cost, less depreciation
4,388,299

 
4,377,302

 
4,418,524

Long-term assets
 
 
 
 
 
Goodwill
3,970,617

 
3,916,128

 
3,815,674

Intangibles, less amortization
1,052,704

 
1,037,511

 
1,203,888

Deferred income taxes
149,932

 
142,472

 
198,867

Other assets
260,036

 
249,804

 
252,387

Total long-term assets
5,433,289

 
5,345,915

 
5,470,816

Total assets
$
18,418,590

 
$
17,756,655

 
$
18,024,810

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
 

 
 

 
 

Notes payable
$
4,513

 
$
3,938

 
$
6,834

Accounts payable
3,951,205

 
3,971,112

 
3,716,517

Accrued expenses
1,502,021

 
1,576,221

 
1,381,300

Accrued income taxes
148,902

 
14,540

 
252,681

Current maturities of long-term debt
533,641

 
530,075

 
9,218

Total current liabilities
6,140,282

 
6,095,886

 
5,366,550

Long-term liabilities
 

 
 

 
 

Long-term debt
8,426,359

 
7,660,877

 
7,843,517

Deferred income taxes
165,622

 
161,715

 
218,414

Other long-term liabilities
1,367,965

 
1,373,822

 
1,498,680

Total long-term liabilities
9,959,946

 
9,196,414

 
9,560,611

Commitments and contingencies


 


 


Noncontrolling interests
83,108

 
82,839

 
76,863

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
1,348,349

 
1,327,366

 
1,313,245

Retained earnings
9,638,386

 
9,447,755

 
9,159,866

Accumulated other comprehensive loss
(1,142,578
)
 
(1,262,737
)
 
(1,434,940
)
Treasury stock at cost, 243,513,095,
    235,135,699 and 216,182,601 shares
(8,374,078
)
 
(7,896,043
)
 
(6,782,560
)
Total shareholders’ equity
2,235,254

 
2,381,516

 
3,020,786

Total liabilities and shareholders’ equity
$
18,418,590

 
$
17,756,655

 
$
18,024,810


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
 
Sep. 30, 2017
 
Oct. 1, 2016
Sales
$
14,650,424

 
$
13,968,654

Cost of sales
11,856,756

 
11,276,735

Gross profit
2,793,668

 
2,691,919

Operating expenses
2,170,576

 
2,125,086

Operating income
623,092

 
566,833

Interest expense
80,884

 
73,623

Other expense (income), net
(4,248
)
 
(7,216
)
Earnings before income taxes
546,456

 
500,426

Income taxes
178,816

 
176,539

Net earnings
$
367,640

 
$
323,887

  
 
 
 
Net earnings:
 

 
 

Basic earnings per share
$
0.70

 
$
0.58

Diluted earnings per share
0.69

 
0.58

 
 
 
 
Average shares outstanding
527,289,675

 
555,437,764

Diluted shares outstanding
533,063,426

 
560,954,068

Dividends declared per common share
$
0.33

 
$
0.31


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. 30, 2017
 
Oct. 1, 2016
Net earnings
$
367,640

 
$
323,887

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustment
121,329

 
(89,553
)
Items presented net of tax:
 

 
 

Amortization of cash flow hedges
1,770

 
1,770

Change in net investment hedges
(12,024
)
 

Change in cash flow hedges
2,203

 
(319
)
Amortization of prior service cost
1,484

 
1,752

Amortization of actuarial loss, net
5,397

 
8,790

Prior service cost arising in current year

 
738

Total other comprehensive income (loss)
120,159

 
(76,822
)
Comprehensive income
$
487,799

 
$
247,065


See Notes to Consolidated Financial Statements

3



Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 
13-Week Period Ended
 
Sep. 30, 2017
 
Oct. 1, 2016
Cash flows from operating activities:
 

 
 

Net earnings
$
367,640

 
$
323,887

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

 
 

Share-based compensation expense
27,955

 
25,127

Depreciation and amortization
179,662

 
211,685

Amortization of debt issuance and other debt-related costs
7,192

 
6,560

Deferred income taxes
(3,706
)
 
11,374

Provision for losses on receivables
8,999

 
3,494

Other non-cash items
6,849

 
(6,829
)
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
 

 
 

(Increase) in receivables
(294,989
)
 
(140,031
)
(Increase) in inventories
(166,992
)
 
(149,759
)
(Increase) in prepaid expenses and other current assets
(28,312
)
 
(12,657
)
(Decrease) increase in accounts payable
(57,368
)
 
110,914

(Decrease) in accrued expenses
(83,883
)
 
(259,698
)
Increase in accrued income taxes
165,944

 
145,601

(Increase) in other assets
(13,616
)
 
(17,066
)
(Decrease) increase in other long-term liabilities
(32,600
)
 
1,340

Net cash provided by operating activities
82,775

 
253,942

Cash flows from investing activities:
 

 
 

Additions to plant and equipment
(136,261
)
 
(142,255
)
Proceeds from sales of plant and equipment
1,722

 
4,261

Acquisition of businesses, net of cash acquired

 
(2,910,461
)
Net cash used for investing activities
(134,539
)
 
(3,048,455
)
Cash flows from financing activities:
 

 
 

Bank and commercial paper borrowings (repayments), net
745,100

 
442,777

Other debt borrowings
1,512

 
1,201

Other debt repayments
(5,186
)
 
(94,935
)
Debt issuance costs
(644
)
 
(2,846
)
Proceeds from stock option exercises
57,075

 
32,307

Treasury stock purchases
(550,098
)
 
(600,139
)
Dividends paid
(174,864
)
 
(173,292
)
Net cash provided by (used for) financing activities
72,895

 
(394,927
)
Effect of exchange rates on cash and cash equivalents
18,570

 
30,038

Net increase (decrease) in cash and cash equivalents
39,701

 
(3,159,402
)
Cash and cash equivalents at beginning of period
869,502

 
3,919,300

Cash and cash equivalents at end of period
$
909,203

 
$
759,898

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
72,057

 
$
118,426

Income taxes
28,714

 
24,406


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 the company’s fiscal 2017 Annual Report on Form 10-K.  The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows.  In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company’s fiscal 2017 Annual Report on Form 10-K.  Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

Reclassifications

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

2. CHANGES IN ACCOUNTING

Stock Compensation

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 first quarter of fiscal 2018, the company recognized excess tax benefits of $16.0 million from stock option exercises that occurred during the quarter.

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. Retrospective application is required for this provision; however, amounts were not material for either period and, therefore, were not separately disclosed or retroactively applied.

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 the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The company elected to early adopt this ASU, as it is easier to execute.


5



3.  NEW ACCOUNTING STANDARDS

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued 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. The guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, which is the first quarter of fiscal 2020 for Sysco, with early adoption permitted. The company is currently reviewing the provisions of the new standard.

Leases

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

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, and could be early adopted in fiscal 2018. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.

The company’s impact assessment of the standard is ongoing, and the company does not intend to early adopt this standard in fiscal 2018. Enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition, are required. We will continue our assessment, which may identify other impacts of the adoption of Topic 606. The company will adopt the standard in the first quarter of fiscal 2019 and preliminarily expects to use the modified retrospective method. However, our adoption method is subject to change as we continue to evaluate the impact of the standard.

4.  ACQUISITIONS

During the first 13 weeks of fiscal 2018, the company had no acquisitions. Certain prior year acquisitions involved contingent consideration that included earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved.  As of September 30, 2017, aggregate contingent consideration outstanding was $11.3 million, of which $2.1 million was recorded as earnout liabilities.

Brakes Group

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


6



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 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 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:

Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value.  These are included within cash equivalents as a Level 2 measurement in the tables below.
Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange.  These are included within cash equivalents as Level 1 measurements in the tables below.
The interest rate swap agreements are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates.  These are included as Level 2 measurements in the tables below.
The foreign currency swap agreements, including cross-currency swaps, are valued using a swap valuation model that utilizes an income approach applying observable market inputs including interest rates, LIBOR swap rates for U.S. dollars, pound sterling and Euro currencies, and credit default swap rates.  These are included as Level 2 measurements in the tables below.
Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. These are included as Level 2 measurements in the tables below.
Fuel swap contracts are valued based on observable market transactions of forward commodity prices. These are included as Level 2 measurements in the tables below.


7



The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017July 1, 2017 and October 1, 2016:
 
Assets and Liabilities Measured at Fair Value as of Sep. 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
287,203

 
$
43,191

 
$

 
$
330,394

Other current assets:
 
 
 
 
 
 
 
Interest rate swaps

 
223

 

 
223

Foreign currency forwards

 
461

 

 
461

Fuel swaps

 
4,743

 

 
4,743

Other assets:
 

 
 

 
 

 
 

Foreign currency swaps

 
5,912

 

 
5,912

Total assets at fair value
$
287,203

 
$
54,530

 
$

 
$
341,733

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Foreign currency forwards
$

 
$
118

 
$

 
$
118

Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
22,653

 

 
22,653

Cross-currency swaps

 
15,115

 

 
15,115

Foreign currency swaps

 
34,114

 

 
34,114

Total liabilities at fair value
$

 
$
72,000

 
$

 
$
72,000



8



 
Assets and Liabilities Measured at Fair Value as of Jul. 1, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Cash equivalents
$
238,954

 
$
49,430

 
$

 
$
288,384

Other current assets:
 
 
 
 
 
 
 
Fuel swaps

 
717

 

 
717

Other assets:
 

 
 

 
 

 
 

Interest rate swaps

 
707

 

 
707

Total assets at fair value
$
238,954

 
$
50,854

 
$

 
$
289,808

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Other current liabilities:
 
 
 
 
 
 
 
Fuel swaps
$

 
$
6,320

 
$

 
$
6,320

Foreign currency forwards

 
154

 

