TM TM 1390 Enclave Parkway Houston, Texas 77077-2099 281.584.1390 www.sysco.com View this online annual report at: www.sysco.com/OnlineAnnual2013 Printed on FSC®-certified, 100% post-consumer recycled paper, and paper made from environmentally responsible Eucalyptus pulp. The use of 100% post-consumer recycled fiber in the printing of this report saved: • 100,162 lbs of wood • 161,162 gallons of water • 111 million BTUs of energy • 13,614 lbs of carbon emissions • 10,217 lbs of solid waste Source: Environmental Defense 2013 ANNUAL REPORT S Y S C O C O R P O R A T I O N 2 0 1 3 A N N U A L R E P O R T Food isn’t the only thing that comes off the back of a Sysco truck. We deliver ingredients for success. FINANCIAL HIGHLIGHTS Fiscal Year Ended Percent Change DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA June 29, 2013 (52 weeks) June 30, 2012 (52 weeks) July 2, 2011 (52 weeks) 2013–12 2012–11 Sales Operating income Earnings before income taxes Net earnings Diluted earnings per share Dividends declared per share Shareholders’ equity per share Capital expenditures Return on invested capital Diluted average shares outstanding Number of shares repurchased Number of employees $ 44,411,233 1,658,478 $ 1,547,455 $ 992,427 $ 1.67 $ 1.11 $ 8.86 $ 511,862 $ $ 42,380,939 1,890,632 $ 1,784,002 $ 1,121,585 $ 1.90 $ 1.07 $ 8.00 $ 784,501 $ $ 39,323,489 1,931,502 $ 1,827,454 $ 1,152,030 $ 1.96 $ 1.03 $ 7.95 $ 636,442 $ 13% 15% 17% 592,675,110 21,672,403 48,100 588,991,441 10,000,000 47,800 588,691,546 10,000,000 46,000 5% (12) (13) (12) (12) 4 11 (35) (13) 1 117 1 8% (2) (2) (3) (3) 4 1 23 (12) 0 – 4 . 9 6 3 . 2 7 3 . 3 9 3 . 4 2 4 . 4 4 4 2 7 8 , 1 6 7 9 , 1 2 3 9 , 1 1 9 8 , 1 8 5 6 , 1 7 7 . 1 9 9 . 1 6 9 . 1 0 9 . 1 7 6 . 1 Sales IN BILLIONS OF DOLLARS Operating Income IN MILLIONS OF DOLLARS Diluted Earnings per Share IN DOLLARS 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 4 9 . 9 9 . 3 0 . 1 7 0 . 1 1 1 . 1 6 5 0 , 1 0 8 1 , 1 2 5 1 , 1 2 2 1 , 1 2 9 9 7 7 5 , 1 5 8 8 2 9 0 , 1 4 0 4 , 1 2 1 5 , 1 Dividends Declared per Share IN DOLLARS Net Earnings IN MILLIONS OF DOLLARS Net Cash from Operations IN MILLIONS OF DOLLARS 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 SHAREHOLDER INFORMATION CORPORATE OFFICES Sysco Corporation 1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com ANNUAL SHAREHOLDERS’ MEETING The Houstonian Hotel 111 North Post Oak Lane Houston, TX 77024 November 15, 2013 at 10:00 a.m. INDEPENDENT ACCOUNTANTS Ernst & Young LLP Houston, TX TRANSFER AGENT & REGISTRAR American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 1.888.CALLSYY (1.888.225.5799) www.amstock.com INVESTOR CONTACT Mr. Neil A. Russell II Vice President, Investor Relations 281.584.1308 Design: Savage Brands, Houston, Texas COMMON STOCK AND DIVIDEND INFORMATION Sysco’s common stock is traded on the New York Stock Exchange under the symbol “SYY.” The company has paid quarterly cash dividends on its common stock since its founding as a public company in 1970 and has increased the dividend 44 times in that period. The current quarterly cash dividend is $0.28 per share. DIVIDEND REINVESTMENT PLAN WITH OPTIONAL CASH PURCHASE FEATURE Sysco’s Dividend Reinvestment Plan provides a convenient way for shareholders of record to reinvest quarterly cash dividends in Sysco shares automatically, with no service charge or brokerage commissions. The Plan also permits registered shareholders to invest additional money to purchase shares. In addition, certificates may be deposited directly into a Plan account for safekeeping and may be sold directly through the Plan for a modest fee. implementation and deployment process, and changes may not prove to be cost effective or result in the cost savings and other benefits that we anticipate. We have temporarily halted the deployment of certain components of our ERP system as we have identified areas of improvement. We may experience further delays, cost overages and/or operating problems as we address these areas of improvement or when we deploy the complete system on a larger scale. Future deployments are dependent upon the success of current efforts and plans are subject to change at any time. Other aspects of our business transformation initiatives, including our category management initia- tive, may fail to provide the expected benefits in a timely fashion, if at all. Sysco’s ability to achieve antici- pated future results could be affected by competitive price pressures, availability of supplies, work stoppages, success or failure of our strategic initiatives, successful integration of acquired companies, conditions in the economy and the industry, and internal factors such as the ability to control expenses. Shareholders desiring information about the Dividend Reinvestment Plan with Optional Cash Purchase Feature may obtain a brochure and enrollment form by contacting the Transfer Agent and Registrar, American Stock Transfer & Trust Company at 1.888.225.5799. For a discussion of additional risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Sysco’s Annual Report on Form 10-K for the fiscal year ended June 29, 2013, which is included in this Annual Report. FORM 10-K AND FINANCIAL INFORMATION A copy of the fiscal 2013 Annual Report on Form 10-K, including the financial statements and financial statement schedules, as well as copies of other financial reports and company literature, may be obtained without charge upon written request to the Investor Relations Department, Sysco Corporation, at the corporate offices listed above, or by calling 281.584.2615. This information, which is included in this Annual Report, also may be found on our website at www.sysco.com in the Investors section. FORWARD-LOOKING STATEMENTS Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements about expected future performance, the impact and expected benefits of strategic initiatives, including our category management initiative, plans regarding expansion and acquisitions, and the implementation timeline for certain initiatives. These statements are based on management’s current expectations and estimates; actual results may differ materially. The success of Sysco’s strategic initiatives and any plans regarding expansion or acquisitions could be affected by conditions in the economy and the industry and internal factors such as the ability to control expenses, including fuel costs. Our ability to meet our long-term strategic objectives depends largely on the success of our Business Transformation Project, which may not be successfully implemented and may not provide the anticipated benefits. The expected costs of our Business Transformation Project may be greater than currently expected because we may encounter the need for changes in design or revi- sions of the project calendar and budget. We may be adversely affected if we experience operating problems, scheduling delays, cost overages or limitations on the extent of the business transformation during the ERP Expansion A considerable portion of Sysco’s historic growth has come from acquiring good companies with extraordinary people that complement or expand the footprint of our core business. In fiscal 2013, we continued that tradition by acquiring 14 businesses with more than $1 billion in annualized sales in the United States, Canada, the Republic of Ireland, Northern Ireland and the Bahamas. We are also rolling out a new brand strategy in New York City aimed at growing our business in this important market. ▲ Productivity Sysco has a longstanding commitment, and record of success, in continuously improving productivity – it’s foundational to our culture. We are using this expertise to build additional efficiencies into our operations, as well as developing a highly efficient end-to-end supply chain. ▲ Partnership We believe that, by partnering with our customers and suppliers, we can profoundly enrich the experience of doing business with Sysco. These essential partnerships lay the foundation for future growth aligned around our differentiated capabilities. ▲ Sysco’s vision is to be our customers’ most valued and trusted business partner. To achieve this vision, our 48,100 highly engaged associates focus on five strategic elements: Partnership, Productivity, Products, Expansion and People. We believe these elements provide the ingredients for success not only for Sysco, but also for our customers, suppliers, employees and the communities we serve. People Our people are at the heart of Sysco’s service and safety- driven culture – they are integral to our success. To ensure a deep pool of talent for the future, we are implementing an enterprise-wide talent management process to drive continuous improve- ment throughout the enterprise. ▲ Products Sysco aspires to be the industry leader in product innovation and business solutions. We are expanding our offerings through the implementation of category management, and developing a robust suite of services and solutions through our Sysco Ventures platform. ▲ For more information, go online to www.sysco.com/investors. 1 We deliver ingredients for success. // 2013 Annual Report TO OUR SHAREHOLDERS, In the world of food, the keys to a chef’s successful recipe are a solid plan, a careful approach and great ingredients. At Sysco we take great pride in our ingredients, striving to provide the freshest, highest quality fare in the business. We are committed to cultivating the freshest ideas and most innovative holistic restaurant solutions that will assure that every moment around food is memorable. We believe that a successful business recipe starts with our mission: to market and deliver great products to our customers with exceptional service. It is reinforced by our vision: to be our customers’ most valued and trusted business partner. And, Sysco’s five-point strategy provides key ingredients which focus on a balanced blend of Partnerships, Productivity, Products, Expansion and People. Fiscal year 2013 at Sysco produced numerous successes. Our more than 48,000 associates continued to demonstrate their commitment to Sysco’s 425,000 customers. During the year, we registered a record $44.4 billion in revenues, a 4.8 percent increase compared to fiscal year 2012. Our gross profit of $7.9 billion was a 2.5 percent year-over-year increase, while our earnings per share for our underlying business of $2.14 were essentially flat compared to a year ago. Our return on invested capital was 13 percent, our cash flow from operations increased 7.6 percent to $1.5 billion, and our free cash flow increased 62 percent to $1 billion. We also returned nearly $650 million in dividends to shareholders and increased our dividend for the 44th time in our 43-year history. The challenges were also significant in a year that saw market conditions initially improve and then fall off in the latter part of the fiscal year. A generally slow and uneven economic recovery led to weak restaurant traffic, which hindered many of our customers’ businesses. Gross profits at Sysco, while increasing modestly for the year, were impeded by the competitive nature of our industry and a shift in customer mix which created pressure on operating earnings. As we continue to drive out transformational change in our company, Sysco’s business fundamentals – the ingredients for our success – remain sound. In fiscal year 2013, we made substantial progress executing our long- term strategy in the following ways. INGREDIENT 1: PARTNERSHIPS PROFOUNDLY ENRICHING THE EXPERIENCE OF DOING BUSINESS WITH SYSCO We experienced success in further deepening relationships with our customers and suppliers. One favorable example was our 9 percent increase in sales to Broadline corporate-managed customers, which helped us offset a year in which sales to locally managed customers were under pressure. Another highlight was the launch of our category management initiative which provides a significant opportunity to generate value through the optimal assortment, sourcing and pricing of products. Our category management approach also fosters deep partnerships with our suppliers, including shared customer insights which we believe will lead to enhanced product innovation and response to customer trends, and provide the foundation for growth in the years ahead. INGREDIENT 2: PRODUCTIVITY CONTINUOUSLY IMPROVING PRODUCTIVITY IN ALL AREAS OF THE BUSINESS We expanded the deployment of our SAP enterprise resource platform to East Texas, North Texas and West Texas, with more rollouts scheduled to take place in fiscal year 2014. We also completed the rollout of our maintenance module across the majority of our U.S. and Canada business. The implementation of the SAP module for human resources and the centralization of U.S. Broadline general ledger functions will be com- pleted in the first half of fiscal year 2014, and we will continue to implement technology enhancements to our delivery routing system over the next two years. In addition, we reduced costs by adjusting our retirement plans, implementing a customer relationship management (CRM) platform, flattening our sales organization structure, modifying our salespeople’s compensation plans to incentivize growth and reducing the number of unprofitable sales territories. HIGHLIGHTS OPERATIONS • Grew case volume for Broadline and SYGMA operations combined by 2.6% • Completed fourteen acquisitions representing more than $1 billion in annual sales • Advanced our category management initiative with four pilot categories – salad dressing/ mayonnaise, frozen french fries, towels/tissues/ napkins, and shrimp • Completed the rollout of the SAP Maintenance module to all U.S. Broadline locations, and the Customer Relationship Management (CRM) platform to all North American Broadline operating companies FINANCIAL • Recorded net earnings of $992 million • Grew free cash flow by more than 60% to $1 billion • Returned nearly $650 million in dividends to shareholders while increasing the dividend for the 44th time in our 43-year history SUSTAINABILITY • Generated energy savings of 3% in our warehouses in fiscal year 2013 and more than 38% since fiscal year 2006 • Continued to incorporate new food safety practices to lead the industry • Expanded our capabilities to provide locally sourced products to our customers 2 TM Manny Fernandez Executive Chairman of the Board Bill DeLaney President & Chief Executive Officer INGREDIENT 3: PRODUCTS EXPANDING OUR PORTFOLIO OF PRODUCTS AND SERVICES BY INITIATING A CUSTOMER-CENTRIC INNOVATION PROGRAM We are utilizing valuable insights gained through research to engage our customers and suppliers in our category management initiative. Customer acceptance of the new assortment in the four pilot categories – salad dressing/mayonnaise, frozen french fries, towels/tissues/napkins, and shrimp – was encouraging. Our customers and our salespeople have generally responded well to the increased variety and value offered by our new optimized assortment. We have a very aggressive implementation plan and will continually improve our processes and seek out valuable feedback from our customers as we roll out successive category waves in fiscal year 2014 and beyond. Additionally in fiscal year 2013, we launched our Sysco Solutions and Services product bundle which was developed within our Sysco Ventures group to offer customers solutions beyond food. Among the featured products was Leapset, a point-of-sale system that’s characterized as a smartphone for restaurant operators. Leapset uses a suite of mobile apps for both front- and back-of-the-house solutions, allowing restaurateurs to dynamically interact with diners while running their business. INGREDIENT 4: EXPANSION EXPLORING, ASSESSING AND PURSUING NEW BUSINESSES AND MARKETS In one of our busiest years to date, we completed 14 acquisitions – in the U.S., Canada, Republic of Ireland, Northern Ireland and in the Bahamas. They included Broadline, seafood, produce and other specialty companies representing more than $1 billion in annualized sales. These acquisitions further demonstrate Sysco’s commitment to pursue quality companies – including those in international locations – that will enhance our ability to serve our customers, further expand our product offerings and service footprint and profitably grow our business. INGREDIENT 5: PEOPLE DEVELOPING AND EFFECTIVELY INTEGRATING A COMPREHENSIVE ENTERPRISE-WIDE TALENT MANAGEMENT PROCESS We appreciate all of our customer-focused associates for their hard work and engagement during a year of significant change at Sysco. For the second straight year, through our Sysco Speaks survey, we actively sought and received feedback from all our associates using a single platform. We also continue to develop our Sysco associates and – where necessary – infuse new talent to address the needs of our customers and the business. Three talented leaders from the food industry – executive vice president and chief technology officer Wayne Shurts, executive vice president and chief commercial officer Tom Bené, and senior vice president for distribution services Scott Charlton – joined our executive team in fiscal year 2013 to bring additional energy, capabilities, experiences and insights to our transformational efforts. In the coming year, our goal is to deliver value to you, our shareholders, by gaining deeper customer insights, profitably growing our locally and corporate-managed business, developing new opportunities, connecting our Sysco Ventures investments to our core business, and developing and recruiting great talent. We will continue on our multi-year business transformation journey that to date has touched nearly every part of our business. While a great deal of work lies ahead, we believe our strategy is sound, our execution will improve, and that we are extremely well-positioned to deliver best-in-class customer service and profitable growth in the years to come. Manny Fernandez Bill DeLaney EXECUTIVE CHAIRMAN OF THE BOARD PRESIDENT & CHIEF EXECUTIVE OFFICER For more information, go online to www.sysco.com/investors. 3 We deliver ingredients for success. // 2013 Annual Report DIRECTORS & OFFICERS DIRECTORS SENIOR OFFICERS MARKET PRESIDENTS Thomas C. Barnes Market President (Mideast) Michael K. Brawner Market President (Midwest) Tim K. Brown Market President (Southeast) Christopher S. DeWitt Market President (Mid Atlantic) Richard A. Johnston Market President (Rocky Mountains) Catherine J. Kayser Market President (Northeast) L. Paul Nasir Market President (Pacific) David B. DeVane Market President (Southwest) DIRECTORS’ COUNCIL The Directors’ Council was established in 1981 to assist the Board of Directors in determining management strategies and policies in order to anticipate industry trends and respond capably to customers’ requirements. The Council is composed of operating company presidents, representing some of Sysco’s most effective operations. David B. DeVane Market President – Southwest Kimberly A. Doherty Division President – West Richard A. Johnston President, Sysco Arizona Peter J. Scatamacchia President, Sysco Memphis Kevin Tulley President, Sysco Meat Production (West) Nicholas J. Zouboukos President, Sysco New Orleans Brian C. Beach Senior Vice President, Business Development and President of Sysco Ventures Thomas L. Bené Executive Vice President and Chief Commercial Officer Greg D. Bertrand Senior Vice President, Foodservice Operations (West) Robert S. Charlton Senior Vice President, Distribution Services Robert J. Davis Senior Vice President, Foodservice Operations (South) William B. Day Executive Vice President, Merchandising William J. DeLaney President and Chief Executive Officer Kirk G. Drummond Senior Vice President, Sysco Business Services G. Mitchell Elmer Senior Vice President, Controller and Chief Accounting Officer Manny A. Fernandez Executive Chairman William W. Goetz Senior Vice President and Chief Marketing Officer Joel T. Grade Senior Vice President, Foodservice Operations (North) Michael W. Green Executive Vice President and President – Foodservice Operations Alan E. Hasty Senior Vice President, Merchandising G. Kent Humphries Senior Vice President, Sysco and President Sysco San Francisco Ajoy H. Karna Senior Vice President, Finance R. Chris Kreidler Executive Vice President and Chief Financial Officer Russell T. Libby Senior Vice President, General Counsel and Corporate Secretary Paul T. Moskowitz Senior Vice President, Human Resources Scott A. Sonnemaker Senior Vice President, Sales Charles W. Staes Senior Vice President, Foodservice Operations (Specialty Companies) Wayne R. Shurts Executive Vice President and Chief Technology Officer John M. Cassaday Joined: 2004 President and Chief Executive Officer, Corus Entertainment, Inc. 2 6 3 Judith B. Craven, M.D., M.P.H. Joined: 1996 Retired President, United Way of the Texas Gulf Coast 2 5 3 William J. DeLaney Joined: 2009 President and Chief Executive Officer, Sysco Corporation 4 6 Manuel A. Fernandez Joined: 2006 Executive Chairman of the Board, Sysco Corporation Managing Director, SI Ventures 4 6 Larry C. Glasscock Joined: 2010 Retired President, CEO and Chairman of the Board, Well Point, Inc. 5 2 3 Jonathan Golden Joined: 1984 Partner, Arnall Golden Gregory, LLP 4 5 Joseph A. Hafner, Jr. Joined: 2003 Retired Chairman and Chief Executive Officer, Riviana Foods, Inc. 1 4 6 5 Hans-Joachim Koerber Joined: 2008 Retired Chief Executive Officer, Metro AG 4 1 Nancy S. Newcomb Joined: 2006 Retired Senior Corporate Officer, Risk Management, Citigroup 1 4 Richard G. Tilghman Joined: 2002 Retired Chairman, SunTrust Banks Mid-Atlantic and Retired Vice Chairman, SunTrust Banks 1 4 6 Jackie M. Ward Joined: 2001 Lead Director, Sysco Corporation Retired Founder, Chairman, Chief Executive Officer and President, Computer Generation Inc. 2 6 3 Board Committees Audit 1 Corporate Governance and Nominating 2 Compensation 3 4 Corporate Sustainability 5 6 Finance Executive Denotes Committee Chair 4 Financials Eleven-Year Summary of Operations and Related Information (Dollars in thousands except for share and per share data) Results of Operations Sales Cost of sales Gross profi t Operating expenses Operating income Interest expense Other expense (income), net Earnings before income taxes Income taxes Earnings before cumulative effect of accounting change Cumulative effect of accounting change Net earnings Effective income tax rate Per Common Share Data Diluted earnings per share: Earnings before accounting change Cumulative effect of accounting change Net earnings Dividends declared Shareholders’ equity Diluted average shares outstanding Performance Measurements 2013 2012 2011 2010 (53 Weeks) 2009 2008 $ 44,411,233 $ 42,380,939 34,704,362 36,543,642 7,676,577 7,867,591 5,785,945 6,209,113 1,890,632 1,658,478 113,396 128,495 (6,766) (17,472) 1,784,002 1,547,455 662,417 555,028 $ 39,323,489 $ 37,243,495 $ 36,853,330 $ 37,522,111 30,252,244 31,928,777 7,269,867 7,394,712 5,389,918 5,463,210 1,879,949 1,931,502 111,541 118,267 (22,930) (14,219) 1,791,338 1,827,454 685,187 675,424 30,055,188 7,188,307 5,212,439 1,975,868 125,477 802 1,849,589 669,606 29,743,076 7,110,254 5,238,043 1,872,211 116,322 (14,945) 1,770,834 714,886 992,427 - 992,427 $ 35.87% 1,121,585 - 1,121,585 $ 37.13% 1,152,030 - 1,179,983 - 1,055,948 - 1,152,030 $ 36.96% 1,179,983 $ 36.20% 1,055,948 $ 40.37% 1,106,151 - 1,106,151 38.25% $ $ 1.67 $ - 1.67 1.11 8.86 592,675,110 1.90 - 1.90 1.07 8.00 588,991,441 $ 1.96 $ - 1.96 1.03 7.95 588,691,546 1.99 $ - 1.99 0.99 6.50 593,590,042 1.77 $ - 1.77 0.94 5.85 596,069,204 1.81 - 1.81 0.85 5.68 610,970,783 3.48% 20% 13% 1.66 $ 2,458,145 $ 2,478,449 3,978,071 12,663,947 2,639,986 5,191,810 4.21% 24% 15% 4.65% 28% 17% 4.97% 31% 19% 4.81% 31% 19% 4.77% 33% 21% 1.78 2,661,229 2,168,649 3,883,750 12,137,207 2,763,688 4,685,040 1.60 1.69 1.69 $ 2,157,807 $ 2,181,919 3,512,389 11,427,190 2,279,517 4,705,242 2,067,060 $ 2,056,355 3,203,823 10,336,436 2,472,662 3,827,526 2,120,525 $ 1,978,875 2,979,200 10,160,321 2,467,486 3,449,702 1.49 1,675,690 2,023,910 2,889,790 10,017,055 1,975,435 3,408,986 $ $ $ 654,871 $ 511,862 48,100 628,024 784,501 47,800 34.16 $ 20 36-28 $ 12,604 29.81 16 32-25 13,594 $ $ $ 604,500 $ 636,442 46,000 585,734 $ 594,604 46,000 557,487 $ 464,561 47,000 513,593 515,963 50,000 31.39 $ 16 33-27 $ 14,291 28.27 $ 14 32-21 $ 15,158 22.98 $ 13 35-19 $ 12,564 28.22 16 36-26 13,015 Pretax return on sales Return on average shareholders’ equity Return on invested capital (equity plus total debt) Financial Position Current ratio Working capital Other assets Plant and equipment (net) Total assets Long-term debt Shareholders’ equity Other Data Dividends declared Capital expenditures Number of employees Shareholder Data Closing price of common share at year end Price/earnings ratio at year end - diluted Market price per common share - high/low Number of shareholders of record at year end 6 SYSCO CORPORATION - Form 10-K 2007 2006 2005 2004 (53 Weeks) 2003 35,042,075 $ 32,628,438 $ 30,281,914 $ 29,335,403 $ 26,140,337 20,927,631 28,209,961 5,212,706 6,832,114 3,888,432 5,123,632 1,324,274 1,708,482 72,234 105,002 (8,347) (17,735) 1,260,387 1,621,215 482,099 620,139 23,560,318 5,775,085 4,242,426 1,532,659 69,880 (12,365) 1,475,144 567,930 26,249,329 6,379,109 4,884,079 1,495,030 109,100 (9,016) 1,394,946 548,906 24,414,748 5,867,166 4,277,636 1,589,530 75,000 (10,906) 1,525,436 563,979 1,001,076 - 1,001,076 $ 38.25% 846,040 9,285 855,325 $ 39.35% 961,457 - 907,214 - 961,457 $ 36.97% 907,214 $ 38.50% 778,288 - 778,288 38.25% 1.60 $ - 1.60 0.74 5.36 626,366,798 1.35 $ 0.01 1.36 0.66 4.93 628,800,647 1.47 $ - 1.47 0.58 4.39 653,157,117 1.37 $ - 1.37 0.50 4.03 661,919,234 1.18 - 1.18 0.42 3.41 661,535,382 4.63% 31% 20% 4.28% 30% 19% 5.04% 35% 23% 5.03% 39% 24% 4.82% 36% 22% 1.37 1.37 1,260,457 $ 2,122,152 2,721,233 9,475,365 1,758,227 3,278,400 1,173,290 $ 2,127,431 2,464,900 8,937,470 1,627,127 3,052,284 1.16 544,216 $ 1.23 724,777 $ 1,997,815 2,268,301 8,223,488 956,177 2,758,839 1,829,412 2,166,809 7,812,740 1,231,493 2,564,506 1.34 928,405 1,384,327 1,922,660 6,936,521 1,249,467 2,197,531 456,438 $ 603,242 50,900 408,264 $ 513,934 49,600 368,792 $ 390,026 47,500 321,353 $ 530,086 47,800 273,852 435,637 47,400 32.99 $ 21 37-27 $ 13,557 30.56 $ 23 37-29 $ 14,282 36.25 $ 25 38-29 $ 15,083 34.80 $ 25 41-29 $ 15,337 29.55 25 33-21 15,533 $ $ $ $ $ $ $ 5-Year Compound Growth Rates 2009-2013 10-Year Compound Growth Rates 2004-2013 20-Year Compound Growth Rates 1994-2013 1-Year Growth Rate 2013 5% 3% 5% 8% (12) (13) (12) (11) (12) (12) 4 11 (2) (3) (2) (2) (2) (2) 5 9 2 2 2 2 4 4 10 10 8 8 8 8 10 10 15 9 11 9 9 8 SYSCO CORPORATION - Form 10-K 7 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fi scal year ended June 29, 2013 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-6544 SYSCO CORPORATION (Exact name of registrant as specifi ed in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 1390 Enclave Parkway Houston, Texas (Address of principal executive offi ces) 74-1648137 (IRS employer identifi cation number) 77077-2099 (Zip Code) (281) 584-1390 (Registrant’s telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Each Class Common Stock, $1.00 par value Name of each exchange on which registered New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark YES NO • if the registrant is a well-known seasoned issuer, as defi ned in Rule 405 of the Securities Act. • if the registrant is not required to fi le reports pursuant to Section 13 or Section 15(d) of the Act. • whether the registrant (1) has fi led all reports required to be fi led 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 fi le such reports), and (2) has been subject to such fi ling requirements for the past 90 days. • 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 fi les). • if disclosure of delinquent fi lers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in defi nitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. • whether the registrant is a large accelerated fi ler, an accelerated fi ler, a non-accelerated fi ler or a smaller reporting company. See defi nition of “large accelerated fi ler,” “accelerated fi ler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated fi ler Accelerated fi ler Non-accelerated fi ler (Do not check if a smaller reporting company) Smaller reporting company • whether the registrant is a shell company (as defi ned in Rule 12b-2 of the Exchange Act). The aggregate market value of the voting stock of the registrant held by stockholders who were not affi liates (as defi ned by regulations of the Securities and Exchange Commission) of the registrant was approximately $18,334,353,000 as of December 29, 2012 (based on the closing sales price on the New York Stock Exchange Composite Tape on December 28, 2012, as reported by The Wall Street Journal (Southwest Edition)). As of August 14, 2013, the registrant had issued and outstanding an aggregate of 588,347,435 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the company’s 2013 Proxy Statement to be fi led with the Securities and Exchange Commission no later than 120 days after the end of the fi scal year covered by this Form 10-K are incorporated by reference into Part III. Table of Contents PART I 1 ITEM 1 Business ..........................................................................................................................................................................................................................................................................................................1 Risk Factors ..............................................................................................................................................................................................................................................................................................5 ITEM 1A ITEM 1B Unresolved Staff Comments .................................................................................................................................................................................................................................11 Properties .................................................................................................................................................................................................................................................................................................12 ITEM 2 Legal Proceedings ...................................................................................................................................................................................................................................................................13 ITEM 3 Mine Safety Disclosures ................................................................................................................................................................................................................................................13 ITEM 4 PART II 14 ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities ................................................................................................................................................................................................................14 Selected Financial Data .................................................................................................................................................................................................................................................16 ITEM 6 ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............16 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ....................................................................................................................40 Financial Statements and Supplementary Data .................................................................................................................................................................43 ITEM 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........85 ITEM 9 ITEM 9A Controls and Procedures .............................................................................................................................................................................................................................................85 ITEM 9B Other Information .......................................................................................................................................................................................................................................................................85 PART III ITEM 10 ITEM 11 ITEM 12 ITEM 13 ITEM 14 PART IV Directors, Executive Offi cers and Corporate Governance ..............................................................................................................................86 Executive Compensation.............................................................................................................................................................................................................................................86 Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters ................................................................................................................................................................................................................86 Certain Relationships and Related Transactions, and Director Independence .........................................................86 Principal Accounting Fees and Services .........................................................................................................................................................................................86 86 87 ITEM 15 Exhibits .........................................................................................................................................................................................................................................................................................................87 SIGNATURES .................................................................................................................................................................................................................................................................................................................................88 PART I ITEM 1 Business Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-K refer to Sysco Corporation together with its consolidated subsidiaries and divisions. Overview Sysco Corporation, acting through its subsidiaries and divisions, is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. We provide products and related services to approximately 425,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Founded in 1969, Sysco commenced operations as a public company in March 1970 when the stockholders of nine companies exchanged their stock for Sysco common stock. Since our formation, we have grown from $115.0 million to $44.4 billion in annual sales, both through internal expansion of existing operations and through acquisitions. Sysco’s fi scal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year ending June 29, 2013 for fi scal 2013, June 30, 2012 for fi scal 2012 and, July 2, 2011 for fi scal 2011. Sysco Corporation is organized under the laws of Delaware. The address and telephone number of our executive offi ces are 1390 Enclave Parkway, Houston, Texas 77077-2099, (281) 584-1390. This annual report on Form 10-K, as well as all other reports fi led or furnished by Sysco pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on Sysco’s website at www.sysco.com as soon as reasonably practicable after they are electronically fi led with or furnished to the Securities and Exchange Commission. Operating Segments Sysco provides food and related products to the foodservice or food-away-from-home industry. Under the accounting provisions related to disclosures about segments of an enterprise, we have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defi ned by accounting standards. Broadline operating companies distribute a full line of food products and a wide variety of non- food products to their customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to chain restaurant customer locations. Our other segments include our specialty produce and lodging industry products segments, a company that distributes specialty imported products and a company that distributes to international customers. Specialty produce companies distribute fresh produce and, on a limited basis, other foodservice products. Our lodging industry products company distributes personal care guest amenities, equipment, housekeeping supplies, room accessories and textiles to the lodging industry. Selected fi nancial data for each of our reportable segments as well as fi nancial information concerning geographic areas can be found in Note 21, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 8. Customers and Products Sysco’s customers in the foodservice industry include restaurants, hospitals and nursing homes, schools and colleges, hotels and motels, industrial caterers and other similar venues where foodservice products are served. Services to our customers are supported by similar physical facilities, vehicles, material handling equipment and techniques, and administrative and operating staffs. SYSCO CORPORATION - Form 10-K 1 PART I ITEM 1 Business The products we distribute include: • a full line of frozen foods, such as meats, seafood, fully prepared entrees, fruits, vegetables and desserts; • a full line of canned and dry foods; • fresh meats and seafood; • dairy products; • beverage products; • imported specialties; and • fresh produce. We also supply a wide variety of non-food items, including: • paper products such as disposable napkins, plates and cups; • tableware such as china and silverware; • cookware such as pots, pans and utensils; • restaurant and kitchen equipment and supplies; and • cleaning supplies. A comparison of the sales mix in the principal product categories during the last three years is presented below: Canned and dry products Fresh and frozen meats Frozen fruits, vegetables, bakery and other Dairy products Poultry Fresh produce Paper and disposables Seafood Beverage products Janitorial products Equipment and smallwares Medical supplies (1) (1) Sales are less than 1% of total. 2013 2012 2011 19% 19 14 10 10 8 8 5 4 2 1 - 100% 19% 19 14 10 10 8 8 5 4 2 1 - 100% 19% 18 14 11 10 8 8 5 4 2 1 - 100% Our distribution centers, which we refer to as operating companies, distribute nationally-branded merchandise, as well as products packaged under our private brands. Products packaged under our private brands have been manufactured for Sysco according to specifi cations that have been developed by our quality assurance team. In addition, our quality assurance team certifi es the manufacturing and processing plants where these products are packaged, enforces our quality control standards and identifi es supply sources that satisfy our requirements. We believe that prompt and accurate delivery of orders, competitive pricing, close contact with customers and the ability to provide a full array of products and services to assist customers in their foodservice operations are of primary importance in the marketing and distribution of foodservice products to our customers. Our operating companies offer daily delivery to certain customer locations and have the capability of delivering special orders on short notice. Through our approximately 12,600 sales and marketing representatives and support staff of Sysco and our operating companies, we stay informed of the needs of our customers and acquaint them with new products and services. Our operating companies also provide ancillary services relating to foodservice distribution, such as providing customers with product usage reports and other data, menu-planning advice, food safety training and assistance in inventory control, as well as access to various third party services designed to add value to our customers’ businesses. No single customer accounted for 10% or more of Sysco’s total sales for the fi scal year ended June 29, 2013. Based upon available information, we estimate that sales by type of customer during the past three fi scal years were as follows: Type of Customer Restaurants Hospitals and nursing homes Hotels and motels Schools and colleges Other TOTALS 2 SYSCO CORPORATION - Form 10-K 2013 2012 2011 61% 9 5 5 20 100% 63% 10 6 5 16 100% 62% 11 6 5 16 100% PART I ITEM 1 Business Sources of Supply We purchase from thousands of suppliers, both domestic and international, none of which individually accounts for more than 10% of our purchases. These suppliers consist generally of large corporations selling brand name and private label merchandise, as well as independent regional brand and private label processors and packers. Purchasing is generally carried out through both centrally developed purchasing programs and direct purchasing programs established by our various operating companies. We administer a consolidated product procurement program designed to develop, obtain and ensure consistent quality food and non-food products. The program covers the purchasing and marketing of Sysco Brand merchandise as well as products from a number of national brand suppliers, encompassing substantially all product lines. Sysco’s operating companies purchase product from the suppliers participating in these consolidated programs and from other suppliers, although Sysco Brand products are only available to the operating companies through these consolidated programs. We also focus on increasing profi tability by lowering operating costs and by lowering aggregate inventory levels, which reduces future facility expansion needs at our broadline operating companies, while providing greater value to our suppliers and customers. This includes the construction and operation of regional distribution centers (RDCs), which aggregate inventory demand to optimize the supply chain activities for certain products for all Sysco broadline operating companies in the region. Currently, we have two RDCs in operation, one in Virginia and one in Florida. Working Capital Practices Our growth is funded through a combination of cash fl ow from operations, commercial paper issuances and long-term borrowings. See the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” at Item 7 regarding our liquidity, fi nancial position and sources and uses of funds. Credit terms we extend to our customers can vary from cash on delivery to 30 days or more based on our assessment of each customer’s credit worthiness. We monitor each customer’s account and will suspend shipments if necessary. A majority of our sales orders are fi lled within 24 hours of when customer orders are placed. We generally maintain inventory on hand to be able to meet customer demand. The level of inventory on hand will vary by product depending on shelf-life, supplier order fulfi llment lead times and customer demand. We also make purchases of additional volumes of certain products based on supply or pricing opportunities. We take advantage of suppliers’ cash discounts where appropriate and otherwise generally receive payment terms from our suppliers ranging from weekly to 30 days or more. Corporate Headquarters And Shared Services Center Our corporate staff makes available a number of services to our operating companies. Members of the corporate staff possess experience and expertise in, among other areas, accounting and fi nance, treasury, legal, cash management, information technology, employee benefi ts, engineering, real estate and construction, risk management and insurance, sales and marketing, payroll, human resources, training and development, strategy, and tax compliance services. The corporate offi ce also makes available warehousing and distribution services, which provide assistance in operational best practices including space utilization, energy conservation, fl eet management and work fl ow. Our shared services center performs support services for employees, suppliers and customers, payroll administration, human resources, customer and vendor contract administration, fi nancial services such as vendor payments, invoicing, cash application, certain credit services, accounting and sales and use tax administration, procurement and maintenance support and sales support for some of our operating companies. Capital Improvements To maximize productivity and customer service, we continue to modernize, expand and construct new distribution facilities. During fi scal 2013, 2012 and 2011, approximately $511.9 million, $784.5 million and $636.4 million, respectively, were invested in delivery fl eet, facilities, technology and other capital asset enhancements. We estimate our capital expenditures in fi scal 2014 should be in the range of $550 million to $600 million. During the three years ended June 29, 2013, capital expenditures were fi nanced primarily by internally generated funds, our commercial paper program and bank and other borrowings. We expect to fi nance our fi scal 2014 capital expenditures from the same sources. SYSCO CORPORATION - Form 10-K 3 PART I ITEM 1 Business Employees As of June 29, 2013, we had approximately 48,100 full-time employees, approximately 17% of whom were represented by unions, primarily the International Brotherhood of Teamsters. Contract negotiations are handled by each individual operating company. Approximately 35% of our union employees are covered by collective bargaining agreements which have expired or will expire during fi scal 2014 and are subject to renegotiation. Since June 29, 2013, two contracts covering approximately 300 of such employees have been renegotiated. We consider our labor relations to be satisfactory. Competition Industry sources estimate that there are more than 15,000 companies engaged in the distribution of food and non-food products to the foodservice industry in the United States. Our customers may also choose to purchase products directly from retail outlets or negotiate prices directly with our suppliers. While we compete primarily with local and regional distributors, a few organizations compete with us on a national basis. We believe that the principal competitive factors in the foodservice industry are effective customer contacts, the ability to deliver a wide range of quality products and related services on a timely and dependable basis and competitive prices. An additional competitive factor for our larger chain restaurant customers is the ability to provide a national distribution network. We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 18% of this approximately $235 billion annual market. We believe, based upon industry trade data, that our sales to the United States and Canada food- away-from-home industry were the highest of any foodservice distributor during fi scal 2013. While adequate industry statistics are not available, we believe that in most instances our local operations are among the leading distributors of food and related non-food products to foodservice customers in their respective trading areas. We believe our competitive advantages include our more than 7,000 marketing associates, our diversifi ed product base, which includes a differentiated group of high quality Sysco brand products, the diversity in the types of customers we serve, our economies of scale and our wide geographic presence in the United States and Canada, which mitigates some of the impact of regional economic declines that may occur over time and provides a national distribution network for larger chain restaurant customers. We believe our liquidity and access to capital provides us the ability to continuously invest in business improvements. We are the only publicly-traded distributor in the food-away-from-home industry in the United States. While our public company status provides us with some advantages, including access to capital, we believe it also provides us with some disadvantages that our competitors do not have in terms of additional costs related to complying with regulatory requirements. Government Regulation Our company is required to comply, and it is our policy to comply, with all applicable laws in the numerous countries throughout the world in which we do business. In many jurisdictions, compliance with competition laws is of special importance to us, and our operations may come under special scrutiny by competition law authorities due to our competitive position in those jurisdictions. In general, competition laws are designed to protect businesses and consumers from anti-competitive behavior. In the United States, as a marketer and distributor of food products, we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (FDA). The FDA regulates food safety through various statutory and regulatory mandates, including manufacturing and holding requirements for foods through good manufacturing practice regulations, hazard analysis and critical control point (HACCP) requirements for certain foods, and the food and color additive approval process. The agency also specifi es the standards of identity for certain foods, prescribes the format and content of information required to appear on food product labels, regulates food contact packaging and materials, and maintains a Reportable Food Registry for the industry to report when there is a reasonable probability that an article of food will cause serious adverse health consequences. