1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com View this online annual report at: www.sysco.com/OnlineAnnual2015 A Fresh Perspective 2015 Annual Report A F r e s h P e r s p e c t i v e S y s c o C o r p o r a t i o n 2 0 1 5 A n n u a l R e p o r t Products We provide innovative solutions nationally and locally. Our customers rely on Sysco for products that meet high standards of safety, qual- ity and traceability, while keeping them at the forefront of foodservice trends. In FY2015 the implementation of our recent category management initiative resulted in the launch of 16 exceptional, exclusive solutions that differentiate Sysco from its competition and enable our customers to create tastier, healthier and more appealing menus. Locally, we increased our offerings of fresh, seasonal and artisanal foods sourced from small- to mid-sized area farms, ranches and processors to better serve customers whose business values are built on sustainability and community. Our ingredients for success: A Fresh Perspective To be our customers’ most valued and trusted business partner. That is our vision and the catalyst for the five strategic pillars that guide us to satisfy all of our valued stakeholders. Sysco’s strong operating performance in fiscal 2015 reflects efforts that are bearing fruit as we continue our quest to enrich the experience of doing business with Sysco, enhance productivity and innovation, attract and develop the industry’s best people and explore opportunities for growth. In applying our portfolio of strategic initiatives, we are trans- forming how we conduct business every day, putting customers first to help them succeed and working cohesively as One Sysco. Productivity Our functional excellence pays off for customers. Our investment in advanced tech- nology tools is driving positive change at Sysco while improving operating expenses in ways that also benefit our customers. At an iconic, busy restaurant like Lowell’s in Seattle’s Pike Place Market, which procures almost all of its products through our Sysco Market online ordering system, the ability to track the location of deliveries via our My Sysco Truck program is crucial. Sales associates and dispatchers can also track that progress. Even before our trucks hit the road, they are being loaded faster as we apply engineered labor standards to improve warehouse productivity. Stockholder Information Forward-looking Statements Statements made herein that look forward in time or that express management’s beliefs, expectations or hopes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from current expectations. These statements include our plans and expectations related to and the benefits and expected timing of our goals and initiatives to increase profitability, manage expenses and grow our business, and our outlook and expectations for fiscal 2016. The success of our initia- tives and expectations regarding our operating performance are subject to the general risks associated with our business, including the risks of interruption of supplies due to lack of long-term contracts, severe weather, crop conditions, work stoppages, intense competition, technology disruptions, dependence on large regional and national customers, inflation risks, the impact of fuel prices, adverse publicity, and labor issues. Risks and uncertainties also include risks impacting the economy generally, including the risks that the current general economic conditions will deteriorate, or consumer confidence in the economy may not improve and decreases in consumer spending, particularly on food-away-from-home, may not reverse. Market conditions may not improve. If sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, our gross margins may decline. Our ability to meet our long-term strategic objectives to grow the profitability of our business depends largely on the success of our various business initiatives. There are various risks related to these efforts, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Our plans related to and the timing of any initiatives are subject to change at any time based on management’s subjective evaluation of our overall business needs. If we are unable to realize the anticipated benefits from our cost-cutting efforts, we could become cost disadvantaged in the market- place, and our competitiveness and our profitability could decrease. Capital expenditures may vary from those projected based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completions of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Periods of high inflation, 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 profit, operating income and earnings. Expanding into international markets presents unique challenges and risks, including compliance with local laws, regulations and customs and the impact of local political and economic conditions, and such expansion efforts may not be successful. Any business that we acquire may not perform as expected, and we may not realize the anticipated benefits of our acquisitions. Expectations regarding the accounting treatment of any acquisitions may change based on management’s subjective evaluation. Expectations regarding tax rates are subject to various factors beyond management’s control. For a discussion of additional factors impacting Sysco’s business, see the Company’s Annual Report on Form 10-K for the year ended June 27, 2015, as filed with the Securities and Exchange Commission, and the Company’s subsequent filings with the SEC. Sysco does not undertake to update its forward-looking statements. Form 10-K and Financial Information A copy of the fiscal 2015 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 left, 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. Corporate Offices Sysco Corporation 1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com Annual Stockholders’ Meeting The Houstonian Hotel 111 North Post Oak Lane Houston, TX 77024 November 18, 2015, at 10:00 a.m. Independent Accountants Ernst & Young LLP Houston, TX Transfer Agent & Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 1.888.CALLSYY (1.888.225.5799) www.amstock.com Investor Contact