 
154

Other long-term liabilities:
 
 
 
 
 
 
 
Interest rate swaps

 
21,390

 

 
21,390

Cross-currency swaps

 
5,816

 

 
5,816

Foreign currency swaps

 
12,308

 

 
12,308

Total liabilities at fair value
$

 
$
45,988

 
$

 
$
45,988

 

 
Assets and Liabilities Measured at Fair Value as of Oct. 1, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 

 
 

 
 

 
 

Cash equivalents
$
9,176

 
$
43,270

 
$

 
$
52,446

Other current assets:
 
 
 
 
 
 
 
Foreign currency forwards

 
873

 

 
873

Other assets
 

 
 

 
 

 
 

Interest rate swap agreement

 
18,935

 

 
18,935

Foreign currency swaps

 
3,979

 

 
3,979

Total assets at fair value
$
9,176

 
$
67,057

 
$

 
$
76,233

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Other current liabilities:
 
 
 
 
 
 
 
Fuel hedges
$

 
$
618

 
$

 
$
618

Other long-term liabilities
 
 
 
 
 
 
 
Cross-currency swaps

 
3,184

 

 
3,184

Foreign currency swaps

 
10,695

 

 
10,695

Total liabilities at fair value
$

 
$
14,497

 
$

 
$
14,497


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

9



Level 2 measurement.  The fair value of total debt was approximately $9.4 billion, $8.6 billion and $8.4 billion as of September 30, 2017, July 1, 2017 and October 1, 2016, respectively.  The carrying value of total debt was $9.0 billion, $8.2 billion and $7.8 billion as of September 30, 2017July 1, 2017 and October 1, 2016, 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. Details of outstanding hedging instruments as of September 30, 2017 are below:

Maturity Date of the Hedging Instrument
 
Currency / Unit of Measure
 
Notional Value
(in millions)
 
 
 
 
 
Hedging of interest rate risk
 
 
 
 
February 2018
 
U.S. Dollar
 
500

April 2019
 
U.S. Dollar
 
500

October 2020
 
U.S. Dollar
 
750

July 2021
 
U.S. Dollar
 
500

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

August 2021
 
Euro
 
534

June 2023
 
Euro
 
500

 
 
 
 
 
Hedging of fuel risk
 
 
 
 
Various (October 2017 to August 2018)
 
Gallons
 
49


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

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 30, 2017, July 1, 2017 and October 1, 2016 are as follows:
 
 
 
Derivative Fair Value
 
Balance Sheet location
 
Sep. 30, 2017
 
Jul. 1, 2017
 
Oct. 1, 2016
 
 
 
(In thousands)
 Fair Value Hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other current assets
 
$
223

 
$
707

 
$

Interest rate swaps
Other assets
 

 

 
18,935

Interest rate swaps
Other long-term liabilities
 
22,653

 
21,390

 

 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
Fuel swaps
Other current assets
 
$
4,743

 
$
717

 
$

Foreign currency forwards
Other current assets
 
461

 

 
873

Fuel swaps
Other current liabilities
 

 
6,320

 
618

Foreign currency forwards
Other current liabilities
 
118

 
154

 

Cross currency swaps
Other long-term liabilities
 
15,115

 
5,816

 
3,184

 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
Foreign currency swaps
Other assets
 
$
5,912

 
$

 
$
3,979

Foreign currency swaps
Other long-term liabilities
 
34,114

 
12,308

 
10,695


10




The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended September 30, 2017 and October 1, 2016, presented on a pretax basis, are as follows:
 
Location of (Gain)
or Loss Recognized
 
Amount of (Gain)
or Loss Recognized
 
 
 
13-Week Period Ended
 
 
 
Sep. 30, 2017
 
Oct. 1, 2016
 
 
 
(In thousands)
Fair Value Hedge Relationships:
 
 
 
 
 
Interest rate swaps
Interest expense
 
$
(600
)
 
$
(3,400
)
Cash Flow Hedge Relationships:
 
 
 
 
 
Forward starting interest rate swaps (1)
Interest expense
 
$
(2,873
)
 
$
(2,873
)
Fuel swaps
Other comprehensive income
 
(10,859
)
 

Foreign currency forwards
Other comprehensive income
 
(185
)
 

Cross currency swaps
Other comprehensive income
 
7,638

 

Net Investment Hedge Relationships:
 
 
 
 
 
Foreign currency swaps
Other comprehensive income
 
$
23,376

 
$


(1) 
Represents amortization of losses on forward starting interest rate swap agreements that were previously settled.

For fair value hedges of interest rate risk, hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fixed rate debt attributable to changes in the benchmark interest rate.  For cash flow hedges, hedge ineffectiveness is the difference between the change in the fair value of the derivative and the change in the hedged transaction. Hedge ineffectiveness is recorded directly in earnings within interest expense for interest rate swaps, other income and expense, net for hedging of the foreign exchange risk on intercompany loans, cost of sales for foreign exchange risk on inventory purchases and operating expense for fuel hedging. All amounts were immaterial for the first quarter of fiscal 2018 and 2017. None of the instruments contain credit-risk-related contingent features.

7.  DEBT

Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $2.0 billion. As of September 30, 2017, there was $864.8 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 13 weeks of 2018, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from $254.5 million to approximately $1.1 billion.

8.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 
13-Week Period Ended
 
Sep. 30, 2017
 
Oct. 1, 2016
 
(In thousands, except for share
and per share data)
Numerator:
 
 
 
Net earnings
$
367,640

 
$
323,887

Denominator:
 

 
 

Weighted-average basic shares outstanding
527,289,675

 
555,437,764

Dilutive effect of share-based awards
5,773,751

 
5,516,304

Weighted-average diluted shares outstanding
533,063,426

 
560,954,068

Basic earnings per share
$
0.70

 
$
0.58

Diluted earnings per share
$
0.69

 
$
0.58


11




The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 6,438,000 and 2,056,000 for the first quarter 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 $487.8 million and $247.1 million for the first quarter of fiscal 2018 and fiscal 2017, respectively.


12



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. 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
Operating expenses
 
$
2,409

 
$
925

 
$
1,484

Amortization of actuarial loss (gain), net
Operating expenses
 
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:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
1,103

 
1,770

Other comprehensive income before
reclassification adjustments:
 
 
 
 
 
 
 
Change in cash flow hedges
N/A
 
3,406

 
1,203

 
2,203

Change in net investment hedges
N/A
 
(23,376
)
 
(11,352
)
 
(12,024
)
Total other comprehensive income
 
 
$
115,402

 
$
(4,757
)
 
$
120,159


 
 
 
13-Week Period Ended Oct. 1, 2016
 
Location of
Expense (Income) Recognized in
Net Earnings
 
Before Tax
Amount
 
Tax
 
Net of Tax
Amount
 
 
 
(In thousands)
Pension and other postretirement benefit plans:
 
 
 

 
 

 
 

Reclassification adjustments:
 
 
 

 
 

 
 

Amortization of prior service cost
Operating expenses
 
$
2,844

 
$
1,092

 
$
1,752

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

 
3,931

 
8,790

Prior service cost arising in current year
Operating expenses
 
738

 

 
738

Total reclassification adjustments
 
 
16,303

 
5,023

 
11,280

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

 
(89,553
)
Interest rate swaps:
 
 
 
 
 
 
 
Reclassification adjustments:
 
 
 
 
 
 
 
Amortization of cash flow hedges
Interest expense
 
2,873

 
1,103

 
1,770

Change in cash flow hedges
N/A
 
(319
)
 

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

 
$
(76,822
)


13



The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 
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

Change in cash flow hedges

 

 
2,203

 
2,203

Amortization of cash flow hedges

 

 
1,770

 
1,770

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

 
13-Week Period Ended Oct. 1, 2016
 
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

 
(89,553
)
 

 
(89,553
)
Other comprehensive income before
   reclassification adjustments

 

 

 

Amortization of cash flow hedges

 

 
1,770

 
1,770

Change in cash flow hedges

 

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

 

 

 
738

Amortization of unrecognized prior service cost
1,752

 

 

 
1,752

Amortization of unrecognized net actuarial losses
8,790

 

 

 
8,790

Balance as of Oct. 1, 2016
$
(1,093,204
)
 
$
(226,366
)
 
$
(115,370
)
 
$
(1,434,940
)

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 quarter of fiscal 2018, options to purchase 4,018,653 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 2018 was $7.08.

In the first quarter of fiscal 2018, 857,527 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 2018 was $51.09.  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.


14



Employee Stock Purchase Plan

Plan participants purchased 280,673 shares of common stock under the Sysco ESPP during the first quarter of fiscal 2018.

The weighted average fair value per right of employee stock purchase rights issued pursuant to the ESPP was $7.55 during the first quarter 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 $28.0 million and $25.1 million for the first quarter of fiscal 2018 and fiscal 2017, respectively.

As of September 30, 2017, there was $145.5 million of total unrecognized compensation cost related to share-based compensation arrangements.  This cost is expected to be recognized over a weighted-average period of 2.23 years.

11.  INCOME TAXES

Effective Tax Rate

Sysco’s effective tax rate is reflective of the jurisdictions where the company has operations. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate have the impact of reducing the effective tax rates. The effective tax rates for the first quarters of fiscal 2018 and fiscal 2017 were 32.72% and 35.28%, respectively. The lower effective tax rate for the first quarter of fiscal 2018 is primarily due to the favorable impact of the excess tax benefits of equity-based compensation that totaled $16.0 million. Sysco began recognizing these amounts within income tax expense in the first quarter of fiscal 2018 due to the adoption of ASU 2016-09.

Uncertain Tax Positions

As of September 30, 2017, the gross amount of unrecognized tax benefit and related accrued interest was $16.2 million and $11.1 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.