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the U.S. Department of Agriculture (USDA) to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program. The USDA reviews and approves the labeling of these products and also establishes standards for the grading and commercial acceptance of produce shipments from our suppliers. We are also subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which imposes certain registration and record keeping requirements on facilities that manufacture, process, pack or hold food for human or animal consumption. We and our products are also subject to state and local regulation through such measures as the licensing of our facilities; enforcement by state and local health agencies of state and local standards for our products; and regulation of our trade practices in connection with the sale of our products. Our facilities are subject to inspections and regulations issued pursuant to the U.S. Occupational Safety and Health Act by the U.S. Department of Labor. These regulations require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents and to establish hazard communication programs to transmit information on the hazards of certain chemicals present in products we distribute. We are also subject to regulation by numerous federal, state and local regulatory agencies, including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, and the U.S. Department of Transportation, which regulates transportation of perishable and hazardous materials and waste, and similar state, provincial and local agencies. 4 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors The U.S. Foreign Corrupt Practices Act (FCPA) prohibits bribery of public offi cials to obtain or retain business in foreign jurisdictions. The FCPA also requires us to keep accurate books and records and to maintain internal accounting controls to detect and prevent bribery and to ensure that transactions are properly authorized. We have implemented and continue to develop a robust anti-corruption compliance program applicable to our global operations to detect and prevent bribery and to comply with these and other anti-corruption laws in countries where we operate. Outside the United States, our business is subject to numerous similar statutes and regulations, as well as other legal and regulatory requirements. All of our company’s facilities and other operations in the United States and elsewhere around the world are subject to various environmental protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. Further, most of our distribution facilities have ammonia-based refrigeration systems and tanks for the storage of diesel fuel and other petroleum products which are subject to laws regulating such systems and storage tanks. Our policy is to comply with all such legal requirements. We are subject to other federal, state, provincial and local provisions relating to the protection of the environment or the discharge of materials; however, these provisions do not materially impact the use or operation of our facilities. General We have numerous trademarks that are of signifi cant importance, including the SYSCO® trademark and our privately-branded product trademarks that include the SYSCO® trademark. These trademarks and the private brands on which they are used are widely recognized within the foodservice industry. Approximately half of our privately-branded sales are from products labeled with our SYSCO® trademark without any other trademark. We believe the loss of the SYSCO® trademark would have a material adverse effect on our results of operations. Our U.S. trademarks are effective for a ten-year period and the company generally renews its trademarks before their expiration dates unless a particular trademark is no longer in use. The company does not have any material patents or licenses. We are not engaged in material research and development activities relating to the development of new products or the improvement of existing products. Our sales do not generally fl uctuate signifi cantly on a seasonal basis; therefore, the business of the company is not deemed to be seasonal. As of June 29, 2013, we operated 193 distribution facilities throughout the United States, Bahamas, Canada, Ireland and Northern Ireland. ITEM 1A Risk Factors The following discussion of “risk factors” identifi es the most signifi cant factors that may adversely affect our business, operations, fi nancial position or future fi nancial performance. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated fi nancial statements and related notes contained in this report. The following discussion of risks is not all inclusive but is designed to highlight what we believe are the most signifi cant factors to consider when evaluating our business. These factors could cause our future results to differ from our expectations expressed in the forward-looking statements identifi ed on page 39 and from historical trends. Industry and General Economic Risks Periods of signifi cant or prolonged infl ation or defl ation affect our product costs and may negatively impact our profi tability Volatile food costs have a direct impact on our industry. Periods of product cost infl ation may have a negative impact on our profi t margins and earnings to the extent that we are unable to pass on all or a portion of such product cost increases to our customers, which may have a negative impact on our business and our profi tability. In addition, periods of rapidly increasing infl ation may negatively impact our business due to the timing needed to pass on such increases, as well as the impact it may have on discretionary spending by consumers. Conversely, our business may be adversely impacted by periods of product cost defl ation because we make a signifi cant portion of our sales at prices that are based on the cost of products we sell plus a percentage margin. As a result, our profi t levels may be negatively impacted during periods of product cost defl ation, even though our gross profi t percentage may remain relatively constant. SYSCO CORPORATION - Form 10-K 5 PART I ITEM 1A Risk Factors Our results and fi nancial condition are directly affected by the volatility in the global economic environment, local market conditions and low consumer confi dence, which can adversely affect our sales, margins and net income The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profi t margins and is especially susceptible to trends and uncertainty in economic activity, such as the general economic slowdown in the US from 2008 to 2011. The global economic environment has recently been characterized by weak economies, persistently high unemployment rates, infl ationary pressures and volatility in fi nancial markets worldwide. In addition, our results of operations are substantially affected by local operating and economic conditions, which can vary substantially by market. The diffi cult economic conditions can affect us in the following ways: • Unfavorable conditions can depress sales and/or gross margins in a given market. • Food cost and fuel cost infl ation experienced by the consumer can lead to reductions in the frequency of dining out and the amount spent by consumers for food-away-from-home purchases which could negatively impact our business by reduced demand for our products. • Heightened uncertainty in the fi nancial markets negatively affects consumer confi dence and discretionary spending and can cause disruptions with our customers and suppliers. • Liquidity issues and the inability of our customers, vendors and suppliers to consistently access credit markets to obtain cash to support operations can cause temporary interruptions in our ability to conduct day-to-day transactions involving the payment to or collection of funds from our customers, vendors and suppliers. The uncertainty in the global economic environment has adversely affected both business and consumer confi dence and spending, and uncertainty about the long-term investment environment could further depress capital investment and economic activity. Competition in our industry may adversely impact our margins and our ability to retain customers, and makes it diffi cult for us to maintain our market share, growth rate and profi tability The foodservice distribution industry is highly competitive, with numerous regional and local competitors, and is a mature industry characterized by slowing revenue growth. Additionally, increased competition from non-traditional sources (such as club stores and commercial wholesale outlets with lower cost structures), group purchasing organizations or consolidation among competitors have served to further increase pressure on the industry’s profi t margins, and continued margin pressure within the industry may have a material adverse impact on our operating results and profi tability. New and increased competitive sources may result in increased focus on pricing and on limiting price increases, or may require increased discounting. Such competition may result in margin erosion and/or make it diffi cult for us to attract and retain customers. Although our sales historically have grown faster than the market, in recent years we have experienced slowing revenue growth rates. These trends have placed pressure on our profi t margins and made it more diffi cult to achieve growth and pass along cost increases. We expect these trends to continue for the foreseeable future. If we are unable to effectively differentiate ourselves from our competitors, our market share, sales and profi tability, through increased expenditures or decreased prices, could be adversely impacted. 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 price and supply of fuel can fl uctuate signifi cantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns. On average, on-highway diesel fuel prices increased approximately 2% and 14% in fi scal 2013 and 2012, respectively, as compared to the prior year. Volatile fuel prices have a direct impact on our industry. The cost of fuel affects the price paid by us for products as well as the costs incurred by us to deliver products to our customers. Although we have been able to pass along a portion of increased fuel costs to our customers in the past, there is no guarantee that we can do so again if another period of high fuel costs occurs. If fuel costs increase again in the future, we may experience diffi culties in passing all or a portion of these costs along to our customers, which may have a negative impact on our business and our profi tability. We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at prices equal to the then-current market price for diesel. If fuel prices decrease signifi cantly, these forward purchases may prove ineffective and result in our paying higher than market costs for a portion of our diesel fuel. Business and Operational Risks Our ability to meet our long-term strategic objectives to grow the profi tability of our business depends largely on the success of the Business Transformation Project Our multi-year Business Transformation Project consists of: • the design and deployment of an Enterprise Resource Planning (ERP) system to implement an integrated software system to support a majority of our business processes and further streamline our operations; 6 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors • an operating cost transformation initiative to lower our cost structure; • a product cost reduction and category management initiative to use market data and customer insights to make changes to product pricing and product assortment; and • several other initiatives. Although we expect the investment in the Business Transformation Project to provide meaningful benefi ts to the company over the long-term, the costs exceeded the benefi ts during the testing stages of implementation of ERP, including in fi scal 2013. Successfully managing deployment is critical to our business success. While we expect all of the components of the Business Transformation Project to enhance our value proposition to customers and suppliers and improve our long-term profi tability, there can be no assurance that we will realize our expectations within the time frame we have established, if at all. The actual cost of the ERP system may be greater or less than currently expected and continued delays in the execution of deployment may adversely affect our business and results of operations ERP implementations are complex and time-consuming projects that involve substantial investments in system software and implementation activities over a multi-year timeframe. Our cost estimates related to our ERP system are based on assumptions which are subject to wide variability, require a great deal of judgment, and are inherently uncertain. Thus, the actual costs of the project in fi scal 2014 (and beyond) may be greater or less than currently expected. We have encountered, and we may continue to encounter, the need for changes in design or revisions of the project calendar and budget, including incurring expenses at an earlier or later time than currently anticipated. For example, we deployed our ERP system to three additional locations in fi scal 2013 and are experiencing improved functionality in many areas compared to past deployments; however, while the majority of the system functionality is performing as designed, we have identifi ed areas of improvement to certain components of the system that we want to address before we continue deploying to additional locations. In addition, implementation of the systems require signifi cant management attention and resources over an extended period of time and any signifi cant design errors or further delay in the implementation of the systems could materially and adversely affect our operating results and impact our ability to manage our business. Continued delays in deployment, additional operating problems discovered in the underlying information technology systems’ processes, cost overages or limitations on the extent of the business transformation during the ERP implementation process adversely affect our business and results of operations. In addition, because the implementation is expected to continue to involve a signifi cant fi nancial commitment, our business, results of operations and liquidity may also be adversely affected if the ERP system, and the associated process changes, do not prove to be cost effective or do not result in the cost savings and other benefi ts at the levels that we anticipate. There can be no guarantee that we will be able to realize the intended results of the system software and implementation activities. We expect costs to continue to outweigh benefi ts for fi scal 2014 as we continue deployment. We may not realize anticipated benefi ts from our operating cost reduction efforts We have implemented a number of cost reduction initiatives that we believe are necessary to position our business for future success and growth. Our future success and earnings growth depend upon our ability to achieve a lower cost structure and operate effi ciently in the highly competitive food and beverage industry, particularly in an environment of increased competitive activity and reduced profi tability. A variety of factors could cause us not to realize some of the expected cost savings, including, among other things, delays in the anticipated timing of activities related to our cost savings initiatives, lack of sustainability in cost savings over time and unexpected costs associated with operating our business. If we are unable to realize the anticipated benefi ts from our cost cutting efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profi tability could decrease. Furthermore, even if we realize the anticipated benefi ts of our cost reduction efforts, we may experience an adverse impact on our employees and customers which could negatively affect our sales and profi ts. We may not realize the full anticipated benefi ts from our category management initiative We are in the midst of deploying our category management initiative which encompasses a rigorous process whereby we use market data and customer insights to optimize the product assortment available to our customers, strengthen strategic relationships with our suppliers, and increase our sales and profi t margins. If our sales associates are not able to effectively gain acceptance of the new product assortment from our customers, or we and our suppliers are not able to absorb the signifi cant administrative and process changes required, then we may not be able to successfully execute the category management initiative in the timeline we anticipate and we may not capture the fi nancial and other benefi ts at the levels that we anticipate, or at all. Furthermore, even if we realize the anticipated benefi ts of our category management initiative, we may experience an adverse impact on our employees and customers which could negatively affect our sales and profi ts. Conditions beyond our control can interrupt our supplies and increase our product costs We obtain substantially all of our foodservice and related products from third-party suppliers. For the most part, we do not have long-term contracts with our suppliers committing them to provide products to us, however we believe the number of long-term contracts will increase as we progress with our category management initiative. Although our purchasing volume can provide benefi ts when dealing with suppliers, suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices requested. We are also subject to delays caused by interruption in production and increases in product costs based on conditions outside of our control. These conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather conditions or more prolonged climate change, crop conditions, water shortages, transportation interruptions, unavailability of fuel or increases in fuel costs, product recalls, competitive demands and natural disasters or other catastrophic events (including, but not SYSCO CORPORATION - Form 10-K 7 PART I ITEM 1A Risk Factors limited to food-borne illnesses). Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Our inability to obtain adequate supplies of foodservice and related products as a result of any of the foregoing factors or otherwise could mean that we could not fulfi ll our obligations to customers, and customers may turn to other distributors. Adverse publicity about us or lack of confi dence in our products could negatively impact our reputation and reduce earnings Maintaining a good reputation and public confi dence in the safety of the products we distribute is critical to our business, particularly to selling Sysco Brand products. The Sysco brand name, trademarks and logos and our reputation are powerful sales and marketing tools, and we devote signifi cant resources to promoting and protecting them. Anything that damages our reputation or the public’s confi dence in our products, whether or not justifi ed, including adverse publicity about the quality, safety or integrity of our products or relating to activities by our operations, employees or agents could tarnish our reputation and reduce the value of our brand, and could quickly affect our revenues and profi ts. Reports, whether true or not, of food-borne illnesses (such as e-coli, avian fl u, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering could also severely injure our reputation or negatively impact the public’s confi dence in our products. If patrons of our restaurant customers become ill from food-borne illnesses, our customers could be forced to temporarily close restaurant locations and our sales and profi tability would be correspondingly decreased. In addition, instances of food-borne illnesses or food tampering or other health concerns (even those unrelated to the use of Sysco products), or public concern regarding the safety of our products, can result in negative publicity about the food service distribution industry and cause our sales and profi tability to decrease dramatically. Damage to our reputation and loss of brand equity could reduce demand for our products and services. This reduction in demand, together with the dedication of time and expense necessary to defend our reputation, could have an adverse effect on our fi nancial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of our brand. Our business prospects, fi nancial condition and results of operations could be adversely affected if our public image or reputation were to be tarnished by negative publicity including dissemination via print, broadcast or social media, or other forms of Internet-based communications. Adverse publicity about regulatory or legal action against us could damage our reputation and image, undermine our customers’ confi dence and reduce short-term or long-term demand for our products and services, even if the regulatory or legal action is unfounded or not material to our operations. Any of these events could have a material negative impact on our results of operations and fi nancial condition. If sales to our independent restaurant customers continue to grow at a lower rate than sales to our large regional and national customers, our operating income may decline Similar to industry trends, we are currently growing our large regional and national customers sales at a faster rate than our sales to independent restaurant locations. Gross margin from our large regional and national customers is generally lower than that of our independent restaurant customers because we typically provide a higher level of services to these customers and are able to earn a higher gross margin as a result. If sales to our independent restaurant customers do not grow at the same or a greater rate as sales to our large regional and national customers, unless we are able to successfully increase prices or reduce our cost structure, our operating income may decline. As we grow sales to large regional and national customers at a faster pace than we grow sales to independent restaurant customers, we face the risk that large regional and national customers will increase their proportion of our total sales, thus subjecting us to greater risk if we lose one or more of these customers and possibly enabling these larger customers to exert greater pressure on us to reduce our prices If sales to our large regional and national customers continues to increase at a faster pace of growth than sales to our independent restaurant customers, we may become more dependent on large regional and national customers as they begin to represent a greater proportion of our total sales, and any loss of sales to these customers could have a material negative impact on our results of operations and fi nancial condition. Additionally, as a result of our greater dependence on these customers, we could be pressured by them to lower our prices. In that event, we would need to achieve additional cost savings to offset these price reductions or our gross margins and profi tability would be materially adversely affected. We may be unable to change our cost structure and pricing practices rapidly enough to successfully compete in such an environment. Expanding into international markets and complementary lines of business presents unique challenges, and our expansion efforts with respect to international operations and complementary lines of business may not be successful In addition to our domestic activities, an element of our strategy includes the possibility of further expansion of operations into international markets. Our ability to successfully operate in international markets may be adversely affected by local laws and customs, legal and regulatory constraints, including compliance with the Foreign Corrupt Practices Act, political and economic conditions and currency regulations of the countries or regions in which we currently operate or intend to operate in the future. Risks inherent in our existing and future international operations also include, among others, the costs and diffi culties of managing international operations, diffi culties in identifying and gaining access to local suppliers, suffering possible adverse tax consequences, maintaining product quality and greater diffi culty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fl uctuations may have an impact on our future costs or on future sales and cash fl ows from our international operations. 8 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors Another element of our strategy includes the possibility of expansion into businesses that are closely related or complementary to, but not currently part of, our core foodservice distribution business. Our ability to successfully operate in these complementary business markets may be adversely affected by legal and regulatory constraints, including compliance with regulatory programs to which we become subject. Risks inherent in branching out into such complementary markets also include the costs and diffi culties of managing operations outside of our core business, which may require additional skills and competencies, as well as diffi culties in identifying and gaining access to suppliers or customers in new markets. If we fail to comply with requirements imposed by applicable law or other governmental regulations, we could become subject to lawsuits, investigations and other liabilities and restrictions on our operations that could signifi cantly and adversely affect our business We are subject to governmental regulation at the federal, state, international, national, provincial and local levels in many areas of our business, such as food safety and sanitation, minimum wage, overtime, wage payment, wage and hour and employment discrimination, immigration, human health and safety, and due to the services we provide in connection with governmentally funded entitlement programs. From time to time, both federal and state governmental agencies have conducted audits of our billing practices as part of investigations of providers of services under governmental contracts, or otherwise. We also receive requests for information from governmental agencies in connection with these audits. While we attempt to comply with all applicable laws and regulations, we cannot represent that we are in full compliance with all applicable laws and regulations or interpretations of these laws and regulations at all times or that we will be able to comply with any future laws, regulations or interpretations of these laws and regulations. We have received notice from the State of California and certain county district attorneys alleging violations of statutes related to the use of drop sites, which are temporary facilities for holding products prior to distributing them to customers. We are fully cooperating with these parties in their investigations. We have discontinued the use of drop sites across the enterprise. While we believe we have mitigated the risk, we may face fi nes and penalties. If we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fi nes, injunctions, prohibitions on exporting, seizures or debarments from contracting with the government. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations. Product liability claims could materially impact our business We, like any other seller of food, face the risk of exposure to product liability claims in the event that the use of products sold by Sysco causes injury or illness. We cannot be sure that consumption of our products will not cause a health-related illness in the future or that we will not be subject to claims or lawsuits relating to such matters. Further, even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. With respect to product liability claims, we believe we have suffi cient primary or excess umbrella liability insurance. However, this insurance may not continue to be available at a reasonable cost or, if available, may not be adequate to cover all of our liabilities. We generally seek contractual indemnifi cation and insurance coverage from parties supplying our products, but this indemnifi cation or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. If Sysco does not have adequate insurance or contractual indemnifi cation available, product liability relating to defective products could materially reduce our net earnings and earnings per share. We must fi nance and integrate acquired businesses effectively Historically, a portion of our growth has come through acquisitions. If we are unable to integrate acquired businesses successfully or realize anticipated economic, operational and other benefi ts and synergies in a timely manner, our earnings per share may be materially adversely impacted. Integration of an acquired business may be more diffi cult when we acquire a business in a market in which we have limited expertise, or with a culture different from Sysco’s. A signifi cant expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and operational resources. Signifi cant acquisitions may also require the issuance of material additional amounts of debt or equity, which could materially alter our debt to equity ratio, increase our interest expense and decrease earnings per share, and make it diffi cult for us to obtain favorable fi nancing for other acquisitions or capital investments. We need access to borrowed funds in order to grow, and any default by us under our indebtedness could have a material adverse impact on cash fl ow and liquidity A substantial part of our growth historically has been the result of acquisitions and capital expansion. We anticipate additional acquisitions and capital expansion in the future. As a result, our inability to fi nance acquisitions and capital expenditures through borrowed funds could restrict our ability to expand. Moreover, any default under the documents governing our indebtedness could have a signifi cant adverse effect on our cash fl ows, as well as the market value of our common stock. SYSCO CORPORATION - Form 10-K 9 PART I ITEM 1A Risk Factors Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position As of June 29, 2013, we had approximately $3 billion of total indebtedness. We have a Board-approved commercial paper program allowing us to issue short-term unsecured notes in an aggregate amount not to exceed $1.3 billion; a revolving credit facility supporting our U.S. and Canadian commercial paper programs in the amount of $1.0 billion set to expire on December 29, 2016, with $925 million extended to December 29, 2017; certain uncommitted bank lines of credit providing for unsecured borrowings for working capital of up to $95.0 million; and a €75.0 million (Euro) multicurrency revolving credit facility for use by our Irish subsidiary set to expire September 25, 2013, which is subject to extension. Our indebtedness may further increase from time to time for various reasons, including fl uctuations in operating results, working capital needs, capital expenditures and potential acquisitions or joint ventures. Our increased level of indebtedness and the ultimate cost of such indebtedness could have a negative impact on our liquidity, cost of capital and fi nancial results. In the future, our cash fl ow and capital resources may not be suffi cient for payments of interest on and principal of our debt, and any alternative fi nancing measures available may not be successful and may not permit us to meet our scheduled debt service obligations. We rely on technology in our business and any technology disruption or delay in implementing new technology could have a material negative impact on our business Our ability to decrease costs and increase profi ts, as well as our ability to serve customers most effectively, depends on the reliability of our technology network. We use software and other technology systems, among other things, to generate and select orders, to load and route trucks, to make purchases, manage our warehouses and to monitor and manage our business on a day-to-day basis. Any disruption to these computer systems could adversely impact our customer service, decrease the volume of our business and result in increased costs and lower profi ts. Furthermore, process changes will be required as we continue to use our existing warehousing, delivery, and payroll systems to support operations as we implement the ERP system. While Sysco has invested and continues to invest in technology security initiatives and disaster recovery plans, these measures cannot fully insulate us from technology disruption that could result in adverse effects on operations and profi ts. We may be required to pay material amounts under multiemployer defi ned benefi t pension plans We contribute to several multiemployer defi ned benefi t pension plans based on obligations arising under collective bargaining agreements covering union- represented employees. Approximately 10% of our current employees are participants in such multiemployer plans. In fi scal 2013, our total contributions to these plans were approximately $66 million, which included payments for withdrawal liabilities of $32 million. The costs of providing benefi ts through such plans have increased in recent years. The amount of any increase or decrease in our required contributions to these multiemployer plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability if we choose to exit. Based upon the information available to us from plan administrators, we believe that several of these multiemployer plans are underfunded. The unfunded liabilities of these plans may result in increased future payments by us and the other participating employers. Underfunded multiemployer pension plans may impose a surcharge requiring additional pension contributions. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount suffi cient to fund the unfunded liabilities associated with its participants in the plan. Based on the latest information available from plan administrators, we estimate our share of the aggregate withdrawal liability on the multiemployer plans in which we participate could have been as much as $220 million as of June 29, 2013. A signifi cant increase to funding requirements could adversely affect the Company’s fi nancial condition, results of operations or cash fl ows. Our funding requirements for our company-sponsored qualifi ed pension plan may increase should fi nancial markets experience future declines At the end of fi scal 2012, we decided to freeze future benefi t accruals under the company-sponsored qualifi ed pension plan (Retirement Plan) as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees. Effective January 1, 2013, these employees were eligible for additional contributions under an enhanced, defi ned contribution plan. While these actions will serve to limit future growth in our pension liabilities, we had a sizable pension obligation of $2.7 billion as of June 29, 2013 therefore fi nancial market factors could impact our funding requirements. Although recent pension funding relief legislation has served to defer some required funding, additional contributions may be required if our plan is not fully funded when the provisions that provided the relief are phased out. See Note 13, “Company-Sponsored Employee Benefi t Plans” to the Consolidated Financial Statements in Item 8 for a discussion of the funded status of the Retirement Plan. The amount of our annual contribution to the plan is dependent upon, among other things, the returns on the plan’s assets and discount rates used to calculate the plan’s liability. Our Retirement Plan holds investments in both equity and fi xed income securities. Fluctuations in asset values can cause the amount of our anticipated future contributions to the plan to increase. The projected liability of the plan will be impacted by the fl uctuations of interest rates on high quality bonds in the public markets as these are inputs in determining our minimum funding requirements. Specifi cally, decreases in these interest rates may have an adverse impact on our funding obligations. To the extent fi nancial markets experience future declines similar to those experienced in fi scal 2008 through the beginning of fi scal 2010, and/or interest rates on high quality bonds in the public markets decline, our required contributions may increase for future years as our funded status decreases, which could have an adverse impact on our liquidity. 10 SYSCO CORPORATION - Form 10-K PART I ITEM 1B Unresolved Staff Comments Failure to successfully renegotiate union contracts could result in work stoppages As of June 29, 2013, approximately 8,100 employees at 51 operating companies were members of 57 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. In fi scal 2014, 19 agreements covering approximately 2,800 employees have expired or will expire. Since June 29, 2013, two contract covering approximately 300 of such employees have been renegotiated. Failure of our operating companies to effectively renegotiate these contracts could result in work stoppages. Although our operating subsidiaries have not experienced any signifi cant labor disputes or work stoppages to date, and we believe they have satisfactory relationships with their unions, a work stoppage due to failure of multiple operating subsidiaries to renegotiate union contracts could have a material adverse effect on us. A shortage of qualifi ed labor could negatively impact our business and materially reduce earnings Our operations rely heavily on our employees, particularly drivers, and any shortage of qualifi ed labor could signifi cantly affect our business. Our recruiting and retention efforts and efforts to increase productivity gains may not be successful and there may be a shortage of qualifi ed drivers in future periods. Any such shortage would decrease Sysco’s ability to effectively serve our customers. Such a shortage would also likely lead to higher wages for employees and a corresponding reduction in our net earnings. A cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking and other online activities to connect with our employees, suppliers, business partners and our customers. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/ or confi dential information and intellectual property, including customers’ and suppliers personal information, private information about employees, and fi nancial and strategic information about the Company and its business partners. Further, as the Company pursues its strategy to grow through acquisitions and to pursue new initiatives that improve our operations and cost structure, the Company is also expanding and improving its information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confi dential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage. Our authorized preferred stock provides anti-takeover benefi ts that may not be viewed as benefi cial to stockholders Under our Restated Certifi cate of Incorporation, Sysco’s Board of Directors is authorized to issue up to 1,500,000 shares of preferred stock without stockholder approval. Issuance of these shares could make it more diffi cult for anyone to acquire Sysco without approval of the Board of Directors, depending on the rights and preferences of the stock issued. In addition, if anyone attempts to acquire Sysco without approval of the Board of Directors of Sysco, the existence of this undesignated preferred stock could allow the Board of Directors to adopt a shareholder rights plan without obtaining stockholder approval, which could result in substantial dilution to a potential acquirer. As a result, hostile takeover attempts that might result in an acquisition of Sysco, that could otherwise have been fi nancially benefi cial to our stockholders, could be deterred. ITEM 1B Unresolved Staff Comments None. SYSCO CORPORATION - Form 10-K 11 PART I ITEM 2 Properties ITEM 2 Properties The table below shows the number of distribution facilities occupied by Sysco in each state, province or country and the aggregate square footage devoted to cold and dry storage as of June 29, 2013. Location Alabama Alaska Arizona Arkansas California Colorado Connecticut District of Columbia Florida Georgia Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Bahamas Alberta, Canada British Columbia, Canada Manitoba, Canada New Brunswick, Canada Newfoundland, Canada Nova Scotia, Canada 12 SYSCO CORPORATION - Form 10-K Number of Facilities Cold Storage (Square Feet in thousands) Dry Storage (Square Feet in thousands) 2 1 2 2 17 4 3 1 15 5 2 6 1 1 1 1 1 1 2 2 3 3 1 2 1 1 3 4 1 4 6 1 6 4 3 4 1 1 5 19 1 3 1 3 1 3 8 1 2 1 1 184 41 129 131 1,284 274 160 7 1,199 294 84 402 100 93 177 92 134 59 291 249 320 239 95 106 120 143 193 140 120 417 332 46 407 192 177 459 3 191 406 1,107 161 564 134 287 90 209 280 78 85 33 31 130 28 117 88 1,225 212 110 7 889 431 88 535 109 95 171 106 113 50 252 229 300 194 69 94 121 129 156 453 108 361 303 59 423 149 160 405 - 98 426 1,053 107 410 92 299 23 202 232 74 41 22 42 Segment Served* BL BL BL, O BL, O BL, S, O BL, S, O BL, O BL BL, S, O BL, S, O BL BL, S, O BL BL BL BL BL BL BL BL, S BL, S BL BL BL, S BL BL BL, O BL, O BL BL, O BL, S, O BL BL, S, O BL, S, O BL, S BL, S BL BL BL, O BL, S, O BL BL BL BL, O BL BL BL, O BL BL BL BL Location Ontario, Canada Quebec, Canada Saskatchewan, Canada Ireland Northern Ireland Puerto Rico TOTAL * Segments served include Broadline (BL), SYGMA (S) and Other (O). PART I ITEM 4 Mine Safety Disclosures Number of Facilities Cold Storage (Square Feet in thousands) Dry Storage (Square Feet in thousands) 10 6 1 6 1 1 193 435 148 40 94 2 8 13,276 394 202 54 71 8 - 12,319 Segment Served* BL, O BL BL BL BL O We own approximately 21,070,000 square feet of our distribution facilities (or 82.3% of the total square feet), and the remainder is occupied under leases expiring at various dates from fi scal 2014 to fi scal 2032, exclusive of renewal options. We own our approximately 625,000 square foot headquarters offi ce complex in Houston, Texas. In addition, we own our approximately 669,000 square foot shared services complex in Cypress, Texas. We are currently constructing a fold-out facility in Ontario, Canada. As of June 29, 2013, our fl eet of approximately 9,100 delivery vehicles consisted of tractor and trailer combinations, vans and panel trucks, most of which are either wholly or partially refrigerated for the transportation of frozen or perishable foods. We own approximately 94% of these vehicles and lease the remainder. ITEM 3 Legal Proceedings None. ITEM 4 Mine Safety Disclosures Not applicable. SYSCO CORPORATION - Form 10-K 13 PART II ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities The principal market for Sysco’s common stock (SYY) is the New York Stock Exchange. The table below sets forth the high and low sales prices per share for our common stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared for the periods indicated. Fiscal 2012: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2013: First Quarter Second Quarter Third Quarter Fourth Quarter Common Stock Prices High Low Dividends Declared Per Share $ $ 31.73 $ 29.62 31.18 30.20 31.41 $ 32.40 35.62 35.40 25.48 $ 25.09 28.70 27.05 28.23 $ 29.75 30.55 33.07 0.26 0.27 0.27 0.27 0.27 0.28 0.28 0.28 The number of record owners of Sysco’s common stock as of August 14, 2013 was 12,469. We made the following share repurchases during the fourth quarter of fi scal 2013: ISSUER PURCHASES OF EQUITY SECURITIES Period Month #1 March 31 – April 27 Month #2 April 28 – May 25 Month #3 May 26 – June 29 TOTAL (a) Total Number of Shares Purchased (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 1,600,486 $ 34.66 1,572,700 11,813,900 1,716,725 8,616,830 11,934,041 $ 34.78 34.19 34.33 1,500,000 10,313,900 8,599,703 11,672,403 1,714,197 1,714,197 On November 16, 2011, the Board of Directors approved the repurchase of 20,000,000 shares. Pursuant to the repurchase program, shares may be acquired in the open market or in privately negotiated transactions at the company’s discretion, subject to market conditions and other factors. In July 2004, the Board of Directors authorized us to enter into agreements from time to time to extend our ongoing repurchase program to include repurchases during company announced “blackout periods” of such securities in compliance with Rule 10b5-1 promulgated under the Exchange Act. 14 SYSCO CORPORATION - Form 10-K PART II ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities Stock Performance Graph The following performance graph and related information shall not be deemed “soliciting material” or to be “fi led” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future fi ling under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that Sysco specifi cally incorporates such information by reference into such fi ling. The following stock performance graph compares the performance of Sysco’s Common Stock to the S&P 500 Index and to the S&P 500 Food/Staple Retail Index for Sysco’s last fi ve fi scal years. The graph assumes that the value of the investment in our Common Stock, the S&P 500 Index, and the S&P 500 Food/Staple Index was $100 on the last trading day of fi scal 2008, and that all dividends were reinvested. Performance data for Sysco, the S&P 500 Index and the S&P 500 Food/Staple Retail Index is provided as of the last trading day of each of our last fi ve fi scal years. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ASSUMES INITIAL INVESTMENT OF $100 In $ 160 140 120 100 80 60 40 20 0 6/28/08 6/27/09 7/3/10 7/2/11 6/30/12 6/29/13 Sysco Corporation S&P 500 Index S&P 500 Food/Staples Retail Index Sysco Corporation S&P 500 S&P 500 Food/Staple Retail Index $ 100 $ 100 100 85 $ 74 82 108 $ 84 83 124 $ 112 108 122 $ 116 125 144 140 151 6/28/08 6/27/09 7/3/10 7/2/11 6/30/12 6/29/13 SYSCO CORPORATION - Form 10-K 15 PART II ITEM 6 Selected Financial Data ITEM 6 Selected Financial Data (In thousands except for per share data) Sales Operating income Earnings before income taxes Income taxes NET EARNINGS Net earnings: BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE $ $ $ Dividends declared per share assets Total Capital expenditures Current maturities of long-term debt Long-term debt Total ebt ong-term Shareholders’ equity TOTAL CAPITALIZATION Ratio of long-term debt to capitalization d l $ $ $ $ Fiscal Year 2013 44,411,233 $ 2012 42,380,939 $ 2011 39,323,489 $ 1,658,478 1,547,455 555,028 992,427 1,890,632 1,784,002 662,417 1,931,502 1,827,454 675,424 2010 (53 Weeks) 37,243,495 $ 1,975,868 1,849,589 669,606 2009 36,853,330 1,872,211 1,770,834 714,886 $ 1,121,585 $ 1,152,030 $ 1,179,983 $ 1,055,948 $ 1.68 1.67 1.11 $ 12,663,947 $ 511,862 207,301 $ 2,639,986 2,847,287 5,191,810 8,039,097 $ $ 1.91 1.90 1.07 $ 12,137,207 $ 784,501 254,650 $ 2,763,688 3,018,338 4,685,040 7,703,378 $ $ 1.96 1.96 1.03 $ 11,427,190 $ 636,442 207,031 $ 2,279,517 2,486,548 4,705,242 7,191,790 $ $ 1.99 1.99 0.99 $ 10,336,436 $ 594,604 7,970 $ 2,472,662 2,480,632 3,827,526 6,308,158 $ 1.77 1.77 0.94 10,160,321 464,561 9,163 2,467,486 2,476,649 3,449,702 5,926,351 35.4% 39.2% 34.6% 39.3% 41.8% ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Our discussion below of our results includes certain non-GAAP fi nancial measures that we believe provide important perspective with respect to underlying business trends. Any non-GAAP fi nancial measure will be denoted as an adjusted measure and our fi scal 2013 comparisons to fi scal 2012 exclude the impact from Business Transformation Project costs, multiemployer pension plan charges, severance charges, executive retirement plans restructuring, a one-time acquisition related charge and facility closure charges. Collectively, these are referred to as Excluded Charges. Our fi scal 2012 comparisons to fi scal 2011 exclude the impact from Business Transformation Project costs, multiemployer pension plan charges, severance charges, corporate-owned life insurance (COLI) policies and certain tax benefi ts. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” Overview Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our operations are primarily located throughout the United States, Bahamas, Canada, Ireland and Northern Ireland and include broadline companies (which include our custom-cut meat operations), SYGMA (our chain restaurant distribution subsidiary), specialty produce companies, hotel supply operations, a company that distributes specialty imported products and a company that distributes to international customers. We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 18% of this approximately $235 billion annual market. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 48% of the total dollars spent on food purchases made at the consumer level in the United States. Industry sources estimate the total foodservice market in the United States experienced a real sales increase of approximately 1.3% in calendar year 2012 and a decline of 0.1% in calendar year 2011. Real sales changes do not include the impact of infl ation or defl ation. General economic conditions and consumer confi dence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, have contributed to a decline in the foodservice market. Historically, we have grown at a faster rate than the overall industry and believe we have continued to grow our market share in this fragmented industry. 16 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Highlights Fiscal 2013 was a year in which we progressed with our Business Transformation Project while facing a challenging business and economic environment. The foodservice industry has not fully participated in the overall economic recovery primarily due to constrained consumer spending for food-away-from- home. Our results of operations refl ect these challenges as well as expenses related to our Business Transformation Project, payroll costs, charges from the withdrawal from multiemployer pension plans and increased fuel expense. We believe our sales growth and expense management on a cost per cases basis was acceptable, however gross profi t did not grow as we planned due partially to competitive pressures and a shift in customer mix. We will remain focused on the execution of our business plan and initiatives from our Business Transformation Project, with the goal for these items to contribute to the long-term success of our customers and in turn, growth in our earnings. We acquired 14 companies during fi scal 2013, which represents annualized sales in excess of $1 billion. We expect these acquisitions will contribute to our sales growth, enhance our international market presence and product assortment. Comparison of results from fi scal 2013 to fi scal 2012: • Sales increased 4.8%, or $2.0 billion to $44.4 billion. • Operating income decreased 12.3%, or $232.2 million, to $1.7 billion. • Adjusted operating income decreased 1.7%, or $36.4 million, to $2.1 billion. • Net earnings decreased 11.5%, or $129.2 million, to $1.0 billion. • Adjusted net earnings increased 0.1%, or $1.4 million, to $1.3 billion. • Basic earnings per share in fi scal 2013 was $1.68, a 12.0% decrease from the comparable prior year period amount of $1.91 per share. Diluted earnings per share in fi scal 2013 was $1.67, a 12.1% decrease from the comparable prior year period amount of $1.90 per share. • Adjusted diluted earnings per share was $2.14 in fi scal 2013, a 0.5% decrease from the comparable prior year amount of $2.15 per share. See “Non-GAAP Reconciliations” for an explanation of these non-GAAP fi nancial measures. Trends and Strategy Trends General economic conditions and consumer confi dence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. Consumer confi dence has improved since 2008, however it remains below its historical highs. We believe that the consumer is currently concerned about lingering unemployment levels and lack of growth in personal income. We believe these items and other current general economic conditions, have negatively impacted consumer confi dence and contributed to a slow rate of recovery in the foodservice market. While these trends can be cyclical in nature, greater consumer confi dence will be required to reverse the trend. According to industry sources, real sales growth for the total foodservice market in the United States is expected to be modest over the long-term. Non-traditional competitors are becoming more of a factor in terms of competition within our industry, and consumer spending trends are gradually shifting more to fresh, natural and sustainably- produced products. We believe these industry trends reinforce the need for us to transform our business so that we can be in a position to provide greater value to our customers and reduce our overall cost structure. Our gross margin performance has been infl uenced by multiple factors. Our sales growth in fi scal 2013 was greater with our large regional and national customers. Gross margin from these types of customers is generally lower than our independent restaurant customers. If sales from our independent restaurant customers do not grow at the same rate or a greater rate than sales from these large regional and national customers, our gross margins may decline. Additional pressure exists on our gross margin from competitive pricing pressures. Low growth in the foodservice market is contributing to increased competition which is in turn pressuring gross profi ts. We expect this pricing pressure will likely continue. Infl ation can be a factor that contributes to gross margin pressure; however, infl ation rates remained relatively stable throughout fi scal 2013 at a rate between 2.0% to 2.5%. Infl ation was present in certain product categories such as poultry and meat, but was not signifi cant in the majority of our product categories. While we cannot predict whether infl ation will continue at current levels, periods of high infl ation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profi t, operating income and earnings. We have experienced higher operating expenses this fi scal year as compared to fi scal 2012. Our Business Transformation Project has been a primary contributor to this increase. This project is a key part of our strategy to control costs and grow our market share over the long-term. This project includes an integrated software system that went into deployment in August 2012, resulting in increased deployment expenses and software amortization. In fi scal 2012, we were still building and testing our software and therefore had a greater amount of capitalized costs. We believe expenses related to the project in fi scal 2014 will be similar to the costs incurred in fi scal 2013. Operating expenses have also increased due to provisions related to multiemployer pension SYSCO CORPORATION - Form 10-K 17 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations plan withdrawals. These pension plan provisions generally occur when a collective bargaining agreement is being renewed. Pay-related expenses have increased primarily from acquired companies and within delivery areas of our business, however these have been partially offset by lower costs in the selling and information technology areas due to initiatives from our Business Transformation Project. Fuel costs have increased due to both increases diesel prices and gallon usage. Our retirement-related expenses consist primarily of costs from our company-sponsored qualifi ed pension plan (Retirement Plan), our Supplement Executive Retirement Plan (SERP) and our defi ned contribution plan. The net impact in fi scal 2013 of our retirement-related expenses as compared to fi scal 2012 was an increase of $31.3 million. At the end of fi scal 2012, we decided to freeze future benefi t accruals under the Retirement Plan as of December 31, 2012 for all United States-based (U.S.-based) salaried and non-union hourly employees. Effective January 1, 2013, these employees were eligible for additional contributions under an enhanced, defi ned contribution plan. Absent the Retirement Plan freeze discussed above, net company-sponsored pension costs would have increased $106.9 million in fi scal 2013, however because of the freeze the costs decreased as compared to fi scal 2012. Our expenses related to our defi ned contribution plan increased in fi scal 2013. During fi scal 2013, we approved a plan to restructure our executive nonqualifi ed retirement program, including the SERP, by freezing benefi ts. We believe this restructuring more closely aligns our executive plans with our non-executive plans. As a result of this restructuring, we incurred $21.0 million in charges in fi scal 2013. We expect our retirement-related expenses will decrease in the range of $75 million to $85 million in fi scal 2014 as compared to fi scal 2013. A greater portion of the decrease will occur in the second half of fi scal 2014 due to operation of our enhanced, defi ned contribution plan for a one-year period. Excluding the $21.0 million restructuring charge in fi scal 2013, the decrease is expected to be $50 million to $60 million in fi scal 2014. Over the long-term, we believe the changes to all of these retirement programs will result in reduced volatility of retirement-related expenses and a reduction in total retirement-related expenses. We expect gross margin pressure to persist in fi scal 2014; however, we intend to achieve sales case growth and to reduce costs per case to improve our earnings performance trends in fi scal 2014 as compared to fi scal 2013. Strategy We are focused on optimizing our core broadline business in the United States, Canada and Ireland, while continuing to explore appropriate opportunities to profi tably grow our market share and create shareholder value by expanding beyond our core business. Day-to-day, our business decisions are driven by our mission to market and deliver great products to our customers with exceptional service, with the aspirational vision of becoming each of our customers’ most valued and trusted business partner. We have identifi ed fi ve strategies to help us achieve our mission and vision: • Profoundly enrich the experience of doing business with Sysco: Our primary focus is to help our customers succeed. We believe that by building on our current competitive advantages, we will be able to further differentiate our offering to customers. Our competitive advantages include our sales force of over 7,000 marketing associates; our diversifi ed product base, which includes quality-assured Sysco brand products; the suite of services we provide to our customers such as business reviews and menu analysis; and our wide geographic presence in the United States and Canada. In addition, we have a portfolio of businesses spanning broadline, specialty meat, chain restaurant distribution, specialty produce, hotel amenities, specialty import and export which serves our customers’ needs across a wide array of business segments. Through our Sysco Ventures platform, we are developing a suite of technology solutions that help support the administrative needs of our customers. We believe this strategy of enriching the experience of doing business with Sysco will increase customer retention and profi tably accelerate sales growth with both existing and new customers. • Continuously improve productivity in all areas of our business: Our multi-year Business Transformation Project is designed to improve productivity and reduce costs. An integrated software system is included in this project and will support a majority of our business processes to further streamline our operations and reduce costs. These systems are commonly referred to as Enterprise Resource Planning (ERP) systems. We view the technology as an important enabler of this project; however the larger outcome of this project will be from transformed processes that standardize portions of our operations. This includes a shared business service center to centrally manage certain back-offi ce functions that are currently performed at a majority of our operating companies. This project includes other components to lower our cost structure through improved productivity without impacting our service to our customers. We continue to optimize warehouse and delivery activities across the corporation to achieve a more effi cient delivery of products to our customers and we seek to improve sales productivity and lower general and administrative costs. We also have a product cost reduction and category management initiative to use market data and customer insights to make changes to product pricing and product assortment. • Expand our portfolio of products and services by initiating a customer-centric innovation program: We continually explore opportunities to provide new and improved products, technologies and services to our customers. • Explore, assess and pursue new businesses and markets: This strategy is focused on identifying opportunities to expand the core business through growth in new international markets and in adjacent areas that complement our core foodservice distribution business. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses. • Develop and effectively integrate a comprehensive, enterprise-wide talent management process: Our ability to drive results and grow our business is directly linked to having the best talent in the industry. We are committed to the continued enhancement of our talent management programs in terms of how we recruit, select, train and develop our associates throughout Sysco as well as succession planning. Our ultimate objective is to provide our associates with outstanding opportunities for professional growth and career development. 18 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Business Transformation Project Our multi-year Business Transformation Project consists of: • the design and deployment of an ERP system to implement an integrated software system to support a majority of our business processes and further streamline our operations; • a cost transformation initiative to lower our cost structure; • a product cost reduction and category management initiative to use market data and customer insights to make changes to product pricing and product assortment; and • several other initiatives. We deployed our ERP system to three additional locations in fi scal 2013 and experienced improved functionality in many areas compared to past deployments. Our shared services center, Sysco Business Services, continues to expand and provide a broader array of centralized administrative services. The majority of the system functionality is performing as designed; however, we have identifi ed areas for improvement to certain components of the system that we want to address before we continue deploying to additional locations. These improvements include simplifying certain processes to improve response times and reduce system loads. We believe that this will improve system stability and result in improved ability to scale the system as we move forward. While these improvements are being made, we will continue implementing individual modules such as our human resource module and continue with other Business Transformation initiatives. We intend to deploy the system to one additional location around the end of this calendar year. If our updates are successful, we anticipate that further deployment will resume early in calendar 2014. Our deployment schedule will be further defi ned at that time. Our cost transformation initiative seeks to lower our cost structure by $300 million to $350 million annually by fi scal 2015. These include initiatives to increase our productivity in the warehouse and delivery activities including fl eet management and maintenance activities. It also involves improving sales productivity and reducing general and administrative expenses, partially through aligning compensation and benefi t plans. Efforts from our cost transformation initiatives in fi scal 2013 spanned many areas of operations. We completed the implementation of maintenance management tools in our United States Broadline (U.S. Broadline) companies. A customer relationship management tool has been implemented in our U.S. Broadline companies that will improve sales productivity. We restructured our information technology department and contracted with a third party provider for information technology managed services. For our U.S. Broadline companies, we accelerated the implementation of our human resource module from our ERP system which is expected to be complete by the third quarter of fi scal 2014. Also, in our U.S. Broadline companies we began centralizing fi eld fi nance work to our shared services center. We believe this transition will be complete by December 2013. We have begun implementing enhancements to our routing technology and processes to improve delivery effi ciencies and expect this initiative to be complete by fi scal 2015. Lastly, our retirement programs have been restructured, which we believe will result in reduced volatility of retirement-related expenses and a reduction in total retirement-related expenses in the long-term. Our product cost reduction and category management initiative is designed to lower our total product costs by $250 million to $300 million annually by fi scal 2015 and to align our product assortment with current customer demand. We are using market data and customer insights to make changes to our product assortment while building strategic partnerships with our suppliers. We believe there are opportunities to more effectively provide the products that our customers want, commit to greater volumes with our suppliers and create mutual benefi ts for all parties. We believe that procuring greater quantities with select vendors will result in reduced prices for our product purchases. In fi scal 2013, our product cost reduction and category management initiative was active in reducing SKUs in our inventory and increasing participation in our centralized purchasing initiative. We are in the process of piloting four product categories in our category management initiative and have received encouraging acceptance rates from our customers of our new assortment of products. Our suppliers have engaged in the process and appreciate building strategic partnerships that include customer insights into current trends and product innovations. Expenses related to the Business Transformation Project were $330.5 million in fi scal 2013 or $0.36 per share, $193.1 million in fi scal 2012 or $0.21 per share and $102.6 million in fi scal 2011 or $0.11 per share. The increase in costs in 2013 was largely attributable to deployment costs and software amortization, which began in August 2012. Software amortization totaled $76.8 million in 2013. The increase in costs in 2012 was due to increased project spending, reduced capitalization of expenditures and expenses due to the ramp up of our shared services center. We anticipate that project expenses for fi scal 2014 will be similar to fi scal 2013. Despite the increase in expense, our cash outlay for our Business Transformation Project, which excludes non- cash software amortization, decreased approximately $48 million as compared to fi scal 2012. Our goal for our Business Transformation Project is to generate approximately $550 million to $650 million in annual benefi ts to be achieved by fi scal 2015. In fi scal 2013, we believe we exceeded our goal of realizing approximately 25% of the total benefi t. In fi scal 2014, we believe we can obtain approximately 50% to 70% of the total targeted benefi t. If we are successful in obtaining these benefi ts in fi scal 2014, some of the trends in gross profi ts and operating expenses noted above could be favorably impacted. Our original goal was to grow our diluted earnings per share to $2.50 to $2.75 by fi scal 2015. Despite the success of our Business Transformation Project, our diluted earnings per share has not grown as originally anticipated due to the diffi cult economic environment and the general operating performance of our underlying business that did not meet our expectations. We no longer believe we will achieve our original goal of producing diluted earnings per share to $2.50 to $2.75 by fi scal 2015. SYSCO CORPORATION - Form 10-K 19 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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: Sales Cost of sales Gross profi t Operating expenses Operating income Interest expense Other expense (income), net Earnings before income taxes Income taxes NET EARNINGS 2013 2012 2011 100.0% 82.3 17.7 14.0 3.7 0.3 (0.0) 3.4 1.2 2.2% 100.0% 81.9 18.1 13.6 4.5 0.3 (0.0) 4.2 1.6 2.6% 100.0% 81.2 18.8 13.9 4.9 0.3 (0.0) 4.6 1.7 2.9% 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 prior year: Sales Cost of sales Gross profi t Operating expenses Operating income Interest expense Other expense (income), net Earnings before income taxes Income taxes NET EARNINGS BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE Average shares outstanding Diluted shares outstanding (1) Other expense (income), net was income of $17.5 million in fiscal 2013, $6.8 million in fiscal 2012 and $14.2 million in fiscal 2011. Sales 2013 2012 4.8% 5.3 2.5 7.3 (12.3) 13.3 158.2(1) (13.3) (16.2) (11.5)% (12.0)% (12.1) 0.3 0.6 7.8% 8.7 3.8 5.9 (2.1) (4.1) (52.4)(1) (2.4) (1.9) (2.6)% (2.6)% (3.1) 0.2 0.1 Sales for fi scal 2013 were 4.8% higher than fi scal 2012. Sales for fi scal 2013 increased as a result of product cost infl ation and the resulting increase in selling prices, sales from acquisitions that occurred within the last 12 months and case volume growth. Our sales growth in fi scal 2013 was greater with our large regional and national customers as compared to sales growth with our independent restaurant customers. We believe our independent sales growth has been negatively infl uenced by lower consumer sentiment. Case volumes excluding acquisitions within the last 12 months improved 1.3% in fi scal 2013. Our case volumes represent our results from our Broadline and SYGMA segments only. Sales from acquisitions within the last 12 months favorably impacted sales by 1.5% for fi scal 2013. Our acquisition activity has been greater in fi scal 2013 as compared to fi scal 2012. We estimate the carryover impact into fi scal 2014 will cause sales to increase by approximately 1.0%. We expect to continue the trend of closing acquisitions in fi scal 2014 that will continue to add at least 1.0% in total annualized sales from new acquisitions in fi scal 2014. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 2.2% during fi scal 2013. Case volumes including acquisitions within the last 12 months improved approximately 2.6% in fi scal 2013. The changes in the exchange rates used to translate our foreign sales into U.S. dollars did not have a signifi cant impact on sales when compared to fi scal 2012. Sales for fi scal 2012 were 7.8% higher than fi scal 2011. Sales for fi scal 2012 increased as a result of product cost infl ation, and the resulting increase in selling prices, along with improving case volumes. Changes in product cost, an internal measure of infl ation, were approximately 5.5% during fi scal 2012. Case volumes including acquisitions within the last 12 months improved approximately 3.0% during fi scal 2012. Case volumes excluding acquisitions within the last 12 months improved approximately 2.5% during fi scal 2012. Sales from acquisitions in the last 12 months favorably impacted sales by 0.7% for fi scal 2012. The changes in the exchange rates used to translate our foreign sales into U.S. dollars did not have a signifi cant impact on sales when compared to fi scal 2011. 20 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating Income Cost of sales primarily includes our product costs, net of vendor consideration, and includes in-bound freight. Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities. Fuel surcharges are refl ected within sales and gross profi t; fuel costs are refl ected within operating expenses. Fiscal 2013 vs. Fiscal 2012 The following table sets forth the change in the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year: (In thousands) Gross profi t Operating expenses OPERATING INCOME Gross profi t Adjusted operating expenses (Non-GAAP) ADJUSTED OPERATING INCOME (NON-GAAP) 2013 7,867,591 $ 6,209,113 1,658,478 $ 7,867,591 $ 5,783,854 2,083,737 $ $ $ $ $ 2012 7,676,577 $ 5,785,945 1,890,632 $ 7,676,577 $ 5,556,468 2,120,109 $ Change in Dollars 191,014 423,168 (232,154 ) 191,014 227,386 (36,372) % Change 2.5% 7.3 (12.3 )% 2.5% 4.1 (1.7)% The decrease in operating income in fi scal 2013 as compared to fi scal 2012 was primarily driven by increased expenses, including charges related to our Business Transformation Project and increased pay-related expenses. Gross profi t dollars increased in fi scal 2013 as compared to fi scal 2012 primarily due to increased sales. Gross margin, which is gross profi t as a percentage of sales, was 17.72% in fi scal 2013, a decline of 39 basis points from the gross margin of 18.11% in fi scal 2012. This decline in gross margin was partially the result of increased growth from large regional and national customers. Gross margin from these types of customers is generally lower than other types of customers. As seen in our results during fi scal 2013, if sales from our independent restaurant customers do not grow at the same rate sales from these large regional and national customers, our gross margins may decline. Increased competition resulting from a slow-growth market also contributed to the decline in gross margins. We estimate that Sysco’s product cost infl ation was 2.2% during fi scal 2013. Based on our product sales mix for fi scal 2013, we were most impacted by higher levels of infl ation in the poultry and meat product categories. While we cannot predict whether infl ation will occur, prolonged periods of high infl ation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profi t and earnings. Operating expenses for fi scal 2013 increased 7.3%, or $423.2 million, over fi scal 2012, primarily due to increased expenses from our Business Transformation Project, pay-related expenses, charges related to multiemployer pension plan withdrawals, depreciation and amortization expense and fuel. Adjusted operating expenses increased 4.1%, or $227.4 million, in fi scal 2013 over fi scal 2012. The increase in adjusted operating expenses was primarily due to increased pay-related expenses, depreciation and amortization expense and fuel. Expenses related to our Business Transformation Project, inclusive of pay-related and software amortization expense, were $330.5 million in fi scal 2013 and $193.1 million in fi scal 2012, representing an increase of $137.4 million. The increase in fi scal 2013 resulted in part from the initiation of software amortization as the system was placed into service in August 2012. The increase in depreciation and amortization expense related to the Business Transformation Project was $59.6 million in fi scal 2013 over fi scal 2012. Our project was not in the deployment stage during any period of fi scal 2012; therefore, a greater portion of the costs were capitalized in fi scal 2012. We anticipate that project expenses for fi scal 2014 will be similar to fi scal 2013. Pay-related expenses, excluding labor costs associated with our Business Transformation Project and retirement-related expenses, increased by $48.3 million in fi scal 2013 over fi scal 2012. The increase was primarily due to added costs from companies acquired in the last 12 months and increased delivery and warehouse compensation. Delivery and warehouse compensation includes activity-based pay which will increase when our case volumes increase. Additionally, pay rates have been higher particularly in geographies where oil and gas exploration occurs due to labor shortages. These increases were partially offset by reduced sales and information technology pay-related expenses as a result of some of our Business Transformation initiatives. During fi scal 2013, we streamlined our sales management organization and modifi ed marketing associate compensation plans. We also restructured our information technology department during the mid-point of fi scal 2013, reducing headcount as a result. Our retirement-related expenses consist primarily of costs from our Retirement Plan, SERP and our defi ned contribution plan. The net impact in fi scal 2013 of our retirement-related expenses as compared to fi scal 2012 was an increase of $31.3 million, consisting of $48.1 million increased costs from the defi ned contribution plan, a $20.8 million decrease in our net company-sponsored pension costs and approximately $4 million for other costs. At the end of fi scal 2012, Sysco decided to freeze future benefi t accruals under the Retirement Plan as of December 31, 2012 for all U.S.-based salaried and non-union hourly employees. Effective January 1, 2013, these employees were eligible for additional contributions under an enhanced, defi ned contribution plan. Absent the Retirement Plan freeze, net company-sponsored pension costs would have increased $106.9 million in fi scal 2013. During fi scal 2013, we approved a plan to restructure our executive nonqualifi ed retirement program including the SERP and our executive deferred compensation plan. SYSCO CORPORATION - Form 10-K 21 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations A non-qualifi ed defi ned contribution plan became effective on January 1, 2013 as a replacement plan and benefi ts were frozen under the SERP at the end of fi scal 2013. We believe this restructuring more closely aligned our executive plans with our non-executive plans. As a result of this restructuring, we incurred $21.0 million in charges in fi scal 2013. We expect our retirement-related expenses in fi scal 2014 as compared to fi scal 2013 will decrease in the range of $75 million to $85 million primarily from reduced expenses of our Retirement Plan, partially offset by increased defi ned contribution plan expenses. A greater portion of the decrease will occur in the second half of fi scal 2014 due to operation of our enhanced, defi ned contribution plan for a one-year period. Excluding the $21.0 million restructuring charge in fi scal 2013 and the decrease in fi scal 2014 is expected to be $50 million to $60 million. Over the long-term, we believe the changes to all of these retirement programs will result in reduced volatility of retirement-related expenses and a reduction in total retirement-related expenses. Depreciation and amortization expense increased by $95.6 million in fi scal 2013 over fi scal 2012. The increase related to our Business Transformation Project is described above. The remaining increase of $36.0 million in fi scal 2013 was primarily related to assets that were not placed in service in fi scal 2012 that were in service in fi scal 2013, primarily from new facilities, property from new acquisitions and expansions. From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our future exposure to these plans. In fi scal 2013 and fi scal 2012, we recorded provisions of $41.9 million and $21.9 million, respectively, related to multiemployer pension plan withdrawals. Fuel costs increased by $18.9 million in fi scal 2013 over fi scal 2012. The increase was primarily due to increased contracted diesel prices and increased gallon usage. Our costs per gallon increased 2.8% in fi scal 2013 over fi scal 2012. Our activities to mitigate fuel costs include reducing miles driven by our trucks through improved routing techniques, improving fl eet utilization by adjusting idling time and maximum speeds and using fuel surcharges. We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements with a goal of mitigating a portion of the volatility in fuel prices. Our fuel commitments will result in either additional fuel costs or avoided fuel costs based on the comparison of the prices on the fi xed price contracts and market prices for the respective periods. In fi scal 2013, the forward purchase commitments resulted in an estimated $17.8 million of avoided fuel costs as the fi xed price contracts were generally lower than market prices for the contracted volumes. In fi scal 2012, the forward purchase commitments resulted in an estimated $20.2 million of avoided fuel costs as the fi xed price contracts were generally lower than market prices for the contracted volumes. As of June 29, 2013, we had forward diesel fuel commitments totaling approximately $204.0 million through August 2014. These contracts will lock in the price of approximately 60% to 65% of our fuel purchase needs for the remainder of the fi scal year at prices slightly lower than the current market price for diesel. Assuming that fuel prices do not rise signifi cantly over recent levels during fi scal 2014, fuel costs, exclusive of any amounts recovered through fuel surcharges, are expected to increase by approximately $10 to $20 million as compared to fi scal 2013. Our estimate is based upon current, published quarterly market price projections for diesel, the cost committed to in our forward fuel purchase agreements currently in place for fi scal 2014 and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these assumptions change, in particular if future fuel prices vary signifi cantly from our current estimates. We continue to evaluate all opportunities to offset potential increases in fuel expense, including the use of fuel surcharges and overall expense management. We also measure our expense performance on a cost per case basis. This metric is calculated by taking the total operating expense of our Broadline companies, excluding charges multiemployer pension plans and severance charges, divided by the number of cases sold. We seek to grow our sales and either minimize or reduce our costs on a per case basis. Our fi scal 2013 cost per case decreased by more than $0.03 per case as compared to fi scal 2012 primarily from reduced pay-related expenses from our sales and information technology areas, partially offset by increased costs from delivery and warehouse pay-related expenses, increased retirement-related expenses and fuel increases. We expect to continue to reduce our Broadline companies cost per case in fi scal 2014 by approximately $0.05 per case partially from reduced retirement-related expenses. Fiscal 2012 vs. Fiscal 2011 The following table sets forth the change in the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year: (In thousands) Gross profi t Operating expenses OPERATING INCOME Gross profi t Adjusted operating expenses (Non-GAAP) ADJUSTED OPERATING INCOME (NON-GAAP) 2012 7,676,577 $ 5,785,945 1,890,632 $ 7,676,577 $ 5,560,189 2,116,388 $ $ $ $ $ 2011 7,394,712 $ 5,463,210 1,931,502 $ 7,394,712 $ 5,338,506 2,056,206 $ Change in Dollars 281,865 322,735 (40,870 ) 281,865 221,683 60,182 % Change 3.8% 5.9 (2.1 )% 3.8% 4.2 2.9% The decrease in operating income from fi scal 2012 to fi scal 2011 was primarily driven by declines in gross margin and increased operating expenses partially from increased expenses from payroll and our Business Transformation Project. These expense increases were partially offset by increases in gross profi t dollars. 22 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Gross profi t dollars increased in fi scal 2012 as compared to fi scal 2011 primarily due to increased sales. Gross margin, which is gross profi t as a percentage of sales, was 18.11% in fi scal 2012, a decline of 69 basis points from the gross margin of 18.80% in fi scal 2011. This decline in gross margin was primarily the result of product cost infl ation. Other factors contributing to our gross margin decline were competitive pressures on pricing, segment mix changes where certain of our lower margin segments grew faster than our Broadline segment and our own strategy to gain market share. Sysco’s product cost infl ation was estimated as infl ation of 5.5% during fi scal 2012. Based on our product sales mix for fi scal 2012, we were most impacted by higher levels of infl ation in the meat, canned and dry and frozen product categories in the range of 6% to 8%. Our product cost infl ation reached a high of 7.3% in the fi rst quarter of fi scal 2012 and a low of 3.3% in the fourth quarter of fi scal 2012. While we are generally able to pass through modest levels of infl ation to our customers, we were unable to fully pass through these higher levels of product cost infl ation with the same gross margin in these product categories without negatively impacting our customers’ business and therefore our business. Gross profi t dollars for fi scal 2012 also increased as a result of higher fuel surcharges. Fuel surcharges were approximately $47.5 million higher in fi scal 2012 than in fi scal 2011 due to higher fuel prices incurred during fi scal 2012 and the application of fuel surcharges to a broader customer base for the entire fi scal period. Operating expenses for fi scal 2012 increased 5.9% primarily due to increased pay-related expenses, increased expenses related to our Business Transformation Project, increased fuel costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values as compared to the prior year period. These increases were partially offset by decreases in net company-sponsored pension costs and lower provisions related to multiemployer pension plans. Adjusted operating expenses increased 4.2%, or $221.7 million, in fi scal 2012 over fi scal 2011. Pay-related expenses, excluding labor costs associated with our Business Transformation Project, increased by $153.7 million in fi scal 2012 over fi scal 2011. The increase was primarily due to increased sales and delivery compensation and added costs from companies acquired within the last 12 months. Sales compensation includes commissions which are driven by gross profi t dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumes. Since these drivers were variable in nature, increased gross profi t dollars and cases volumes increased sales and delivery compensation. Also contributing to the increase in pay-related expenses was an increase in severance incurred in fi scal 2012 over fi scal 2011 of $5.7 million. Expenses related to our Business Transformation Project, inclusive of pay-related expense, were $193.1 million in fi scal 2012 and $102.6 million in fi scal 2011, representing an increase of $90.5 million. The increase in fi scal 2012 resulted from increased project spending, reduced capitalization of expenditures and expenses due to the ramp up of our shared services center. Fuel costs increased by $39.8 million in fi scal 2012 over fi scal 2011 primarily due to increased contracted and market diesel prices. Our costs per gallon increased 13.0% in fi scal 2012 over fi scal 2011. Our fuel commitments will result in either additional fuel costs or avoided fuel costs based on the comparison of the prices on the fi xed price contracts and market prices for the respective periods. In fi scal 2012, the forward purchase commitments resulted in an estimated $20.2 million of avoided fuel costs as the fi xed price contracts were generally lower than market prices for the contracted volumes. In fi scal 2011, the forward purchase commitments resulted in an estimated $16.4 million of avoided fuel costs as the fi xed price contracts were generally lower than market prices for the contracted volumes. We adjust the carrying values of our COLI policies to their cash surrender values on an ongoing basis. The cash surrender values of these policies are largely based on the values of underlying investments, which through fi scal 2011 included publicly traded securities. As a result, the cash surrender values of these policies fl uctuated with changes in the market value of such securities. The changes in the fi nancial markets resulted in gains for these policies of $28.2 million in fi scal 2011. Near the end of fi scal 2011, we reallocated all of our policies into low-risk, fi xed-income securities to reduce earnings volatility and therefore our adjustments for fi scal 2012 were not signifi cant. Net company-sponsored pension costs in fi scal 2012 were $27.3 million lower than in fi scal 2011. The decrease in fi scal 2012 was due primarily to higher returns on assets of Sysco’s Retirement Plan obtained in fi scal 2011. From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our future exposure to these plans. In the last two fi scal years, we voluntary withdrew from several multiemployer plans and recorded provisions of $21.9 million in fi scal 2012 and $41.5 million in fi scal 2011. Our fi scal 2012, our Broadline companies cost per case increased approximately $0.04 per case as compared to fi scal 2011 primarily from increased pay-related expenses and higher fuel costs. Net Earnings Net earnings decreased 11.5% in fi scal 2013 from fi scal 2012 due primarily to the changes in operating income discussed above. Adjusted net earnings increased 0.1% in fi scal 2013. The increase in adjusted net earnings in fi scal 2013 was primarily from increased gross profi ts, partially offset by increases in adjusted operating expenses that were primarily due to increased pay-related expenses, depreciation and amortization expense and fuel. Net earnings for fi scal 2012 decreased 2.6% over fi scal 2011. This decrease was primarily due to changes in operating income discussed above. Adjusted net earnings increased 4.6% during fi scal 2012. SYSCO CORPORATION - Form 10-K 23 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations The effective tax rate of 35.87% for fi scal 2013 was favorably impacted primarily by two items. First, we recorded a tax benefi t of $14.0 million related to changes in estimates for the prior year domestic tax provision. Second, we recorded a tax benefi t of $8.8 million related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. The effective tax rate was negatively impacted by the recording of $5.7 million in tax and interest related to various federal, foreign and state uncertain tax positions. Indefi nitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate. The effective tax rate for fi scal 2012 was 37.13%. Indefi nitely reinvested earnings taxed at foreign statutory tax rates less than our domestic tax rate had the impact of reducing the effective tax rate. The effective tax rate of 36.96% for fi scal 2011 was favorably impacted primarily by two items. First, we recorded a tax benefi t of approximately $17.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. Second, we adjust the carrying values of our COLI policies to their cash surrender values. The gain of $28.2 million recorded in fi scal 2011 was primarily non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.1 million. Partially offsetting these favorable impacts was the recording of $9.3 million in tax and interest related to various federal, foreign and state uncertain tax positions. Earnings Per Share Basic earnings per share in fi scal 2013 was $1.68, a 12.0% decrease from the comparable prior year period amount of $1.91 per share. Diluted earnings per share in fi scal 2013 was $1.67, a 12.1% decrease from the comparable prior year period amount of $1.90 per share. This decrease was primarily the result of the factors discussed above. Adjusted diluted earnings per share in fi scal 2013 was $2.14, a decrease of 0.5% from the comparable prior year period amount of $2.15. All earnings per share metrics for the fi scal 2013 were partially impacted from greater shares outstanding. Sysco experienced a greater number of stock option exercises in fi scal 2013 as compared to fi scal 2012, which has increased the number of shares outstanding. Basic and diluted earnings per share in fi scal 2012 were $1.91 and $1.90, respectively. This represents a 2.6% decrease from the comparable prior year period amount for basic earnings per share of $1.96 per share and a 3.1% decrease from the comparable prior year period amount for diluted earnings per share of $1.96. This decrease was primarily the result of the factors discussed above. Adjusted diluted earnings per share was $2.14 in fi scal 2012 and $2.05 in fi scal 2011, or an increase of 4.4%. Non-GAAP Reconciliations Sysco’s results of operations are impacted by costs from the Business Transformation Project (BTP costs), multiemployer pension plans (MEPP), severance, executive retirement plans restructuring, a one-time acquisition related charge and facility closure charges. Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove the impact of these items provides an important perspective with respect to underlying business trends and results and provides meaningful supplemental information to both management and investors that is indicative of the performance of the company’s underlying operations and facilitates comparison on a year-over year basis. Additionally, near the end of fi scal 2011, we reallocated all of our investments in our COLI policies into low-risk, fi xed-income securities and therefore we do not expect signifi cant volatility in operating expenses, operating income, net earnings and diluted earnings per share in future periods related to these policies. We experienced signifi cant gains in these policies during fi scal 2011. In addition, we recorded tax benefi ts in fi scal 2011. As such, the comparison of fi scal 2012 and fi scal 2011 is also adjusted for COLI gains and recognized tax benefi ts. The company uses these non-GAAP measures when evaluating its fi nancial results as well as for internal planning and forecasting purposes. These fi nancial measures should not be used as a substitute in assessing the company’s results of operations for periods presented. An analysis of any non-GAAP fi nancial measure should be used in conjunction with results presented in accordance with GAAP. As a result, in the tables below, where applicable, each period presented is adjusted to remove costs of the Business Transformation Project, MEPP, severance, executive retirement plan restructuring, a one-time acquisition related charge, facility closure charges, COLI gains and recognized tax benefi ts. 24 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Set forth below is a reconciliation of actual operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for fi scal 2013 and fi scal 2012: $ $ $ $ $ $ $ $ 2013 2012 7.3% % Change 71.2 91.2 60.6 (In thousands, except for share and per share data) Operating expenses (GAAP) Impact of BTP costs Impact of MEPP charge Impact of severance charge Impact of restructuring executive retirement plans Impact of one-time acquisition-related charge Impact of facility closure charges ADJUSTED OPERATING EXPENSES (NON-GAAP) Operating Income (GAAP) Impact of BTP costs Impact of MEPP charge Impact of severance charge Impact of restructuring executive retirement plans Impact of one-time acquisition-related charge Impact of facility closure charges ADJUSTED OPERATING INCOME (NON-GAAP) Net earnings (GAAP) Impact of BTP costs (net of tax) (1) Impact of MEPP charge (net of tax) (1) Impact of severance charge (net of tax) (1) Impact of restructuring executive retirement plans (net of tax) (1) Impact of one-time acquisition-related charge (no tax impact) Impact of facility closure charge (net of tax) (1) ADJUSTED NET EARNINGS (NON-GAAP) Diluted earnings per share (GAAP) Impact of BTP costs (net of tax) (2) Impact of MEPP charge (net of tax) (2) Impact of severance charge (net of tax) (2) Impact of restructuring executive retirement plans (net of tax) (2) Impact of one-time acquisition-related charge (no tax impact) (2) Impact of facility closure charge (net of tax) (2) ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP) Diluted shares outstanding (1) The aggregate tax impact of adjustments for Business Transformation Project, multiemployer pension plan expenses, severance charges, executive retirement plans restructuring and facility Change in Dollars 423,168 $ (137,418) (19,977) (8,754) (20,990) (5,998) (2,645) 227,386 (232,154) 137,418 19,977 8,754 20,990 5,998 2,645 (36,372) (129,158) 90,560 13,087 5,796 13,461 5,998 1,696 1,440 (0.23) 0.15 0.03 0.01 0.02 0.01 - (0.01) 5,785,945 (193,126) (21,899) (14,452) - - - 5,556,468 1,890,632 193,126 21,899 14,452 - - - 2,120,109 1,121,585 121,418 13,768 9,086 - - - 1,265,857 1.90 0.21 0.02 0.02 - - - 2.15 588,991,441 6,209,113 (330,544) (41,876) (23,206) (20,990) (5,998) (2,645) 5,783,854 1,658,478 330,544 41,876 23,206 20,990 5,998 2,645 2,083,737 992,427 211,978 26,855 14,882 13,461 5,998 1,696 1,267,297 1.67 0.36 0.05 0.03 0.02 0.01 - 2.14 592,675,110 0.1% (12.1)% 71.4 150.0 50.0 (1.7)% (11.5)% 74.6 95.1 63.8 4.1% (12.3)% 71.2 91.2 60.6 (0.5)% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ closure charges was $150.3 million and $85.2 million for fiscal 2013 and 2012, respectively. Individual components of diluted earnings per share may not sum to the total adjusted diluted earnings due to rounding. (2) SYSCO CORPORATION - Form 10-K 25 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Set forth below is a reconciliation of actual operating expenses, operating income, net earnings and diluted earnings per share to adjusted results for these measures for fi scal 2012 and fi scal 2011: $ $ $ $ $ $ $ $ 2011 2012 5.9% 3,721 % Change 5,560,189 1,890,632 5,338,506 1,931,502 88.2 (47.3) 65.4 (86.8) 5,785,945 (193,126) (21,899) (14,452) 5,463,210 (102,622) (41,544) (8,735) 28,197 (In thousands, except for share and per share data) Operating expenses (GAAP) Impact of BTP costs Impact of MEPP charge Impact of severance charge Impact of COLI ADJUSTED OPERATING EXPENSES (NON-GAAP) Operating Income (GAAP) Impact of BTP costs Impact of MEPP charge Impact of severance charge Impact of COLI ADJUSTED OPERATING INCOME (NON-GAAP) Net earnings (GAAP) Impact of BTP costs (net of tax) (1) Impact of MEPP charge (net of tax) (1) Impact of severance charge (net of tax) (1) Impact of tax benefi ts Impact of COLI ADJUSTED NET EARNINGS (NON-GAAP) Diluted earnings per share (GAAP) Impact of BTP costs (net of tax) (2) Impact of MEPP charge (net of tax) (2) Impact of severance charge (net of tax) (2) Impact of tax benefi ts (2) Impact of COLI (2) ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP) Diluted shares outstanding (1) The aggregate tax impact of adjustments for Business Transformation Project, multiemployer pension plan expenses and severance charges was $85.2 million and $56.5 million for fiscal 2012 Change in Dollars 322,735 $ (90,504) 19,645 (5,717) (24,476) 221,683 (40,870) 90,504 (19,645) 5,717 24,476 60,182 (30,445) 56,724 (12,421) 3,580 14,032 24,476 55,946 (0.06) 0.10 (0.02) 0.01 0.02 0.04 0.09 (14,032) (28,197) 1,206,190 1.96 0.11 0.04 0.01 (0.02) (0.05) 2.05 (3,721) 1,262,136 1.90 0.21 0.02 0.02 - 193,126 21,899 14,452 (3,721) 2,116,388 1,121,585 4.6% (3.1)% 90.9 (50.0) 100.0 (100.0) (80.0) 2.9% (2.6)% 87.7 (47.4) 65.0 (100.0) (86.8) 4.2% (2.1)% 88.2 (47.3) 65.4 (86.8) 121,418 13,768 9,086 - 102,622 41,544 8,735 (28,197) 2,056,206 1,152,030 64,694 26,189 5,506 588,691,546 588,991,441 (0.01) 2.14 4.4% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ and 2011, respectively. Individual components of diluted earnings per share may not sum to the total adjusted diluted earnings due to rounding. (2) Segment Results We have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defi ned in accounting provisions related to disclosures about segments of an enterprise. The accounting policies for the segments are the same as those disclosed by Sysco within the Financial Statements and Supplementary Data within Part II Item 8 of this Form 10-K. Intersegment sales represent specialty produce and imported specialty products distributed by the Broadline and SYGMA operating companies. 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 offi ce and Sysco’s shared service center. These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project. While a segment’s operating income may be impacted in the short-term by increases or decreases in gross profi ts, expenses, or a combination thereof, over the long-term each business segment is expected to increase its operating income at a greater rate than sales growth. This is consistent with our long-term goal of leveraging earnings growth at a greater rate than sales growth. The following table sets forth the operating income of each of our reportable segments and the other segment expressed as a percentage of each segment’s sales for each period reported and should be read in conjunction with Note 21, “Business Segment Information” to the Consolidated Financial Statements in Item 8: Broadline SYGMA Other 26 SYSCO CORPORATION - Form 10-K Operating Income as a Percentage of Sales 2013 2012 2011 6.6% 0.9 3.6 7.0% 1.1 3.8 7.3% 1.2 4.5 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth the change in the selected fi nancial data of each of our reportable segments and the other segment expressed as a percentage increase over the prior year and should be read in conjunction with Note 21, “Business Segment Information” to the Consolidated Financial Statements in Item 8: 2013 Operating Income Sales 2012 Operating Income Sales Broadline SYGMA Other (1) SYGMA had operating income of $52.0 million in fiscal 2013, $61.0 million in fiscal 2012 and $62.2 million in fiscal 2011. 5.0% 0.8 14.4 (0.6)% (14.7)(1) 8.3 7.8% 7.4 7.0 3.8% (2.0)(1) (9.2) The following table sets forth sales and operating income of each of our reportable segments, the other segment, and intersegment sales, expressed as a percentage of aggregate segment sales, including intersegment sales, and operating income, respectively. For purposes of this statistical table, operating income of our segments excludes corporate expenses of $894.3 million in fi scal 2013, $677.6 million in fi scal 2012 and $558.8 million in fi scal 2011 that are not charged to our segments. This information should be read in conjunction with Note 21, “Business Segment Information” to the Consolidated Financial Statements in Item 8: 2013 2012 2011 Sales 81.3% 13.0 6.2 (0.5) 100.0% Segment Operating Income 94.1% 2.0 3.9 - 100.0% Sales 81.2% 13.5 5.7 (0.4) 100.0% Segment Operating Income 94.1% 2.4 3.5 - 100.0% Sales 81.2% 13.6 5.7 (0.5) 100.0% Segment Operating Income 93.5% 2.5 4.0 - 100.0% Broadline SYGMA Other Intersegment sales TOTAL Broadline Segment The Broadline reportable segment is an aggregation of the company’s United States, Canadian, Caribbean and European Broadline segments. 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. These companies also provide custom-cut meat operations. Broadline operations have signifi cantly higher operating margins than the rest of Sysco’s operations. In fi scal 2013, the Broadline operating results represented approximately 81.3% of Sysco’s overall sales and 94.1% of the aggregate operating income of Sysco’s segments, which excludes corporate expenses. There are several factors which contribute to these higher operating results as compared to the SYGMA and Other operating segments. We have invested substantial amounts in assets, operating methods, technology and management expertise in this segment. The breadth of its sales force, geographic reach of its distribution area and its purchasing power allow us to benefi t from this segment’s earnings. Sales Sales were 5.0% greater in fi scal 2013 than fi scal 2012. Sales for fi scal 2013 increased as a result of product cost infl ation and the resulting increase in selling prices, sales from acquisitions that occurred within the last 12 months and improving case volumes. Our sales growth in fi scal 2013 has been greater with our large regional and national customers as compared to sales growth with our independent restaurant customers. We believe our independent sales growth has been negatively infl uenced by lower consumer sentiment. Sales from acquisitions within the last 12 months contributed 1.6% to the overall sales comparison for fi scal 2013. Our acquisition activity has been greater in fi scal 2013 as compared to fi scal 2012. We estimate the carryover impact into fi scal 2014 will cause sales to increase by approximately 1.0%. We expect to continue at the trend of closing acquisitions in fi scal 2014 that will continue to add annualized sales from new acquisitions in fi scal 2014. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 2.3% in fi scal 2013. The changes in the exchange rates used to translate our foreign sales into U.S. dollars did not have a signifi cant impact on sales when compared to fi scal 2012. Sales for fi scal 2012 were 7.8% greater than fi scal 2011. Product cost infl ation and the resulting increase in selling prices, combined with case volume improvement, contributed to the increase in sales in fi scal 2012. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 5.7% in fi scal 2012. Non-comparable acquisitions contributed 0.7% to the overall sales comparison for fi scal 2012. The changes in the exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.1% compared to fi scal 2011. SYSCO CORPORATION - Form 10-K 27 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating Income Operating income decreased by 0.6% in fi scal 2013 from fi scal 2012. This decrease was driven by operating expenses increasing more than gross profi t dollars. Gross profi t dollars increased in fi scal 2013 primarily due to increased sales; however, gross profi t dollars increased at a lower rate than sales. This decline in gross margin was partially the result of increased growth from large regional and national customers. Gross margin from these types of customers is generally lower than from other types of customers. As seen in our results during fi scal 2013, if sales from our independent restaurant customers do not grow at the same rate as sales from these large regional and national customers, our gross margins may decline. Increased competition resulting from a slow-growth market also contributed to the decline in gross margins. Our Broadline segment experienced product cost infl ation in fi scal 2013. Based on our product sales mix during fi scal 2013, we were most impacted by higher levels of infl ation in the poultry and meat product categories. While we cannot predict whether infl ation will occur, prolonged periods of high infl ation, either overall or in certain product categories, can have a negative impact on us and our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross profi t and earnings. Operating expenses for the Broadline segment increased in fi scal 2013 as compared to fi scal 2012. The expense increases in fi scal 2013 were driven largely by charges related to multiemployer pension plan withdrawals, pay-related expenses including severance costs, depreciation and amortization expense and fuel. The increase in pay-related expenses was primarily due to increased delivery and warehouse compensation, partially attributable to case growth, and added costs from companies acquired in the last 12 months. Delivery and warehouse compensation includes activity-based pay which will increase when our case volumes increase. Additionally, pay rates have been higher particularly in geographies where oil and gas exploration occurs. These increases were partially offset by reduced sales and information technology pay-related expenses. Our enhanced defi ned contribution plan became effective January 1, 2013 and contributed to the increase in operating expenses. Depreciation and amortization increased primarily from assets that were not placed in service in fi scal 2012 that were in service in fi scal 2013, primarily from new facilities, property from new acquisitions and expansions. Fuel costs were $16.7 million higher in fi scal 2013 than in fi scal 2012. Assuming that fuel prices do not rise signifi cantly over recent levels during fi scal 2014, fuel costs exclusive of any amounts recovered through fuel surcharges, are expected to increase by approximately $5 million to $15 million as compared to fi scal 2013. Our estimate is based upon current, published quarterly market price projections for diesel, the cost committed to in our forward fuel purchase agreements currently in place for fi scal 2014 and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these assumptions change, in particular if future fuel prices vary signifi cantly from our current estimates. We continue to evaluate all opportunities to offset potential increases in fuel expense, including the use of fuel surcharges and overall expense management. From time to time, we may voluntarily withdraw from multiemployer pension plans to minimize or limit our future exposure to these plans. In fi scal 2013 and fi scal 2012, we recorded provisions of $41.9 million and $21.9 million, respectively, related to multiemployer pension plan withdrawals. Our fi scal 2013 cost per case decreased by more than $0.03 per case as compared to fi scal 2012 primarily from reduced pay-related expenses from our sales and information technology areas, partially offset by increased costs from delivery and warehouse pay-related expenses, increased retirement-related expenses and fuel increases. We expect to continue to reduce our cost per case in fi scal 2014 by approximately $0.05 per case partially from reduced retirement-related expenses. Operating income increased by 3.8% in fi scal 2012 over fi scal 2011. This increase was driven by gross profi t dollars increasing more than operating expenses. Gross profi t dollars increased in fi scal 2012 primarily due to increased sales; however, gross profi t dollars increased at a lower rate than sales. This decline in gross margin was primarily the result of product cost infl ation and competitive pressures on pricing. Based on Broadline’s product sales mix for fi scal 2012, we were most impacted by higher levels of infl ation in the meat, canned and dry and frozen product categories. While we are generally able to pass through modest levels of infl ation to our customers, we were unable pass through fully these higher levels of product cost infl ation with the same gross margin in these product categories without negatively impacting our customers’ business and therefore our business. In addition, gross profi t dollars for fi scal 2012 increased as a result of higher fuel surcharges. Fuel surcharges were approximately $39.1 million higher in fi scal 2012 than the prior year due to the application of fuel surcharges to a broader customer base during fi scal 2012 due to higher fuel prices incurred during these periods. Operating expenses for the Broadline segment increased in fi scal 2012 as compared to fi scal 2011. The expense increases in fi scal 2012 were driven largely by an increase in pay-related expenses and fuel costs, partially offset by a favorable comparison in the provisions recorded for the withdrawal from multiemployer pension plans in each fi scal year. Sales compensation includes commissions which are driven by gross profi t dollars and case volumes, and delivery compensation includes activity-based pay which is driven by case volumes. Since these drivers are variable in nature, increased gross profi t dollars and case volumes will increase sales and delivery compensation. Fuel costs were $26.5 million higher in fi scal 2012 than the prior year. We recorded provisions related to the withdrawal from multiemployer pension plans of $21.9 million in fi scal 2012 and $41.5 million in fi scal 2011. In fi scal 2012, our Broadline companies cost per case increased approximately $0.04 per case as compared to fi scal 2011 primarily from increased pay- related expenses and higher fuel costs. 28 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations SYGMA Segment SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. SYGMA operations have traditionally had lower operating income as a percentage of sales than Sysco’s other segments. This segment of the foodservice industry has generally been characterized by lower overall operating margins as the volume that these customers command allows them to negotiate for reduced margins. These operations service chain restaurants through contractual agreements that are typically structured on a fee per case delivered basis. Sales Sales were 0.8% greater in fi scal 2013 than in fi scal 2012. The increase was primarily due to product cost infl ation and the resulting increase in selling prices, partially offset by case volume declines. Case volumes were challenged from low levels of growth from existing customers and from lost customers. While SYGMA has experienced some success in replacing lost business with new customers, it has not been enough to signifi cantly overcome the factors noted above. We believe SYGMA’s sales growth prospects are better in fi scal 2014 as compared to fi scal 2013. Sales were 7.4% greater in fi scal 2012 than in fi scal 2011. The increase in sales was primarily due to product cost infl ation and the resulting increase in selling prices. Sales to new customers also contributed to the increase. One chain restaurant customer (The Wendy’s Company) accounted for approximately 25% of the SYGMA segment sales for the fi scal year ended June 29, 2013. SYGMA maintains multiple regional contracts with varied expiration dates with this customer. While the loss of this customer would have a material adverse effect on SYGMA, we do not believe that the loss of this customer would have a material adverse effect on Sysco as a whole. Operating Income Operating income decreased by 14.7% in fi scal 2013 from fi scal 2012. Gross profi t dollars decreased 0.9% while operating expenses increased 1.2% in fi scal 2013 over fi scal 2012. These gross profi t results largely refl ect the sluggish sales environment. Operating expenses increased in fi scal 2013 largely due to increased delivery costs including pay-related expenses. Our enhanced defi ned contribution plan became effective January 1, 2013 and contributed to the increase in pay-related expense. Operating income decreased $1.2 million in 2012 from the prior year due to rising operating expenses. Gross profi t dollars increased 4.3% while operating expenses increased 5.3% in fi scal 2012 from fi scal 2011. Contributing to the gross profi t increase in fi scal 2012 were increased sales and an increase of approximately $8.3 million in the fuel surcharges charged to customers in fi scal 2012 from prior year due to higher fuel prices in fi scal 2012. The increase in operating expenses for fi scal 2012 was largely driven by increased fuel costs. Fuel costs in fi scal 2012 were $11.3 million greater than the prior year. Assuming that fuel prices do not signifi cantly rise above recent levels during fi scal 2013, we expect fuel costs and fuel surcharges for our SYGMA segment not to fl uctuate signifi cantly as compared to fi scal 2012. Other Segment “Other” fi nancial information is attributable to our other operating segments, including our specialty produce and lodging industry products segments, a company that distributes specialty imported products and a company that distributes to international customers. These operating segments are discussed on an aggregate basis as they do not represent reportable segments under segment accounting literature. On an aggregate basis, our “Other” segment has had a lower operating income as a percentage of sales than Sysco’s Broadline segment. Sysco has acquired the operating companies within these segments in relatively recent years. These operations generally operate in a niche within the foodservice industry except for our lodging industry supply company. Each individual operation is also generally smaller in sales and scope than an average Broadline operation and each of these operating segments is considerably smaller in sales and overall scope than the Broadline segment. In fi scal 2013, in the aggregate, the “Other” segment represented approximately 6.2% of Sysco’s overall sales and 3.9% of the aggregate operating income of Sysco’s segments, which excludes corporate expenses. Operating income increased 8.3% for fi scal 2013 over fi scal 2012. The increase in operating income was primarily driven by earnings from our lodging industry products segment, our specialty import business, that was acquired in the third quarter of fi scal 2012, and our company that distributes to international customers. All businesses in this segment experienced increased operating income which was partially offset by charges in our specialty produce companies which incurred facility closing costs of $2.6 million in fi scal 2013. An additional item partially offsetting the increase in operating income was an increase in retirement-related expense for these companies. Our enhanced defi ned contribution plan became effective January 1, 2013 and contributed to increased expense at these companies. Operating income decreased 9.2% for fi scal 2012 from fi scal 2011. The decrease in operating income was caused partially due to increased expenses in our specialty produce segment. SYSCO CORPORATION - Form 10-K 29 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Highlights Comparisons of the cash fl ows from fi scal 2013 to fi scal 2012: • Cash fl ows from operations were $1.5 billion this year compared to $1.4 billion last year. • Settlement payments to the Internal Revenue Service (IRS) were zero this year compared to $212.0 million last year. • Capital expenditures totaled $511.9 million this year compared to $784.5 million last year. • Free cash fl ow was $1.0 billion this year compared to $627.9 million last year (See Non-GAAP reconciliation below under the heading “Free Cash Flow.”) • Cash fl ows for acquisition of businesses were $397.4 million this year compared to $110.6 million last year. • Net bank borrowings were a net borrowing of $95.5 million this year compared to a net repayment of $182.0 million last year. • Proceeds from exercises of share-based compensation awards was $628.7 million this year compared to $99.4 million last year. • Treasury stock purchases were $721.6 million this year compared to $272.3 million last year. • Dividends paid were $648.3 million this year compared to $622.9 million last year. 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 fi nancial markets. Our operations historically have produced signifi cant cash fl ow. Cash generated from operations is generally allocated to: • working capital requirements; • investments in facilities, systems, fl eet, 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 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 fl ows from operations and remain in a strong fi nancial position, however our liquidity and capital resources can be infl uenced by economic trends and conditions that impact our results of operations. Uncertain economic conditions and uneven levels of consumer confi dence and the resulting pressure on consumer disposable income have lowered our sales growth and impacted our cash fl ows from operations. Competitive pressures in a low growth environment have also lowered our gross margins which in turn can cause our cash fl ows from operations to decrease. 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 profi ts have been suffi cient to limit a signifi cant unfavorable impact on our cash fl ows from operations. We believe these mechanisms will continue prevent a signifi cant unfavorable impact on our cash fl ows from operations. As of June 29, 2013, we had $412.3 million in cash and cash equivalents, approximately 27% 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 United States, such amounts may be subject to additional tax obligations; however, we do not currently anticipate the need to relocate this cash. We believe the following sources will be suffi cient to meet our anticipated cash requirements for the next twelve months, while maintaining suffi cient liquidity for normal operating purposes: • our cash fl ows from operations; • the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility, and bank lines of credit; • our ability to access capital from fi nancial markets, including issuances of debt securities, either privately or under our shelf registration statement fi led with the Securities and Exchange Commission (SEC). Due to our strong fi nancial position, we believe that we will continue to be able to effectively access the commercial paper market and long-term capital markets, if necessary. We believe our cash fl ows from operations will improve over the long-term due to benefi ts from our Business Transformation Project and initiatives to improve our working capital management. 30 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Cash Flows Operating Activities Fiscal 2013 vs. Fiscal 2012 We generated $1.5 billion in cash fl ow from operations in fi scal 2013, as compared to $1.4 billion in fi scal 2012. The increase of $107.4 million or 7.6%, was largely attributable to a favorable comparison year-over-year on the settlement payments made to the IRS, an increase in non-cash depreciation and amortization expense and a favorable comparison for multiemployer and company-sponsored pension expense and contributions. These decreases were partially offset by a reduction in net earnings, the redemption of some of our COLI policies in fi scal 2012 and a reduction in taxes. Changes in working capital, including accounts receivable, inventory and accounts payable, did not have a signifi cant impact on the comparison of cash fl ow from operations from fi scal 2013 to fi scal 2012. These items are more fully described below. In fi scal 2012, we paid $212 million in settlement payments to the IRS. We completed these settlement payments in fi scal 2012, which resulted in a favorable comparison in cash fl ow from operations related to this item in fi scal 2013. Excluding the IRS settlement payment comparison, the combined impact of changes in deferred taxes and changes in accrued income taxes was a decrease of $171.5 in cash fl ow from operations in fi scal 2013 as compared to fi scal 2012. This decrease resulted primarily from decreased tax expense of $107.4 million year over year and an increase in non-IRS tax payments of $59.6 million which were primarily foreign tax payments related to a one-time transaction as well as increased earnings in these jurisdictions. The increase in non-cash depreciation and amortization expense of $95.6 million was primarily related to assets that were not in service in fi scal 2012 that were in service in fi scal 2013. These assets include our software related to our Business Transformation Project, which was placed into service in August 2012, as well as various new facilities and expansions. We do not anticipate that our depreciation and amortization expense will increase as much in fi scal 2014. Multiemployer and company-sponsored pension expense and contributions resulted in a favorable comparison of $69.9 million in cash fl ow from operations in fi scal 2013 as compared to fi scal 2012. Provisions for multiemployer pension withdrawals increased $20.0 million in fi scal 2013 as compared to fi scal 2012, and payments for withdrawals decreased $1.8 million. Company-sponsored pension contributions decreased $68.9 million year over year, which was partially offset by a decrease in company-sponsored pension expense of $20.8 million. We anticipate making a $40.7 million payment in the fi rst 26 weeks of fi scal 2014 related to a fi scal 2013 multiemployer pension withdrawal. The comparison of cash fl ow from operations from fi scal 2013 to fi scal 2012 was negatively impacted by an unfavorable change of $56.4 million in other assets. This unfavorable change resulted primarily from an increase in cash in the prior year from the redemption of approximately $75 million of our COLI policies. These COLI policies were maintained to meet a portion of our obligations under the SERP and were replaced by less volatile corporate-owned real estate assets as part of our plan to reduce the market-driven COLI impact on our earnings. There was no similar redemption in fi scal 2013. Other miscellaneous changes in other assets partially offset this decrease year over year. Fiscal 2012 vs. Fiscal 2011 We generated $1.4 billion in cash fl ow from operations in fi scal 2012, as compared to $1.1 billion in fi scal 2011. The increase of $312.7 million between fi scal 2013 and fi scal 2012 was largely attributable to changes in working capital, a year-over-year reduction in tax payments and the redemption of some of our COLI policies. These increases were partially offset by the year-over-year impact of multiemployer withdrawal provisions and payments. These items are more fully described below. Changes in working capital, specifi cally accounts receivable, inventory and accounts payable, contributed $144.3 million to the increase in cash fl ow from operations in fi scal 2012 as compared to fi scal 2011. Both periods were affected by increases in accounts receivable and inventory, partially offset by an increase in accounts payable resulting primarily from infl ation-driven increases in product costs and sales. However, fi scal 2012 was impacted by these items to a lesser extent due primarily to working capital improvements within accounts receivable and inventory and also less growth in average daily sales in the fi nal month of fi scal 2012 as compared to the same period in fi scal 2011. Tax payments were $135.2 million less in fi scal 2012 than in fi scal 2011. The decrease in tax payments was partially due to the company being in a prepaid position at the end of fi scal 2011 in certain jurisdictions. In addition, various movements in taxable temporary differences caused estimated taxable income to be lower in fi scal 2012, requiring less tax payments in fi scal 2012 than in fi scal 2011. We made our fi nal payments on a previous IRS tax settlement of $212 million in fi scal 2012. We received approximately $75 million in cash from the one-time redemption during the period of some of our investments in COLI policies that we maintained to meet a portion of our obligations under the SERP. This resulted in a positive impact to cash fl ow from operations in fi scal 2012 by decreasing other assets by $57.1 million. Those redeemed COLI policies were replaced by less volatile existing corporate-owned real estate assets as part of our plan to reduce the market-driven COLI impact on our earnings. Multiemployer withdrawal provisions and payments had a negative impact of $53.3 million on the comparison of cash fl ow from operations in fi scal 2013 to fi scal 2012. The net impact of withdrawal provisions and payments was a cash outfl ow of $11.7 million in fi scal 2012, compared to a $41.5 million accrual in fi scal 2012. SYSCO CORPORATION - Form 10-K 31 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Investing Activities Fiscal 2013 capital expenditures included: • fl eet replacements; • construction of a fold-out facility in southern California; • replacement or signifi cant expansion of facilities in Atlanta, Georgia; British Columbia, Canada; Boston, Massachusetts and Columbia, South Carolina; and • investments in technology. Fiscal 2012 capital expenditures included: • replacement or signifi cant expansion of facilities in San Diego, California; Boston, Massachusetts; Lincoln, Nebraska; Syracuse, New York and central Texas; • construction of fold-out facilities in southern California and Long Island, New York; • the continued remodeling of our shared services facility purchased in fi scal 2010; • fl eet replacements; and • investments in technology including our Business Transformation Project. Fiscal 2011 capital expenditures included: • investments in technology including our Business Transformation Project; • fl eet replacements; • replacement or signifi cant expansion of facilities in Philadelphia, Pennsylvania and central Texas; • the purchase of land for a fold-out facility in southern California; and • the remodeling of our shared services facility purchased in fi scal 2010. Capital expenditures in fi scal 2013 decreased by $272.6 million from fi scal 2012 primarily due to less investment in technology in fi scal 2013 related to our Business Transformation Project due to the initiation of the project’s deployment phase in August 2012. Capital expenditures in fi scal 2012 increased by $148.1 million over fi scal 2011 primarily due to a greater number of new facilities and expansion projects underway in fi scal 2012 as compared to fi scal 2011. Capital expenditures in fi scal 2013, 2012 and 2011 for our Business Transformation Project were $20.0 million, $146.2 million and $195.8 million, respectively. We expect total capital expenditures in fi scal 2014 to be in the range of $550 million to $600 million. Fiscal 2014 expenditures will include facility, fl eet and other equipment replacements and expansions; new facility construction, including fold-out facilities; and investments in technology. During fi scal 2013, in the aggregate, the company paid cash of $397.4 million for operations acquired during fi scal 2013 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2013, we acquired for cash foodservice operations in Nassau, Bahamas; San Francisco, California; San Jose, California; Stockton, California; Ontario, Canada; Quebec, Canada; Orlando, Florida; Dublin, Ireland; St. Cloud, Minnesota; Co. Down, Northern Ireland; Greenville, Ohio and Houston, Texas. During fi scal 2012, in the aggregate, the company paid cash of $110.6 million for operations acquired during fi scal 2012 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2012, we acquired for cash broadline foodservice operations in Sacramento, California; Quebec, Canada; New Haven, Connecticut; Grand Rapids, Michigan; Minneapolis, Minnesota; Columbia, South Carolina and Spokane, Washington. In addition, Sysco acquired for cash a company that distributes specialty imported products headquartered in Chicago, Illinois. During fi scal 2011, in the aggregate, the company paid cash of $101.1 million for operations acquired during fi scal 2011 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2011, we acquired for cash broadline foodservice operations in central California; Los Angeles, California; Ontario, Canada; Lincoln, Nebraska; and Trenton, New Jersey. Free Cash Flow Free cash fl ow 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 fl ow 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 of buildings, fl eet, 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. We do not mean to imply that free cash fl ow is necessarily available for discretionary expenditures, however, as it may be necessary that we use it to make mandatory debt service or other payments. As a result of reduced capital spending and increased cash provided by operating activities, free cash fl ow for fi scal 2013 increased 61.7%, or $387.4 million, to $1.0 billion as compared to fi scal 2012. Increased cash provided by operating activities, partially offset by increased capital spending, resulted in free cash fl ow for fi scal 2012 increasing 32.4%, or $153.7 million, to $627.9 million as compared to fi scal 2011. We expect the growth rate in free cash fl ow for fi scal 2014 will not be as signifi cant as the growth rate experienced in fi scal 2013. 32 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Free cash fl ow should not be used as a substitute in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP fi nancial measure should be used in conjunction with results presented in accordance with GAAP. In the tables that follow, free cash fl ow for each period presented is reconciled to net cash provided by operating activities. (In thousands) Net cash provided by operating activities (GAAP) Additions to plant and equipment Proceeds from sales of plant and equipment FREE CASH FLOW (NON-GAAP) (In thousands) Net cash provided by operating activities (GAAP) Additions to plant and equipment Proceeds from sales of plant and equipment FREE CASH FLOW (NON-GAAP) Financing Activities Equity Transactions $ $ $ $ 2013 2012 1,511,594 (511,862) 15,527 1,015,259 $ $ 1,404,180 (784,501) 8,185 627,864 $ Change in Dollars % Change $ 107,414 272,639 7,342 387,395 7.6% 34.8 89.7 61.7% 2012 2011 1,404,180 (784,501) $ 8,185 $ 627,864 1,091,518 (636,442) 19,069 474,145 Change in Dollars 312,662 $ (148,059) (10,884) 153,719 $ % Change 28.6% (23.3) (57.1) 32.4% Proceeds from exercises of share-based compensation awards were $628.7 million in fi scal 2013, $99.4 million in fi scal 2012 and $332.7 million in fi scal 2011. The higher level of proceeds in fi scal 2013 and fi scal 2011 was due to an increase in the number of options exercised in these years, as compared to fi scal 2012. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price. We traditionally have engaged in Board-approved share repurchase programs. The number of shares acquired and their cost during the past three fi scal years were 21,672,403 shares for $721.6 million in fi scal 2013, 10,000,000 shares for $272.3 million in fi scal 2012 and 10,000,000 shares for $291.6 million in fi scal 2011. There were 275,000 additional shares repurchased through August 14, 2013, resulting in a remaining authorization by our Board of Directors to repurchase up to 1,214,197 shares, based on the trades made through that date. Our share repurchase strategy is to purchase enough shares to keep our average shares outstanding relatively constant over time. Due to a high level of stock option exercises in fi scal 2013, more shares were repurchased to meet this strategy. The number of shares we repurchase in fi scal 2014 will be dependent on the level of stock option exercises; however, we believe that share repurchases will be signifi cantly less than the amount repurchased in fi scal 2013 because fewer options are now available for exercise than in fi scal 2013. We have made dividend payments to our shareholders in each fi scal year since our company inception over 40 years ago. We target a dividend payout of 40% to 50% of net earnings. We paid in excess of that range in fi scal 2013 and fi scal 2012 primarily due to increased expenses from our Business Transformation Project. We believe as we realize benefi ts from this project, our dividend payout will return to this targeted range. Dividends paid were $648.3 million, or $1.10 per share, in fi scal 2013, $622.9 million, or $1.06 per share, in fi scal 2012 and $597.1 million, or $1.02 per share, in fi scal 2011. In May 2013, we declared our regular quarterly dividend for the fi rst quarter of fi scal 2014 of $0.28 per share, which was paid in July 2013. In November 2000, we fi led with the SEC a shelf registration statement covering 30,000,000 shares of common stock to be offered from time to time in connection with acquisitions. As of August 14, 2013, 29,477,835 shares remained available for issuance under this registration statement. Debt Activity and Borrowing Availability Short-term Borrowings We have uncommitted bank lines of credit, which provided for unsecured borrowings for working capital of up to $95.0 million, of which none was outstanding as of June 29, 2013. Outstanding borrowings under this facility were $4.0 million as of August 14, 2013. In September 2012, the company’s Irish subsidiary, Pallas Foods, entered into a €75.0 million (Euro) multicurrency revolving credit facility, which will be utilized for capital needs for the company’s European subsidiaries. This facility replaces the subsidiary’s previous €10.0 million (Euro) committed facility for unsecured borrowings. The new facility provides for unsecured borrowings and expires September 25, 2013, but is subject to extension. Outstanding borrowings under this facility were €32.0 million (Euro) as of June 29, 2013, located within Notes payable on the consolidated balance sheet. Outstanding borrowings under this facility were €32.0 million (Euro) as of August 14, 2013. On June 30, 2011, a Canadian subsidiary of Sysco entered into a short-term demand loan facility for the purpose of facilitating a distribution from the Canadian subsidiary to Sysco, and Sysco concurrently entered into an agreement with the bank to guarantee the loan. The amount borrowed was $182.0 million and was repaid in full on July 4, 2011. SYSCO CORPORATION - Form 10-K 33 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Commercial Paper and Revolving Credit Facility We have a Board-approved commercial paper program allowing us to issue short-term unsecured notes in an aggregate amount not to exceed $1.3 billion. In December 2011, we terminated our previously existing revolving credit facility that supported the company’s U.S. and Canadian commercial paper programs. At the same time, Sysco and one of its subsidiaries, Sysco International, ULC, entered into a new $1.0 billion credit facility supporting the company’s U.S. and Canadian commercial paper programs. This facility provides for borrowings in both U.S. and Canadian dollars. Borrowings by Sysco International, ULC under the credit agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by all the wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures. The original facility in the amount of $1.0 billion expires on December 29, 2016. In December 2012, a portion of the facility was extended for an additional year. This extended facility, which expires on December 29, 2017, is for $925.0 million of the original $1.0 billion facility, but is subject to further extension. As of June 29, 2013, commercial paper issuances outstanding were $95.5 million. As of August 14, 2013, commercial paper issuances outstanding were $76.0 million. During fi scal 2013, 2012 and 2011, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from approximately zero to $330.0 million, zero to $563.1 million, and zero to $330.3 million, respectively. During fi scal 2013, 2012 and 2011, our aggregate commercial paper issuances and short-term bank borrowings had a weighted average interest rate of 0.16%, 0.16% and 0.25%, respectively. Fixed Rate Debt Included in current maturities of long-term debt as of June 29, 2013 are the 4.6% senior notes totaling $200.0 million, which mature in March 2014. It is our intention to fund the repayment of these notes at maturity through cash on hand, cash fl ow from operations, issuances of commercial paper, senior notes or a combination thereof. In February 2012, we fi led with the SEC an automatically effective well-known seasoned issuer shelf registration statement for the issuance of an indeterminate amount of common stock, preferred stock, debt securities and guarantees of debt securities that may be issued from time to time. In June 2012, we repaid the 6.1% senior notes totaling $200.0 million at maturity utilizing a combination of cash fl ow from operations and commercial paper issuances. In May 2012, we entered into an agreement with a notional amount of $200.0 million to lock in a component of the interest rate on our then forecasted debt offering. We designated this derivative as a cash fl ow hedge of the variability in the cash outfl ows of interest payments on a portion of the then forecasted June 2012 debt issuance due to changes in the benchmark interest rate. In June 2012, in conjunction with the issuance of the $450.0 million senior notes maturing in fi scal 2022, we settled the treasury lock, locking in the effective yields on the related debt. Upon settlement, we received cash of $0.7 million, which represented the fair value of the swap agreement at the time of settlement. This amount is being amortized as an offset to interest expense over the 10-year term of the debt, and the unamortized balance is refl ected as a gain, net of tax, Accumulated other comprehensive loss. In June 2012, we issued 0.55% senior notes totaling $300.0 million due June 12, 2015 (the 2015 notes) and 2.6% senior notes totaling $450.0 million due June 12, 2022 (the 2022 notes) under its February 2012 shelf registration. The 2015 and 2022 notes, which were priced at 99.319% and 98.722% of par, respectively, are unsecured, are not subject to any sinking fund requirement and include a redemption provision which allows Sysco to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the note holders are not penalized by early redemption. Proceeds from the notes will be utilized over a period of time for general corporate purposes, which may include acquisitions, refi nancing of debt, working capital, share repurchases and capital expenditures. In February 2013, we repaid the 4.2% senior notes totaling $250.0 million at maturity utilizing a combination of cash fl ow from operations and cash on hand. In August 2013, we entered into an interest rate swap agreement that effectively converted $500 million of fi xed rate debt maturing in fi scal 2018 to fl oating rate debt. This transaction was entered into with the goal of reducing overall borrowing cost and was designated as a fair value hedge against the changes in fair value of fi xed rate debt resulting from changes in interest rates. Total Debt Total debt as of June 29, 2013 was $3.0 billion of which approximately 88% was at fi xed rates with a weighted average of 4.7% and an average life of 13 years, and the remainder was at fl oating rates with a weighted average of 1.4% and an average life of one year. Certain loan agreements contain typical debt covenants to protect note holders, including provisions to maintain the company’s long-term debt to total capital ratio below a specifi ed level. We are currently in compliance with all debt covenants. Other As part of normal business activities, we issue letters of credit through major banking institutions as required by certain vendor and insurance agreements. In addition, in connection with our audits in certain tax jurisdictions, we have posted of letters of credit in order to proceed to the appeals process. As of June 29, 2013, letters of credit outstanding were $42.2 million. 