Neil Russell Vice President, Investor Relations 281.584.1308 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 46 times in that period. The current quarterly cash dividend is $0.30 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. Shareholders desiring information about the Dividend Reinvestment Plan with Optional Cash Purchase Fea- ture may obtain a brochure and enrollment form by contacting the Transfer Agent & Registrar, American Stock Transfer & Trust Company at 1.888.225.5799. X T n o t s u o H , s d n a r B e g a v a S : n g i s e D Partnership We are bringing more to the table. While Sysco is the world’s largest food- service distributor with a global supply chain spanning 40 countries, we emphasize locally managed customer relationships. Our sales associates are advocates who understand customer needs first-hand and provide access to our extensive team of product, business, quality and culinary experts to help customers grow their businesses. People Human power drives our results. No other initiatives impact our success as much as finding, developing and retaining the industry’s best talent. Sysco fosters a culture of continuous learning, offering our associates the tools and resources to excel in their jobs and take on new chal- lenges. A human resources model was recently launched across our U.S. broadline companies that provides enhanced tools for managing and tracking the near-term, mid-term and long-term professional development of our people. Expansion We speak the language of growth. Reinforcing our leadership position in North America and our international expansion strategy, Sysco committed to its first significant investment in Mexico during FY2015. With a 50-percent stake in Pacific Star Foodservice, we now jointly own a lead- ing distributor whose accounts include fast food and casual dining restau- rants, casinos, theme parks, movie theaters and hotels throughout Mexico. Delivering Innovative New Products We create opportunities for our customers to turn market trends into business advantages. In the past year we evaluated more than 100 potential new products, including menu enhancers and back-of-the-house goods, before working with our supplier partners to develop products that solve unmet customer needs. Our new health-focused solutions include a suite of zero trans- fat, non-GMO cooking oils, shell-on, deveined shrimp that are individually quick-frozen, and a line of versatile vegetable and grain blends. In sync with the craft beer trend, we developed craft-beer infused pub buns. A growing number of customers also desire local and other sustainably-sourced foods. Across the nation we’re helping to grow innovative companies such as Oregon Natural Meats, a family-owned purveyor of grass-fed beef that utilizes beer grain and seed farm byproducts in its feeds. Beyond product offerings, we also deliver daily on a commitment to conduct our own business responsibly. We incorporate sus- tainable practices across our operations, from warehouses to corporate offices. 1 A Fresh Perspective To Our Stockholders, Sysco’s financial and operational results for fiscal 2015 reflect a period of solid core business performance and excellent progress on several key initiatives that now provide a strong foundation for ongoing value creation. Our favorable operating performance was driven by local and corporate-managed sales growth, category management benefits and improving expense management. For the full year, Sysco sales increased five percent to a record $49 billion, while adjusted operating income* and adjusted earnings per share* grew three percent and five percent, respectively. We generated $1 billion in free cash flow* in the fiscal year and importantly, we returned over $700 million in dividends to our sharehold- ers while increasing the dividend for the 46th time in our 45-year history. It is important to note that we achieved these results with minimal disruption from the US Foods merger planning and litigation processes that continued throughout the entire fiscal year. Our improved operating performance for the year can be attributed to: • Accelerating local case growth, which was achieved through a combination of promotions like our Test Drive promo- tions, email marketing campaigns and improved relationship management tools that help us earn even more of our customers’ business; • Effectively implementing our category management process across a full range of products, resulting in competitive prices for our customers and procure- ment efficiencies for Sysco and our supplier partners; Improving penetration on the sale of our high-value, Sysco-branded products, especially with the customers that we serve in local markets where we provide the most value; • • • Making significant progress in developing and increasing our offerings for Hispanic customers, the fastest-growing segment in the U.S. restaurant industry, by tripling our outreach efforts to 15 markets; and Implementing collaborative and mutually beneficial joint business-planning pro- cesses with a small but increasing num- ber of corporate-managed accounts to leverage Sysco’s full capability, so that they can benefit from a range of products across the Sysco family of companies. Volatility in food-cost inflation had a mean- ingful impact on our fiscal 2015 results. We experienced about five percent food-cost inflation during the first three quarters of 2015, and we managed it very well. However, food-cost inflation in the fourth quarter was essentially flat, which unfavorably affected sales and gross-profit growth. While it’s impossible to predict the future of the economic environment in which we operate, we believe that Sysco remains well positioned to succeed. Whether the overall industry grows over the next few years at one percent real growth – consistent with the past few years – or closer to the two percent in Technomic’s recently released five-year forecast, Sysco will continue to differentiate our product and service offer- ings in a manner that will allow us to both profitably grow our market share and pro- vide an improved return on invested capital for our shareholders. And, while