15




13.  BUSINESS SEGMENT INFORMATION

The company has aggregated certain of its operating companies into three reportable segments. “Other” financial information is attributable to the company’s other operating segments that do not meet the quantitative disclosure thresholds.

U.S. Foodservice Operations - primarily includes U.S. Broadline operations, custom-cut meat and seafood companies, FreshPoint (our specialty produce companies) and European Imports (a specialty import company);
International Foodservice Operations - primarily includes broadline operations in Canada, Europe, Bahamas, Mexico, Costa Rica and Panama, as well as a company that distributes to international customers;
SYGMA - our customized distribution subsidiary; and
Other - primarily our hotel supply operations and Sysco Labs, which includes our suite of technology solutions that help support the business needs of our customers and provides support for some of our business technology needs.

Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served.  SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.

The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Management evaluates the performance of each of our operating segments based on its respective operating income results. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared services center.  These also include all share-based compensation costs.  While a segment’s operating income may be impacted in the short-term by increases or decreases in gross profits, expenses, or a combination thereof, over the long-term each business segment is expected to increase its operating income at a greater rate than sales growth.  This is consistent with our long-term goal of leveraging earnings growth at a greater rate than sales growth.


16



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

 
13-Week Period Ended
 
Sep. 30, 2017
 
Oct. 1, 2016
Sales:
(In thousands)
U.S. Foodservice Operations
$
9,848,942

 
$
9,481,115

International Foodservice Operations
2,903,255

 
2,728,360

SYGMA
1,640,671

 
1,504,692

Other
257,556

 
254,487

Total
$
14,650,424

 
$
13,968,654

 
 
 
 
 
13-Week Period Ended
 
Sep. 30, 2017
 
Oct. 1, 2016
Operating income:
(In thousands)
U.S. Foodservice Operations
$
780,869

 
$
745,231

International Foodservice Operations
76,646

 
79,435

SYGMA
4,845

 
4,908

Other
6,929

 
8,001

Total segments
869,289

 
837,575

Corporate
(246,197
)
 
(270,742
)
Total operating income
623,092

 
566,833

Interest expense
80,884

 
73,623

Other expense (income), net
(4,248
)
 
(7,216
)
Earnings before income taxes
$
546,456

 
$
500,426


 
Sep. 30, 2017
 
Jul. 1, 2017
 
Oct. 1, 2016
Assets:
(In thousands)
U.S. Foodservice Operations
$
7,153,312

 
$
6,675,543

 
$
6,988,148

International Foodservice Operations
6,607,325

 
6,433,815

 
6,410,354

SYGMA
626,589

 
625,653

 
583,106

Other
448,891

 
448,885

 
433,895

Total segments
14,836,117

 
14,183,896

 
14,415,503

Corporate
3,582,473

 
3,572,759

 
3,609,307

Total
$
18,418,590

 
$
17,756,655

 
$
18,024,810


14.  SUPPLEMENTAL GUARANTOR INFORMATION - SUBSIDIARY GUARANTEES

On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation.  Borrowings under the company’s revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs are also covered under these guarantees.  As of September 30, 2017, Sysco had a total of $9.0 billion in senior notes, debentures and commercial paper issuances outstanding that was covered by these guarantees.

All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional and all guarantees are joint and several, except that the guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances.  If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series.  Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable

17



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 but 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 have 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 (the company’s U.S. Broadline subsidiaries), and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.
 
Condensed Consolidating Balance Sheet
 
Sep. 30, 2017
 
Sysco
 
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



18



 
Condensed Consolidating Balance Sheet
 
July 1, 2017
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
177,495

 
$
3,786,055

 
$
4,069,888

 
$

 
$
8,033,438

Intercompany receivables
4,444,035

 

 

 
(4,444,035
)
 

Investment in subsidiaries
6,451,994

 

 

 
(6,451,994
)
 

Plant and equipment, net
258,527

 
2,039,761

 
2,079,014

 

 
4,377,302

Other assets
151,743

 
426,257

 
4,767,915

 

 
5,345,915

Total assets
$
11,483,794

 
$
6,252,073

 
$
10,916,817

 
$
(10,896,029
)
 
$
17,756,655

Current liabilities
$
650,899

 
$
3,521,661

 
$
1,923,326

 
$

 
$
6,095,886

Intercompany payables

 
276,933

 
4,167,102

 
(4,444,035
)
 

Long-term debt
7,588,041

 
7,776

 
65,060

 

 
7,660,877

Other liabilities
863,338

 
103,784

 
568,415

 

 
1,535,537

Noncontrolling interest

 

 
82,839

 

 
82,839

Shareholders’ equity
2,381,516

 
2,341,919

 
4,110,075

 
(6,451,994
)
 
2,381,516

Total liabilities and shareholders’ equity
$
11,483,794

 
$
6,252,073

 
$
10,916,817

 
$
(10,896,029
)
 
$
17,756,655


 
Condensed Consolidating Balance Sheet
 
Oct. 1, 2016
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Current assets
$
226,681

 
$
4,130,493

 
$
3,778,296

 
$

 
$
8,135,470

Intercompany receivables
3,408,107

 

 
 
 
(3,408,107
)
 
 
Investment in subsidiaries
7,865,699

 

 

 
(7,865,699
)
 

Plant and equipment, net
394,254

 
2,032,194

 
1,992,076

 

 
4,418,524

Other assets
199,918

 
1,111,301

 
4,159,597

 

 
5,470,816

Total assets
$
12,094,659

 
$
7,273,988

 
$
9,929,969

 
$
(11,273,806
)
 
$
18,024,810

Current liabilities
$
433,751

 
$
1,708,547

 
$
3,224,252

 
$

 
$
5,366,550

Intercompany payables

 
1,617,949

 
1,790,158

 
(3,408,107
)
 

Long-term debt
7,607,826

 
61,663

 
174,028

 

 
7,843,517

Other liabilities
1,032,296

 
156,272

 
528,526

 

 
1,717,094

Noncontrolling interest

 

 
76,863

 

 
76,863

Shareholders’ equity
3,020,786

 
3,729,557

 
4,136,142

 
(7,865,699
)
 
3,020,786

Total liabilities and shareholders’ equity
$
12,094,659

 
$
7,273,988

 
$
9,929,969

 
$
(11,273,806
)
 
$
18,024,810



19



 
Condensed Consolidating Statement of Comprehensive Income
 
For the 13-Week Period Ended Sep. 30, 2017
 
Sysco
 
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

 
1,746,234

 
1,047,434

 

 
2,793,668

Operating expenses
197,864

 
1,007,359

 
965,353

 

 
2,170,576

Operating income (loss)
(197,864
)
 
738,875

 
82,081

 

 
623,092

Interest expense (income) (1)
98,996

 
(23,351
)
 
5,239

 

 
80,884

Other expense (income), net
(3,615
)
 
(422
)
 
(211
)
 

 
(4,248
)
Earnings (losses) before income taxes
(293,245
)
 
762,648

 
77,053

 

 
546,456

Income tax (benefit) provision
(95,958
)
 
249,561

 
25,213

 

 
178,816

Equity in earnings of subsidiaries
564,927

 

 

 
(564,927
)
 

Net earnings
367,640

 
513,087

 
51,840

 
(564,927
)
 
367,640

Other comprehensive income (loss)
120,159

 

 
121,329

 
(121,329
)
 
120,159

Comprehensive income
$
487,799

 
$
513,087

 
$
173,169

 
$
(686,256
)
 
$
487,799

 

(1) Interest expense (income) includes $27.8 million of intercompany interest income, net, for the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.

 
Condensed Consolidating Statement of Comprehensive Income
 
For the 52-Week Period Ended Jul. 1, 2017
 
Sysco
 
U.S.
Broadline
Subsidiaries
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Totals
 
(In thousands)
Sales
$

 
$
34,325,884

 
$
22,862,131

 
$
(1,816,876
)
 
$
55,371,139

Cost of sales

 
27,690,469

 
18,940,039

 
(1,816,876
)
 
44,813,632

Gross profit

 
6,635,415

 
3,922,092

 

 
10,557,507

Operating expenses
931,498

 
3,907,829

 
3,665,009

 

 
8,504,336

Operating income (loss)
(931,498
)
 
2,727,586

 
257,083

 

 
2,053,171

Interest expense (income) (1)
405,030

 
(122,012
)
 
19,860

 

 
302,878

Other expense (income), net
(23,740
)
 
(1,116
)
 
8,919

 

 
(15,937
)
Earnings (losses) before income taxes
(1,312,788
)
 
2,850,714

 
228,304

 

 
1,766,230

Income tax (benefit) provision
(463,598
)
 
1,006,703

 
80,622

 

 
623,727

Equity in earnings of subsidiaries
1,991,693

 

 

 
(1,991,693
)
 

Net earnings
1,142,503

 
1,844,011

 
147,682

 
(1,991,693
)
 
1,142,503

Other comprehensive income (loss)
95,381

 

 
(9,317
)
 
9,317

 
95,381

Comprehensive income
$
1,237,884

 
$
1,844,011

 
$
138,365

 
$
(1,982,376
)
 
$
1,237,884


(1) Interest expense (income) includes $135.9 million of intercompany interest income, net, for the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.