34 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Other Considerations - Multiemployer Pension Plans As discussed in Note 14, “Multiemployer Employee Benefi t Plans”, to the Consolidated Financial Statements in Item 8, we contribute to several multiemployer defi ned benefi t pension plans based on obligations arising under collective bargaining agreements covering union-represented employees. Under certain circumstances, including our voluntary withdrawal or a mass withdrawal of all contributing employers from certain underfunded plans, we would be required to make payments to the plans for our proportionate share of the multiemployer plan’s unfunded vested liabilities. We believe that one of the above-mentioned events is reasonably possible with certain plans in which we participate and estimate our share of withdrawal liability for these plans could have been as much as $80.0 million as of June 29, 2013 and as much as $90.0 million as of August 14, 2013, based on the latest available information available as of each date. This estimate excludes plans for which we have recorded withdrawal liabilities or where the likelihood of the above-mentioned events is deemed remote. Due to the lack of current information, we believe our current share of the withdrawal liability could materially differ from this estimate. Required contributions to multiemployer plans could increase in the future as these plans strive to improve their funding levels. In addition, pension-related legislation in the United States requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. We believe that any unforeseen requirements to pay such increased contributions, withdrawal liability and excise taxes would be funded through cash fl ow from operations, borrowing capacity or a combination of these items. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Contractual Obligations The following table sets forth, as of June 29, 2013, certain information concerning our obligations and commitments to make contractual future payments: Payments Due by Period More Than 5 Years Total < 1 Year 1-3 Years 3-5 Years $ (In thousands) Recorded Contractual Obligations: Revolving credit facility borrowings Commercial paper Long-term debt Capital lease obligations Deferred compensation (1) SERP and other postretirement plans (2) Multiemployer pension plans (3) Unrecognized tax benefi ts and interest (4) Unrecorded Contractual Obligations: Interest payments related to debt (5) Retirement plan (6) Long-term non-capitalized leases Purchase obligations (7) TOTAL CONTRACTUAL CASH OBLIGATIONS (1) The estimate of the timing of future payments under the Executive Deferred Compensation Plan involves the use of certain assumptions, including retirement ages and payout periods. (2) 41,632 $ 95,500 2,715,408 36,379 82,081 295,354 40,744 145,099 41,632 $ 95,500 202,730 4,571 8,522 26,185 40,744 17,393 - $ - 498,534 4,139 9,926 59,267 - - $ - 299,615 7,518 14,079 55,120 - 1,637,553 160,249 162,393 3,475,007 8,750,267 $ 227,714 6,926 59,147 890,982 1,561,101 $ 226,063 119,758 29,126 172,539 1,119,352 $ 119,623 - 41,371 2,411,469 2,872,608 $ $ - - 1,714,529 20,151 49,554 154,782 - 1,064,153 33,565 32,749 17 3,069,500 Includes estimated contributions to the unfunded SERP and other postretirement benefit plans made in amounts needed to fund benefit payments for vested participants in these plans through fiscal 2023, based on actuarial assumptions. (3) Represents voluntary withdrawal liabilities recorded and excludes normal contributions required under our collective bargaining agreements. (4) Unrecognized tax benefits relate to uncertain tax positions recorded under accounting standards related to uncertain tax positions. As of June 29, 2013, we had a liability of $108.3 million for unrecognized tax benefits for all tax jurisdictions and $36.8 million for related interest that could result in cash payment. We are not able to reasonably estimate the timing of non-current payments or the amount by which the liability will increase or decrease over time. Accordingly, the related non-current balances have not been reflected in the “Payments Due by Period” section of the table. Includes payments on floating rate debt based on rates as of June 29, 2013, assuming amount remains unchanged until maturity, and payments on fixed rate debt based on maturity dates. The impact of our outstanding fixed-to-floating interest rate swap on the fixed rate debt interest payments is included as well based on the floating rates in effect as of June 29, 2013. (5) (6) Provides the estimated minimum contribution to the Retirement Plan through fiscal 2023 to meet ERISA minimum funding requirements under the assumption that we only make minimum funding requirement contributions each year, based on actuarial assumptions. (7) For purposes of this table, purchase obligations include agreements for purchases of product in the normal course of busine ss, for which all significant terms have been confirmed, including minimum quantities resulting from our sourcing initiative. Such amounts included in the table above are based on estimates. Purchase obligations also includes amounts committed with various third party service providers to provide information technology services for period up to fiscal 2016 (See discussion under Note 20, “Commitments and Contingencies”, to the Notes to Consolidated Financial Statements in Item 8), fixed electricity agreements and fixed fuel purchase commitments. Purchase obligations exclude full requirements electricity contracts where no stated minimum purchase volume is required. Certain acquisitions involve contingent consideration, typically payable only in the event that certain operating results are attained or certain outstanding contingencies are resolved. Aggregate contingent consideration amounts outstanding as of June 29, 2013 were $108.0 million. This amount is not included in the table above. SYSCO CORPORATION - Form 10-K 35 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates The preparation of fi nancial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses in the accompanying fi nancial statements. Signifi cant accounting policies employed by Sysco are presented in the notes to the fi nancial statements. Critical accounting policies and estimates are those that are most important to the portrayal of our fi nancial condition 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 allowance for doubtful accounts receivable, self-insurance programs, company-sponsored pension plans, income taxes, vendor consideration, goodwill and intangible assets and share-based compensation. Allowance for Doubtful Accounts We evaluate the collectability of accounts receivable and determine the appropriate reserve for doubtful accounts based on a combination of factors. We utilize specifi c criteria to determine uncollectible receivables to be written off, including whether a customer has fi led for or has been placed in bankruptcy, has had accounts referred to outside parties for collection or has had accounts past due over specifi ed periods. Allowances are recorded for all other receivables based on analysis of historical trends of write-offs and recoveries. In addition, in circumstances where we are aware of a specifi c customer’s inability to meet its fi nancial obligation, a specifi c allowance for doubtful accounts is recorded to reduce the receivable to the net amount reasonably expected to be collected. Our judgment is required as to the impact of certain of these items and other factors as to ultimate realization of our accounts receivable. If the fi nancial condition of our customers were to deteriorate, additional allowances may be required. Self-Insurance Program We maintain a self-insurance program covering portions of workers’ compensation, general liability and vehicle liability costs. The amounts in excess of the self-insured levels are fully insured by third party insurers. We also maintain a fully self-insured group medical program. Liabilities associated with these risks are estimated in part by considering historical claims experience, medical cost trends, demographic factors, severity factors and other actuarial assumptions. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be signifi cantly affected if future occurrences and claims differ from these assumptions and historical trends. In an attempt to mitigate the risks of workers’ compensation, vehicle and general liability claims, safety procedures and awareness programs have been implemented. Company-Sponsored Pension Plans Amounts related to defi ned benefi t plans recognized in the fi nancial statements are determined on an actuarial basis. Two of the more critical assumptions in the actuarial calculations are the discount rate for determining the current value of plan benefi ts and the expected rate of return on plan assets. Our Retirement Plan was frozen in fi scal 2013 and is only open to a small number of employees. Our SERP was frozen in fi scal 2013. Due to these plan freezes, our assumption for the rate of increase in future compensation is no longer a critical assumption. For guidance in determining the discount rates, we calculate the implied rate of return on a hypothetical portfolio of high-quality fi xed-income investments for which the timing and amount of cash outfl ows approximates the estimated payouts of the pension plan. The discount rate assumption is reviewed annually and revised as deemed appropriate. The discount rate for determining fi scal 2013 net pension costs for the Retirement Plan, which was determined as of the June 30, 2012 measurement date, decreased 113 basis points to 4.81%. The discount rate for determining fi scal 2013 net pension costs for the SERP, which was determined as of the June 30, 2012 measurement date, decreased 104 basis points to 4.89%. The SERP was remeasured during fi scal 2013 upon approval to freeze the plan. The remeasured discount rate was 3.96%. The combined effect of these discount rate changes increased our net company-sponsored pension costs for all plans for fi scal 2013 by an estimated $87.7 million. The discount rate for determining fi scal 2014 net pension costs for the Retirement Plan, which was determined as of the June 29, 2013 measurement date, increased 51 basis points to 5.32%. The discount rate for determining fi scal 2014 net pension costs for the SERP, which was determined as of the June 29, 2013 measurement date, increased 98 basis points to 4.94%, as compared to the discount rate upon the remeasurement of the plan during fi scal 2013. The combined effect of these discount rate changes will decrease our net company-sponsored pension costs for all plans for fi scal 2014 by an estimated $5.0 million. A 100 basis point increase (or decrease) in the discount rates for fi scal 2014 would decrease (or increase) Sysco’s net company-sponsored pension cost by $10.1 million. Now that Sysco’s pension plans are frozen, net company-sponsored pension cost is not as sensitive to discount rate changes as compared to when these plans were active. 36 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations The expected long-term rate of return on plan assets of the Retirement Plan was 7.75% for fi scal 2013 and fi scal 2012. The expectations of future returns are derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, refl ecting a combination of historical performance analysis and the forward-looking views of the fi nancial markets regarding the yield on bonds, historical returns of the major stock markets and returns on alternative investments. Although not determinative of future returns, the effective annual rate of return on plan assets, developed using geometric/ compound averaging, was approximately 7.4%, 7.4%, 2.8%, and 15.4%, over the 20-year, 10-year, 5-year and 1-year periods ended December 31, 2012, respectively. In addition, in eight of the last 15 years, the actual return on plan assets has exceeded 10%. The rate of return assumption is reviewed annually and revised as deemed appropriate. The expected return on plan assets impacts the recorded amount of net pension costs. The expected long-term rate of return on plan assets of the Retirement Plan is 7.75% for fi scal 2014. A 100 basis point increase (decrease) in the assumed rate of return for fi scal 2014 would decrease (increase) Sysco’s net company-sponsored pension costs for fi scal 2014 by approximately $24.9 million. Pension accounting standards require the recognition of the funded status of our defi ned benefi t plans in the statement of fi nancial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The amount refl ected in accumulated other comprehensive loss related to the recognition of the funded status of our defi ned benefi t plans as of June 29, 2013 was a charge, net of tax, of $575.2 million. The amount refl ected in accumulated other comprehensive loss related to the recognition of the funded status of our defi ned benefi t plans as of June 30, 2012 was a charge, net of tax, of $823.9 million. We made cash contributions to our company-sponsored pension plans of $93.6 million and $162.4 million in fi scal years 2013 and 2012, respectively. The $70.0 million contribution to the Retirement Plan in fi scal 2013 was voluntary, as there was no minimum required contribution for the calendar 2012 plan year to meet ERISA minimum funding requirements. The $140.0 million contribution to the Retirement Plan in fi scal 2012 exceeded the minimum required contribution for the calendar 2011 plan year to meet ERISA minimum funding requirements. There are no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fi scal 2014. The estimated fi scal 2014 contributions to fund benefi t payments for the SERP plan are approximately $26 million. Income Taxes The determination of our provision for income taxes requires signifi cant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily refl ects 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 benefi ts or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Our liability for unrecognized tax benefi ts contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various fi ling positions. We believe that the judgments and estimates discussed herein are reasonable; however, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been established, or pay amounts in excess of recorded liabilities, our effective income tax rate in a given fi nancial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. Vendor Consideration We recognize consideration received from vendors when the services performed in connection with the monies received are completed and when the related product has been sold by Sysco. There are several types of cash consideration received from vendors. In many instances, the vendor consideration is in the form of a specifi ed amount per case or per pound. In these instances, we will recognize the vendor consideration as a reduction of cost of sales when the product is sold. In some instances, vendor consideration is received upon receipt of inventory in our distribution facilities. We estimate the amount needed to reduce our inventory based on inventory turns until the product is sold. Our inventory turnover is usually less than one month; therefore, amounts deferred against inventory do not require long-term estimation. In the situations where the vendor consideration is not related directly to specifi c product purchases, we will recognize these as a reduction of cost of sales when the earnings process is complete, the related service is performed and the amounts realized. Historically, adjustments to our estimates related to vendor consideration have not been signifi cant. Goodwill and Intangible Assets Goodwill and intangible assets represent the excess of consideration paid over the fair value of tangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired, including goodwill and other intangible assets, as well as determining the allocation of goodwill to the appropriate reporting unit. SYSCO CORPORATION - Form 10-K 37 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations In addition, annually in our fourth quarter or more frequently as needed, we assess the recoverability of goodwill and indefi nite-lived intangibles by determining whether the fair values of the applicable reporting units exceed the carrying values of these assets. The reporting units used in assessing goodwill impairment are our ten operating segments as described in Note 21, “Business Segment Information,” to the Consolidated Financial Statements in Item 8. The components within each of our ten operating segments have similar economic characteristics and therefore are aggregated into ten reporting units. We arrive at our estimates of fair value using a combination of discounted cash fl ow and earnings multiple models. The results from each of these models are then weighted and combined into a single estimate of fair value for each of our ten operating segments. We use a 60% weighting for our discounted cash fl ow valuation and 40% for the earnings multiple models giving greater emphasis to our discounted cash fl ow model because the forecasted operating results that serve as a basis for the analysis incorporate management’s outlook and anticipated changes for the businesses consistent with a market participant. The primary assumptions used in these various models include estimated earnings multiples of comparable acquisitions in the industry including control premiums, earnings multiples on acquisitions completed by Sysco in the past, future cash fl ow estimates of the reporting units, which are dependent on internal forecasts and projected growth rates, and weighted average cost of capital, along with working capital and capital expenditure requirements. When possible, we use observable market inputs in our models to arrive at the fair values of our reporting units. We update our projections used in our discounted cash fl ow model based on historical performance and changing business conditions for each of our reporting units. Our estimates of fair value contain uncertainties requiring management to make assumptions and to apply judgment to estimate industry economic factors and the profi tability 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 were no impairments of goodwill or indefi nite-lived intangibles recorded as a result of assessment in fi scal 2013, 2012 or 2011. Our past estimates of fair value for fi scal 2012 and 2011 have not been materially different when revised to include subsequent years’ actual results. Sysco has not made any material changes in its impairment assessment methodology during the past three fi scal years. 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 reporting units. In the fi scal 2013 analysis our estimates of fair value did not require additional analysis; however, we would have performed additional analysis to determine if an impairment existed for the following reporting units if our estimates of fair value were decreased by the following amounts. First, our specialty produce operations would have required additional analysis if the estimated fair value had been 30% lower. Second, our European Broadline company would have required additional analysis if the estimated fair value had been 37% lower. As of June 29, 2013, these two reporting units had goodwill aggregating $381.0 million. For the remainder of our reporting units, which as of June 29, 2013 had goodwill aggregating $1.5 billion, we would have performed additional analysis to determine if an impairment existed for a reporting unit if the estimated fair value for any of these reporting units had declined by greater than 48%. Certain reporting units (Caribbean Broadline, European Broadline, specialty produce, custom-cut meat, lodging industry products, imported specialty products and international distribution operations) have a greater proportion of goodwill recorded to estimated fair value as compared to the United States Broadline, Canadian Broadline or SYGMA reporting units. This is primarily due to these businesses having been more recently acquired, and as a result there has been less history of organic growth than in the United States Broadline, Canadian Broadline and SYGMA reporting units. In addition, these businesses also have lower levels of cash fl ow than the United States Broadline reporting unit. As such, these reporting units have a greater risk of future impairment if their operations were to suffer a signifi cant downturn. Share-Based Compensation We provide compensation benefi ts to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employees’ Stock Purchase Plan, the Management Incentive Plan and various non-employee director plans. As of June 29, 2013, there was $69.4 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.41 years. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatility is based on historical volatility of Sysco’s stock, implied volatilities from traded options on Sysco’s stock and other factors. We utilize historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected dividend yield is estimated based on the historical pattern of dividends and the average stock price for the year preceding the option grant. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock units granted without dividend equivalents, the fair value is reduced by the present value of expected dividends during the vesting period. The fair value of the stock issued under the Employee Stock Purchase Plan is calculated as the difference between the stock price and the employee purchase price. The fair value of restricted stock granted to employees is based on the stock price on grant date. The application of a discount to the fair value of a restricted stock grant is dependent upon whether or not each individual grant contains a post-vesting restriction. 38 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award. The compensation cost related to stock issuances resulting from employee purchases of stock under the Employees’ Stock Purchase Plan is recognized during the quarter in which the employee payroll withholdings are made. Our share-based awards are generally subject to graded vesting over a service period. We will recognize compensation cost on a straight-line basis over the requisite service period for the entire award. In addition, certain of our share-based awards provide that the awards continue to vest as if the award holder continued to be an employee or director if the award holder meets certain age and years of service thresholds upon retirement. In these cases, we will recognize compensation cost for such awards over the period from the grant date to the date the employee or director fi rst becomes eligible to retire with the options continuing to vest after retirement. Our option grants include options that qualify as incentive stock options for income tax purposes. In the period the compensation cost related to incentive stock options is recorded, a corresponding tax benefi t is not recorded as it is assumed that we will not receive a tax deduction related to such incentive stock options. We may be eligible for tax deductions in subsequent periods to the extent that there is a disqualifying disposition of the incentive stock option. In such cases, we would record a tax benefi t related to the tax deduction in an amount not to exceed the corresponding cumulative compensation cost recorded in the fi nancial statements on the particular options multiplied by the statutory tax rate. 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. They include statements about Sysco’s ability to increase its sales and market share and grow earnings, expectations regarding pricing and margin pressure, cost per case reductions and sales case growth, the continuing impact of economic conditions on consumer confi dence and our business, sales and expense trends, including without limitation, expectations regarding defi ned contribution plan costs and pension costs, anticipated multiemployer pension related liabilities and contributions to various multiemployer pension plans, expectations regarding potential payments of unrecognized tax benefi ts and interest, expectations regarding share repurchases, dividend payments, expected trends in fuel pricing, usage costs and surcharges, our expectation regarding the provision for losses on accounts receivable, expected implementation, costs and benefi ts of the ERP system, estimated expenses and capital expenditures related to our Business Transformation Project, beliefs regarding future ERP conversions at our operating companies, expectations regarding our other Business Transformation initiatives including cost transformation and product cost reduction and category management initiatives, beliefs regarding the timeline for the realization of benefi ts from each of our initiatives within our Business Transformation Project, expectation regarding the number of long-term contracts increasing as we progress with our category management initiative, our plan to continue to explore and identify opportunities to grow in international markets and adjacent areas that complement our core foodservice distribution business, expectations regarding future acquisitions and the contributions of acquisitions to our business and future revenues, SYGMA’s growth prospects in fi scal 2014, the loss of SYGMA’s largest customer not having a material adverse effect on Sysco as a whole, compliance with laws and government regulations not having a material effect on our capital expenditures, earnings or competitive position, anticipated acquisitions and capital expenditures and the sources of fi nancing for them, continued competitive advantages and positive results from strategic initiatives, expectations that depreciation and amortization expense will increase at a lower rate in fi scal 2014 than the rate in fi scal 2013, expectations that depreciation and amortization expense will increase at a lower rate in fi scal 2014 than the rate in fi scal 2013, anticipated company-sponsored pension plan liabilities, our expectations regarding cash fl ow from operations, our intentions regarding the repayment of debt, the impact of initiatives to improve working capital, the availability and adequacy of insurance to cover liabilities, predictions regarding the impact of changes in estimates used in impairment analyses, the anticipated impact of changes in foreign currency exchange rates and Sysco’s ability to meet future cash requirements. These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors discussed at Item 1.A. in the Annual Report on Form 10-K and elsewhere. In addition, the success of Sysco’s strategic initiatives could be affected by conditions in the economy and the industry and internal factors such as the ability to control expenses, including fuel costs. Expected trends related to fuel costs and usage are impacted by fl uctuations in the economy generally and numerous factors affecting the oil industry that are beyond our control. Our efforts to lower our cost of goods sold may be impacted by factors beyond our control, including actions by our competitors and/or customers. We have experienced delays in the implementation of our Business Transformation Project and the expected costs of our Business Transformation Project may be greater or less than currently expected, as we may encounter the need for changes in design or revisions of the project calendar and budget. Our business and results of operations may be adversely affected if we experience operating problems, scheduling delays, cost overages, or limitations on the extent of the business transformation during the ERP implementation process. As implementation of the ERP system and other initiatives within the Business Transformation Project begins, there may be changes in design or timing that impact near-term expense and cause us to revise the project calendar and budget, and additional hiring and training of employees and consultants may be required, which could also impact project expense and timing. Our Business Transformation Project initiatives related to ERP implementation, cost transformation and produce cost reduction may not provide the expected benefi ts or cost savings in a timely fashion, if at all. If we are unable to realize the anticipated benefi ts from our cost cutting efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profi tability could decrease. Defi ned contribution plan costs are impacted by the number of employees SYSCO CORPORATION - Form 10-K 39 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk participating in the plan and the level of contributions made by each employee. Company-sponsored pension plan liabilities are impacted by a number of factors including the discount rate for determining the current value of plan benefi ts, the assumption for the rate of increase in future compensation levels and the expected rate of return on plan assets. The amount of shares repurchased in a given period is subject to a number of factors, including available cash and our general working capital needs at the time. Meeting our dividend target objectives depends on our level of earnings. Our plans with respect to growth in international markets and adjacent areas that complement our core business are subject to the company’s other strategic initiatives and plans and economic conditions generally. Legal proceedings are impacted by events, circumstances and individuals beyond the control of Sysco. The need for additional borrowing or other capital is impacted by factors that include capital expenditures or acquisitions in excess of those currently anticipated, stock repurchases at historical levels, or other unexpected cash requirements. Plans regarding the repayment of debt are subject to change at any time based on management’s assessment of the overall needs of the company. The anticipated impact of compliance with laws and regulations also involves the risk that estimates may turn out to be materially incorrect, and laws and regulations, as well as methods of enforcement, are subject to change. ITEM 7A Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We do not utilize fi nancial instruments for trading purposes. Our use of debt directly exposes us to interest rate risk. Floating rate debt, where the interest rate fl uctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fi xed over the life of the instrument, exposes us to changes in market interest rates refl ected in the fair value of the debt and to the risk that we may need to refi nance maturing debt with new debt at higher rates. We manage our debt portfolio to achieve an overall desired position of fi xed and fl oating rates and may employ interest rate swaps as a tool to achieve that position. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in fl oating interest rates and the creditworthiness of the counterparties in such transactions. Fiscal 2013 As of June 29, 2013, we had $95.5 million of commercial paper outstanding. Total debt as of June 29, 2013 was $2.9 billion, of which approximately 88% was at fi xed rates of interest, including the impact of our interest rate swap agreement. In fi scal 2010, we entered into two interest rate swap agreements that effectively converted $250 million of fi xed rate debt maturing in fi scal 2013 (the fi scal 2013 swap) and $200 million of fi xed rate debt maturing in fi scal 2014 (the fi scal 2014 swap) to fl oating rate debt. Both transactions were entered into with the goal of reducing overall borrowing cost. These transactions were designated as fair value hedges since the swaps hedge against the changes in fair value of fi xed rate debt resulting from changes in interest rates. The swap agreement related to the fi scal 2013 debt was settled upon maturity of the senior notes in February 2013, leaving one remaining outstanding swap agreement as of June 29, 2013. As of June 29, 2013, the fi scal 2014 swap was recognized as an asset within the consolidated balance sheet at fair value within prepaid expenses and other current assets of $3.0 million. The fi xed interest rate on the hedged debt is 4.6% and the fl oating interest rate on the swap is three-month LIBOR which resets quarterly. 40 SYSCO CORPORATION - Form 10-K PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk The following tables present our interest rate position as of June 29, 2013. All amounts are stated in U.S. dollar equivalents. Interest Rate Position as of June 29, 2013 Principal Amount by Expected Maturity Average Interest Rate (In thousands) U.S. $ Denominated: Fixed Rate Debt 2014 2015 2016 2017 2018 Thereafter Total Fair Value $ 3,251 $ 301,632 $ 1,856 $ 1,149 $ 498,867 $ 1,719,270 $ 2,526,025 $ 2,838,162 Average Interest Rate 4.4% 0.8% 4.4% 4.2% 5.4% 5.2% 4.7% Floating Rate Debt (1) $ 297,690 $ Average Interest Rate 1.5% - $ - - $ - - $ - - $ - - $ - 297,690 $ 301,364 1.5% Canadian $ Denominated: Fixed Rate Debt Average Interest Rate Euro € Denominated: Fixed Rate Debt Average Interest Rate $ $ 1,396 $ 8.0% 464 $ 3.8% Floating Rate Debt $ 41,632 $ Average Interest Rate 1.0% 1,520 $ 1,430 $ 1,345 $ 8.6% 7.7% 9.1% 1,312 $ 9.7% 15,410 $ 22,413 $ 25,183 9.7% 9.4% 695 $ 3.8% - $ - - $ - - $ - - $ - - $ - - $ - - $ - - $ - - $ - 1,159 $ 3.8% 1,302 41,632 $ 41,632 1.0% (1) Includes fixed rate debt that has been converted to floating rate debt through an interest rate swap agreement. Interest Rate Position as of June 29, 2013 Notional Amount by Expected Maturity Average Interest Swap Rate 2014 2015 2016 2017 2018 Thereafter Total Fair Value $ 200,000 $ - $ - $ - $ - $ - $ 200,000 $ 2,988 2.1% 4.6% - - - - - - - - - - 2.1% 4.6% (In thousands) Interest Rate Swaps Related To Debt: Pay Variable/Receive Fixed Average Variable Rate Paid: Rate A Plus Fixed Rate Received Rate A – three-month LIBOR Fiscal 2012 As of June 30, 2012, we had no commercial paper outstanding. Total debt as of June 30, 2012 was $3.0 billion, of which approximately 84% was at fi xed rates of interest, including the impact of our interest rate swap agreements. In May 2012, we entered into an agreement with a notional amount of $200.0 million to lock in a component of the interest rate on our then forecasted debt offering. We designated this derivative as a cash fl ow hedge of the variability in the cash outfl ows of interest payments on a portion of the June 2012 forecasted debt issuance due to changes in the benchmark interest rate. In June 2012, in conjunction with the issuance of the $450.0 million senior notes maturing in fi scal 2022, we settled the treasury lock, locking in the effective yields on the related debt. As of June 30, 2012, the fi scal 2013 swap was recognized as an asset within the consolidated balance sheet at fair value within prepaid expenses and other current assets of $2.5 million. The fi xed interest rate on the hedged debt is 4.2% and the fl oating interest rate on the swap is three-month LIBOR which resets quarterly. As of June 30, 2012, the fi scal 2014 swap was recognized as an asset within the consolidated balance sheet at fair value within other assets of $6.2 million. The fi xed interest rate on the hedged debt is 4.6% and the fl oating interest rate on the swap is three-month LIBOR which resets quarterly. SYSCO CORPORATION - Form 10-K 41 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk The following tables present our interest rate position as of June 30, 2012. All amounts are stated in U.S. dollar equivalents. 2013 2014 2015 2016 2017 Thereafter Total Fair Value Interest Rate Position as of June 30, 2012 Principal Amount by Expected Maturity Average Interest Rate (In thousands) U.S. $ Denominated: Fixed Rate Debt Average nterest Rate I Floating Rate Debt (1) $ 3,570 $ 4.5% 4.1% $ 249,964 $ 206,673 $ 2,979 $ 299,846 $ 0.8% 1,100 $ 0.2% 2.1% 1,153 $ 4.7% - $ - 604 $ 2,216,827 $ 2,524,979 $ 3,030,042 4.9% - $ - 4.7% 470,237 $ 2.3% 5.2% 12,500 $ 0.5% 481,475 Average Interest Rate 2.6% Canadian $ Denominated: Fixed Rate Debt Average 1,187 $ 9.3% Includes fixed rate debt that has been converted to floating rate debt through interest rate swap agreements. 1,147 $ 8.7% 1,116 $ 8.4% 1,189 $ 8.9% nterest I $ R ate (1) 1,203 $ 9.8% 17,280 $ 9.7% 23,122 $ 9.6% 27,746 Interest Rate Position as of June 30, 2012 Notional Amount by Expected Maturity Average Interest Swap Rate 2013 2014 2015 2016 2017 Thereafter Total Fair Value $ 250,000 $ 200,000 $ - $ - $ - $ - $ 450,000 $ 8,694 2.1% 4.2% 2.1% 4.6% - - - - - - - - 2.1% 4.4% (In thousands) Interest Rate Swaps Related To Debt: Pay Variable/Receive Fixed Average Variable Rate Paid: Rate A Plus Fixed Rate Received Rate A – three-month LIBOR Foreign Currency Exchange Rate Risk The majority of our foreign subsidiaries use their local currency as their functional currency. To the extent that business transactions are not denominated in a foreign subsidiary’s functional currency, we are exposed to foreign currency exchange rate risk. We will also incur gains and losses within our shareholders’ equity due to the translation of our fi nancial statements from foreign currencies into U.S. dollars. Our income statement trends may be impacted by the translation of the income statements of our foreign subsidiaries into U.S. dollars. The changes in the exchange rates used to translate our foreign sales into U.S. dollars did not have a signifi cant impact on sales in fi scal 2013 when compared to fi scal 2012 or in fi scal 2012 when compared to fi scal 2011. The impact to our operating income, net earnings and earnings per share was not material in fi scal 2013 or fi scal 2012. A 10% unfavorable change in the fi scal 2013 weighted year-to-date exchange rate and the resulting impact on our fi nancial statements would have negatively impacted fi scal 2013 sales by 1.1% and would not have materially impacted our operating income, net earnings and earnings per share. We do not routinely enter into material agreements to hedge foreign currency exchange rate risks. 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 fl uctuates 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 impact consumer confi dence 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 fi scal 2013, 2012 and 2011, fuel costs related to outbound deliveries represented approximately 0.7%, 0.7% and 0.6% of sales, respectively. Fuel costs, excluding any amounts recovered through fuel surcharges, incurred by Sysco increased by approximately $18.9 million in fi scal 2013 from fi scal 2012 and by $39.8 million in fi scal 2012 over fi scal 2011. We routinely enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements. As of June 29, 2013, we had forward diesel fuel commitments totaling approximately $204 million through August 2014. These contracts will lock in the price of approximately 60% to 65% of our fuel purchase needs for the contracted periods at prices slightly lower than the current market price for diesel. 42 SYSCO CORPORATION - Form 10-K Assuming that fuel prices do not rise signifi cantly over recent levels during fi scal 2014, fuel costs, exclusive of any amounts recovered through fuel surcharges, are expected to increase by approximately $10 to $20 million as compared to fi scal 2013. Our estimate is based upon current, published quarterly market price projections for diesel, the cost committed to in our forward fuel purchase agreements currently in place for fi scal 2014 and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these assumptions change, in particular if future fuel prices vary signifi cantly from our current estimates. A 10% unfavorable change in diesel prices from the market price used in our estimates above would result in a potential PART II ITEM 8 Financial Statements and Supplementary Data increase of $20 million to $30 million. Investment Risk Our company-sponsored qualifi ed pension plan (Retirement Plan) holds investments in public and private equity, fi xed income securities and real estate funds. The amount of our annual contribution to the plan is dependent upon, among other things, the return on the plan’s assets and discount rates used to calculate the plan’s liability. Fluctuations in asset values can cause the amount of our anticipated future contributions to the plan to increase and can result in a reduction to shareholders’ equity on our balance sheet as of fi scal year-end, which is when this plan’s funded status is measured. Also, the projected liability of the plan will be impacted by the fl uctuations of interest rates on high quality bonds in the public markets. To the extent the fi nancial markets experience declines, our anticipated future contributions and funded status will be affected for future years. A 10% unfavorable change in the value of the investments held by our company-sponsored Retirement Plan at the plan’s fi scal year end (December 31, 2012) would not have a material impact on our anticipated future contributions for fi scal 2014; however, this unfavorable change would increase our pension expense for fi scal 2014 by $26.8 million and would reduce our shareholders’ equity on our balance sheet as of June 29, 2013 by $155.1 million. ITEM 8 Financial Statements and Supplementary Data Sysco Corporation and Subsidiaries Index to Consolidated Financial Statements Consolidated Financial Statements: Report of Management on Internal Control Over Financial Reporting .....................................................................................................................................................................44 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting .............................................................45 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements ...............................................................................46 Consolidated Balance Sheets .......................................................................................................................................................................................................................................................................................47 Consolidated Results of Operations .....................................................................................................................................................................................................................................................................48 Consolidated Statements of Comprehensive Income....................................................................................................................................................................................................................48 Changes in Consolidated Shareholders’ Equity.....................................................................................................................................................................................................................................49 Consolidated Cash Flows ...................................................................................................................................................................................................................................................................................................50 Notes to Consolidated Financial Statements ............................................................................................................................................................................................................................................51 All schedules are omitted because they are not applicable or the information is set forth in the consolidated fi nancial statements or notes thereto. SYSCO CORPORATION - Form 10-K 43 PART II ITEM 8 Financial Statements and Supplementary Data Report of Management on Internal Control Over Financial Reporting The management of Sysco Corporation (“Sysco”) is responsible for establishing and maintaining adequate internal control over fi nancial reporting for the company. Sysco’s internal control system is designed to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation and fair presentation of published fi nancial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to fi nancial statement preparation and presentation. Sysco’s management assessed the effectiveness of Sysco’s internal control over fi nancial reporting as of June 29, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, management concluded that, as of June 29, 2013, Sysco’s internal control over fi nancial reporting was effective based on those criteria. Ernst & Young LLP has issued an audit report on the effectiveness of Sysco’s internal control over fi nancial reporting as of June 29, 2013. 