20



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

 
$
8,706,151

 
$
5,707,420

 
$
(444,917
)
 
$
13,968,654

Cost of sales

 
7,012,713

 
4,708,939

 
(444,917
)
 
11,276,735

Gross profit

 
1,693,438

 
998,481

 

 
2,691,919

Operating expenses
217,903

 
983,072

 
924,111

 

 
2,125,086

Operating income (loss)
(217,903
)
 
710,366

 
74,370

 

 
566,833

Interest expense (income) (1)
90,158

 
(21,210
)
 
4,675

 

 
73,623

Other expense (income), net
(14,891
)
 
(241
)
 
7,916

 

 
(7,216
)
Earnings (losses) before income taxes
(293,170
)
 
731,817

 
61,779

 

 
500,426

Income tax (benefit) provision
(103,424
)
 
258,169

 
21,794

 

 
176,539

Equity in earnings of subsidiaries
513,633

 

 

 
(513,633
)
 

Net earnings
323,887

 
473,648

 
39,985

 
(513,633
)
 
323,887

Other comprehensive income (loss)
(76,822
)
 

 
(89,553
)
 
89,553

 
(76,822
)
Comprehensive income
$
247,065

 
$
473,648

 
$
(49,568
)
 
$
(424,080
)
 
$
247,065


(1) Interest expense (income) includes $24.8 million of intercompany interest income, net, for the U.S. Broadline subsidiaries, which is intercompany interest expense for Sysco Corporation. There is an immaterial amount of intercompany interest expense related to Sysco Corporation for the Other Non-Guarantor Subsidiaries.

 
Condensed Consolidating Cash Flows
 
For the 13-Week Period Ended Sep. 30, 2017
 
Sysco
 
U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
Operating activities
$
(49,085
)
 
$
76,658

 
$
55,202

 
$
82,775

Investing activities
(18,365
)
 
(53,281
)
 
(62,893
)
 
(134,539
)
Financing activities
76,568

 
(4,872
)
 
1,199

 
72,895

Effect of exchange rates on cash

 

 
18,570

 
18,570

Net increase (decrease) in cash and cash equivalents
9,118

 
18,505

 
12,078

 
39,701

Cash and cash equivalents at the beginning of period
111,576

 
18,788

 
739,138

 
869,502

Cash and cash equivalents at the end of period
$
120,694

 
$
37,293

 
$
751,216

 
$
909,203



21



 
Condensed Consolidating Cash Flows
 
For the 52-Week Period Ended Jul. 1, 2017
 
Sysco
 
U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Eliminations (1)
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
 
 
Operating activities
$
1,511,881

 
$
3,023,400

 
$
658,229

 
$
(2,978,000
)
 
$
2,215,510

Investing activities
(3,274,566
)
 
(261,330
)
 
(175,565
)
 
127,000

 
(3,584,461
)
Financing activities
(1,502,151
)
 
(2,777,661
)
 
(229,931
)
 
2,851,000

 
(1,658,743
)
Effect of exchange rates on cash

 

 
(22,104
)
 

 
(22,104
)
Net increase (decrease) in cash and cash equivalents
(3,264,836
)
 
(15,591
)
 
230,629

 

 
(3,049,798
)
Cash and cash equivalents at the beginning of period
3,376,412

 
34,379

 
508,509

 

 
3,919,300

Cash and cash equivalents at the end of period
$
111,576

 
$
18,788

 
$
739,138

 
$

 
$
869,502

(1) Represents primarily inter-company dividends paid from the subsidiaries to the parent, Sysco Corporation.

 
Condensed Consolidating Cash Flows
 
For the 13-Week Period Ended Oct. 1, 2016
 
Sysco
 
U.S.
 Broadline
Subsidiaries
 
Other
Non-Guarantor
Subsidiaries
 
Consolidated
Totals
 
(In thousands)
Cash flows provided by (used for):
 
 
 
 
 
 
 
Operating activities
$
151,435

 
$
55,491

 
$
47,016

 
$
253,942

Investing activities
(3,095,842
)
 
(48,677
)
 
96,064

 
(3,048,455
)
Financing activities
(301,193
)
 
(8,894
)
 
(84,840
)
 
(394,927
)
Effect of exchange rates on cash

 

 
30,038

 
30,038

Net increase (decrease) in cash and cash equivalents
(3,245,600
)
 
(2,080
)
 
88,278

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

 
34,379

 
508,509

 
3,919,300

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

 
$
32,299

 
$
596,787

 
$
759,898


22



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our consolidated financial statements as of July 1, 2017, and the fiscal year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year ended July 1, 2017 (our 2017 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.

Sysco’s results of operations for fiscal 2018 and 2017 are impacted by restructuring costs consisting of (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we incurred costs to convert to a modernized version of our established platform, (2) professional fees related to our three-year strategic plan, (3) restructuring expenses within our Brakes Group operations, and (4) severance charges related to restructuring. In addition, fiscal 2018 results of operations are impacted by business technology costs. Our results of operations for fiscal 2018 and 2017 are also impacted by the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. All acquisition-related costs in fiscal 2018 and 2017 that have been excluded relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition), discussed in Note 4, "Acquisitions." The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible integration costs. These fiscal 2018 and fiscal 2017 items are collectively referred to as "Certain Items."

More information on the rationale for the use of these items and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.”

Highlights and Trends

Highlights

Sysco’s results for the first quarter of fiscal 2018 reflect a continued execution of our customer-centric strategy in a cohesive and effective manner, as our U.S. Foodservice Operations delivered favorable first quarter results that more than offset weaker performance from our International Foodservice Operations. These results largely mitigated the unfavorable near-term financial impact of multiple devastating hurricanes in several of our key markets. These results were driven by continued local case growth and sound margin management. Our operating income, net earnings and earnings per share, both including and excluding Certain Items, increased for the first quarter of fiscal 2018, as compared to the corresponding period in fiscal 2017, primarily due to these factors.

Comparisons of results from the first quarter of fiscal 2018 to the first quarter of fiscal 2017:

Sales:
increased 4.9%, or $0.7 billion, to $14.7 billion;
Operating income:
increased 9.9%, or $56.3 million, to $623.1 million;
adjusted operating income increased 5.6%, or $35.1 million, to $661.9 million;
Net earnings:
increased 13.5%, or $43.8 million, to $367.6 million;
adjusted net earnings increased 4.9%, or $18.4 million, to $394.5 million;
Basic earnings per share:
increased 20.7%, or $0.12, to $0.70 per share;
Diluted earnings per share:
increased 19.0%, or $0.11, to $0.69 per share; and
adjusted diluted earnings per share increased 10.4%, or $0.07, to $0.74 per share.

See “Non-GAAP Reconciliations” for an explanation of the non-GAAP financial measures listed above.

Trends

General macroeconomic conditions in the United States have improved in the past few months, which we hope will lead to increased demand for our domestic customer base. While it is difficult to isolate the impact of the extreme weather experienced in Texas and Florida in September, current market conditions in the Unites States for foodservice operators appear modestly favorable. Larger check sizes at restaurants continue to offset lower traffic counts, while consumer sentiment remains at positive levels. Conversely, economic growth in the European markets in which we operate is more muted. Our European business

23



continues to face macroeconomic challenges, as customers are experiencing slower restaurant traffic, and there is an overall slowdown in food away from home in the United Kingdom (U.K.) In our U.K. business, food cost inflation, driven by unfavorable foreign exchange rates, is pressuring our pricing, which has impacted our volume growth and gross margins.

Our operating income and net earnings during the first quarter of fiscal 2018 have been affected by some temporary impacts of hurricanes on some of our customers, rising inflation, a challenging in-bound freight environment and reduced depreciation expense. Our U.S. Broadline operations experienced product cost inflation at a rate of 3.8% for the first quarter of fiscal 2018, which increased sales and gross profits. The pace of inflation has been greater in meat, poultry and dairy categories. The recent hurricanes resulted in lost sales and reduced productivity. We believe that the negative impact on operating income was approximately $10 million, and on earnings per share was approximately one cent. Our depreciation expense has declined, as our former Enterprise Resource Planning (ERP) system was fully depreciated by the end of fiscal 2017. We expect to see a one-time benefit of approximately $50 million in reduced depreciation expense, net. We expect to see further softness in our European operations in the second quarter of fiscal 2018, followed by a stronger second half of the year, as we align its fiscal year to our fiscal year.

In the first quarter of fiscal 2018, we prospectively adopted a new accounting standard related to improvements in share-based payment accounting. As discussed in Note 2, "Changes in Accounting," excess tax benefits, or detriments, of equity-based compensation are now recorded within income tax expense in the consolidated results of operations. In the first quarter of fiscal 2018, we recognized tax benefits that totaled $16.0 million, or three cents on a per share basis, primarily from stock option exercises that occurred during the quarter. These tax benefits are difficult to predict and depend on factors such as our stock price and option exercise activity. Absent these benefits, we expect our effective tax rate to be in the range of 35% to 36%.

In the second quarter of fiscal 2018, we acquired Kerr Pacific Corporation d/b/a HFM Foodservice (HFM), a Hawaii-based broadline distributor with approximately $290 million in annual sales. HFM has been providing quality service to Hawaii and Guam for over 50 years. Acquiring HFM provides Sysco with direct access to the growing Hawaiian market and is in clear alignment with our strategy for disciplined, profitable growth of the business. HFM will be a part of our U.S. Foodservice Operations.

In the second quarter of fiscal 2018, we acquired the remaining 50% interest in our joint venture in Costa Rica. Sysco initially acquired a 50% interest in the foodservice company in fiscal 2015.

Results of Operations

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
 
13-Week Period Ended
 
Sep. 30, 2017
 
Oct. 1, 2016
Sales
100.0
 %
 
100.0
 %
Cost of sales
80.9

 
80.7

Gross profit
19.1

 
19.3

Operating expenses
14.8

 
15.2

Operating income
4.3

 
4.1

Interest expense
0.6

 
0.5

Other expense (income), net

 
(0.1
)
Earnings before income taxes
3.7

 
3.6

Income taxes
1.2

 
1.3

Net earnings
2.5
 %
 
2.3
 %


24



The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended
Sales
4.9
 %
Cost of sales
5.1

Gross profit
3.8

Operating expenses
2.1

Operating income
9.9

Interest expense
9.9

Other expense (income), net (1)
(41.1
)
Earnings before income taxes
9.2

Income taxes
1.3

Net earnings
13.5
 %
Basic earnings per share
20.7
 %
Diluted earnings per share
19.0

Average shares outstanding
(5.1
)
Diluted shares outstanding
(5.0
)
 

(1) Other expense (income), net was income of $4.2 million in the first quarter of fiscal 2018 and income of $7.2 million in the first quarter of fiscal 2017.


25



The following represents our results by reportable segments:
 
13-Week Period Ended Sep. 30, 2017
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
9,848,942

 
$
2,903,255

 
$
1,640,671

 
$
257,556

 
$

 
$
14,650,424

Sales increase (decrease)
3.9
%
 
6.4
 %
 
9.0
 %
 
1.2
 %
 
 
 
4.9
%
Percentage of total
67.2
%
 
19.8
 %
 
11.2
 %
 
1.8
 %
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
780,869

 
$
76,646

 
$
4,845

 
$
6,929

 
$
(246,197
)
 
$
623,092

Operating income increase (decrease)
4.8
%
 
(3.5
)%
 
(1.3
)%
 
(13.4
)%
 
 
 
9.9
%
Percentage of total segments
89.8
%
 
8.8
 %
 
0.6
 %
 
0.8
 %
 
 
 
100.0
%
Operating income as a percentage of sales
7.9
%
 
2.6
 %
 
0.3
 %
 
2.7
 %
 
 
 
4.3
%


 
13-Week Period Ended Oct. 1, 2016
 
U.S. Foodservice Operations
 
International Foodservice Operations
 
SYGMA
 
Other
 
Corporate
 
Consolidated
Totals
 
(In thousands)
Sales
$
9,481,115

 
$
2,728,360

 
$
1,504,692

 
$
254,487

 
$

 
$
13,968,654

Percentage of total
67.9
%
 
19.5
%
 
10.8
%
 
1.8
%
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
745,231

 
$
79,435

 
$
4,908

 
$
8,001

 
$
(270,742
)
 
$
566,833

Percentage of total segments
89.0
%
 
9.5
%
 
0.6
%
 
1.0
%
 
 
 
100.0
%
Operating income as a percentage of sales
7.9
%
 
2.9
%
 
0.3
%
 
3.1
%
 
 
 
4.1
%

Based on information in Note 13 "Business Segment Information." in the first quarter of fiscal 2018, U.S. Foodservice Operations and International Foodservice Operations, collectively, represented approximately 87.0% of Sysco’s overall sales. In the first quarter of fiscal 2018, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 98.9% of the total segment operating income.  This illustrates that these segments represent the majority of our total segment results when compared to the other reportable segment.

Results of U.S. Foodservice Operations

The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended Sep. 30, 2017
 
13-Week Period Ended Oct. 1, 2016
 
13-Week Period Ended Change in Dollars
 
13-Week Period % Change
 
(In thousands)
Sales
$
9,848,942

 
$
9,481,115

 
$
367,827

 
3.9
%
Gross profit
1,986,283

 
1,913,115

 
73,168

 
3.8

Operating expenses
1,205,414

 
1,167,884

 
37,530

 
3.2

Operating income
$
780,869

 
$
745,231

 
$
35,638

 
4.8
%


26



Sales

The following table sets forth the percentage and dollar value increase or decrease in sales as compared to the comparable prior year period in order to demonstrate the cause and magnitude of change.
 
Increase (Decrease)
 
13-Week Period
 
(Dollars in millions)
Cause of change
Percentage
 
Dollars
Case volume
0.4
 %
 
$
41.2

Inflation
3.8

 
363.2

Other (1)
(0.3
)
 
(36.6
)
Total sales increase
3.9
 %
 
$
367.8


(1) Case volume excludes the volume impact from our custom-cut meat companies that do not measure volume in cases. Any impact in volumes from these operations is included within “Other.”

Sales for the first quarter of fiscal 2018 were 3.9% higher than the first quarter of fiscal 2017. The largest drivers of the increase were the impact of product cost inflation in our U.S. Broadline operations and case volume growth from our U.S. Broadline operations, which increased 0.3% in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. Case growth for locally managed customers increased 2.8%. This growth was partially offset by declines in case volume for our multi-unit business, including chain restaurants and multi-locational restaurants. We have proactively managed our business in a more disciplined and profitable manner with our multi-unit customers and have begun to add new customers in the second quarter of fiscal 2018. We expect to see multi-unit growth begin in the second quarter, continuing in the second half of the year.

Operating income increased 4.8% for the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017. This increase reflects gross profit growth that exceeded our operating expense growth.

Gross profit dollars increased 3.8% in the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017. Gross margin, which is gross profit as a percentage of sales, was flat at 20.2% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. These results reflect (1) local case volume that grew at a pace greater than our multi-unit business, (2) providing the highest quality products through category management and a balanced approach to pricing with our revenue management efforts and (3) investment in our Sysco brands as part of a larger brand story revitalization effort. Our Sysco brand sales to local customers increased by approximately 82 basis points for the first quarter of fiscal 2018. The estimated change in product costs, an internal measure of inflation or deflation, for the first quarter of fiscal 2018 for our U.S. Broadline operations was inflation of 3.8%. Inflation in the first quarter of fiscal 2018 occurred primarily in the meat, poultry and dairy categories.

Operating expenses for the first quarter of fiscal 2018 increased 3.2%, or $37.5 million, compared to the first quarter of fiscal 2017.  The increases in operating expenses for the period resulted primarily from a $13.3 million increase in pay-related expenses and increased transportation expenses, along with a large favorable bad debt recovery in the prior year.  We are implementing productivity initiatives and process improvements to streamline hours, improve delivery and deliver warehouse efficiencies.

27



Results of International Foodservice Operations

The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
 
13-Week Period Ended Sep. 30, 2017
 
13-Week Period Ended Oct. 1, 2016
 
13-Week Period Ended Change in Dollars
 
13-Week Period % Change
 
(In thousands)
Sales
$
2,903,255

 
$
2,728,360

 
$
174,895

 
6.4
 %
Gross profit
615,103

 
598,406

 
16,697

 
2.8

Operating expenses
538,457

 
518,971

 
19,486

 
3.8

Operating income
$
76,646

 
$
79,435

 
$
(2,789
)
 
(3.5
)%
 


 


 
 
 
 
Gross profit
$
615,103

 
$
598,406

 
$
16,697

 
2.8
 %
Adjusted operating expenses (Non-GAAP)
520,045

 
494,793

 
25,252

 
5.1

Adjusted operating income (Non-GAAP)
$
95,058

 
$
103,613

 
$
(8,555
)
 
(8.3
)%

Sales

The following table sets forth the percentage and dollar value increase or decrease in sales as compared to the comparable prior year period in order to demonstrate the cause and magnitude of change.
 
Increase (Decrease)
 
13-Week Period
 
(Dollars in millions)
Cause of change
Percentage
 
Dollars
Inflation
5.6
 %
 
$
153.8

Foreign currency
1.5

 
41.9

Other
(0.7
)
 
(20.8
)
Total sales increase
6.4
 %
 
$
174.9


Sales for the first quarter of fiscal 2018 were 6.4% higher than the first quarter of fiscal 2017, primarily due to product cost inflation in Canada and Europe. We experienced sales growth in most regions of Canada, especially in major markets, for the first quarter of fiscal 2018 due to a focused approach to local customers, which has translated into accelerated local case growth. Currency translation also contributed favorably to sales growth due to favorable exchange rates used to translate our Canadian sales into U.S. dollars. In Europe, we experienced an increase in sales for the first quarter of fiscal 2018 due primarily to inflation. The U.K. continues to experience inflation due to weakness in the pound sterling, which contributed to a portion of the high food cost inflation of approximately 9% during the first quarter of fiscal 2018.

Operating income decreased by $2.8 million, or 3.5%, for the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. The decrease was primarily attributable to softer results in the European business due to lower gross margins and increased operating expenses. Our European business continues to face macroeconomic challenges, as customers are experiencing slower restaurant traffic, and there is an overall slowdown in food away from home in the U.K. The decrease was partially offset by improvements in our Canadian operations, which are implementing strategic initiatives from our U.S. business, such as revenue management and other differentiated customer solutions, including online ordering, while effectively managing our cost structure and improving supply chain efficiencies. Our Latin American operations experienced some weakness due to the recent earthquake in Mexico City and the transition expenses related to the addition of a large customer in Mexico. We continue to see strong growth in Costa Rica and are expanding our cash and carry operations.

Gross profit dollars increased by 2.8% in the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017, primarily attributable to local case growth in our Canadian operations. Growth in gross profit dollars was partially offset by a

28



decline in higher margin sales to independent customers in the U.K. and case volume increases in lower margin independent and multi-unit businesses in France.

Operating expenses for the first quarter of fiscal 2018 increased 3.8%, or $19.5 million, compared to the first quarter of fiscal 2017. The increase was driven primarily by our European operations and resulted from increased transportation and depreciation expenses and investments in our transformation initiatives. Certain Items applicable to this segment include Brakes Acquisition-related costs and restructuring costs within our European and Canadian operations.

Results of SYGMA and Other Segment

For SYGMA, sales were 9.0% higher in the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017, primarily from case growth and product cost inflation. Case growth was primarily due to increased volume from existing customers. SYGMA experienced product cost inflation at a rate of 3.9% for the first quarter of fiscal 2018. Operating income decreased by $0.1 million in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017.  SYGMA’s profitability has been negatively impacted primarily by rising operating expenses attributable to higher case volumes, including an increase in pay-related expenses and fuel expenses. We are focused on implementing operational improvements that will contribute to long-term operating income growth.