44 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting The Board of Directors and Shareholders of Sysco Corporation We have audited Sysco Corporation (a Delaware Corporation) and subsidiaries’ (the “Company”) internal control over fi nancial reporting as of June 29, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sysco Corporation’s management is responsible for maintaining effective internal control over fi nancial reporting, and for its assessment of the effectiveness of internal control over fi nancial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over fi nancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the fi nancial statements. Because of its inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Sysco Corporation maintained, in all material respects, effective internal control over fi nancial reporting as of June 29, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of June 29, 2013 and June 30, 2012, and the related consolidated results of operations, statements of comprehensive income, shareholders’ equity, and cash fl ows for each of the three years in the period ended June 29, 2013 of Sysco Corporation and subsidiaries and our report dated August 26, 2013 expressed an unqualifi ed opinion thereon. Houston, Texas August 26, 2013 SYSCO CORPORATION - Form 10-K 45 PART II ITEM 8 Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements The Board of Directors and Shareholders of Sysco Corporation We have audited the accompanying consolidated balance sheets of Sysco Corporation (a Delaware Corporation) and subsidiaries (the ‘‘Company”) as of June 29, 2013 and June 30, 2012, and the related consolidated results of operations, statements of comprehensive income, shareholders’ equity and cash fl ows for each of the three years in the period ended June 29, 2013. These fi nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the fi nancial statements referred to above present fairly, in all material respects, the consolidated fi nancial position of the Company at June 29, 2013 and June 30, 2012, and the consolidated results of its operations and its cash fl ows for each of the three years in the period ended June 29, 2013, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over fi nancial reporting as of June 29, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2013 expressed an unqualifi ed opinion thereon. Houston, Texas August 26, 2013 46 SYSCO CORPORATION - Form 10-K Consolidated Balance Sheets (In thousands except for share data) ASSETS Current assets Cash and cash equivalents Accounts and notes receivable, less allowances of $47,345 and $42,919 Inventories Deferred income taxes Prepaid expenses and other current assets Prepaid income taxes Total current assets Plant and equipment at cost, less depreciation Other assets Goodwill Intangibles, less amortization Restricted cash Other assets Total other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Notes payable Accounts payable Accrued expenses Accrued income taxes Current maturities of long-term debt Total current liabilities Other liabilities Long-term debt Deferred income taxes Other long-term liabilities Total other liabilities Commitments and contingencies 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 Paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, 179,068,430 and 179,228,383 shares, at cost Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY See Notes to Consolidated Financial Statements PART II ITEM 8 Financial Statements and Supplementary Data June 29, 2013 June 30, 2012 $ 412,285 $ 3,183,114 2,396,188 136,211 61,925 17,704 6,207,427 3,978,071 1,884,235 205,719 145,328 243,167 2,478,449 688,867 2,966,624 2,178,830 134,503 80,713 35,271 6,084,808 3,883,750 1,665,611 113,571 127,228 262,239 2,168,649 $ $ 12,663,947 $ 12,137,207 41,632 $ 2,463,494 1,036,855 - 207,301 3,749,282 2,639,986 266,222 816,647 3,722,855 - 2,209,469 909,144 50,316 254,650 3,423,579 2,763,688 115,166 1,149,734 4,028,588 - - 765,175 1,059,624 8,512,786 (446,937) (4,698,838) 5,191,810 765,175 939,179 8,175,230 (662,866) (4,531,678) 4,685,040 $ 12,663,947 $ 12,137,207 SYSCO CORPORATION - Form 10-K 47 PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Results of Operations (In thousands except for share and per share data) Sales Cost of sales Gross profi t Operating expenses Operating income Interest expense Other expense (income), net Earnings before income taxes Income taxes NET EARNINGS Net earnings: BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE Average shares Diluted shares outstanding outstanding Dividends declared per common share See Notes to Consolidated Financial Statements June 29, 2013 June 30, 2012 July 2, 2011 Year Ended $ $ $ $ 44,411,233 $ 36,543,642 7,867,591 6,209,113 1,658,478 128,495 (17,472) 1,547,455 555,028 992,427 $ 42,380,939 $ 34,704,362 7,676,577 5,785,945 1,890,632 113,396 (6,766) 1,784,002 662,417 1,121,585 $ $ 39,323,489 31,928,777 7,394,712 5,463,210 1,931,502 118,267 (14,219) 1,827,454 675,424 1,152,030 1.96 1.96 $ 1.68 1.67 1.91 1.90 589,397,807 592,675,110 587,726,343 588,991,441 1.11 $ 1.07 $ 586,526,142 588,691,546 1.03 Consolidated Statements of Comprehensive Income Year Ended June 29, 2013 June 30, 2012 July 2, 2011 $ 992,427 $ 1,121,585 $ 1,152,030 (33,191) (81,003) 122,217 386 - 11,310 44,610 88 (33,203) 225,929 215,929 $ 1,208,356 $ 426 445 3,093 36,860 93 (5,363) (357,459) (402,908) 718,677 428 - 2,553 49,013 93 (5,692) 51,681 220,293 $ 1,372,323 (In thousands) Net earnings Other comprehensive income (loss): Foreign currency translation adjustment Items presented net of tax: Amortization of cash fl ow hedges Settlement of cash fl ow hedge Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net arising in current year Total other comprehensive income (loss) COMPREHENSIVE INCOME See Notes to Consolidated Financial Statements 48 SYSCO CORPORATION - Form 10-K Changes in Consolidated Shareholders’ Equity PART II ITEM 8 Financial Statements and Supplementary Data Common Stock Amount Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Shares Amounts Totals 765,174,900 $ 765,175 $ 816,833 $ 7,134,139 $ 1,152,030 (480,251) 176,768,795 $ (4,408,370) $ 3,827,526 1,152,030 Shares (In thousands except for share data) Balance as of July 3, 2010 Net earnings Foreign currency translation adjustment Amortization of cash fl ow hedges, net of tax Reclassifi cation of pension and other postretirement benefi t plans amounts to net earnings, net of tax Pension funded status adjustment, net of tax Dividends declared Treasury stock purchases Treasury stock issued for acquisitions Share-based compensation awards BALANCE AS OF JULY 2, 2011 Net earnings Foreign currency translation adjustment Amortization of cash fl ow hedges, net of tax Settlement of cash fl ow hedge, net of tax Reclassifi cation of pension and other postretirement benefi t plans amounts to net earnings, net of tax Pension funded status adjustment, net of tax Dividends declared Treasury stock purchases Share-based compensation awards BALANCE AS OF JUNE 30, 2012 Net earnings Foreign currency translation adjustment Amortization of cash fl ow hedges, net of tax Reclassifi cation of pension and other postretirement benefi t plans amounts to net earnings, net of tax Pension funded status adjustment, net of tax Dividends declared Treasury stock purchases Share-based compensation awards BALANCE AS OF JUNE 29, 2013 See Notes to Consolidated Financial Statements 765,174,900 $ 765,175 $ 887,754 122,217 428 51,659 45,989 (604,500) 10,000,000 (291,600) 122,217 428 51,659 45,989 (604,500) (291,600) (10,625) 81,546 (422,132) 10,625 - (12,749,317) 319,947 401,493 $ 7,681,669 1,121,585 $ (259,958) 173,597,346 $ (4,369,398) $ 4,705,242 1,121,585 (81,003) 426 445 40,046 (362,822) (628,024) 10,000,000 (272,299) (81,003) 426 445 40,046 (362,822) (628,024) (272,299) 51,425 (4,368,963) 110,019 161,444 765,174,900 $ 765,175 $ 939,179 $ 8,175,230 $ 992,427 (662,866) 179,228,383 $ (4,531,678) $ 4,685,040 992,427 (33,191) 386 56,008 192,726 (654,871) 21,897,403 (729,333) (33,191) 386 56,008 192,726 (654,871) (729,333) 120,445 (22,057,356) 562,173 682,618 765,174,900 $ 765,175 $ 1,059,624 $ 8,512,786 $ (446,937) 179,068,430 $ (4,698,838) $ 5,191,810 SYSCO CORPORATION - Form 10-K 49 PART II ITEM 8 Financial Statements and Supplementary Data Consolidated Cash Flows (In thousands) Cash fl ows from operating activities: Net earnings Adjustments to reconcile net earnings to cash provided by operating activities: June 29, 2013 June 30, 2012 July 2, 2011 Year Ended $ 992,427 $ 1,121,585 $ 1,152,030 Share-based compensation expense Depreciation and amortization Deferred income taxes Provision for losses on receivables Other non-cash items Additional investment in certain assets and liabilities, net of effect of businesses acquired: (Increase) in receivables (Increase) in inventories Decrease (increase) in prepaid expenses and other current assets Increase in accounts payable Increase (decrease) in accrued expenses (Decrease) increase in accrued income taxes Decrease (increase) in other assets Increase (decrease) in other long-term liabilities Excess tax benefi ts from share-based compensation arrangements Net cash provided by operating activities Cash fl ows from investing activities: Additions to plant and equipment Proceeds from sales of plant and equipment Acquisition of businesses, net of cash acquired Maturities of short-term investments (Increase) decrease in restricted cash Net cash used for investing activities Cash fl ows from fi nancing activities: Bank and commercial paper borrowings (repayments), net Other debt borrowings Other debt repayments Debt issuance costs Cash received from settlement of cash fl ow hedge Proceeds from common stock reissued from treasury for share-based compensation awards Treasury stock purchases Dividends paid Excess tax benefi ts from share-based compensation arrangements Net cash used for fi nancing activities Effect of exchange rates on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD Supplemental disclosures of cash fl ow information: Cash paid during the period for: Interest Income taxes See Notes to Consolidated Financial Statements $ $ 70,147 512,548 (28,129) 35,243 2,485 (193,755) (180,277) 21,704 207,243 76,497 (38,017) 182 37,852 (4,556) 1,511,594 (511,862) 15,527 (397,447) 70,319 416,943 (177,906) 33,359 (958) (106,834) (99,218) (6,478) 30,335 41,429 71,251 56,538 (46,170) (15) 1,404,180 (784,501) 8,185 (110,601) - - (18,100) (911,882) 95,500 61,467 (294,514) - - 628,652 (721,616) (648,253) 4,556 (874,208) (2,086) (276,582) 688,867 412,285 $ (16,712) (903,629) (181,975) 744,597 (205,638) (4,641) 722 99,439 (272,299) (622,869) 15 (442,649) (8,800) 49,102 639,765 688,867 $ 59,235 402,588 (165,239) 42,623 (9,454) (252,641) (254,738) 341 187,410 (43,348) (44,202) (45,866) 63,208 (429) 1,091,518 (636,442) 19,069 (101,148) 24,993 13,972 (679,556) 181,975 4,411 (8,732) (7) - 332,688 (291,600) (597,071) 429 (377,907) 20,267 54,322 585,443 639,765 131,665 $ 620,132 114,067 $ 772,493 119,050 907,720 50 SYSCO CORPORATION - Form 10-K Notes to Consolidated Financial Statements PART II ITEM 8 Financial Statements and Supplementary Data NOTE 1 Summary of Accounting Policies Business and Consolidation Sysco Corporation, acting through its subsidiaries and divisions, (Sysco or the company), is engaged in the marketing and distribution of a wide range of food and related products primarily to the foodservice or food-away-from-home industry. These services are performed for approximately 425,000 customers from 193 distribution facilities located throughout the United States, Bahamas, Canada, Ireland and Northern Ireland. Sysco’s fi scal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year ending June 29, 2013 for fi scal 2013, June 30, 2012 for fi scal 2012 and, July 2, 2011 for fi scal 2011. The accompanying fi nancial statements include the accounts of Sysco and its consolidated subsidiaries. All signifi cant intercompany transactions and account balances have been eliminated. The preparation of fi nancial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets, liabilities, sales and expenses. Actual results could differ from the estimates used. Cash and Cash Equivalents Cash includes cash equivalents such as time deposits, certifi cates of deposit, short-term investments and all highly liquid instruments with original maturities of three months or less, which are recorded at fair value. Accounts Receivable Accounts receivable consist primarily of trade receivables from customers and receivables from suppliers for marketing or incentive programs. Sysco determines the past due status of trade receivables based on contractual terms with each customer. Sysco evaluates the collectability of accounts receivable and determines the appropriate reserve for doubtful accounts based on a combination of factors. The company utilizes specifi c criteria to determine uncollectible receivables to be written off including whether a customer has fi led for or been placed in bankruptcy, has had accounts referred to outside parties for collection or has had accounts past due over specifi ed periods. Allowances are recorded for all other receivables based on an analysis of historical trends of write-offs and recoveries. In addition, in circumstances where the company is aware of a specifi c customer’s inability to meet its fi nancial obligation to Sysco, a specifi c allowance for doubtful accounts is recorded to reduce the receivable to the net amount reasonably expected to be collected. Inventories Inventories consisting primarily of fi nished goods include food and related products and lodging products held for resale and are valued at the lower of cost (fi rst-in, fi rst-out method) or market. Elements of costs include the purchase price of the product and freight charges to deliver the product to the company’s warehouses and are net of certain cash or non-cash consideration received from vendors (see “Vendor Consideration”). Plant and Equipment Capital additions, improvements and major replacements are classifi ed as plant and equipment and are carried at cost. Depreciation is recorded using the straight-line method, which reduces the book value of each asset in equal amounts over its estimated useful life, and is included within operating expenses in the consolidated results of operations. Maintenance, repairs and minor replacements are charged to earnings when they are incurred. Upon the disposition of an asset, its accumulated depreciation is deducted from the original cost, and any gain or loss is refl ected in current earnings. Certain internal and external costs related to the acquisition and development of internal use software being built within our Business Transformation Project are capitalized within plant and equipment during the application development stages of the project. Amortization commenced in August 2012 as the project entered the deployment stage. Additional costs are capitalized for added software that is in the application development stage of the project. Applicable interest charges incurred during the construction of new facilities and development of software for internal use are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives. Interest capitalized for the past three fi scal years was $4.2 million in fi scal 2013, $20.8 million in fi scal 2012 and $13.9 million in fi scal 2011. SYSCO CORPORATION - Form 10-K 51 PART II ITEM 8 Financial Statements and Supplementary Data Long-Lived Assets Management reviews long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash fl ows expected to be generated by the related assets are estimated over the asset’s useful life based on updated projections on an undiscounted basis. If the evaluation indicates that the carrying value of the asset may not be recoverable, the potential impairment is measured at fair value. Goodwill and Intangibles Goodwill and intangibles represent the excess of cost over the fair value of tangible net assets acquired. Goodwill and intangibles with indefi nite lives are not amortized. Goodwill is assigned to the reporting units that are expected to benefi t from the synergies of a business combination. The recoverability of goodwill and indefi nite-lived intangibles is assessed annually, or more frequently as needed when events or changes have occurred that would suggest an impairment of carrying value, by determining whether the fair values of the applicable reporting units exceed their carrying values. The reporting units used to assess goodwill impairment are the company’s 10 operating segments as described in Note 21, “Business Segment Information.” The components within each of the 10 operating segments have similar economic characteristics and therefore are aggregated into 10 reporting units. The evaluation of fair value requires the use of projections, estimates and assumptions as to the future performance of the operations in performing a discounted cash fl ow analysis, as well as assumptions regarding sales and earnings multiples that would be applied in comparable acquisitions. Intangibles with defi nite lives are amortized over their useful lives in a manner consistent with underlying cash fl ow, which generally ranges from three to ten years. Management reviews fi nite-lived intangibles for indicators of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash fl ows expected to be generated by the fi nite-lived intangibles are estimated over the intangible asset’s useful life based on updated projections on an undiscounted basis. If the evaluation indicates that the carrying value of the fi nite-lived intangible asset may not be recoverable, the potential impairment is measured at fair value. Restricted Cash Sysco is required by its insurers to collateralize a part of the self-insured portion of its workers’ compensation and liability claims. Sysco has chosen to satisfy these collateral requirements by depositing funds in insurance trusts or by issuing letters of credit. All amounts in restricted cash at June 29, 2013 and June 30, 2012 represented funds deposited in insurance trusts. Derivative Financial Instruments All derivatives are recognized as assets or liabilities within the consolidated balance sheets at fair value. Gains or losses on derivative fi nancial instruments designated as fair value hedges are recognized immediately in the consolidated results of operations, along with the offsetting gain or loss related to the underlying hedged item. Gains or losses on derivative fi nancial instruments designated as cash fl ow hedges are recorded as a separate component of shareholders’ equity at their settlement, whereby gains or losses are reclassifi ed to the Consolidated Results of Operations in conjunction with the recognition of the underlying hedged item. In the normal course of business, Sysco enters into forward purchase agreements for the procurement of fuel and electricity. Certain of these agreements meet the defi nition of a derivative. However, the company elected to use the normal purchase and sale exemption available under derivatives accounting literature; therefore, these agreements are not recorded at fair value. Investments in Corporate-Owned Life Insurance Investments in corporate-owned life insurance (COLI) policies are recorded at their cash surrender values as of each balance sheet date. Changes in the cash surrender value during the period are recorded as a gain or loss within operating expenses. The company does not record deferred tax balances related to cash surrender value gains or losses for the policies that Sysco has the intent to hold these policies to maturity. Deferred tax balances are recorded for those policies that Sysco intends to redeem prior to maturity. The total amounts related to the company’s investments in COLI policies included in other assets in the consolidated balance sheets were $159.3 million and $160.5 million at June 29, 2013 and June 30, 2012, respectively. Treasury Stock The company records treasury stock purchases at cost. Shares removed from treasury are valued at cost using the average cost method. 52 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Foreign Currency Translation The assets and liabilities of all foreign subsidiaries are translated at current exchange rates. Related translation adjustments are recorded as a component of accumulated other comprehensive income (loss). Revenue Recognition The company recognizes revenue from the sale of a product when it is considered to be realized or realizable and earned. The company determines these requirements to be met at the point at which the product is delivered to the customer. The company grants certain customers sales incentives such as rebates or discounts and treats these as a reduction of sales at the time the sale is recognized. Sales tax collected from customers is not included in revenue but rather recorded as a liability due to the respective taxing authorities. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are considered to be a single nonmonetary transaction. As such, the company records the net effect of such transactions in the consolidated results of operations within sales. Vendor Consideration Sysco recognizes consideration received from vendors when the services performed in connection with the monies received are completed and when the related product has been sold by Sysco as a reduction to cost of sales. There are several types of cash consideration received from vendors. In many instances, the vendor consideration is in the form of a specifi ed amount per case or per pound. In these instances, Sysco will recognize the vendor consideration as a reduction of cost of sales when the product is sold. In the situations in which the vendor consideration is not related directly to specifi c product purchases, Sysco will recognize these as a reduction of cost of sales when the earnings process is complete, the related service is performed and the amounts are realized. Shipping and Handling Costs Shipping and handling costs include costs associated with the selection of products and delivery to customers. Included in operating expenses are shipping and handling costs of approximately $2,539.6 million in fi scal 2013, $2,396.2 million in fi scal 2012, and $2,222.1 million in fi scal 2011. Insurance Program Sysco maintains a self-insurance program covering portions of workers’ compensation, general and vehicle liability and property insurance costs. The amounts in excess of the self-insured levels are fully insured by third party insurers. The company also maintains a fully self-insured group medical program. Liabilities associated with these risks are estimated in part by considering historical claims experience, medical cost trends, demographic factors, severity factors and other actuarial assumptions. Share-Based Compensation Sysco recognizes expense for its share-based compensation based on the fair value of the awards that are granted. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. Option pricing methods require the input of highly subjective assumptions, including the expected stock price volatility. The fair value of restricted stock and restricted stock unit awards are based on the company’s stock price on the date of grant. Measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award. Cash fl ows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefi ts) are classifi ed as fi nancing cash fl ows on the consolidated cash fl ows statements. Income Taxes Sysco recognizes deferred tax assets and liabilities based on the estimated future tax consequences attributable to differences between the fi nancial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Sysco recognizes a tax benefi t from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefi t that has greater than a 50% likelihood of being realized upon settlement. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, estimated amounts required by the accounting guidance related to uncertain tax positions have been accrued and are classifi ed as a component of income taxes in the consolidated results of operations. SYSCO CORPORATION - Form 10-K 53 PART II ITEM 8 Financial Statements and Supplementary Data The determination of the company’s provision for income taxes requires signifi cant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes primarily refl ects a combination of income earned and taxed in the various U.S. federal and state, as well as various foreign jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Acquisitions Acquisitions of businesses are accounted for using the purchase method of accounting, and the fi nancial statements include the results of the acquired operations from the respective dates of acquisition. The purchase price of the acquired entities is allocated to the net assets acquired and liabilities assumed based on the estimated fair value at the dates of acquisition, with any excess of cost over the fair value of net assets acquired, including intangibles, recognized as goodwill. The balances included in the consolidated balance sheets related to recent acquisitions are based upon preliminary information and are subject to change when fi nal asset and liability valuations are obtained. Subsequent changes to the preliminary balances are refl ected retrospectively, if material. Material changes to the preliminary allocations are not anticipated by management. Reclassifi cations Prior year amounts within the consolidated balance sheets and consolidated cash fl ows have been reclassifi ed to conform to the current year presentation as it relates to the presentation of certain tax-related balances within these statements. The impact of these reclassifi cations was immaterial to all periods presented. NOTE 2 Changes in Accounting Testing Goodwill for Impairment In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment.” This update amends Accounting Standards Codifi cation (ASC) 350, “Intangibles–Goodwill and Other” to allow entities an option to fi rst assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. In addition, the update provided a revised list of factors that should be considered when evaluating whether a potential goodwill impairment may have occurred at an interim period. The amendments in this update were effective for annual and interim goodwill impairment tests performed for fi scal years beginning after December 15, 2011. Early adoption was permitted. The adoption of this update in the fi rst quarter of fi scal 2013 did not result in a material change to the company’s interim consideration of potential goodwill impairment nor to its annual goodwill impairment testing in the fourth quarter of fi scal 2013. NOTE 3 New Accounting Standards Testing Indefi nite-Lived Intangible Assets for Impairment In July 2012, the FASB issued ASU 2012-02, “Testing Indefi nite-Lived Intangible Assets for Impairment.” This update amends ASC 350, “Intangibles— Goodwill and Other” to allow entities an option to fi rst assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option, an entity no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim impairment tests performed for fi scal years beginning after September 15, 2012, which will be fi scal 2014 for Sysco. Early adoption is permitted. Sysco is currently evaluating the impact this update may have on its indefi nite-lived intangibles impairment testing. Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This update amends ASC 210, “Balance Sheet,” specifi cally the disclosure requirements created by ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities,” issued by the FASB in December 2011. This update clarifi es the scope of these disclosure requirements to be applicable only to derivatives and securities borrowing 54 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data and lending transactions that are offset in accordance with GAAP or are subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements continue to be effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013, which will be fi scal 2014 for Sysco. Based on the scope clarifi cation of this update, Sysco does not believe it has any fi nancial instruments requiring these disclosures but will continue to evaluate this assessment. Reporting of Amounts Reclassifi ed Out of Accumulated Other Comprehensive Income In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassifi ed Out of Accumulated Other Comprehensive Income.” This update amends ASC 220, “Comprehensive Income,” to require an entity to report the effect of signifi cant reclassifi cations out of accumulated other comprehensive income on the respective line items in net earnings if the amount is being reclassifi ed in its entirety to net earnings. For other amounts that are not being reclassifi ed in their entirety to net earnings, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The amendments in this update are effective prospectively for fi scal years, and interim periods within those years, beginning after December 15, 2012, which is fi scal 2014 for Sysco. Sysco is currently evaluating the impact this update will have on its disclosures. Inclusion of the Fed Funds Effective Swap Rate(or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate(or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” This update amends ASC 815, “Derivatives and Hedging,” to permit the Fed Funds Effective Swap rate to be used as a benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury rates and the London Interbank Offered Rate swap rate. The update also removes the restriction on using different benchmark rates for similar hedges. The amendments in this update are effective prospectively for new or redesignated hedging relationships entered into on or after July 17, 2013. Sysco will consider all available benchmark interest rates for any new hedging relationships. Presentation of an Unrecognized Tax Benefi t When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefi t When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update amends ASC 740, “Income Taxes,” to require that in certain cases, an unrecognized tax benefi t, or portion of an unrecognized tax benefi t, should be presented in the fi nancial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fi scal years, and interim periods within those years, beginning after December 15, 2013, which is fi scal 2015 for Sysco. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefi ts that exist at the effective date, and retrospective application is permitted. Sysco is currently evaluating the impact this update will have on its fi nancial statements. NOTE 4 Fair Value Measurements Fair value is defi ned 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, certifi cates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less. Restricted cash consists of investments in high-quality money market funds. SYSCO CORPORATION - Form 10-K 55 PART II ITEM 8 Financial Statements and Supplementary Data The following is a description of the valuation methodologies used for assets 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 and restricted cash as Level 1 measurements in the tables below. • The interest rate swap agreements, discussed further in Note 8, “Derivative Financial Instruments,” 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 within prepaid expenses and other current assets and other assets as Level 2 measurements in the tables below. The following tables present the company’s assets measured at fair value on a recurring basis as of June 29, 2013 and June 30, 2012: (In thousands) Assets: Cash and cash equivalents Cash equivalents Prepaid expenses and other current assets Interest rate swap agreement Restricted cash TOTAL ASSETS AT FAIR VALUE (In thousands) Assets: Cash and cash equivalents Cash equivalents Prepaid expenses and other current assets Interest rate swap agreement Restricted cash Other assets Interest rate swap agreements TOTAL ASSETS AT FAIR VALUE Assets Measured at Fair Value as of June 29, 2013 Level 1 Level 2 Level 3 Total $ $ 1,160 $ 132,731 $ - $ 133,891 - 145,328 146,488 $ 2,988 - 135,719 $ - - - $ 2,988 145,328 282,207 Assets Measured at Fair Value as of June 30, 2012 Level 1 Level 2 Level 3 Total $ 228,310 $ 248,714 $ - $ 477,024 - 127,228 2,475 - - $ 355,538 $ 6,219 257,408 $ - - - - $ 2,475 127,228 6,219 612,946 The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short-term maturities of these instruments. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities and is considered a Level 2 measurement. The fair value of total debt approximated $3,207.6 million and $3,539.3 million as of June 29, 2013 and June 30, 2012, respectively. The carrying value of total debt was $2,888.9 million and $3,018.3 million as of June 29, 2013 and June 30, 2012, respectively. NOTE 5 Allowance For Doubtful Accounts A summary of the activity in the allowance for doubtful accounts appears below: (In thousands) Balance at beginning of period Charged to costs and expenses Customer accounts written off, net of recoveries Other adjustments BALANCE AT END OF PERIOD 2013 2012 2011 $ $ 42,919 $ 35,243 (30,824) 7 47,345 $ 42,436 $ 33,359 (32,318) (558) 42,919 $ 36,573 42,623 (37,823) 1,063 42,436 56 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 6 Plant and Equipment A summary of plant and equipment, including the related accumulated depreciation, appears below: (In thousands) Plant and equipment, at cost: Land Buildings and improvements Fleet and equipment Computer hardware and software Accumulated depreciation NET PLANT AND EQUIPMENT June 29, 2013 June 30, 2012 Estimated Useful Lives $ 435,447 $ 3,632,568 2,633,228 1,054,754 7,755,997 (3,777,926) 3,978,071 $ $ 352,812 3,510,627 2,449,018 1,028,594 7,341,051 (3,457,301) 3,883,750 10-30 years 3-10 years 3-7 years The capitalized direct costs for the internal use software portion of the company’s Business Transformation Project are included within “computer hardware and software” in the table above in the amount of $417.7 million and $469.4 million, net of accumulated amortization, as of June 29, 2013 and June 30, 2012, respectively. The majority of this internal use software related to the Business Transformation Project was placed into service and began amortization in August of fi scal 2013. Depreciation expense, including capital leases, for the past three years was $473.5 million in 2013, $384.9 million in 2012 and $374.0 million in 2011. NOTE 7 Goodwill and Other Intangibles The changes in the carrying amount of goodwill and the amount allocated by reportable segment for the years presented are as follows: (In thousands) Carrying amount as of July 2, 2011 Goodwill acquired during year Currency translation/other Carrying amount as of June 30, 2012 Goodwill acquired during year Currency translation/other Broadline SYGMA Other Total $ 1,201,265 $ 32,609 $ 399,415 $ 1,633,289 48,911 (30,064) 1,220,112 203,393 (8,663) - - 32,609 - - 13,677 (202) 412,890 24,005 (111) 62,588 (30,266) 1,665,611 227,398 (8,774) CARRYING AMOUNT AS OF JUNE 29, 2013 $ 1,414,842 $ 32,609 $ 436,784 $ 1,884,235 Amortized intangible assets acquired during fi scal 2013 were $124.1 million with a weighted-average amortization period of eight years. By intangible asset category, the amortized intangible assets acquired during fi scal 2013 were customer relationships of $85.7 million with a weighted-average amortization period of nine years, non-compete agreements of $21.0 million with a weighted-average amortization period of fi ve years, amortized trademarks of $7.8 million with a weighted-average amortization period of eight years and other intangibles of $9.6 million with a weighted-average amortization period of fi ve years. The following table presents details of the company’s amortized intangible assets: (In thousands) Customer relationships Non-compete agreements Trademarks Other TOTAL AMORTIZED INTANGIBLE ASSETS $ $ Gross Carrying Amount June 29, 2013 Accumulated Amortization 274,410 $ 29,460 11,618 9,556 (125,250) $ (4,655) (1,580) (159) Net Gross Carrying Amount 149,160 $ 24,805 10,038 9,397 200,801 $ 8,453 3,759 - June 30, 2012 Accumulated Amortization (110,080) $ (2,024) (518) - Net 90,721 6,429 3,241 - 325,044 $ (131,644) $ 193,400 $ 213,013 $ (112,622) $ 100,391 Intangible assets that have been fully amortized have been removed in the schedule above in the period full amortization is reached. The following table presents details of the company’s indefi nite-lived intangible assets: (In thousands) Trademarks Licenses TOTAL INDEFINITE-LIVED INTANGIBLE ASSETS June 29, 2013 June 30, 2012 $ $ 11,353 $ 966 12,319 $ 12,214 966 13,180 SYSCO CORPORATION - Form 10-K 57 PART II ITEM 8 Financial Statements and Supplementary Data Amortization expense for the past three years was $32.1 million in 2013, $24.9 million in 2012 and $21.9 million in 2011. The estimated future amortization expense for the next fi ve fi scal years on intangible assets outstanding as of June 29, 2013 is shown below: (In thousands) 2014 2015 2016 2017 2018 $ Amount 40,999 36,581 29,150 24,515 21,068 NOTE 8 Derivative Financial Instruments Sysco manages its debt portfolio to achieve an overall desired position of fi xed and fl oating rates and may employ interest rate swaps from time to time to achieve this position. The company does not use derivative fi nancial instruments for trading or speculative purposes. In May 2012, the company entered into a treasury lock agreement with a notional amount of $200.0 million. The company designated this derivative as a cash fl ow hedge of the variability in the cash outfl ows of interest payments on a portion of the then forecasted June 2012 debt issuance due to changes in the benchmark interest rate. In June 2012, in conjunction with the issuance of the $450.0 million senior notes maturing in fi scal 2022, the company settled the treasury lock, locking in the effective yields on the related debt. Upon settlement, the company received cash of $0.7 million, which represented the fair value of the swap agreement at the time of settlement. This amount is being amortized as an offset to interest expense over the 10-year term of the debt, and the unamortized balance is refl ected as a gain, net of tax, in accumulated other comprehensive loss. In fi scal 2010, the company entered into two interest rate swap agreements that effectively converted $250.0 million of fi xed rate debt maturing in fi scal 2013 and $200.0 million of fi xed rate debt maturing in fi scal 2014 to fl oating rate debt. These transactions were entered into with the goal of reducing overall borrowing cost and increasing fl oating interest rate exposure. These transactions were designated as fair value hedges since the swaps hedge against the changes in fair value of fi xed rate debt resulting from changes in interest rates. The swap agreement related to the fi scal 2013 debt was settled upon maturity of the senior notes in February 2013, leaving one remaining outstanding swap agreement as of June 29, 2013. The location and the fair value of derivative instruments in the consolidated balance sheet as of each fi scal year-end are as follows: (In thousands) Fair Value Hedge Relationships: Interest rate swap agreements June 29, 2013 June 30, 2012 June 30, 2012 Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value Prepaid expenses and other current assets $ Prepaid expenses and other current assets Other assets 2,988 2,475 6,219 N/A N/A N/A N/A N/A N/A The location and effect of derivative instruments and related hedged items on consolidated comprehensive income for each fi scal year presented on a pre-tax basis are as follows: (In thousands) Fair Value Hedge Relationships: Interest rate swap agreements Cash Flow Hedge Relationships: Treasury lock agreement Interest rate contracts Location of (Gain) or Loss Recognized in Income Amount of (Gain) or Loss Recognized in Income 2012 2011 2013 Interest expense $ (4,492) $ (7,900) $ (9,026) Other comprehensive income Interest expense N/A 626 (722) 692 N/A 696 Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes in fair value of the fi xed rate debt attributable to changes in the benchmark interest rate. Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for fi scal 2013, fi scal 2012 and fi scal 2011. The interest rate swaps do not contain credit-risk-related contingent features. 58 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 9 Self-Insured Liabilities Sysco maintains a self-insurance program covering portions of workers’ compensation, general and vehicle liability and property insurance costs. The amounts in excess of the self-insured levels are fully insured by third party insurers. The company also maintains a fully self-insured group medical program. A summary of the activity in self-insured liabilities appears below: (In thousands) Balance at beginning of period Charged to costs and expenses Payments BALANCE AT END OF PERIOD 2013 2012 2011 $ $ 129,749 $ 352,374 (334,525) 147,598 $ 129,671 $ 318,828 (318,750) 129,749 $ 128,997 325,540 (324,866) 129,671 NOTE 10 Debt and Other Financing Arrangements Sysco’s debt consists of the following: (In thousands) Multicurrency revolving credit facility borrowings, interest averaging 1.0%, as of June 29, 2013 Commercial paper, interest averaging 0.1%, as of June 29, 2013 Senior notes, interest at 4.2%, maturing in fi scal 2013 Senior notes, interest at 4.6%, maturing in fi scal 2014 Senior notes, interest at 0.55%, maturing in fi scal 2015 Senior notes, interest at 5.25%, maturing in fi scal 2018 Senior notes, interest at 5.375%, maturing in fi scal 2019 Senior notes, interest at 2.6%, maturing in fi scal 2022 Debentures, interest at 7.16%, maturing in fi scal 2027 Debentures, interest at 6.5%, maturing in fi scal 2029 Senior notes, interest at 5.375%, maturing in fi scal 2036 Senior notes, interest at 6.625%, maturing in fi scal 2039 Capital leases and other debt, interest averaging 7.4% and maturing at various dates to fi scal 2029 as of June 29, 2013 and 5.9% and maturing at various dates to fi scal 2026 as of June 30, 2012 Total debt Less current maturities of long-term debt Less notes payable NET LONG-TERM DEBT June 29, 2013 June 30, 2012 $ $ 41,632 $ 95,500 - 202,190 298,669 498,414 249,031 444,844 50,000 224,641 499,669 245,845 - - 249,964 206,673 297,983 498,069 248,862 444,271 50,000 224,617 499,654 245,685 38,484 2,888,919 (207,301) (41,632) 2,639,986 $ 52,560 3,018,338 (254,650) - 2,763,688 The principal payments required to be made during the next fi ve fi scal years on debt outstanding as of June 29, 2013 are shown below: (In thousands) 2014 2015 2016 2017 2018 Short-term Borrowings $ Amount 207,301 303,847 3,286 2,494 500,179 As of June 29, 2013 and June 30, 2012, Sysco had uncommitted bank lines of credit, which provided for unsecured borrowings for working capital of up to $95.0 million. There were no borrowings outstanding under these lines of credit as of June 29, 2013 or June 30, 2012, respectively. In September 2012, the company’s Irish subsidiary, Pallas Foods, entered into a €75.0 million (Euro) multicurrency revolving credit facility, which will be utilized for capital needs for the company’s European subsidiaries. This facility provides for unsecured borrowings and expires September 25, 2013, but is subject to extension. Outstanding borrowings under this facility were €32.0 million (Euro) as of June 29, 2013, located within Notes payable on the consolidated balance sheet. As of June 30, 2012, the company’s Irish subsidiary, Pallas Foods Limited, had a €10.0 million (Euro) committed facility for unsecured borrowings for working capital. There were no borrowings outstanding under this facility as of June 30, 2012. During fi scal 2013, this facility was replaced with the facility described above. SYSCO CORPORATION - Form 10-K 59 PART II ITEM 8 Financial Statements and Supplementary Data On June 30, 2011, a Canadian subsidiary of Sysco entered into a short-term demand loan facility for the purpose of facilitating a distribution from the Canadian subsidiary to Sysco, and Sysco concurrently entered into an agreement with the bank to guarantee the loan. As of July 2, 2011, the amount outstanding under the facility was $182.0 million. The interest rate under the facility was 2.0% and payable on the due date. The loan was repaid in full on July 4, 2011. Commercial Paper and Revolving Credit Facility Sysco has a Board-approved commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $1,300.0 million. In December 2011, Sysco terminated its previously existing revolving credit facility that supported the company’s U.S. and Canadian commercial paper programs. At the same time, Sysco and one of its subsidiaries, Sysco International, ULC, entered into a new $1,000.0 million credit facility supporting the company’s U.S. and Canadian commercial paper programs. This facility provides for borrowings in both U.S. and Canadian dollars. Borrowings by Sysco International, ULC under the credit agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by all wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures. The original facility in the amount of $1,000.0 million expires on December 29, 2016. In December 2012, a portion of the facility was extended for an additional year. This extended facility, which expires on December 29, 2017, is for $925.0 million of the original $1,000.0 million facility, but is subject to further extension. As of June 29, 2013, commercial paper issuances outstanding were $95.5 million and were classifi ed as long-term debt, as the company’s commercial paper programs are supported by the long-term revolving credit facility described above. There were no commercial paper issuances outstanding as of June 30, 2012. During fi scal 2013, 2012, and 2011, aggregate outstanding commercial paper issuances and short-term bank borrowings ranged from approximately zero to $330.0 million, zero to $563.1 million, and zero to $330.3 million, respectively. Fixed Rate Debt In February 2012, Sysco fi led with the Securities and Exchange Commission an automatically effective well-known seasoned issuer shelf registration statement for the issuance of an indeterminate amount of common stock, preferred stock, debt securities and guarantees of debt securities that may be issued from time to time. In June 2012, Sysco repaid the 6.1% senior notes totaling $200.0 million at maturity utilizing a combination of cash fl ow from operations and commercial paper issuances. In June 2012, Sysco issued 0.55% senior notes totaling $300.0 million due June 12, 2015 (the 2015 notes) and 2.6% senior notes totaling $450.0 million due June 12, 2022 (the 2022 notes) under its February 2012 shelf registration. The 2015 and 2022 notes, which were priced at 99.319% and 98.722% of par, respectively, are unsecured, are not subject to any sinking fund requirement and include a redemption provision which allows Sysco to retire the notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the note holders are not penalized by early redemption. Proceeds from the notes will be utilized over a period of time for general corporate purposes, which may include acquisitions, refi nancing of debt, working capital, share repurchases and capital expenditures. In February 2013, Sysco repaid the 4.2% senior notes totaling $250.0 million at maturity utilizing a combination of cash fl ow from operations and cash on hand. The 4.6% senior notes due March 15, 2014, the 5.25% senior notes due February 12, 2018, the 5.375% senior notes due March 17, 2019, the 6.5% debentures due August 1, 2028, the 5.375% senior notes due September 21, 2035 and the 6.625% senior notes due March 17, 2039 are unsecured, are not subject to any sinking fund requirement and include a redemption provision that allows Sysco to retire the debentures and notes at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture and note holders are not penalized by the early redemption. The 7.16% debentures due April 15, 2027 are unsecured, are not subject to any sinking fund requirement and are no longer redeemable prior to maturity. Total Debt Total debt as of June 29, 2013 was $2,888.9 million of which approximately 88% was at fi xed rates with a weighted average of 4.7% and an average life of 13 years, and the remainder was at fl oating rates with a weighted average of 1.4% and an average life of one year. Certain loan agreements contain typical debt covenants to protect note holders, including provisions to maintain the company’s long-term debt to total capital ratio below a specifi ed level. Sysco is currently in compliance with all debt covenants. Other As of June 29, 2013 and June 30, 2012, letters of credit outstanding were $42.2 million and $29.8 million, respectively. 