For the operations that are grouped within Other, operating income decreased 13.4%, or $1.1 million, in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. These decreases are largely the result from our hotel lodging supply company.

Corporate Expenses

Corporate expenses in the first quarter of fiscal 2018 decreased $25.7 million, or 9.6%, as compared to the first quarter of fiscal 2017, due primarily to the favorable comparison of depreciation expense. During the first quarter of fiscal 2017, we incurred $45.6 million of depreciation on our previously existing ERP system, which became fully depreciated at the end of fiscal 2017. A portion of this depreciation expense was included in Certain Items during fiscal 2017. The decrease in expenses was partially offset by an increase in pay-related expenses resulting from wage increases. Corporate expenses, on an adjusted basis, decreased $10.3 million, or 4.4%, as compared to the first quarter of fiscal 2017, primarily due to lower business technology costs, partially attributable to reduced depreciation expense.

Included in corporate expenses are Certain Items that totaled $20.4 million in the first quarter of fiscal 2018 as compared to $35.8 million in the first quarter of fiscal 2017. Certain Items impacting the first quarter of fiscal 2018 were primarily expenses associated with our business technology transformation projects, Brakes integration costs, professional fees on three-year financial objectives and severance charges. Certain Items for the first quarter of fiscal 2017 primarily included $28.2 million of accelerated depreciation on our previously existing ERP system, in addition to expenses related to professional fees on three-year financial objectives and costs incurred to convert to legacy systems in conjunction with our revised business technology strategy.

Interest Expense

Interest expense increased $7.3 million for the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017, due to higher relative debt levels in the first quarter of fiscal 2018 related to senior notes that were issued in fiscal 2017 and commercial paper borrowings issued in fiscal 2018, largely due to share repurchase programs completed in fiscal 2018.

Net Earnings

Net earnings increased 13.5% in the first quarter of fiscal 2018 as compared to the first quarter of the prior year due primarily to the items noted above, as well as items impacting our income taxes that are discussed in Note 2, "Changes in Accounting" and Note 11, "Income Taxes." Adjusted net earnings increased 4.9% in the first quarter of fiscal 2018, primarily from gross profit growth and favorable expense management. Partially offsetting these increases were increased interest expense.

Earnings Per Share

Basic earnings per share in the first quarter of fiscal 2018 were $0.70, a 20.7% increase from the comparable prior period amount of $0.58 per share. Diluted earnings per share in the first quarter of fiscal 2018 were $0.69, a 19.0% increase from the comparable prior period amount of $0.58 per share. Adjusted diluted earnings per share in the first quarter of fiscal 2018 were $0.74, a 10.4% increase from the comparable prior period amount of $0.67 per share. These results were primarily attributable to the factors discussed above related to net earnings in the first quarter of fiscal 2018, including a three cent per share benefit from

29



excess tax benefits of equity-based compensation. Hurricanes Harvey, Irma and Maria resulted in lost sales and decreased productivity. In total, we believe that the negative impact on earnings per share was approximately one cent.

Non-GAAP Reconciliations

Sysco’s results of operations for fiscal 2018 and 2017 are impacted by restructuring costs consisting of (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we incurred costs to convert to a modernized version of our established platform, (2) professional fees related to our three-year strategic plan, (3) restructuring expenses within our Brakes Group operations, and (4) severance charges related to restructuring. In addition, fiscal 2018 results of operations are impacted by business technology costs. Our results of operations for fiscal 2018 and 2017 are also impacted by the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. All acquisition-related costs in fiscal 2018 and 2017 that have been excluded relate to the Brakes Acquisition.  The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs. These fiscal 2018 and fiscal 2017 items are collectively referred to as "Certain Items."

Management believes that adjusting its operating expenses, operating income, interest expense, net earnings and diluted earnings per share to remove these Certain Items provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations and facilitates comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated, and which as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.

Although Sysco has a history of growth through acquisitions, the Brakes Group is significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2018 and fiscal 2017.

Set forth below is a reconciliation of operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add to the total presented due to rounding.  Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.

30



 
13-Week Period Ended Sep. 30, 2017
 
13-Week Period Ended Oct. 1, 2016
 
Change in Dollars
 
%/bps Change
 
(In thousands, except for share and per share data)
Operating expenses (GAAP)
$
2,170,576

 
$
2,125,086

 
$
45,490

 
2.1
 %
Impact of restructuring costs (1)
(19,053
)
 
(38,285
)
 
19,232

 
(50.2
)
Impact of acquisition-related costs (2)
(19,745
)
 
(21,710
)
 
1,965

 
(9.1
)
Operating expenses adjusted for certain items (Non-GAAP)
$
2,131,778

 
$
2,065,091

 
$
66,687

 
3.2
 %
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
623,092

 
$
566,833

 
$
56,259

 
9.9
 %
Impact of restructuring costs (1)
19,053

 
38,285

 
(19,232
)
 
(50.2
)
Impact of acquisition-related costs (2)
19,745

 
21,710

 
(1,965
)
 
(9.1
)
Operating income adjusted for certain items (Non-GAAP)
$
661,890

 
$
626,828

 
$
35,062

 
5.6
 %
 
 
 
 
 
 
 
 
Net earnings (GAAP)
$
367,640

 
$
323,887

 
$
43,753

 
13.5
 %
Impact of restructuring costs (1)
19,053

 
38,285

 
(19,232
)
 
(50.2
)
Impact of acquisition-related costs (2)
19,745

 
21,710

 
(1,965
)
 
(9.1
)
Tax impact of restructuring costs (3)
(6,943
)
 
(3,593
)
 
(3,350
)
 
93.2

Tax impact of acquisition-related costs (3)
(4,998
)
 
(4,169
)
 
(829
)
 
19.9

Net earnings adjusted for certain items (Non-GAAP)
$
394,497

 
$
376,120

 
$
18,377

 
4.9
 %
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
$
0.69

 
$
0.58

 
$
0.11

 
19.0
 %
Impact of restructuring costs (1)
0.04

 
0.07

 
(0.03
)
 
(42.9
)
Impact of acquisition-related costs (2)
0.04

 
0.04

 

 
NM

Tax impact of restructuring costs (3)
(0.01
)
 
(0.01
)
 

 
NM

Tax impact of acquisition-related costs (3)
(0.01
)
 
(0.01
)
 

 
NM

Diluted EPS adjusted for certain items (Non-GAAP) (4)
$
0.74

 
$
0.67

 
$
0.07

 
10.4
 %
 

(1) Fiscal 2018 includes $19 million related to business technology costs, professional fees on three-year financial objectives, restructuring expenses within our Brakes operations, severance charges related to restructuring and costs to convert to legacy systems in conjunction with our revised business technology strategy. Fiscal 2017 includes $28 million in accelerated depreciation associated with our revised business technology strategy and $10 million related to professional fees on three-year financial objectives, restructuring expenses within our Brakes operations, costs to convert to legacy systems in conjunction with our revised business technology strategy and severance charges related to restructuring.
(2) Fiscal 2018 and 2017 include $15 million and $19 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of Brakes and $5 million and $2 million, respectively, in integration costs.
(3) The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred. The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs.
(4) Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
NM represent that the percentage change is not meaningful.


31



Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for applicable segments and corporate for the periods presented:
 
13-Week Period Ended Sep. 30, 2017
 
13-Week Period Ended Oct. 1, 2016
 
Change in Dollars
 
%/bps Change
INTERNATIONAL FOODSERVICE OPERATIONS


 


 


 


Operating expenses (GAAP)
$
538,457

 
$
518,971

 
$
19,486

 
3.8
 %
Impact of restructuring costs (1)
(3,898
)
 
(4,680
)
 
782

 
(16.7
)
Impact of acquisition-related costs (2)
(14,514
)
 
(19,498
)
 
4,984

 
(25.6
)
Operating expenses adjusted for certain items (Non-GAAP)
$
520,045

 
$
494,793

 
$
25,252

 
5.1
 %



 


 


 


Operating income (GAAP)
$
76,646

 
$
79,435

 
$
(2,789
)
 
(3.5
)%
Impact of restructuring costs (1)
3,898

 
4,680

 
(782
)
 
(16.7
)
Impact of acquisition related costs (2)
14,514

 
19,498

 
(4,984
)
 
(25.6
)
Operating income adjusted for certain items (Non-GAAP)
$
95,058

 
$
103,613

 
$
(8,555
)
 
(8.3
)%
 
 
 
 
 
 
 
 
CORPORATE
 
 
 
 
 
 
 
Operating expenses (GAAP)
$
242,133

 
$
267,880

 
$
(25,747
)
 
(9.6
)%
Impact of restructuring costs (3)
(15,154
)
 
(33,604
)
 
18,450

 
(54.9
)
Impact of acquisition-related costs (4)
(5,232
)
 
(2,212
)
 
(3,020
)
 
NM

Operating expenses adjusted for certain items (Non-GAAP)
$
221,747

 
$
232,064

 
$
(10,317
)
 
(4.4
)%
 
 
 
 
 
 
 
 
Operating income (GAAP)
$
(243,284
)
 
$
(270,742
)
 
$
27,457

 
(10.1
)%
Impact of restructuring costs (3)
15,154

 
33,604

 
(18,450
)
 
(54.9
)
Impact of acquisition-related costs (4)
5,232

 
2,212

 
3,020

 
NM

Operating income adjusted for certain items (Non-GAAP)
$
(222,899
)
 
$
(234,925
)
 
$
12,027

 
(5.1
)%

(1) Includes Brakes Acquisition-related restructuring charges and other severance charges related to restructuring.
(2) Fiscal 2018 and 2017 include $15 million and $19 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group.
(3) Fiscal 2018 includes $15 million related to business technology costs, professional fees on three-year financial objectives, severance charges related to restructuring, and costs to convert to legacy systems in conjunction with our revised business technology strategy. Fiscal 2017 includes $28 million in accelerated depreciation associated with our revised business technology strategy and $5 million in professional fees on three-year financial objectives, costs to convert to legacy systems in conjunction with our revised business technology strategy and severance charges related to restructuring.
(4) Fiscal 2018 and 2017 include $5 million and $2 million, respectively, related to integration costs from the Brakes Acquisition.
NM represent that the percentage change is not meaningful.