60 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 11 Leases Sysco has obligations under capital and operating leases for certain distribution facilities, vehicles and computers. Total rental expense under operating leases was $84.4 million, $83.0 million, and $79.3 million in fi scal 2013, 2012 and 2011, respectively. Contingent rentals, subleases and assets and obligations under capital leases are not signifi cant. Aggregate minimum lease payments by fi scal year under existing non-capitalized long-term leases are as follows: (In thousands) 2014 2015 2016 2017 2018 Thereafter NOTE 12 Other Long-Term Liabilities The following table presents details of the company’s other long-term liabilities: (In thousands) Qualifi ed pension plan Supplemental executive retirement plan Other TOTAL $ Amount 41,371 34,427 24,720 18,041 11,085 32,749 June 29, 2013 June 30, 2012 $ $ 136,808 $ 409,024 270,815 816,647 $ 456,969 450,326 242,439 1,149,734 NOTE 13 Company-Sponsored Employee Benefi t Plans Sysco has company-sponsored defi ned benefi t and defi ned contribution retirement plans for its employees. Also, the company provides certain health care benefi ts to eligible retirees and their dependents. Defi ned Contribution Plan In December 2012, the company amended its defi ned contribution 401(k) Plan to be a Safe Harbor plan, a plan that treats all employees’ benefi ts equally within the plan, under Sections 401(k) and 401(m) of the Internal Revenue Code with respect to non-union employees and those union employees whose unions adopted the Safe Harbor Plan provisions. Effective January 1, 2013, the new Safe Harbor plan provides that the Company will make a non-elective contribution each pay period equal to 3% of a participant’s compensation. Additionally, the Company will make matching contributions of 50% of a participant’s pre-tax contribution on the fi rst 5% of the participant’s compensation. Certain employees are also eligible for a transition contribution, and the Company may also make discretionary contributions. For union employees who are members of unions that did not adopt the Safe Harbor Plan provisions, the plan provides that under certain circumstances the company may make matching contributions of up to 50% of the fi rst 6% of a participant’s compensation. Prior to the adoption of the Safe Harbor Plan in January 2013, the company’s defi ned contribution 401(k) plan provided that under certain circumstances the company may make matching contributions of up to 50% of the fi rst 6% of a participant’s compensation. Sysco’s expense related to its defi ned contribution 401(k) plan was $65.3 million in fi scal 2013, $17.2 million in fi scal 2012, and $19.8 million in fi scal 2011. Defi ned Benefi t Plans Sysco maintains a qualifi ed pension plan (Retirement Plan) that pays benefi ts to employees at retirement, using formulas based on a participant’s years of service and compensation. At the end of fi scal 2012, Sysco approved a plan to freeze future benefi t accruals under the Retirement Plan as of December 31, 2012 for all United States-based salaried and non-union hourly employees. Effective January 1, 2013, these employees were eligible for additional contributions under the company’s defi ned contribution 401(k) plan. In addition to receiving benefi ts upon retirement under the company’s Retirement Plan, key management personnel who are participants in the Management Incentive Plan will receive benefi ts under a Supplemental Executive Retirement Plan (SERP). This plan is a nonqualifi ed, unfunded supplementary retirement plan. In November 2012, Sysco approved a plan to restructure its executive nonqualifi ed retirement program including the SERP. Future benefi t accruals have been frozen under this plan as of June 29, 2013 for all participants. Also, the company provides certain health care benefi ts to eligible retirees and their dependents. SYSCO CORPORATION - Form 10-K 61 PART II ITEM 8 Financial Statements and Supplementary Data Funded Status Accumulated pension assets measured against the obligation for pension benefi ts represents the funded status of a given plan. The funded status of Sysco’s company-sponsored defi ned benefi t plans is presented in the table below. The caption “Pension Benefi ts” in the tables below includes both the Retirement Plan and the SERP. (In thousands) Change in benefi t obligation: Benefi t obligation at beginning of year Service cost Interest cost Amendments Curtailments Actuarial (gain) loss, net Total d Benefi t obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Total Fair value of plan assets at end of year FUNDED STATUS AT END OF YEAR isbursements isbursements d Pension Benefi ts Other Postretirement Plans June 29, 2013 June 30, 2012 June 29, 2013 June 30, 2012 $ 3,164,974 $ 70,166 148,561 53,902 (72,967) (201,517) (74,097) 3,089,022 2,234,869 263,675 93,562 (74,097) 2,518,009 $ (571,013) $ 2,516,660 $ 108,223 147,512 8,705 (176,531) 625,890 (65,485) 3,164,974 2,106,313 31,597 162,444 (65,485) 2,234,869 (930,105) 12,954 $ 541 614 - - 188 (49) 14,248 - - 49 (49) - 10,812 457 632 - - 925 128 12,954 - - (128) 128 - (12,954) $ (14,248) $ The measurements for the Retirement Plan at June 30, 2012 included the impact of the freeze discussed above. This resulted in the recognition of a curtailment gain as a component of actuarial loss arising in fi scal 2012 in other comprehensive loss. As a result of the SERP freeze discussed above in November 2012, the liabilities of this plan were remeasured using a discount rate of 3.96%. A curtailment gain of $73.0 million was recognized as a component of actuarial losses (net of tax) within other comprehensive income with an offsetting reduction to benefi ts obligations to accumulated benefi ts. Further, an $8.3 million loss was recognized in the income statement arising from the write-off of prior service costs. In addition to the plan freeze, participants will be fully vested in their frozen benefi ts on their date of freeze. This resulted in an increase in the benefi t obligation of $48.6 million which was refl ected as unrecognized prior service cost in other comprehensive income. This amount will amortize into pension expense over the next seven years. The SERP benefi t obligation resulting after these changes on the date of the approved plan was $486.6 million. In order to meet a portion of its obligations under the SERP, Sysco maintains life insurance policies on the lives of the participants with carrying values of $95.0 million as of June 29, 2013 and $97.6 million as of June 30, 2012. In the second quarter of fi scal 2012, approximately $75.0 million of these policies were redeemed and corporate-owned real estate assets were substituted for these policies. These policies are not included as plan assets or in the funded status amounts in the tables above and below; rather, the assets are held in a rabbi trust and are therefore available to satisfy the claims of the company’s creditors in the event of bankruptcy or insolvency of the company. Sysco is the sole owner and benefi ciary of such policies. The amounts recognized on Sysco’s consolidated balance sheets related to its company-sponsored defi ned benefi t plans are as follows: (In thousands) Current accrued benefi t liability (Accrued expenses) Non-current accrued benefi t liability (Other long-term liabilities) NET AMOUNT RECOGNIZED June 29, 2013 June 30, 2012 June 29, 2013 June 30, 2012 $ $ (25,181) $ (545,832) (571,013) $ (22,810) (907,295) (930,105) $ $ (380) $ (13,868) (14,248) $ (369) (12,585) (12,954) Pension Benefi ts Other Postretirement Plans Accumulated other comprehensive loss (income) as of June 29, 2013 consists of the following amounts that had not, as of that date, been recognized in net benefi t cost: (In thousands) Prior service cost Actuarial losses (gains) TOTAL 62 SYSCO CORPORATION - Form 10-K Other Postretirement Plans Pension Benefi ts $ 71,798 $ 864,000 935,798 $ $ 1,067 $ (3,151) (2,084) $ Total 72,865 860,849 933,714 Accumulated other comprehensive loss (income) as of June 30, 2012 consists of the following amounts that had not, as of that date, been recognized in net PART II ITEM 8 Financial Statements and Supplementary Data benefi t cost: (In thousands) Prior service cost Actuarial losses (gains) Transition obligation TOTAL Other Postretirement Plans Pension Benefi ts $ 36,087 $ 1,303,582 - $ 1,339,669 $ 1,236 $ (3,543) 141 (2,166) $ Total 37,323 1,300,039 141 1,337,503 The accumulated benefi t obligation, which does not consider any salary increases for the remaining active union employees in the Retirement Plan, for the company-sponsored defi ned benefi t pension plans was $3,079.1 million and $3,078.5 million as of June 29, 2013 and June 30, 2012, respectively. Information for plans with accumulated benefi t obligation/aggregate benefi t obligation in excess of fair value of plan assets is as follows: Pension Benefi ts Other Postretirement Plans (In thousands) Accumulated benefi t obligation/aggregate benefi t obligation Fair value of plan assets at end of year (1) Information under Pension Benefits as of June 29, 2013 and June 30, 2012 includes both the Retirement Plan and the SERP. June 29, 2013 (1) $ 3,079,068 $ 2,518,009 June 30, 2012 (1) 3,078,488 2,234,869 $ June 29, 2013 June 30, 2012 14,248 $ - 12,954 - Components of Net Benefi t Costs and Other Comprehensive Income The components of net company-sponsored pension costs for each fi scal year are as follows: (In thousands) Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of actuarial loss Curtailment loss NET PENSION COSTS The components of other postretirement benefi t costs for each fi scal year are as follows: (In thousands) Service cost Interest cost Amortization of prior service cost Amortization of actuarial gain Amortization of transition obligation NET OTHER POSTRETIREMENT BENEFIT COSTS $ $ $ Pension Benefi ts 2013 2012 2011 $ 70,166 $ 148,561 (171,201) 9,899 72,624 8,293 108,223 $ 147,512 (161,605) 4,806 60,166 - 138,342 $ 159,102 $ 99,443 134,973 (131,921) 3,960 79,952 - 186,407 Other Postretirement Plans 2013 2012 2011 541 $ 614 168 (203) 141 457 $ 632 215 (331) 153 1,261 $ 1,126 $ 396 524 185 (388) 153 870 Other changes in plan assets and benefi t obligations recognized in other comprehensive income (loss) related to company-sponsored pension plans for each fi scal year are as follows: (In thousands) Amortization of prior service cost Amortization of actuarial loss Prior service cost arising in current year Actuarial (loss) gain arising in current year NET PENSION COSTS Pension Benefi ts 2013 2012 2011 $ $ 18,192 $ 72,624 (53,902) 366,957 403,871 $ 4,806 $ 60,166 (8,706) (579,366) (523,100) $ 3,960 79,952 (8,252) 84,055 159,715 SYSCO CORPORATION - Form 10-K 63 PART II ITEM 8 Financial Statements and Supplementary Data Other changes in benefi t obligations recognized in other comprehensive (loss) income related to other postretirement plans for each fi scal year are as follows: (In thousands) Amortization of prior service cost Amortization of actuarial gain Amortization of transition obligation Prior service cost arising in current year Actuarial (loss) gain arising in current year NET PENSION COSTS 2013 Other Postretirement Plans 2012 2011 $ $ 168 $ (203) 141 - (188) (82) $ 215 $ (331) 153 - (925) (888) $ 185 (388) 153 (987) (157) (1,194) Amounts included in accumulated other comprehensive loss (income) as of June 29, 2013 that are expected to be recognized as components of net company- sponsored benefi t cost during fi scal 2014 are: (In thousands) Amortization of prior service cost Amortization of actuarial losses (gains) TOTAL Employer Contributions Other Postretirement Plans Pension Benefi ts $ 11,145 $ 16,327 27,472 $ $ 168 $ (143) 25 $ Total 11,313 16,184 27,497 The company made cash contributions to its company-sponsored pension plans of $93.6 million and $162.4 million in fi scal years 2013 and 2012, respectively. The $70.0 million contribution to the Retirement Plan in fi scal 2013 was voluntary, as there were no required contributions to meet ERISA minimum funding requirements in fi scal 2013. The $140.0 million contribution to the Retirement Plan in fi scal 2012 exceeded the minimum required contribution for the calendar 2011 plan year to meet ERISA minimum funding requirements. There are no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fi scal 2014. The company’s contributions to the SERP and other post-retirement plans are made in the amounts needed to fund current year benefi t payments. The estimated fi scal 2014 contributions to fund benefi t payments for the SERP and other postretirement plans are $25.8 million and $0.4 million, respectively. Estimated Future Benefi t Payments Estimated future benefi t payments for vested participants, based on actuarial assumptions, are as follows: (In thousands) 2014 2015 2016 2017 2018 Subsequent fi ve years Assumptions Pension Benefi ts $ 86,447 $ 95,024 104,529 115,629 126,202 786,838 Other Postretirement Plans 390 775 1,075 1,271 1,404 7,123 Weighted-average assumptions used to determine benefi t obligations as of year-end were: Discount rate — Retirement Plan Discount rate — SERP Discount rate — Other Postretirement Plans Rate of compensation increase — Retirement Plan June 29, 2013 June 30, 2012 5.32% 4.94 5.32 3.89 4.81% 4.89 4.81 5.30 As benefi t accruals under the SERP were frozen as of June 29, 2013 due to the plan freeze discussed above, future pay is not projected in the determination of the benefi t obligation as of that date. For determining the benefi t obligations as of June 30, 2012, the SERP calculations utilized an age-graded salary growth assumption. 64 SYSCO CORPORATION - Form 10-K Weighted-average assumptions used to determine net company-sponsored pension costs and other postretirement benefi t costs for each fi scal year were: 2013 2012 2011 PART II ITEM 8 Financial Statements and Supplementary Data Discount rate — Retirement Plan Discount rate — SERP Discount rate — Other Postretirement Plans Expected rate of return — Retirement Plan Rate of compensation increase — Retirement Plan (1) The SERP was remeasured in November 2012 as a result of the plan freeze discussed above. The rate in the table above reflects the discount rate as of this remeasurement. 4.81% 3.96(1) 4.81 7.75 5.30 5.94% 5.93 5.94 7.75 5.30 6.15% 6.35 6.32 8.00 5.30 For determining the net pension costs related to the SERP for fi scal 2013, 2012 and 2011, the SERP calculations utilized an age-graded salary growth assumption. A healthcare cost trend rate is not used in the calculations of postretirement benefi t obligations because Sysco subsidizes the cost of postretirement medical coverage by a fi xed dollar amount, with the retiree responsible for the cost of coverage in excess of the subsidy, including all future cost increases. For guidance in determining the discount rate, Sysco calculates the implied rate of return on a hypothetical portfolio of high-quality fi xed-income investments for which the timing and amount of cash outfl ows approximates the estimated payouts of the company-sponsored pension plans. The discount rate assumption is reviewed annually and revised as deemed appropriate. The discount rate to be used for the calculation of fi scal 2014 net company-sponsored benefi t costs for the Retirement Plan is 5.32%. The discount rate to be used for the calculation of fi scal 2014 net company-sponsored benefi t costs for the SERP is 4.94%. The discount rate to be used for the calculation of fi scal 2014 net company-sponsored benefi t costs for the Other Postretirement Plans is 5.32%. The expected long-term rate of return on plan assets assumption is net return on assets assumption, representing gross return on assets less plan expenses. The expected return is derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, refl ecting a combination of rigorous historical performance analysis and the forward-looking views of the fi nancial markets regarding the yield on bonds, the historical returns of the major stock markets and returns on alternative investments. The rate of return assumption is reviewed annually and revised as deemed appropriate. The expected long-term rate of return to be used in the calculation of fi scal 2014 net company-sponsored benefi t costs for the Retirement Plan is 7.75%. Plan Assets Investment Strategy The company’s overall strategic investment objectives for the Retirement Plan are to preserve capital for future benefi t payments and to balance risk and return commensurate with ongoing changes in the valuation of plan liabilities. In order to accomplish these objectives, the company oversees the Retirement Plan’s investment objectives and policy design, decides proper plan asset class strategies and structures, monitors the performance of plan investment managers and investment funds and determines the proper investment allocation of pension plan contributions and withdrawals. The company has created an investment structure for the Retirement Plan that takes into account the nature of the Retirement Plan’s liabilities. This structure ensures the Retirement Plan’s investment are diversifi ed within each asset class, in addition to being diversifi ed across asset classes with the intent to build asset class portfolios that are structured without strategic bias for or against any subcategories within each asset class. The company has also created a set of investment guidelines for the Retirement Plan’s investment managers to specify prohibited transactions, including borrowing of money except for real estate portfolios or private equity portfolios where leverage is a key component of the investment strategy and permitted in the investments’ governing documents, the purchase of securities on margin unless fully collateralized by cash or cash equivalents or short sales, pledging, mortgaging or hypothecating of any securities except for loans of securities that are fully collateralized, market timing transactions and the direct purchase of the securities of Sysco or the investment manager. The purchase or sale of derivatives for speculation or leverage is also prohibited; however, investment managers are allowed to use derivative securities so long as they do not increase the risk profi le or leverage of the manager’s portfolio. The company’s target and actual investment allocation as of June 29, 2013 is as follows: U.S. equity International equity Long duration fi xed income High yield fi xed income Alternative investments Target Asset Allocation Range Actual Asset Allocation 23 - 31% 23 - 31 21 - 35 7 - 11 5 - 15 34% 31 23 9 3 100% SYSCO CORPORATION - Form 10-K 65 PART II ITEM 8 Financial Statements and Supplementary Data Sysco’s investment strategy is implemented through a combination of balanced and specialist investment managers, passive investment funds and actively- managed investment funds. U.S. equity consists of both large-cap and small-to-mid-cap securities. Core fi xed income investments include intermediate range U.S. government and agency securities, corporate bonds from diversifi ed industries, asset-backed securities, mortgage-backed securities, other debt securities and derivative securities. Long duration fi xed income investments include U.S. government and agency securities, corporate bonds from diversifi ed industries, asset-backed securities, mortgage-backed securities, other debt securities and derivative securities. High yield fi xed income consists of below investment grade corporate debt securities and may include derivative securities. Alternative investments may include private equity, private real estate, timberland, and commodities investments. Investment funds are selected based on each fund’s stated investment strategy to align with Sysco’s overall target mix of investments. Actual asset allocation is regularly reviewed and periodically rebalanced to the target allocation when considered appropriate. As of June 29, 2013, actual asset allocation varied from the stated target in certain categories, as alternative investment funding, primarily in private equity funds require contributions over a multi-year period. Until such capital is required, the company has chosen to invest these amounts in U.S. and international equities. As discussed above, the Retirement Plan’s investments in equity, fi xed income and alternative investments provide a range of returns and also expose the plan to investment risk. However, the investment policies put in place by the company require diversifi cation of plan assets across issuers, industries and countries. As such, the Retirement Plan does not have signifi cant concentrations of risk in plan assets. Fair Value of Plan Assets Fair value is defi ned 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). See Note 4, “Fair Value Measurements,” for a description of the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. Cash and cash equivalents: Valued at amortized cost, which approximates fair value. Cash and cash equivalents is included as a Level 2 measurement in the table below. Equity securities: Valued at the closing price reported on the exchange market. If a stock is not listed on a public exchange, such as an American Depository Receipt or some preferred stocks, the stock is valued using an evaluated bid price based on a compilation of observable market information. Inputs used include yields, the underlying security “best price”, adjustments for corporate actions and exchange prices of underlying and common stock of the same issuer. Equity securities valued at the closing price reported on the exchange market are classifi ed as a Level 1 measurement in the table below; all other equity securities are included as a Level 2 measurement. Fixed income securities: Valued using evaluated bid prices based on a compilation of observable market information or a broker quote in a non-active market. Inputs used vary by type of security, but include spreads, yields, rate benchmarks, rate of prepayment, cash fl ows, rating changes and collateral performance and type. All fi xed income securities are included as a Level 2 measurement in the table below. Investment funds: Funds holding debt and equity securities are valued at the net asset value (NAV) provided by the manager of each fund. The NAV is calculated as the underlying net assets owned by the fund, divided by the number of shares outstanding. The NAV is based on the fair value of the underlying securities within the fund. The real estate funds are valued based on the proportionate interest held by the Retirement Plan, which is based on the valuations of the underlying real estate investments held by each fund. Each real estate investment is valued on the basis of a discounted cash fl ow approach. Inputs used include future rental receipts, expenses and residual values from a market participant view of the highest and best use of the real estate as rental property. The private equity funds are valued based on the proportionate interest held by the Retirement Plan, which is based on the valuations of the underlying private equity investments held by each fund. Indirectly-held investments are valued utilizing the latest fi nancial reports supplied by the fund’s portfolio investments. Directly-held investments are valued initially based on transaction price and are adjusted utilizing available market data and investment-specifi c factors, such as estimates of liquidation value, prices of recent transactions in the same or similar issuer, current operating performance and future expectations of the particular investment, changes in market outlook and the fi nancing environment. Investment funds holding debt and equity securities are included as a Level 2 measurement in the table below. The real estate funds and private equity funds are included as Level 3 measurements. Derivatives: Valuation method varies by type of derivative security. • Credit default and interest rate swaps: Valued using evaluated bid prices based on a compilation of observable market information. Inputs used for credit default swaps include spread curves and trade data about the credit quality of the counterparty. Inputs used for interest rate swaps include benchmark yields, swap curves, cash fl ow analysis, and interdealer broker rates. Credit default and interest rate swaps are included as a Level 2 measurement in the table below. • Foreign currency contracts: Valued using a standardized interpolation model that utilizes the quoted prices for standard-length forward foreign currency contracts and adjusts to the remaining term outstanding on the contract being valued. Foreign currency contracts are included as a Level 2 measurement in the table below. • Futures and option contracts: Valued at the closing price reported on the exchange market for exchange-traded futures and options. Over-the-counter options are valued using pricing models that are based on observable market information. Exchange-traded futures and options are included as a Level 1 measurement in the table below; over-the-counter options are included as a Level 2 measurement. 66 SYSCO CORPORATION - Form 10-K The following table presents the fair value of the Retirement Plan’s assets by major asset category as of June 29, 2013: PART II ITEM 8 Financial Statements and Supplementary Data (In thousands) Cash and cash equivalents (1) U.S. equity: U.S. large-cap (1) U.S. small-to-mid-cap (1) International equity (2) Long duration fi xed income: Diversifi ed fi xed income (2) U.S. government and agency securities Corporate bonds Mortgage-backed securities Municipal bonds Sovereign debt Other (1) Derivatives, net (3) High yield fi xed income (2) Alternative investments: Real estate (2) Private equity (2) Assets Measured at Fair Value as of June 29, 2013 Level 1 Level 2 Level 3 Total $ - $ 88,812 $ - $ 88,812 189,548 99,518 - - - - - - - - (249) - - - 531,667 - 745,262 264,139 123,253 117,565 8,316 23,840 16,744 13,277 (687) 226,955 - - $ 288,817 $ 2,159,143 $ - - - - - - - - - - - - 721,215 99,518 745,262 264,139 123,253 117,565 8,316 23,840 16,744 13,277 (936) 226,955 64,845 14,375 79,220 $ $ 64,845 14,375 2,527,180 (9,171) 2,518,009 Total investments at fair value Other (4) FAIR VALUE OF PLAN ASSETS AT END OF YEAR (1) (2) (3) Include direct investments and investment funds. Include investments in investment funds only. Include credit default swaps, interest rate swaps, foreign currency contracts, futures and options. The fair value of asset positions totaled $0.4 million; the fair value of liability positions totaled $1.3 million. Include primarily plan receivables and payables, net. (4) SYSCO CORPORATION - Form 10-K 67 PART II ITEM 8 Financial Statements and Supplementary Data The following table presents the fair value of the Retirement Plan’s assets by major asset category as of June 30, 2012: (In thousands) Cash and cash equivalents (1) U.S. equity: U.S. large-cap (1) U.S. small-to-mid-cap International equity (2) Core fi xed income: U.S. government and agency securities Corporate bonds (1) Asset-backed securities Mortgage-backed securities, net (1) Other (1) Derivatives, net (3) Long duration fi xed income: U.S. government and agency securities Corporate bonds Mortgage-backed securities Municipal bonds Sovereign debt Other (1) Derivatives, net (4) High yield fi xed income (2) Alternative investments: Real estate (2) Private equity (2) Assets Measured at Fair Value as of June 30, 2012 Level 1 Level 2 Level 3 Total $ - $ 44,904 $ - $ 44,904 143,544 133,388 - - - - - 192 (16) - - - - - - - - - - 414,048 - 670,139 43,690 85,391 11,937 106,722 17,248 (6) 143,825 119,947 9,946 22,014 18,126 12,813 (43) 205,984 - - $ 277,108 $ 1,926,685 $ - - - - - - - - - - - - - - - - - 557,592 133,388 670,139 43,690 85,391 11,937 106,722 17,440 (22) 143,825 119,947 9,946 22,014 18,126 12,813 (43) 205,984 51,097 5,295 56,392 $ $ 51,097 5,295 2,260,185 (25,316) 2,234,869 Total investments at fair value Other (5) FAIR VALUE OF PLAN ASSETS AT END OF YEAR (1) (2) (3) (4) Include direct investments and investment funds. Include investments in investment funds only. Include credit default swaps, interest rate swaps and futures. The fair value of asset positions totaled $0.3 million; the fair value of liability positions totaled $0.3 million. Include credit default swaps, interest rate swaps, foreign currency contracts, futures and options. The fair value of asset positions totaled $0.5 million; the fair value of liability positions totaled $0.6 million. Include primarily plan receivables and payables, net. (5) The following table sets forth a summary of changes in the fair value of the Retirement Plan’s Level 3 assets for each fi scal year: Real Estate Funds Private Equity Funds Total Level 3 Measurements $ 30,615 $ 1,480 $ 32,095 2,155 - 18,327 - $ 51,097 $ 6,696 - 7,052 - (14) - 3,829 - 5,295 $ 1,327 - 7,753 - $ 64,845 $ 14,375 $ 2,141 - 22,156 - 56,392 8,023 - 14,805 - 79,220 (In thousands) Balance, July 2, 2011 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases and sales, net Transfers in and/or out of Level 3 Balance, June 30, 2012 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases and sales, net Transfers in and/or out of Level 3 BALANCE, JUNE 29, 2013 68 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 14 Multiemployer Employee Benefi t Plans Defi ned Benefi t Pension Plans Sysco contributes to several multiemployer defi ned benefi t pension plans in the United States and Canada based on obligations arising under collective bargaining agreements covering union-represented employees. Sysco does not directly manage these multiemployer plans, which are generally managed by boards of trustees, half of whom are appointed by the unions and the other half by other employers contributing to the plan. Approximately 10% of Sysco’s current employees are participants in such multiemployer plans as of June 29, 2013. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: • Assets contributed to the multiemployer plan by one employer may be used to provide benefi ts to employees of other participating employers. • If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. • If Sysco chooses to stop participating in some of its multiemployer plans, Sysco may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Based upon the information available from plan administrators, management believes that several of these multiemployer plans are underfunded. In addition, pension-related legislation in the United States requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, Sysco expects its contributions to these plans to increase in the future. In addition, if a United States multiemployer defi ned benefi t plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service (IRS) may impose a nondeductible excise tax of 5% on the amount of the accumulated funding defi ciency for those employers contributing to the fund. Withdrawal Activity Sysco has voluntarily withdrawn from various multiemployer pension plans. Total withdrawal liability provisions recorded were $41.9 million in fi scal 2013, $21.9 million in fi scal 2012 and $41.5 million in fi scal 2011. As of June 29, 2013 and June 30, 2012, Sysco had approximately $40.7 million and $30.7 million, respectively, in liabilities recorded related to certain multiemployer defi ned benefi t plans for which Sysco’s voluntary withdrawal had already occurred. Recorded withdrawal liabilities are estimated at the time of withdrawal based on the most recently available valuation and participant data for the respective plans; amounts are subsequently adjusted to the period of payment to refl ect any changes to these estimates. If any of these plans were to undergo a mass withdrawal, as defi ned by the Pension Benefi t Guaranty Corporation, within the two plan years following the plan year in which we completely withdraw from that plan, Sysco could have additional liability. The company does not currently believe any mass withdrawals are probable to occur in the applicable two-plan year time frame relating to the plans from which Sysco has voluntarily withdrawn. Potential Withdrawal Liability Under current law regarding multiemployer defi ned benefi t plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multiemployer defi ned benefi t plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multiemployer plan’s unfunded vested liabilities. Generally, Sysco does not have the greatest share of liability among the participants in any of the plans in which it participates. Sysco believes that one of the above-mentioned events is reasonably possible for certain plans in which it participates and estimates its share of withdrawal liability for these plans could have been as much as $80.0 million as of June 29, 2013. This estimate excludes plans for which Sysco has recorded withdrawal liabilities or where the likelihood of the above-mentioned events is deemed remote. This estimate is based on the information available from plan administrators, which had a valuation date of December 31, 2011. As the valuation date for all of these plans was December 31, 2011, the company’s estimate refl ects the condition of the fi nancial markets as of that date. Due to the lack of current information, management believes Sysco’s current share of the withdrawal liability could materially differ from this estimate. Plan Contributions Sysco’s contributions to multiemployer defi ned benefi t pension plans were as follows for each fi scal year: (In thousands) Individually signifi cant plans All other plans TOTAL CONTRIBUTIONS 2013 2012 2011 $ $ 28,816 $ 36,923 65,739 $ 29,497 $ 38,611 68,108 $ 27,196 6,819 34,015 Payments for voluntary withdrawals included in contributions were $31.8 million, $33.6 million and zero in fi scal 2013, 2012 and 2011, respectively. Contributions for individually signifi cant plans and all other plans have been presented in the table above for all years based on the current year designation of individually signifi cant plans. Prior periods amounts have been reclassifi ed for consistency with the current year presentation. SYSCO CORPORATION - Form 10-K 69 PART II ITEM 8 Financial Statements and Supplementary Data Individually Signifi cant Plans The information in the following tables relates to multiemployer defi ned benefi t pension plans which Sysco has determined to be individually signifi cant to the company. To determine individually signifi cant plans, the company evaluated several factors, including Sysco’s signifi cance to the plan in terms of employees and contributions, the funded status of the plan and the size of company’s potential withdrawal liability if it were to voluntarily withdraw from the plan. The following table provides information about the funded status of individually signifi cant plans: • The “EIN-PN” column provides the Employer Identifi cation Number (EIN) and the three-digit plan number (PN). • The “Pension Protection Act Zone Status” columns provide the two most recent Pension Protection Act zone statuses available from each plan. The zone status is based on information that the company received from the plan’s administrators and is certifi ed by each plan’s actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the orange zone are both less than 80% funded and have an accumulated funding defi ciency or are expected to have a defi ciency in any of the next six plan years, plans in the yellow zone are less than 80% funded and plans in the green zone are at least 80% funded. • The “FIP/RP Status” column indicates whether a fi nancial improvement plan (FIP) for yellow/orange zone plans or a rehabilitation plan (RP) for red zone plans is pending or implemented in the current year or was put in place in a prior year. A status of “Pending” indicates a FIP/RP has been approved but actual period covered by the FIP/RP has not begun. A status of “Implemented” means the period covered by the FIP/RP began in the current year or is ongoing. • The “Surcharge Imposed” column indicates whether a surcharge was paid during the most recent annual period presented for the company’s contributions to each plan in the red zone. If the company’s current collective bargaining agreement (CBA) with a plan satisfi es the requirements of a pending but not yet implemented RP, then the payment of surcharges is not required and “No” will be refl ected in this column. If the company’s current collective bargaining agreement (CBA) with a plan does not yet satisfy the requirements of a pending but not yet implemented RP, then the payment of surcharges is required and “Yes” will be refl ected in this column. Expiration Date(s) of CBA(s) 9/28/13 to 2/15/19 7/19/13 to 7/31/16 4/30/14 (1) (2) Pension Protection Act Zone Status As of 12/31/13 As of 12/31/12 Green Green FIP/RP Status N/A Surcharge Imposed N/A Pension Fund EIN-PN 23-1511735-001 91-6145047-001 Western Conference of Teamsters Pension Plan Teamsters Pension Trust Fund of Philadelphia and Vicinity New York State Teamsters Conference Pension and Retirement Fund Truck Drivers and Helpers Local Union No. 355 Retirement Pension Fund Minneapolis Food Distributing Industry Pension Plan (1) Sysco is party to 23 CBAs that require contributions to the Western Conference of Teamsters Pension Trust. Each agreement c overs anywhere from less than 1% to 11% of the total 16-6063585-074 52-6043608-001 41-6047047-001 Implemented Implemented Implemented Pending Yellow Yellow Yellow Yellow Yellow Green Red Red N/A N/A N/A No 8/10/13 3/1/15 contributions Sysco is required to pay the fund. (2) Sysco is party to three CBAs that require contributions to the Teamsters Pension Trust Fund of Philadelphia and Vicinity. One agreement expires July 19, 2013 and covers approximately 50% of the total contributions Sysco is required to pay the fund. The remaining two agreements expire July 31, 2016 and cover the remaining 50% of the total contributions Sysco is required to pay the fund. The following table provides information about the company’s contributions to individually signifi cant plans: • The “Sysco Contributions” columns provide contribution amounts based on Sysco’s fi scal years, which may not coincide with the plans’ fi scal years. • The “Sysco 5% of Total Plan Contributions” columns indicate whether Sysco was listed in the plan’s most recently fi led Form 5500s as providing more than fi ve percent of the total contributions to the plan, and the plan year-end is noted. As of the date these fi nancial statements were fi led with the SEC, Form 5500s were not available for plan years ending December 31, 2012. Pension Fund (In thousands) Western Conference of Teamsters Pension Plan Teamsters Pension Trust Fund of Philadelphia and Vicinity New York State Teamsters Conference Pension and Retirement Fund Truck Drivers and Helpers Local Union No. 355 Retirement Pension Fund Minneapolis Food Distributing Industry Pension Plan $ Sysco Contributions 2013 2012 2011 20,561 $ 2,256 1,399 19,829 $ 2,227 1,395 1,624 1,490 2,976 4,556 19,490 2,009 1,366 1,358 2,973 Sysco 5% of Total Plan Contributions Year Ending 12/31/11 Year Ending 12/31/10 No No No Yes Yes No No No Yes Yes For all of the plans noted in the table above, minimum contributions outside of the agreed upon contractual rate are not required. 70 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Other Postretirement Benefi t Plans In addition to the contributions to the defi ned benefi t pension plans described above, Sysco also contributes to several multiemployer plans that provide other postretirement benefi ts based on obligations arising under collective bargaining agreements covering union-represented employees. These plans may provide medical, pharmacy, dental, vision, mental health and other benefi ts to active employees and retirees as determined by the trustees of each plan. Sysco contributed to these plans $30.6 million in fi scal 2013, $25.5 million in fi scal 2012 and $23.9 million in fi scal 2011. There have been no signifi cant changes that affect the comparability of fi scal 2013, fi scal 2012 and fi scal 2011 contributions. NOTE 15 Earnings Per Share Basic earnings per share has been computed by dividing net earnings by the weighted average number of shares of common stock outstanding for each respective year. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares of common stock outstanding during those respective years adjusted for the dilutive effect of share-based awards outstanding using the treasury stock method. The two-class method is also utilized for the computation of earnings per share. The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based compensation with non-forfeitable rights to receive dividends or dividend equivalents, if declared. Net earnings allocated to these participating securities are excluded from net earnings allocated to common shares and were insignifi cant in fi scal 2013, 2012 and 2011. A reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for the periods presented follows: (In thousands, except for share and per share data) Numerator: Net earnings Denominator: basic shares Weighted-average Dilutive effect of share-based awards Weighted-average iluted shares BASIC EARNINGS PER SHARE: DILUTED EARNINGS PER SHARE: d tstanding ou tstanding ou 2013 2012 2011 $ 992,427 $ 1,121,585 $ 1,152,030 589,397,807 3,277,303 592,675,110 587,726,343 1,265,098 588,991,441 $ $ 1.68 $ 1.67 $ 1.91 $ 1.90 $ 586,526,142 2,165,404 588,691,546 1.96 1.96 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 18,200,000, 49,100,000 and 50,700,000 for fi scal 2013, 2012 and 2011, respectively. Dividends declared were $654.9 million, $628.0 million and $604.5 million in fi scal 2013, 2012 and 2011, respectively. Included in dividends declared for each year were dividends declared but not yet paid at year-end of approximately $165.8 million, $159.4 million and $155.0 million in fi scal 2013, 2012 and 2011, respectively. NOTE 16 Comprehensive Income Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustments, amounts related to cash fl ow hedging arrangements and certain amounts related to pension and other postretirement plans. Comprehensive income was $1,208.4 million, $718.7 million and $1,372.3 million in fi scal 2013, 2012 and 2011, respectively. A summary of the components of other comprehensive income (loss) and the related tax effects for each of the years presented is as follows: (In thousands) Foreign currency translation adjustment Amortization of cash fl ow hedges Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net arising in current year TOTAL OTHER COMPREHENSIVE INCOME (LOSS) Before Tax Amount 2013 Tax Net of Tax Amount $ (33,191) $ - $ 626 18,360 72,421 141 (53,902) 366,769 371,224 $ 240 7,050 27,811 53 (20,699) 140,840 155,295 $ $ (33,191) 386 11,310 44,610 88 (33,203) 225,929 215,929 SYSCO CORPORATION - Form 10-K 71 PART II ITEM 8 Financial Statements and Supplementary Data (In thousands) Foreign currency translation adjustment Amortization of cash fl ow hedges Settlement of cash fl ow hedge Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net arising in current year TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (In thousands) Foreign currency translation adjustment Amortization of cash fl ow hedge Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net arising in current year TOTAL OTHER COMPREHENSIVE INCOME (LOSS) Before Tax Amount 2012 Tax Net of Tax Amount $ (81,003) $ - $ 692 722 5,021 59,835 153 (8,706) (580,291) (603,577) $ 266 277 1,928 22,975 60 (3,343) (222,832) (200,669) $ (81,003) 426 445 3,093 36,860 93 (5,363) (357,459) (402,908) Before Tax Amount 2011 Tax Net of Tax Amount 122,217 $ 696 4,145 79,564 153 (9,239) 83,898 $ 281,434 $ - $ 268 1,592 30,551 60 (3,547) 32,217 61,141 $ 122,217 428 2,553 49,013 93 (5,692) 51,681 220,293 $ $ The following table provides a summary of the changes in accumulated other comprehensive (loss) income for the years presented: Pension and Other Postretirement Benefi t Plans, net of tax $ (598,773) $ - - 2,553 49,013 93 (5,692) 51,681 (501,125) - - - 3,093 36,860 93 (5,363) (357,459) (823,901) - - 11,310 44,610 88 (33,203) 225,929 (575,167) $ $ Foreign Currency Translation Interest Rate Swap, net of tax Total 129,535 $ 122,217 - - - - - - 251,752 (81,003) - - - - - - - 170,749 (33,191) - - - - - - (11,013) $ - 428 - - - - - (10,585) - 426 445 - - - - - (9,714) - 386 - - - - - 137,558 $ (9,328) $ (480,251) 122,217 428 2,553 49,013 93 (5,692) 51,681 (259,958) (81,003) 426 445 3,093 36,860 93 (5,363) (357,459) (662,866) (33,191) 386 11,310 44,610 88 (33,203) 225,929 (446,937) (In thousands) Balance as of July 3, 2010 Foreign currency translation adjustment Amortization of cash fl ow hedge Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net, arising in current year Balance as of July 2, 2011 Foreign currency translation adjustment Amortization of cash fl ow hedges Settlement of cash fl ow hedge Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net, arising in current year Balance as of June 30, 2012 Foreign currency translation adjustment Amortization of cash fl ow hedges Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation Prior service cost arising in current year Actuarial gain (loss), net, arising in current year BALANCE AS OF JUNE 29, 2013 72 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 17 Share-Based Compensation Sysco provides compensation benefi ts to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, the Employees’ Stock Purchase Plan, the Management Incentive Plan and various non-employee director plans. Stock Incentive Plans In November 2009, Sysco’s 2007 Stock Incentive Plan was amended and provides for the issuance of up to 55,000,000 shares of Sysco common stock for share-based awards to offi cers and other employees of the company. Of the 55,000,000 authorized shares, the full 55,000,000 shares may be issued as options or stock appreciation rights and up to 10,000,000 shares may be issued as restricted stock, restricted stock units or other types of stock-based awards. To date, Sysco has issued options, restricted stock and restricted stock units under this plan. Vesting requirements for awards under this plan will vary by individual grant and may include either time-based vesting or time-based vesting subject to acceleration based on performance criteria for fi scal periods of at least one year. The contractual life of all options granted under this plan will be no greater than seven years. As of June 29, 2013, there were 10,159,110 remaining shares authorized and available for grant in total under the amended 2007 Stock Incentive Plan, of which the full 10,159,110 shares may be issued as options or stock appreciation rights, or as a combination of up to 5,530,402 shares that may be issued as restricted stock, restricted stock units or other types of stock-based awards with the remainder available for issuance as options or stock appreciation rights. Sysco has also granted employee options under several previous employee stock option plans for which previously granted options remain outstanding as of June 29, 2013. No new options will be issued under any of the prior plans, as future grants to employees will be made through the amended 2007 Stock Incentive Plan or subsequently adopted plans. Vesting requirements for awards under these plans vary by individual grant and include either time- based vesting or time-based vesting subject to acceleration based on performance criteria. The contractual life of all options granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years. In November 2009, Sysco’s 2009 Non-Employee Directors Stock Plan was adopted and provides for the issuance of up to 750,000 shares of Sysco common stock for share-based awards to non-employee directors. The authorized shares may be granted as restricted stock, restricted stock units, elected shares or additional shares. In addition, options and unvested common shares also remained outstanding as of June 29, 2013 under previous non-employee director stock plans. No further grants will be made under these previous plans, as all future grants to non-employee directors will be made through the 2009 Non-Employee Directors Stock Plan or subsequently adopted plans. Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or vesting based on performance criteria. The contractual life of all options granted under these plans through July 3, 2004 is 10 years; options granted after July 3, 2004 have a contractual life of seven years. As of June 29, 2013, there were 483,096 remaining shares authorized and available for grant in total under the 2009 Non-Employee Directors Stock Plan. Stock Options Sysco’s option awards are subject to graded vesting over a service period. Sysco recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. In addition, certain of Sysco’s options provide that the options continue to vest as if the optionee continued to be an employee or director if the optionee meets certain age and years of service thresholds upon retirement. In these cases, Sysco will recognize compensation cost for such awards over the period from the grant date to the date the employee or director fi rst becomes eligible to retire with the options continuing to vest after retirement. 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 assumptions for the periods indicated are noted in the following table. Expected volatility is based on historical volatility of Sysco’s stock, implied volatilities from traded options on Sysco’s stock and other factors. Sysco utilizes historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected dividend yield is estimated based on the historical pattern of dividends and the average stock price for the year preceding the option grant. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following weighted-average assumptions were used for each fi scal year presented: Dividend yield Expected volatility Risk-free interest rate Expected life 2013 2012 2011 3.7% 20.7 0.7 5.4 years 3.7% 23.4 1.0 5.4 years 3.5% 23.4 1.2 5.0 years SYSCO CORPORATION - Form 10-K 73 PART II ITEM 8 Financial Statements and Supplementary Data The following summary presents information regarding outstanding options as of June 29, 2013 and changes during the fi scal year then ended with regard to options under all stock incentive plans: Outstanding as of June 30, 2012 Granted Exercised Forfeited Expired OUTSTANDING AS OF JUNE 29, 2013 VESTED OR EXPECTED TO VEST AS OF JUNE 29, 2013 EXERCISABLE AS OF JUNE 29, 2013 Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) 29.85 29.96 30.19 28.19 31.42 29.07 29.07 30.19 3.84 $ 3.83 $ 2.15 $ 160,756 159,125 45,866 Shares Under Option 59,224,226 $ 6,212,716 (20,916,611) (653,616) (12,309,926) 31,556,789 31,255,012 11,546,717 $ $ $ The total number of employee options granted was 6,212,716, 7,015,952 and 7,190,250 in fi scal years 2013, 2012 and 2011, respectively. During fi scal 2013, 2,351,720 options were granted to 11 executive offi cers and 3,860,996 options were granted to approximately 152 other key employees. During fi scal 2012, 2,898,854 options were granted to 11 executive offi cers and 4,117,098 options were granted to approximately 180 other key employees. During fi scal 2011, 1,423,000 options were granted to 11 executive offi cers and 5,767,250 options were granted to approximately 1,500 other key employees. The weighted average grant-date fair value of options granted in fi scal 2013, 2012 and 2011 was $3.20, $3.69 and $3.96, respectively. The total intrinsic value of options exercised during fi scal 2013, 2012 and 2011 was $24.1 million, $8.3 million and $45.5 million, respectively. Restricted Stock Units During fi scal 2013, 2012 and 2011, 1,722,835, 1,528,734 and 656,000 restricted stock units, respectively, were granted to employees, the majority of which will vest ratably over a three-year period. Some of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards 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 share of restricted stock units granted during fi scal 2013, 2012 and 2011 was $29.75, $27.35 and $28.72, respectively. The total fair value of restricted stock units vested during fi scal 2013, 2012 and 2011 was $27.6 million, $11.8 million and $6.2 million, respectively. Restricted Stock In fi scal 2009, 75,822 shares of restricted stock were granted to an executive offi cer. The fair value of these shares was $23.74 per share, which was based on the stock price on the grant date. These shares were to vest ratably over a three-year period. In fi scal 2010, this executive offi cer announced his retirement, and 37,911 of the shares were forfeited according to the terms of the agreement. The remaining shares have vested according to the terms of the agreement as amended in connection with the executive offi cer’s retirement. The total fair value of restricted stock vested during fi scal 2011 was $0.4 million. There were no vestings of restricted stock in fi scal 2013 or 2012. Non-Employee Director Awards The 2009 Non-Employee Directors Stock Plan, as well as previous plans, provides for the issuance of restricted awards to current non-employee directors. During fi scal 2013, 2012 and 2011, 48,069, 63,657 and 60,973 shares, respectively, of restricted awards were granted to non-employee directors that will vest over a one-year period. Beginning in fi scal 2011, the non-employee directors may elect to receive these awards in restricted stock shares that will vest at the end of the award’s stated vesting period or as deferred units which convert into shares of Sysco common stock upon a date selected by the non-employee director that is subsequent to the award’s stated vesting date. The fair value of the restricted awards is based on the company’s stock price as of the date of grant. The weighted average grant-date fair value of the shares granted during fi scal 2013, 2012 and 2011 was $29.96, $27.65 and $28.87, respectively. The total fair value of restricted stock shares vested and deferred units distributed during fi scal 2013, 2012 and 2011 was $1.9 million, $2.2 million and $1.7 million, respectively. Restricted stock shares are valued on their vesting date. Vested deferred units are valued on their subsequent conversion and distribution date. Under the 2009 Non-Employee Directors Stock Plan, non-employee directors may elect to receive up to 100% of their annual directors’ fees in Sysco common stock on either an annual or deferred basis. Sysco provides a matching grant of 50% of the number of shares received for the stock election subject to certain limitations. As a result of such elections, a total of 26,702, 31,397 and 27,979 shares with a weighted-average grant date fair value of $30.38, $28.46 and $29.26 per share were issued in fi scal 2013, 2012 and 2011, respectively, in the form of fully vested common stock or deferred units. The total fair value of common stock issued as a result of election shares and deferred units distributed during fi scal 2013, 2012 and 2011 was $0.5 million, $0.5 million and $0.4 million, respectively. Common stock shares are valued on their vesting date. Vested deferred units are valued on their subsequent conversion and distribution date. As of June 29, 2013, there were 74,153 fully vested deferred units outstanding which will convert into shares of Sysco common stock upon dates selected by the respective non-employee directors. 74 SYSCO CORPORATION - Form 10-K Summary of Nonvested Awards The following summary presents information regarding outstanding nonvested awards as of June 29, 2013 and changes during the fi scal year then ended with regard to these awards under all stock incentive plans. Award types represented include: restricted stock units granted to employees and restricted awards granted to non-employee directors. PART II ITEM 8 Financial Statements and Supplementary Data Nonvested as of June 30, 2012 Granted Vested Forfeited NONVESTED AS OF JUNE 29, 2013 Employees’ Stock Purchase Plan Weighted Average Grant Date Fair Value Per Share Shares 2,213,371 $ 1,771,096 (986,354) (64,306) 2,933,807 $ 27.61 29.75 27.64 27.39 28.90 Sysco has an Employees’ Stock Purchase Plan that permits employees to invest in Sysco common stock by means of periodic payroll deductions at a discount of 15% from the closing price on the last business day of each calendar quarter. In November 2010, the Employees’ Stock Purchase Plan was amended to reserve an additional 5,000,000 shares of Sysco common stock for issuance under the plan. Including the additional 5,000,000 shares reserved in fi scal 2011, the total number of shares which may be sold pursuant to the plan may not exceed 79,000,000 shares, of which 3,770,467 remained available as of June 29, 2013. During fi scal 2013, 1,470,271 shares of Sysco common stock were purchased by the participants as compared to 1,661,758 shares purchased in fi scal 2012 and 1,655,100 shares purchased in fi scal 2011. The weighted average fair value of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $4.78, $4.33 and $4.28 per share during fi scal 2013, 2012 and 2011, respectively. The fair value of the stock purchase rights was calculated as the difference between the stock price at date of issuance 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 $70.1 million, $70.3 million and $59.2 million for fi scal 2013, 2012 and 2011, respectively, and is included within operating expenses in the consolidated results of operations. The total income tax benefi t recognized in results of operations for share-based compensation arrangements was $29.9 million, $21.7 million and $18.2 million for fi scal 2013, 2012 and 2011, respectively. As of June 29, 2013, there was $69.4 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.41 years. Cash received from option exercises and purchases of shares under the Employees’ Stock Purchase Plan was $628.7 million, $99.4 million and $332.7 million during fi scal 2013, 2012 and 2011, respectively. The actual tax benefi t realized for the tax deductions from option exercises totaled $24.0 million, $3.0 million and $15.9 million during fi scal 2013, 2012 and 2011, respectively. NOTE 18 Income Taxes Income Tax Provisions For fi nancial reporting purposes, earnings before income taxes consists of the following: (In thousands) United States Foreign TOTAL 2013 1,351,947 $ 195,508 1,547,455 $ 2012 1,606,928 $ 177,074 1,784,002 $ 2011 1,639,258 188,196 1,827,454 $ $ SYSCO CORPORATION - Form 10-K 75 PART II ITEM 8 Financial Statements and Supplementary Data The income tax provision for each fi scal year consists of the following: (In thousands) United States federal income taxes State and local income taxes Foreign income taxes TOTAL The current and deferred components of the income tax provisions for each fi scal year are as follows: (In thousands) Current Deferred TOTAL 2013 439,667 69,759 45,602 555,028 $ $ $ $ 2012 540,861 77,064 44,492 662,417 $ $ 2011 556,663 60,081 58,680 675,424 2013 $ 582,889 $ (27,861) $ 555,028 $ 2012 840,745 $ (178,328) 662,417 $ 2011 840,173 (164,749) 675,424 The deferred tax provisions result from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and the amounts used for income tax purposes. Deferred Tax Assets and Liabilities Signifi cant components of Sysco’s deferred tax assets and liabilities are as follows: (In thousands) Deferred tax liabilities: Excess tax depreciation and basis differences of assets Goodwill and intangible assets Other Total deferred tax liabilities Deferred tax assets: Net operating tax loss carryforwards Benefi t on unrecognized tax benefi ts Pension Share-based compensation Deferred compensation Self-insured liabilities Receivables Inventory Other Total deferred tax assets TOTAL NET DEFERRED TAX LIABILITIES (ASSETS) June 29, 2013 June 30, 2012 $ $ 455,752 $ 208,229 18,127 682,108 19,149 23,833 224,990 39,316 34,951 47,538 48,236 63,509 50,575 552,097 130,011 $ 473,947 186,921 19,756 680,624 21,609 23,287 362,391 63,522 36,639 41,030 51,607 59,619 40,257 699,961 (19,337) The company had state net operating tax loss carryforwards as of June 29, 2013 and June 30, 2012. The net operating tax loss carryforwards outstanding as of June 29, 2013 expire in fi scal years 2014 through 2033. There were no valuation allowances recorded for the state tax loss carryforwards as of June 29, 2013 and June 30, 2012 because management believes it is more likely than not that these benefi ts will be realized based on utilization forecasts. Sysco’s deferred taxes were impacted by an IRS settlement related to Sysco’s affi liate, Baugh Supply Chain Cooperative, which resulted in payments of deferred taxes of $212.0 million in each of fi scal 2012, 2011, and 2010. Sysco reclassifi ed amounts due within one year from deferred taxes to accrued income taxes at the beginning of each of fi scal 2012, 2011, and 2010. Effective Tax Rates Reconciliations of the statutory federal income tax rate to the effective income tax rates for each fi scal year are as follows: United States statutory federal income tax rate State and local income taxes, net of any applicable federal income tax benefi t Foreign income taxes Impact of uncertain tax benefi ts Impact of adjusting carrying value of corporate-owned life insurance policies to their cash surrender values Other 2013 2012 2011 35.00% 2.59 (1.22) 0.37 (0.13) (0.74) 35.87% 35.00% 2.65 (1.07) 0.12 (0.08) 0.51 37.13% 35.00% 1.96 (0.50) 0.51 (0.61) 0.60 36.96% 76 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data The effective tax rate of 35.87% for fi scal 2013 was favorably impacted primarily by two items. First, the company recorded a tax benefi t of $14.0 million related to changes in estimates for the prior year domestic tax provision. Second, the company recorded a tax benefi t of $8.8 million related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. The effective tax rate was negatively impacted by the recording of $5.7 million in tax and interest related to various federal, foreign and state uncertain tax positions. Indefi nitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate. The effective tax rate for fi scal 2012 was 37.13%. Indefi nitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate had the impact of reducing the effective tax rate. The effective tax rate of 36.96% for fi scal 2011 was favorably impacted primarily by two items. First, the company recorded a tax benefi t of approximately $17.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards. Second, the company adjusted the carrying values of the company’s COLI policies to their cash surrender values. The gain of $28.2 million recorded in fi scal 2011 was primarily non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $11.1 million. Partially offsetting these favorable impacts was the recording of $9.3 million in tax and interest related to various federal, foreign and state uncertain tax positions. Uncertain Tax Positions In the third quarter of fi scal 2013, we reclassifi ed a receivable that would arise upon the resolution of an unrecognized tax benefi t from a net position in other long-term liabilities to a gross position in other assets and other long-term liabilities on our consolidated balance sheet. Prior year amounts within the consolidated balance sheets have been reclassifi ed to conform to the current year presentation. Prior year amounts in schedule below have also been adjusted to conform to the current year gross presentation of the unrecognized tax benefi t on this tax position. A reconciliation of the beginning and ending amount of gross unrecognized tax benefi ts, excluding interest and penalties, is as follows: (In thousands) Unrecognized tax benefi ts at beginning of year Additions for tax positions related to prior years Reductions for tax positions related to prior years Additions for tax positions related to the current year Reductions for tax positions related to the current year Reductions due to settlements with taxing authorities Reductions due to lapse of applicable statute of limitations UNRECOGNIZED TAX BENEFITS AT END OF YEAR $ 2013 103,988 $ 15,431 (2,030) - - (9,052) - $ 108,337 $ 2012 107,925 2,479 (2,154) - - (2,831) (1,431) 103,988 As of June 29, 2013, $11.6 million of the gross liability for unrecognized tax benefi ts was netted within prepaid income taxes due to expected payment in fi scal 2014. As of June 29, 2013, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefi ts was $36.8 million, of which $5.8 million was netted within prepaid income taxes due to expected payment in fi scal 2014. The expense recorded for interest and penalties related to unrecognized tax benefi ts in fi scal 2013 was $5.0 million. As of June 30, 2012, $15.9 million of the gross liability for unrecognized tax benefi ts was netted within prepaid income taxes relating to a payment that occurred during fi scal 2011; however, the liability is considered outstanding until the matters have been settled with the respective jurisdiction. As of June 30, 2012, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefi ts was $43.2 million, of which $8.7 million was netted within prepaid income taxes relating to a payment that occurred during fi scal 2011; however, the liability is considered outstanding until the matters have been settled with the respective jurisdiction. The expense recorded for interest and penalties related to unrecognized tax benefi ts in fi scal 2012 was $4.7 million. If Sysco were to recognize all unrecognized tax benefi ts recorded as of June 29, 2013, approximately $42.0 million of the $108.3 million reserve would reduce the effective tax rate. If Sysco were to recognize all unrecognized tax benefi ts recorded as of June 30, 2012, approximately $37.1 million of the $104.0 million reserve would reduce the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefi ts with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco’s positions are sustained on audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefi ts primarily include the consideration of various fi ling requirements in various states and the allocation of income and expense between tax jurisdictions. In addition, the amount of unrecognized tax benefi ts recognized within the next twelve months may decrease due to the expiration of the statute of limitations for certain years in various jurisdictions; however, it is possible that a jurisdiction may open an audit on one of these years prior to the statute of limitations expiring. At this time, an estimate of the range of the reasonably possible change cannot be made. The IRS has open audits for Sysco’s 2006, 2007, 2008 and 2009 federal income tax returns. As of June 29, 2013, Sysco’s tax returns in the majority of the state and local jurisdictions and Canada are no longer subject to audit for the years before 2007. However, some jurisdictions have audits open prior to 2007, with the earliest dating back to 2002. Certain tax jurisdictions require partial to full payment on audit assessments or the posting of letters of credit in order to proceed to the appeals process. Although the outcome of tax audits is generally uncertain, the company believes that adequate amounts of tax, including interest and penalties, have been accrued for any adjustments that may result from those open years. SYSCO CORPORATION - Form 10-K 77 PART II ITEM 8 Financial Statements and Supplementary Data Other Undistributed income of certain consolidated foreign subsidiaries at June 29, 2013 amounted to $1,052.0 million for which no deferred U.S. income tax provision has been recorded because Sysco intends to permanently reinvest such income in those foreign operations. An estimate of any U.S. or foreign withholding taxes that may be applicable upon actual or deemed repatriation is not practical due to the complexities associated with the hypothetical calculation. NOTE 19 Acquisitions During fi scal 2013, in the aggregate, the company paid cash of $397.4 million for operations acquired during fi scal 2013 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2013, Sysco acquired for cash foodservice operations in Nassau, Bahamas; San Francisco, California; San Jose, California; Stockton, California; Ontario, Canada; Quebec, Canada; Orlando, Florida; Dublin, Ireland; St. Cloud, Minnesota; Co. Down, Northern Ireland; Greenville, Ohio and Houston, Texas. The fi scal 2013 acquisitions were immaterial, individually and in the aggregate, to the consolidated fi nancial statements. Certain acquisitions involve contingent consideration typically payable over periods up to fi ve years only in the event that certain outstanding contingencies are resolved. As of June 29, 2013, aggregate contingent consideration amounts outstanding relating to acquisitions was $108.0 million, of which $25.3 million could result in the recording of additional goodwill when paid and $68.9 million was recorded as earnout liabilities as of June 29, 2013. NOTE 20 Commitments and Contingencies Legal Proceedings Sysco is engaged in various legal proceedings which have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on defi nitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable, 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 fi nancial position or results of operations of the company. However, the fi nal 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 fi nancial position or results of operations could be materially adversely affected in future periods. Fuel Commitments Sysco routinely enters into forward purchase commitments for a portion of its projected diesel fuel requirements. As of June 29, 2013, we had forward diesel fuel commitments totaling approximately $204.0 million through August 2014. Other Commitments Sysco has committed to aggregate product purchases for resale in order to benefi t from a centralized approach to purchasing. A majority of these agreements expire within one year; however, certain agreements have terms through fi scal 2018. These agreements commit the company to a minimum volume at various pricing terms, including fi xed pricing, variable pricing or a combination thereof. Minimum amounts committed to as of June 29, 2013 totaled approximately $1,819.1 million. Minimum amounts committed to by year are as follows: (In thousands) 2014 2015 2016 2017 2018 $ Amount 1,157,103 426,362 141,893 93,266 444 Sysco has contracts with various third party service providers to receive information technology services. The services have been committed for periods up to fi scal 2016 and may be extended. As of June 29, 2013, the total remaining cost of the services over that period is expected to be approximately $531.7 million. A portion of this amount may be reduced by Sysco utilizing less than estimated resources and can be increased by Sysco utilizing more than estimated resources. Certain agreements allow adjustments for infl ation. Sysco may also cancel a portion or all of the services provided subject to termination fees which decrease over time. If Sysco were to terminate all of the services in fi scal 2014, the estimated termination fee incurred in fi scal 2014 would range from approximately $22.8 million to $32.6 million. 78 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 21 Business Segment Information The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defi ned in the accounting literature related to disclosures about segments of an enterprise. The Broadline reportable segment is an aggregation of the company’s United States, Canadian, Caribbean and European Broadline segments. 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. These companies also provide custom-cut meat operations. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. “Other” fi nancial information is attributable to the company’s other operating segments, including the company’s specialty produce and lodging industry segments, a company that distributes specialty imported products and a company that distributes to international customers. The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated fi nancial statements. Intersegment sales represent specialty produce and imported specialty products distributed by the Broadline and SYGMA operating companies. 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 offi ce and Sysco’s shared service center. These also include all share-based compensation costs and expenses related to the company’s Business Transformation Project. The following table sets forth the fi nancial information for Sysco’s business segments: in come (In thousands) Sales: Broadline SYGMA Other Intersegment sales TOTAL Operating income: Broadline SYGMA Other Total egments s Corporate expenses Total erating op Interest expense Other expense (income), net EARNINGS BEFORE INCOME TAXES Depreciation and amortization: Broadline SYGMA Other Total Corporate TOTAL Capital expenditures: Broadline SYGMA Other Total Corporate TOTAL Assets: Broadline SYGMA Other Total segments Corporate TOTAL egments s egments s 2013 Fiscal Year 2012 2011 36,129,463 $ 5,780,103 2,741,537 (239,870) 44,411,233 $ 34,420,851 $ 5,735,673 2,396,113 (171,698) 42,380,939 $ 31,924,473 5,341,094 2,238,796 (180,874) 39,323,489 2,402,215 $ 52,016 98,564 2,552,795 (894,317) 1,658,478 128,495 (17,472) 1,547,455 $ 313,611 $ 28,059 28,194 369,864 142,684 512,548 $ 284,016 $ 18,078 47,744 349,838 162,024 511,862 $ 2,416,225 $ 60,967 91,048 2,568,240 (677,608) 1,890,632 113,396 (6,766) 1,784,002 $ 298,852 $ 27,706 24,745 351,303 65,640 416,943 $ 525,368 $ 30,961 41,669 597,998 186,503 784,501 $ 2,327,847 62,190 100,222 2,490,259 (558,757) 1,931,502 118,267 (14,219) 1,827,454 291,756 24,975 25,131 341,862 60,726 402,588 353,296 38,612 20,228 412,136 224,306 636,442 10,228,722 $ 485,520 944,140 11,658,382 1,005,565 12,663,947 $ 8,067,912 $ 475,877 877,207 9,420,996 2,716,211 12,137,207 $ 7,261,681 456,204 814,174 8,532,059 2,895,131 11,427,190 $ $ $ $ $ $ $ $ $ $ SYSCO CORPORATION - Form 10-K 79 PART II ITEM 8 Financial Statements and Supplementary Data The sales mix for the principal product categories for each fi scal year is as follows: (In thousands) Canned and dry products Fresh and frozen meats Frozen fruits, vegetables, bakery and other Dairy products Poultry Fresh produce Paper and disposables Seafood Beverage products Janitorial products Equipment and smallwares Medical supplies TOTAL Information concerning geographic areas is as follows: (In thousands) Sales: (1) United States Canada Other TOTAL Long-lived assets: (2) United States Canada Other TOTAL (1) Represents sales to external customers from businesses operating in these countries. (2) Long-lived assets represents net property, plant and equipment reported in the country in which they are held. 2013 8,310,634 $ 8,242,423 6,023,990 4,669,986 4,580,445 3,540,027 3,364,965 2,167,588 1,643,034 1,013,488 637,680 216,973 44,411,233 $ Fiscal Year 2012 7,948,187 $ 7,929,235 5,757,871 4,456,634 4,188,787 3,332,504 3,295,483 2,076,848 1,591,540 952,569 613,590 237,691 42,380,939 $ 2011 7,308,893 7,163,505 5,337,625 4,145,350 3,912,510 3,345,929 3,055,862 1,929,417 1,478,456 902,636 581,628 161,678 39,323,489 2013 Fiscal Year 2012 2011 38,985,715 $ 4,698,814 726,704 44,411,233 $ 37,596,862 $ 4,246,611 537,466 42,380,939 $ 34,992,273 3,864,420 466,796 39,323,489 3,593,346 $ 307,605 77,120 3,978,071 $ 3,564,854 $ 291,304 27,592 3,883,750 $ 3,161,724 321,185 29,480 3,512,389 $ $ $ $ $ $ NOTE 22 Supplemental Guarantor Information – Subsidiary Guarantees On January 19, 2011, the wholly-owned United States Broadline (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 by these guarantees. As of June 29, 2013, Sysco had a total of approximately $2,820.5 million in senior notes, debentures and commercial paper outstanding that was covered by these guarantees. All subsidiary guarantors are 100%-owned by the parent company, all guarantees are full and unconditional and all guarantees are joint and several, except that the guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances. If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series. Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable subsidiary guarantor shall consolidate with or merge into Sysco Corporation or any successor of Sysco Corporation and (2) Sysco Corporation or any successor of Sysco Corporation consolidates with or merges into the applicable subsidiary guarantor. 80 SYSCO CORPORATION - Form 10-K The following condensed consolidating fi nancial statements present separately the fi nancial position, comprehensive income and cash fl ows of the parent issuer (Sysco Corporation), the guarantors (the majority of Sysco’s U.S. Broadline subsidiaries) and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries. PART II ITEM 8 Financial Statements and Supplementary Data $ (In thousands) Current assets Investment in subsidiaries Plant and equipment, net Other assets TOTAL ASSETS Current liabilities Intercompany payables (receivables) Long-term debt Other liabilities Shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ $ $ $ (In thousands) Current assets Investment in subsidiaries Plant and equipment, net Other assets TOTAL ASSETS Current liabilities Intercompany payables (receivables) Long-term debt Other liabilities Shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ $ $ Condensed Consolidating Balance Sheet June 29, 2013 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Eliminations Consolidated Totals 276,713 $ 3,746,192 $ 2,184,522 $ - $ 8,429,887 540,860 325,045 9,572,505 $ 664,366 $ 594,928 2,606,612 514,789 5,191,810 9,572,505 $ - 1,885,908 534,713 6,166,813 $ 928,824 $ (1,003,219) 10,422 414,623 5,816,163 6,166,813 $ - 1,551,303 1,618,691 5,354,516 $ 2,156,092 $ 408,291 22,952 153,457 2,613,724 5,354,516 $ (8,429,887) - - (8,429,887) $ - $ - - - (8,429,887) (8,429,887) $ 6,207,427 - 3,978,071 2,478,449 12,663,947 3,749,282 - 2,639,986 1,082,869 5,191,810 12,663,947 Condensed Consolidating Balance Sheet June 30, 2012 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Eliminations Consolidated Totals 538,451 $ 3,675,676 $ 1,870,681 $ - $ 10,334,147 703,658 324,839 11,901,095 $ 678,527 $ 3,068,001 2,714,415 755,112 4,685,040 11,901,095 $ - 1,923,925 532,922 6,132,523 $ 900,416 $ (3,334,860) 25,459 396,659 8,144,849 6,132,523 $ (10,334,147) - - - 1,256,167 1,310,888 4,437,736 $ (10,334,147) $ 1,844,636 $ $ 266,859 23,814 113,129 2,189,298 4,437,736 $ (10,334,147) $ - - - - (10,334,147) 6,084,808 - 3,883,750 2,168,649 12,137,207 3,423,579 - 2,763,688 1,264,900 4,685,040 12,137,207 (In thousands) Sales Cost of sales Gross profi t Operating expenses Operating income (loss) Interest expense (income) Other expense (income), net Earnings (losses) before income taxes Income tax (benefi t) provision Equity in earnings of subsidiaries Net earnings Other comprehensive income (loss) COMPREHENSIVE INCOME Condensed Consolidating Statement of Comprehensive Income Year Ended June 29, 2013 Other Non- Guarantor Subsidiaries Eliminations U.S. Broadline Subsidiaries $ Sysco $ - - - 694,323 (694,323) 298,474 (12,864) (979,933) (351,474) 1,620,886 992,427 215,929 30,162,329 $ 24,385,677 5,776,652 3,610,907 2,165,745 (177,421) (4,554) 2,347,720 842,062 - 1,505,658 - 15,335,180 $ (1,086,276) $ 13,127,398 2,207,782 2,020,726 187,056 7,442 (54) (969,433) (116,843) (116,843) 179,668 64,440 - 115,228 (33,191) 82,037 (1,620,886) (1,620,886) 33,191 Consolidated Totals 44,411,233 36,543,642 7,867,591 6,209,113 1,658,478 128,495 (17,472) 1,547,455 555,028 - 992,427 215,929 - - - - - $ 1,208,356 $ 1,505,658 $ $ (1,587,695) $ 1,208,356 SYSCO CORPORATION - Form 10-K 81 PART II ITEM 8 Financial Statements and Supplementary Data (In thousands) Sales Cost of sales Gross profi t Operating expenses Operating income (loss) Interest expense (income) Other expense (income), net Earnings (losses) before income taxes Income tax (benefi t) provision Equity in earnings of subsidiaries Net earnings Other comprehensive income (loss) COMPREHENSIVE INCOME (In thousands) Sales Cost of sales Gross profi t Operating expenses Operating income (loss) Interest expense (income) Other expense (income), net Earnings (losses) before income taxes Income tax (benefi t) provision Equity in earnings of subsidiaries Net earnings Other comprehensive income (loss) COMPREHENSIVE INCOME $ $ $ $ Condensed Consolidating Statement of Comprehensive Income Year Ended June 30, 2012 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries - $ - - 527,888 (527,888) 396,374 (6,993) (917,269) (340,592) 1,698,262 1,121,585 (402,908) 718,677 $ 29,100,106 $ 23,374,199 5,725,907 3,534,382 2,191,525 (281,193) (1,244) 2,473,962 918,607 - 1,555,355 - 1,555,355 $ 14,131,162 $ 12,089,441 2,041,721 1,814,726 226,995 (1,785) 1,471 227,309 84,402 - 142,907 (81,003) 61,904 $ Eliminations (850,329) $ (759,278) (91,051) (91,051) - - - - - (1,698,262) (1,698,262) 81,003 (1,617,259) $ Consolidated Totals 42,380,939 34,704,362 7,676,577 5,785,945 1,890,632 113,396 (6,766) 1,784,002 662,417 - 1,121,585 (402,908) 718,677 Condensed Consolidating Statement of Comprehensive Income Year Ended July 2, 2011 Other Non- Guarantor Subsidiaries U.S. Broadline Subsidiaries Eliminations Sysco - $ - - 535,224 (535,224) 453,593 (5,581) (983,236) (363,403) 1,771,863 1,152,030 220,293 1,372,323 $ 27,138,172 $ 21,591,829 5,546,343 3,455,148 2,091,195 (332,561) (4,636) 2,428,392 897,529 - 1,530,863 - 1,530,863 $ 12,861,426 $ 10,923,446 1,937,980 1,562,449 375,531 (2,765) (4,002) 382,298 141,298 - 241,000 122,217 363,217 $ (676,109) $ (586,498) (89,611) (89,611) - - - - - (1,771,863) (1,771,863) (122,217) (1,894,080) $ Consolidated Totals 39,323,489 31,928,777 7,394,712 5,463,210 1,931,502 118,267 (14,219) 1,827,454 675,424 - 1,152,030 220,293 1,372,323 (In thousands) Net cash provided by (used for): Operating activities Investing activities Financing activities Effect of exchange rate on cash Intercompany activity Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ $ Condensed Consolidating Cash Flows Year Ended June 29, 2013 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals (449,417) $ (105,314) (887,707) - 1,178,922 (263,516) 471,107 207,591 $ 1,705,950 $ (140,217) (15,666) - (1,560,250) (10,183) 34,478 24,295 $ 255,061 $ (666,351) 29,165 (2,086) 381,328 (2,883) 183,282 180,399 $ 1,511,594 (911,882) (874,208) (2,086) - (276,582) 688,867 412,285 82 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Condensed Consolidating Cash Flows Year Ended June 30, 2012 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals $ $ $ $ (413,535) $ (222,483) (58,168) - 859,780 165,594 305,513 471,107 $ 1,674,817 $ (367,909) (2,038) - (1,302,546) 2,324 32,154 34,478 $ 142,898 $ (313,237) (382,443) (8,800) 442,766 (118,816) 302,098 183,282 $ 1,404,180 (903,629) (442,649) (8,800) - 49,102 639,765 688,867 Condensed Consolidating Cash Flows Year Ended July 2, 2011 Sysco U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals (491,211) $ (203,090) (555,282) - 1,181,573 (68,010) 373,523 305,513 $ 1,243,884 $ (318,382) 1,263 - (926,546) 219 31,935 32,154 $ 338,845 $ (158,084) 176,112 20,267 (255,027) 122,113 179,985 302,098 $ 1,091,518 (679,556) (377,907) 20,267 - 54,322 585,443 639,765 (In thousands) Net cash provided by (used for): Operating activities Investing activities Financing activities Effect of exchange rate on cash Intercompany activity Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period CASH AND CASH EQUIVALENTS AT END OF THE PERIOD (In thousands) Net cash provided by (used for): Operating activities Investing activities Financing activities Effect of exchange rate on cash Intercompany activity Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period CASH AND CASH EQUIVALENTS AT END OF THE PERIOD SYSCO CORPORATION - Form 10-K 83 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 23 Quarterly Results (Unaudited) Financial information for each quarter in the years ended June 29, 2013 and June 30, 2012 is set forth below: p (In thousands except for per share data) Sales Cost of sales Gross rofi t Operating expenses Operating income Interest expense Other expense (income), net Earnings before income taxes Income taxes NET EARNINGS Per share: BASIC NET EARNINGS DILUTED NET EARNINGS Dividends declared Market price — high/low p (In thousands except for per share data) Sales Cost of sales Gross rofi t Operating expenses Operating income Interest expense Other (income), net Earnings before income taxes Income taxes NET EARNINGS Per share: BASIC NET EARNINGS DILUTED NET EARNINGS Dividends declared Market price — high/low September 29 December 29 March 30 June 29 Fiscal Year Fiscal 2013 Quarter Ended $ $ $ $ $ $ 11,086,916 $ 9,083,372 2,003,544 1,524,762 478,782 30,868 (2,477) 450,391 163,793 286,598 $ 10,796,890 $ 8,879,324 1,917,566 1,534,915 382,651 32,242 (1,753) 352,162 130,793 221,369 $ 10,926,371 $ 9,016,052 1,910,319 1,573,117 337,202 34,215 (3,410) 306,397 104,980 201,417 $ 11,601,056 $ 9,564,894 2,036,162 1,576,319 459,843 31,170 (9,832) 438,505 155,462 283,043 $ $ 0.49 0.49 0.27 31-28 $ 0.38 0.38 0.28 32-30 $ 0.34 0.34 0.28 36-31 $ 0.48 0.47 0.28 35-33 44,411,233 36,543,642 7,867,591 6,209,113 1,658,478 128,495 (17,472) 1,547,455 555,028 992,427 1.68 1.67 1.11 36-28 October 1 December 31 March 31 June 30 Fiscal Year Fiscal 2012 Quarter Ended 10,586,390 $ 8,638,790 1,947,600 1,438,260 509,340 29,474 250 479,616 176,963 302,653 $ 10,244,421 $ 8,398,771 1,845,650 1,418,652 426,998 28,324 (3,472) 402,146 152,033 250,113 $ 10,504,746 $ 8,633,130 1,871,616 1,432,786 438,830 28,290 (2,248) 412,788 153,238 259,550 $ 11,045,382 $ 9,033,671 2,011,711 1,496,247 515,464 27,308 (1,296) 489,452 180,183 309,269 $ 0.51 $ 0.51 0.26 32-25 $ 0.43 0.43 0.27 30-25 $ 0.44 0.44 0.27 31-29 $ 0.53 0.53 0.27 30-27 42,380,939 34,704,362 7,676,577 5,785,945 1,890,632 113,396 (6,766) 1,784,002 662,417 1,121,585 1.91 1.90 1.07 32-25 PERCENTAGE CHANGE — 2013 VS. 2012: Sales Operating income Net earnings Basic net earnings per share Diluted net earnings per share Quarter 1 Quarter 2 Quarter 3 Quarter 4 Fiscal Year 5% (6) (5) (4) (4) 5% (10) (11) (12) (12) 4% (23) (22) (23) (23) 5% (11) (8) (9) (11) 5% (12) (12) (12) (12) Financial results are impacted by accounting changes and the adoption of various accounting standards. See Note 2, “Changes in Accounting.” 84 SYSCO CORPORATION - Form 10-K ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART II ITEM 9B Other Information ITEM 9A Controls and Procedures Sysco’s management, with the participation of our chief executive offi cer and chief fi nancial offi cer, evaluated the effectiveness of our disclosure controls and procedures as of June 29, 2013. The term “disclosure controls and procedures,” as defi ned 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 fi les or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specifi ed in the SEC’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 fi les or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal fi nancial offi cers, 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-benefi t 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 June 29, 2013, our chief executive offi cer and chief fi nancial offi cer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level. Management’s report on internal control over fi nancial reporting is included in the fi nancial statement pages at page 44. No change in our internal control over fi nancial reporting (as defi ned in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fi scal quarter ended June 29, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over fi nancial reporting. ITEM 9B Other Information None. SYSCO CORPORATION - Form 10-K 85 PART III ITEM 10 Directors, Executive Offi cers and Corporate Governance The information required by this item will be included in our proxy statement for the 2013 Annual Meeting of Stockholders under the following captions, and is incorporated herein by reference thereto: “Corporate Governance,” “Executive Offi cers,” “Section 16(a) Benefi cial Ownership Reporting Compliance,” “Report of the Audit Committee” and “Board of Directors Matters.” ITEM 11 Executive Compensation The information required by this item will be included in our proxy statement for the 2013 Annual Meeting of Stockholders under the following captions, and is incorporated herein by reference thereto: “Compensation Discussion and Analysis,” “Report of the Compensation Committee,” “Director Compensation” and “Executive Compensation.” ITEM 12 Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters The information required by this item will be included in our proxy statement for the 2013 Annual Meeting of Stockholders under the following captions, and is incorporated herein by reference thereto: “Stock Ownership” and “Equity Compensation Plan Information.” ITEM 13 Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in our proxy statement for the 2013 Annual Meeting of Stockholders under the following caption, and is incorporated herein by reference thereto: “Corporate Governance – Certain Relationships and Related Person Transactions” and “Corporate Governance – Director Independence.” ITEM 14 Principal Accounting Fees and Services The information required by this item will be included in our proxy statement for the 2013 Annual Meeting of Stockholders under the following caption, and is incorporated herein by reference thereto: “Fees Paid to Independent Registered Public Accounting Firm.” 86 SYSCO CORPORATION - Form 10-K PART IV ITEM 15 Exhibits (a) The following documents are fi led, or incorporated by reference, as part of this Form 10-K: 1. All fi nancial statements. See Index to Consolidated Financial Statements on page 43 of this Form 10-K. 2. All fi nancial statement schedules are omitted because they are not applicable or the information is set forth in the consolidated fi nancial statements or notes thereto within Item 8. Financial Statements and Supplementary Data. 3. Exhibits. The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is hereby incorporated herein by reference, are fi led or furnished as part of this Annual Report on Form 10-K. SYSCO CORPORATION - Form 10-K 87 PART IV ITEM 15 Signatures Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sysco Corporation has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 26th day of August, 2013. SYSCO CORPORATION By /s/ WILLIAM J. DELANEY William J. DeLaney President and Chief Executive Offi cer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Sysco Corporation in the capacities indicated and on the date indicated above. Principal Executive, Financial & Accounting Offi cers: /s/ WILLIAM J. DELANEY William J. DeLaney President and Chief Executive Offi cer (principal executive offi cer) /s/ ROBERT C. KREIDLER Executive Vice President and Chief Financial Offi cer (principal fi nancial offi cer) Directors: Robert C. Kreidler /s/ G. MITCHELL ELMER G. Mitchell Elmer /s/ JOHN M. CASSADAY John M. Cassaday /s/ JUDITH B. CRAVEN Judith B. Craven /s/ WILLIAM J. DELANEY William J. DeLaney /s/ MANUEL A. FERNANDEZ Manuel A. Fernandez /s/ LARRY C. GLASSCOCK Larry C. Glasscock /s/ JONATHAN GOLDEN Jonathan Golden Senior Vice President, Controller and Chief Accounting Offi cer (principal accounting offi cer) /s/ JOSEPH A. HAFNER, JR. Joseph A. Hafner, Jr. /s/ HANS-JOACHIM KOERBER Hans-Joachim Koerber /s/ NANCY S. NEWCOMB Nancy S. Newcomb /s/ RICHARD G. TILGHMAN Richard G. Tilghman /s/ JACKIE M. WARD Jackie M. Ward 88 SYSCO CORPORATION - Form 10-K FINANCIAL HIGHLIGHTS Fiscal Year Ended Percent Change DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA June 29, 2013 (52 weeks) June 30, 2012 (52 weeks) July 2, 2011 (52 weeks) 2013–12 2012–11 Sales Operating income Earnings before income taxes Net earnings Diluted earnings per share Dividends declared per share Shareholders’ equity per share Capital expenditures Return on invested capital Diluted average shares outstanding Number of shares repurchased Number of employees $ 44,411,233 1,658,478 $ 1,547,455 $ 992,427 $ 1.67 $ 1.11 $ 8.86 $ 511,862 $ $ 42,380,939 1,890,632 $ 1,784,002 $ 1,121,585 $ 1.90 $ 1.07 $ 8.00 $ 784,501 $ $ 39,323,489 1,931,502 $ 1,827,454 $ 1,152,030 $ 1.96 $ 1.03 $ 7.95 $ 636,442 $ 13% 15% 17% 592,675,110 21,672,403 48,100 588,991,441 10,000,000 47,800 588,691,546 10,000,000 46,000 5% (12) (13) (12) (12) 4 11 (35) (13) 1 117 1 8% (2) (2) (3) (3) 4 1 23 (12) 0 – 4 . 9 6 3 . 2 7 3 . 3 9 3 . 4 2 4 . 4 4 4 2 7 8 , 1 6 7 9 , 1 2 3 9 , 1 1 9 8 , 1 8 5 6 , 1 7 7 . 1 9 9 . 1 6 9 . 1 0 9 . 1 7 6 . 1 Sales IN BILLIONS OF DOLLARS Operating Income IN MILLIONS OF DOLLARS Diluted Earnings per Share IN DOLLARS 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 4 9 . 9 9 . 3 0 . 1 7 0 . 1 1 1 . 1 6 5 0 , 1 0 8 1 , 1 2 5 1 , 1 2 2 1 , 1 2 9 9 7 7 5 , 1 5 8 8 2 9 0 , 1 4 0 4 , 1 2 1 5 , 1 Dividends Declared per Share IN DOLLARS Net Earnings IN MILLIONS OF DOLLARS Net Cash from Operations IN MILLIONS OF DOLLARS 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 SHAREHOLDER INFORMATION CORPORATE OFFICES Sysco Corporation 1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com ANNUAL SHAREHOLDERS’ MEETING The Houstonian Hotel 111 North Post Oak Lane Houston, TX 77024 November 15, 2013 at 10:00 a.m. INDEPENDENT ACCOUNTANTS Ernst & Young LLP Houston, TX TRANSFER AGENT & REGISTRAR American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 1.888.CALLSYY (1.888.225.5799) www.amstock.com INVESTOR CONTACT Mr. Neil A. Russell II Vice President, Investor Relations 281.584.1308 Design: Savage Brands, Houston, Texas COMMON STOCK AND DIVIDEND INFORMATION Sysco’s common stock is traded on the New York Stock Exchange under the symbol “SYY.” The company has paid quarterly cash dividends on its common stock since its founding as a public company in 1970 and has increased the dividend 44 times in that period. The current quarterly cash dividend is $0.28 per share. DIVIDEND REINVESTMENT PLAN WITH OPTIONAL CASH PURCHASE FEATURE Sysco’s Dividend Reinvestment Plan provides a convenient way for shareholders of record to reinvest quarterly cash dividends in Sysco shares automatically, with no service charge or brokerage commissions. The Plan also permits registered shareholders to invest additional money to purchase shares. In addition, certificates may be deposited directly into a Plan account for safekeeping and may be sold directly through the Plan for a modest fee. implementation and deployment process, and changes may not prove to be cost effective or result in the cost savings and other benefits that we anticipate. We have temporarily halted the deployment of certain components of our ERP system as we have identified areas of improvement. We may experience further delays, cost overages and/or operating problems as we address these areas of improvement or when we deploy the complete system on a larger scale. Future deployments are dependent upon the success of current efforts and plans are subject to change at any time. Other aspects of our business transformation initiatives, including our category management initia- tive, may fail to provide the expected benefits in a timely fashion, if at all. Sysco’s ability to achieve antici- pated future results could be affected by competitive price pressures, availability of supplies, work stoppages, success or failure of our strategic initiatives, successful integration of acquired companies, conditions in the economy and the industry, and internal factors such as the ability to control expenses. Shareholders desiring information about the Dividend Reinvestment Plan with Optional Cash Purchase Feature may obtain a brochure and enrollment form by contacting the Transfer Agent and Registrar, American Stock Transfer & Trust Company at 1.888.225.5799. For a discussion of additional risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Sysco’s Annual Report on Form 10-K for the fiscal year ended June 29, 2013, which is included in this Annual Report. FORM 10-K AND FINANCIAL INFORMATION A copy of the fiscal 2013 Annual Report on Form 10-K, including the financial statements and financial statement schedules, as well as copies of other financial reports and company literature, may be obtained without charge upon written request to the Investor Relations Department, Sysco Corporation, at the corporate offices listed above, or by calling 281.584.2615. This information, which is included in this Annual Report, also may be found on our website at www.sysco.com in the Investors section. FORWARD-LOOKING STATEMENTS Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements about expected future performance, the impact and expected benefits of strategic initiatives, including our category management initiative, plans regarding expansion and acquisitions, and the implementation timeline for certain initiatives. These statements are based on management’s current expectations and estimates; actual results may differ materially. The success of Sysco’s strategic initiatives and any plans regarding expansion or acquisitions could be affected by conditions in the economy and the industry and internal factors such as the ability to control expenses, including fuel costs. Our ability to meet our long-term strategic objectives depends largely on the success of our Business Transformation Project, which may not be successfully implemented and may not provide the anticipated benefits. The expected costs of our Business Transformation Project may be greater than currently expected because we may encounter the need for changes in design or revi- sions of the project calendar and budget. We may be adversely affected if we experience operating problems, scheduling delays, cost overages or limitations on the extent of the business transformation during the ERP TM TM 1390 Enclave Parkway Houston, Texas 77077-2099 281.584.1390 www.sysco.com View this online annual report at: www.sysco.com/OnlineAnnual2013 Printed on FSC®-certified, 100% post-consumer recycled paper, and paper made from environmentally responsible Eucalyptus pulp. The use of 100% post-consumer recycled fiber in the printing of this report saved: • 100,162 lbs of wood • 161,162 gallons of water • 111 million BTUs of energy • 13,614 lbs of carbon emissions • 10,217 lbs of solid waste Source: Environmental Defense 2013 ANNUAL REPORT S Y S C O C O R P O R A T I O N 2 0 1 3 A N N U A L R E P O R T Food isn’t the only thing that comes off the back of a Sysco truck. We deliver ingredients for success.