Three-Year Financial Targets

Sysco management considers adjusted ROIC to be a measure that provides useful information to management and investors in evaluating the efficiency and effectiveness of the company’s long-term capital investments. In addition, we have targets and expectations that are based on adjusted results including an adjusted ROIC target of 15%. We cannot predict with certainty when we will achieve these results or whether the calculation of our ROIC in such future period will be on an adjusted basis due to the effect of Certain Items, which would be excluded from such calculation. Due to these uncertainties, to the extent our future calculation of ROIC is on an adjusted basis excluding Certain Items, we cannot provide a quantitative reconciliation of this non-GAAP measure to the most directly comparable GAAP measure without unreasonable effort. However, we would expect to calculate adjusted ROIC, if applicable, in the same manner as we have calculated this historically. All components of our adjusted ROIC calculation would be impacted by Certain Items. We calculate adjusted ROIC as adjusted net earnings divided by (i) stockholders’ equity, computed as the average of adjusted stockholders’ equity at the beginning of the year and at the end of each fiscal quarter during the year; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year.

32




Form of calculation:
Net earnings (GAAP)
Impact of Certain Items on net earnings
Adjusted net earnings (Non-GAAP)
 
Invested Capital (GAAP)
Adjustments to invested capital
Adjusted Invested capital (GAAP)
 
Return on investment capital (GAAP)
Return on investment capital (Non-GAAP)

Additional targets and expectations include our adjusted operating income target that we expect to achieve by the end of fiscal 2018. Due to uncertainties in projecting Certain Items, we cannot provide a quantitative reconciliation of these non-GAAP measures to the most directly comparable GAAP measures without unreasonable effort. However, we would expect to calculate these adjusted results in the same manner as the reconciliations provided for the historical periods that are presented herein. The impact of future Certain Items could cause projected non-GAAP amounts to differ significantly from our GAAP results.

Liquidity and Capital Resources

Highlights

Comparisons of the cash flows from the first quarter of fiscal 2018 to the first quarter of fiscal 2017:

Cash flows from operations were $82.8 million in 2018, compared to $253.9 million in 2017;
Capital expenditures totaled $136.3 million in 2018, compared to $142.3 million in 2017;
Free cash flow was negative $51.8 million in 2018, compared to $115.9 million in 2017 (see “Non-GAAP Reconciliations” below under the heading “Free Cash Flow”);
Commercial paper issuances and net bank borrowings were $745.1 million in 2018, compared to $442.8 million of commercial paper issuances and bank borrowings in 2017;
Dividends paid were $174.9 million in 2018, compared to $173.3 million in 2017; and
Cash paid for treasury stock repurchases was $550.1 million in 2018, compared to $600.1 million in 2017.

Sources and Uses of Cash

Sysco’s strategic objectives include continuous investment in our business; these investments are funded by a combination of cash from operations and access to capital from financial markets.  Our operations historically have produced significant cash flow.  Cash generated from operations is generally allocated to:

working capital requirements;
investments in facilities, systems, fleet, other equipment and technology;
return of capital to shareholders, including cash dividends and share repurchases;
acquisitions compatible with our overall growth strategy;
contributions to our various retirement plans; and
debt repayments.

Any remaining cash generated from operations may be invested in high-quality, short-term instruments. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and

33



businesses, and our overall capital structure. Any transactions resulting from these evaluations may materially impact our liquidity, borrowing capacity, leverage ratios and capital availability.

We continue to generate substantial cash flows from operations and remain in a strong financial position; however, our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations.  We believe our mechanisms to manage working capital, such as credit monitoring, optimizing inventory levels and maximizing payment terms with vendors, and our mechanisms to manage the items impacting our gross profits have been sufficient to limit a significant unfavorable impact on our cash flows from operations.  We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations.  Seasonal trends also impact our cash flows from operations and free cash flow, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year. As of September 30, 2017, we had $909.2 million in cash and cash equivalents, approximately 76.0% of which was held by our international subsidiaries generated from our earnings of international operations.  If these earnings were transferred among countries or repatriated to the U.S., such amounts may be subject to additional tax obligations; however, we do not currently anticipate the need to repatriate this cash.

We believe the following sources will be sufficient to meet our anticipated cash requirements for the next twelve months, while maintaining sufficient liquidity for normal operating purposes:

our cash flows from operations;
the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility and bank line of credit; and
our ability to access capital from financial markets, including issuances of debt securities, either privately or under our shelf registration statement filed with the Securities and Exchange Commission (SEC).

Due to our strong financial position, we believe that we will continue to be able to effectively access the commercial paper market and long-term capital markets, if necessary.

Cash Flows

Operating Activities

We generated $82.8 million in cash flows from operations in the first quarter of fiscal 2018, compared to cash flows of $253.9 million in the first quarter of fiscal 2017. This decrease of $171.2 million year-over-year was largely due to working capital, partially offset by a favorable comparison on accrued expenses and higher operating results.

Changes in working capital, specifically accounts receivable, inventory and accounts payable, had a negative impact of $340.5 million on the period-over-period change in cash flow from operations. This was primarily from working capital investments in support of sales growth.

The positive comparison on accrued expenses was primarily due to a $70.8 million decrease in other accruals, such as corporate business technology accruals and earned rebate accruals. There was also a $55.5 million decrease in accrued interest and a $47.8 million decrease from incentive payments. Our annual incentive payments from the prior fiscal year are paid in the first quarter of each fiscal year. Our fiscal 2017 performance resulted in lower incentive payments, paid in the first quarter of fiscal 2018, as compared to our payments in the first quarter of fiscal 2017, that resulted from our fiscal 2016 performance.

Normally, our U.S. tax payments are greater in the second quarter than the first quarter of each fiscal year. In fiscal 2018, due to relief provided in connection with the impact of Hurricane Harvey, our tax payments will not be made until our third quarter of fiscal 2018, resulting in a one quarter deferral of approximately $300 million.

Seasonal trends also impact our cash flows from operations, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year. We believe our operating cash flows for fiscal 2018 will be generally consistent with the results achieved in fiscal 2017.


34




Investing Activities

Our capital expenditures in the first quarter of fiscal 2018 primarily consisted of facility replacements and expansions, fleet, technology and warehouse equipment, including supply chain opportunities involving Sysco Europe. Our capital expenditures in the first quarter of fiscal 2018 were higher by $6.0 million as compared to the first quarter of fiscal 2017.

During the first quarter of fiscal 2018, we had no acquisitions.

Free Cash Flow

Free cash flow represents net cash provided from operating activities, less purchases of plant and equipment, plus proceeds from sales of plant and equipment.  Sysco considers free cash flow to be a non-GAAP liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash, including dividend payments, share repurchases and acquisitions.  However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments.  Our free cash flow for the first quarter of fiscal 2018 decreased by $167.7 million, to negative $51.8 million, as compared to the first quarter of fiscal 2017, principally as a result of a year-over-year increase in receivables and inventory, as well as a decrease in accounts payable.

Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented.  An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.  In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities.
 
13-Week Period Ended Sep. 30, 2017
 
13-Week Period Ended Oct. 1, 2016
 
(In thousands)
Net cash provided by operating activities (GAAP)
$
82,775

 
$
253,942

Additions to plant and equipment
(136,261
)
 
(142,255
)
Proceeds from sales of plant and equipment
1,722

 
4,261

Free Cash Flow (Non-GAAP)
$
(51,764
)
 
$
115,948


Seasonal trends also impact our free cash flow, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year. We believe our free cash flow for fiscal 2018 will be generally consistent with the results achieved in fiscal 2017 and, therefore, anticipate that we will experience free cash flow growth over the remainder of the fiscal year.

Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $57.1 million in the first quarter of fiscal 2018, as compared to $32.3 million in the first quarter of fiscal 2017. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.

We routinely engage in share repurchase programs.  The number of shares acquired and their cost during the first quarter of fiscal 2018 were 10.5 million shares for $550.1 million, with 11.1 million shares repurchased in the first quarter of fiscal 2017 for $600.1 million. We repurchased 1.4 million additional shares for $77.0 million through October 13, 2017. In February 2017, our Board of Directors approved a repurchase program authorizing the repurchase of shares of the company’s common stock not to exceed $1.0 billion through the end of fiscal 2019. This repurchase program is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans. All share repurchases in the first quarter of fiscal 2018 were done under this authorization. The number of shares we repurchase during the remainder of fiscal 2018 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash. At this time, we do not expect our repurchase activity to match the pace of repurchases that occurred in the first quarter of fiscal 2018.


35



Dividends paid in the first quarter of fiscal 2018 were $174.9 million, or 0.33 per share, as compared to $173.3 million, or $0.31 per share, in the first quarter of fiscal 2017.  In July 2017, we declared our regular quarterly dividend for the first quarter of fiscal 2018 of $0.33 per share, which was paid in October 2017.

Debt Activity and Borrowing Availability

Our debt activity, including issuances and repayments, and our borrowing availability is described in Note 7, "Debt." Our outstanding borrowings at September 30, 2017, and repayment activity since the close of the first quarter of fiscal 2018, are disclosed within that note.  Updated amounts through October 13, 2017, include:

$959.8 million outstanding from our commercial paper program; and
No amounts outstanding from the credit facility supporting the company’s U.S. commercial paper program.

During the first quarter of fiscal 2018 and 2017, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 1.40% and 0.62%, respectively.

Included in current maturities of long-term debt as of September 30, 2017 are the 5.25% senior notes totaling $500.0 million, which mature in February 2018. It is our intention to fund the repayment of these notes at maturity through cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes or a combination thereof.

Contractual Obligations

Our 2017 Form 10-K contains a table that summarizes our obligations and commitments to make specified contractual future cash payments as of July 1, 2017. Since July 1, 2017, there have been no material changes to our specified contractual obligations.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations.  These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain.  We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to the company-sponsored pension plans, income taxes, goodwill and intangible assets and share-based compensation, which are described in Item 7 of our 2017 Form 10-K.

In the first quarter of fiscal 2018, two reporting units within Ireland combined as a result of the integration of Sysco’s Ireland operations with the Ireland operations acquired in the Brakes Acquisition. As a result of this combination, the company performed an interim impairment test of the goodwill attributable to these reporting units. Each of the reporting units was tested separately using qualitative assessments. A quantitative test was completed for the combined reporting unit and no impairment charges were applicable.

Our estimates of fair value contain uncertainties requiring management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. Actual results could differ from these assumptions and projections, resulting in the company revising its assumptions and, if required, recognizing an impairment loss.  There was no impairment recorded as a result of assessment in the first quarter of fiscal 2018. We do not believe the estimates used in the analysis are reasonably likely to change materially in the future, but we will continue to assess the estimates in the future based on the expectations of the combined reporting unit.

Forward-Looking Statements

Certain statements made herein that look forward in time or express management’s expectations or beliefs with respect to the occurrence of future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995.  Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” “projected,” “continuously,” variations of such terms, and similar terms and phrases denoting anticipated or expected occurrences or results. Examples of forward-looking statements include, but are not limited to, statements about:
consumer confidence;

36



expectations with respect to achieving our three-year financial targets;
expectations regarding future fuel costs;
anticipated earnings growth in our for our International Foodservice Operations;
the impact of general economic conditions on our business and our industry, including general macroeconomic conditions in the United States;
changes in future depreciation expense;
expectations regarding our effective tax rate;
expectations regarding multi-unit customer growth;
expectations regarding the calculation of adjusted return on invested capital;
Sysco’s expectations regarding cash held by international subsidiaries, including our need to repatriate cash held outside of the United States in a tax-efficient manner;
the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms;
Sysco’s ability to meet future cash requirements, including the ability to access financial markets effectively, including issuances of debt securities, and maintain sufficient liquidity;
Sysco’s ability to effectively access the commercial paper market and long-term capital markets;
our expectations regarding the impact of seasonal trends on cash flow from operations and free cash flow;
our expectations regarding cash flow growth;
our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes, or a combination thereof; and
our expectations regarding share repurchases.

These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below and those discussed in Item 1A of our 2017 Form 10-K:
periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability;
risks related to unfavorable conditions in the U.S. economy and local markets and the impact on our results of operations and financial condition;
the risks related to our efforts to meet our long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated;
the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs;
the risk that competition in our industry may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability;
the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs;
the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control;
the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products;
risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers;
the risk that we may not realize anticipated benefits from our operating cost reduction efforts;

37



difficulties in successfully expanding into international markets and complimentary lines of business;
the potential impact of product liability claims;
the risk that we fail to comply with requirements imposed by applicable law or government regulations;
risks related to our ability to effectively finance and integrate acquired businesses;
risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity;
our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position;
the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending;
the risk that the U.K.’s anticipated exit from the European Union, commonly referred to as Brexit, may adversely impact our operations in the U.K., including those of the Brakes Group;
the risk that factors beyond management’s control, including fluctuations in the stock market, as well as management’s future subjective evaluation of the company’s needs, would impact the timing of share repurchases;
due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business;
the risk that a cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers;
the potential requirement to pay material amounts under our multiemployer defined benefit pension plans;
our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines;
labor issues, including the renegotiation of union contracts and shortage of qualified labor;
capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; and
the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders.

For a more detailed discussion of factors that could cause actual results to differ from those contained in the forward-looking statements, see the risk factors discussion contained in Item 1A of our 2017 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks consist of interest rate risk, foreign currency exchange rate risk, fuel price risk and investment risk.  For a discussion on our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risks” in our 2017 Form 10-K. There have been no significant changes to our market risks since July 1, 2017, except as noted below.

Interest Rate Risk

At September 30, 2017, there were $864.8 million in commercial paper issuances outstanding.  Total debt as of September 30, 2017 was $9.0 billion, of which approximately 65% was at fixed rates of interest, including the impact of our interest rate swap agreements.

Fuel Price Risk

Due to the nature of our distribution business, we are exposed to potential volatility in fuel prices.  The price and availability of diesel fuel fluctuates due to changes in production, seasonality and other market factors generally outside of our control. Increased fuel costs may have a negative impact on our results of operations in three areas. First, the high cost of fuel can negatively

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impact consumer confidence and discretionary spending and thus reduce the frequency and amount spent by consumers for food-away-from-home purchases. Second, the high cost of fuel can increase the price we pay for product purchases and we may not be able to pass these costs fully to our customers. Third, increased fuel costs impact the costs we incur to deliver product to our customers. During the first quarter of fiscal 2018 and fiscal 2017, fuel costs related to outbound deliveries represented approximately 0.5% of sales in both periods.

We use diesel fuel swap contracts to fix the price of a portion of our projected monthly diesel fuel requirements.  As of September 30, 2017, we had diesel fuel swaps with a total notional amount of approximately 40 million gallons through June 2018.  These swaps will lock in the price of approximately 55% to 60% of our projected fuel purchase needs for fiscal 2018. Additional swaps have been entered into for hedging activity in fiscal 2019. As of September 30, 2017, we had diesel fuel swaps with a total notional amount of approximately 9 million gallons specific to fiscal 2019. Our remaining fuel purchase needs will occur at market rates unless contracted for a fixed price or hedged at a later date.

Item 4.  Controls and Procedures

Sysco’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Sysco’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives.  Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, our chief executive officer and chief financial officer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1A.  Risk Factors

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended July 1, 2017.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

Issuer Purchases of Equity Securities

We made the following share repurchases during the first quarter of fiscal 2018:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Number of Shares Purchased (1)
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1
 
 
 
 
 
 
 
July 2 - July 29
2,119,371

 
$
50.26

 
2,119,371

 

Month #2
 
 
 
 
 

 
 
July 30 - August 26
2,514,164

 
51.72

 
2,514,164

 

Month #3
 
 
 
 
 

 
 
August 27 - September 30
5,905,416

 
53.12

 
5,902,593

 

Total
10,538,951

 
$
52.21

 
10,536,128

 


(1) The total number of shares purchased includes 0, 0 and 2,823 shares tendered by individuals in connection with stock option exercises in Month #1, Month #2 and Month #3, respectively.

We routinely engage in share repurchase programs. In February 2017, our Board of Directors approved a repurchase program authorizing the repurchase of shares of the company’s common stock not to exceed $1.0 billion through the end of fiscal 2019. This repurchase program is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans. This share repurchase program was approved using a dollar value limit and, therefore, is not included in the table above for “Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs.”

We repurchased 10.5 million shares during the first quarter of fiscal 2018, resulting in a remaining authorization under this program of approximately $438.3 million. We purchased 11.1 million shares in the first quarter of fiscal 2017. We purchased 1.4 million additional shares under these authorizations through October 13, 2017. The number of shares we repurchase during the remainder of fiscal 2018 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash. For the remainder of fiscal 2018, we do not expect our repurchase activity to match the pace of repurchases that occurred in the first quarter of fiscal 2018.

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

Not applicable

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Item 5.  Other Information

None

Item 6.  Exhibits

The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as a part of this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
Sysco Corporation
 
 
(Registrant)
 
 
 
 
 
 
Date: November 9, 2017
By:
/s/ WILLIAM J. DELANEY
 
 
William J. DeLaney
 
 
Chief Executive Officer
 
 
 
Date: November 9, 2017
By:
/s/ JOEL T. GRADE
 
 
Joel T. Grade
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
Date: November 9, 2017
By:
/s/ ANITA A. ZIELINSKI
 
 
Anita A. Zielinski
 
 
Senior Vice President and
 
 
Chief Accounting Officer

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EXHIBIT INDEX
3.1
Restated Certificate of Incorporation, incorporated by reference to Exhibit 3(a) to Form 10-K for the year ended June 28, 1997 (File No. 1-6544).
 
 
 
3.2
 
 
 
3.3
Form of Amended Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 3(c) to Form 10-K for the year ended June 29, 1996 (File No. 1-6544).
 
 
 
3.4
 
 
 
10.1#†
 
 
 
10.2#†
 
 
 
10.3#†
 
 
 
10.4†
 
 
 
12.1#
 
 
 
31.1#
 
 
 
31.2#
 
 
 
32.1#
 
 
 
32.2#
 
 
 
101.1#
The following financial information from Sysco Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the SEC on November 9, 2017, formatted in XBRL includes:  (i) Consolidated Balance Sheets as of September 30, 2017, July 1, 2017 and October 1, 2016, (ii) Consolidated Results of Operations for the thirteen week period ended September 30, 2017 and October 1, 2016, (iii) Consolidated Statements of Comprehensive Income for the thirteen week period ended September 30, 2017 and October 1, 2016, (iv) Consolidated Cash Flows for the thirteen week period ended September 30, 2017 and October 1, 2016, and (v) the Notes to Consolidated Financial Statements.

___________
† Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K
# Filed herewith

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