pleased with our progress and accomplishments in fiscal 2015, we recog- nize that there is still much work to do if we are to fully realize our vision: to be our customers’ most valued and trusted business partner. We continue to pursue our vision through a long-term business strategy with five key focus areas: • Partnership – Profoundly enriching the experience of doing business with Sysco, • Productivity – Continuously improving productivity in all areas of our business, • Products – Enhancing our offerings through a customer-centric innovation program, • People – Implementing a company-wide talent management process, and • Expansion – Exploring, assessing and pursuing new businesses and markets. With that strategy as our guide, we have begun to realize the benefits of several years of transformative change to our business through a portfolio of business initiatives that include category manage- ment, revenue management and gaining customer insights. We are now beginning to embed these initiatives in how we do business each and every day by putting the customer first and working cohesively as One Sysco. Using the knowledge that we continue to acquire through our ongoing customer insights work, we are currently updating our three-year strategic business plan. Specifically, we see opportunities to further accelerate our case growth, especially with locally managed customers through more impactful product and service differentia- tion, together with enhanced sales and technology capabilities. * See Non-GAAP Reconciliations within our Annual Report on Form 10-K for the year ended June 27, 2015 for an explanation of these non-GAAP measures. 2 Sysco Corporation 2015 Annual Report Jackie Ward Chairman of the Board Bill DeLaney President and Chief Executive Officer We believe we can build on our recent success in stabilizing gross margins through enhanced product innovation, growing our Sysco-brand sales and improv- ing our pricing analytics and support. In addition, we see significant potential to improve our productivity and reduce costs throughout our supply chain organization and in the administrative areas of our business. We will also continue to invest in our business and improve our return on invested capital over the next three years. In closing, we are encouraged with our recent momentum of demonstrable improve- ment in our business performance. This reflects that many of our foundational strategies and plans are taking hold. In turn, we thank you for your continued sup- port for and confidence in Sysco, and we look forward to a successful Fiscal 2016 and beyond. Jackie Ward Chairman of the Board Bill DeLaney President and Chief Executive Officer Financial Highlights Fiscal Year Ended ooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo Dollars in thousands, except for per share data ooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo June 27, 2015 June 29, 2013 June 28, 2014 Percent Change ooooooooooooooooooooooooooooooo 2015–14 2014–13 ooooooooooooooooooooooooooooooo Sales $ 48,680,752 $ 46,516,712 $ 44,411,233 5% 5% Adjusted Operating income* $ 1,791,830 $ 1,733,630 $ 1,753,193 Adjusted Net Earnings* $ 1,100,166 $ 1,033,836 $ 1,055,319 Adjusted Diluted earnings per share* $ Dividends declared per share Shareholders’ equity per share Capital expenditures Diluted average $ $ $ 1.84 $ 1.75 $ 1.78 1.19 $ 1.15 $ 1.11 8.96 542,830 $ $ 8.99 $ 8.86 523,206 $ 511,862 shares outstanding 596,849,034 590,216,220 592,675,110 Number of employees 48,100 51,700 ooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo 50,300 3 6 5 3 0 4 1 3 (1) (2) (2) 4 1 2 0 5 ooooooooooooooooooooooooooooooo * See Non-GAAP Reconciliations within our Annual Report on Form 10-K for the year ended June 27, 2015 for an explanation of these non-GAAP measures. Sales in billions of dollars Adjusted Operating Income in millions of dollars . 4 4 4 $ . 5 6 4 $ . 7 8 4 $ 3 5 7 1 $ , 4 3 7 1 $ , 2 9 7 1 $ , Net Cash Provided by Operating Activities in millions of dollars 2 1 5 1 $ , 3 9 4 1 $ , 5 5 5 1 $ , Dividends Declared Per Share in dollars . 1 1 1 $ 5 1 1 $ . 9 1 1 $ . 13 14 15 13 14 15 13 14 15 13 14 15 3 A Fresh Perspective Officers & Directors Directors 2 3 6 John M. Cassaday Joined: 2004 Retired President and Chief Executive Officer, Corus Entertainment, Inc. Judith B. Craven, M.D., M.P.H. 2 3 5 Joined: 1996 Retired President, United Way of the Texas Gulf Coast 4 6 William J. DeLaney Joined: 2009 President and Chief Executive Officer, Sysco Corporation Joshua D. Frank Joined: 2015 Partner at Trian Fund Management, L.P. 3 4 2 3 5 6 Larry C. Glasscock Joined: 2010 Retired President, CEO and Chairman of the Board, WellPoint, Inc. 4 5 Jonathan Golden Joined: 1984 Partner, Arnall Golden Gregory, LLP 1 Joseph A. Hafner, Jr. Joined: 2003 Retired Chairman and Chief Executive Officer, Riviana Foods, Inc. 4 5 6 Hans-Joachim Koerber Joined: 2008 Retired Chief Executive Officer, Metro AG 4 1 1 Nancy S. Newcomb Joined: 2006 Retired Senior Corporate Officer, Risk Management, Citigroup 4 Senior Officers Brian C. Beach Senior Vice President, Business Development and President of Sysco Ventures 2 Nelson Peltz Joined: 2015 Chief Executive Officer and Founding Partner at Trian Fund Management, L.P. Thomas L. Bené Executive Vice President and President, Foodservice Operations 4 6 1 Richard G. Tilghman Joined: 2002 Retired Chairman, SunTrust Banks Mid-Atlantic and Retired Vice Chairman, SunTrust Banks 2 3 6 Jackie M. Ward Joined: 2001 Chairman of the Board, Sysco Corporation Retired Founder, Chairman, Chief Executive Officer and President, Computer Generation Inc. Board Committees 1 2 3 4 5 6 Audit Corporate Governance and Nominating Compensation Finance Corporate Sustainability Executive Denotes Committee Chair Greg D. Bertrand Senior Vice President, Foodservice Operations, West Robert S. Charlton Executive Vice President, Supply Chain Robert J. Davis Senior Vice President, Foodservice Operations, East William B. Day Executive Vice President, Merchandising William J. DeLaney President and Chief Executive Officer William W. Goetz Senior Vice President and Chief Marketing Officer Joel T. Grade Executive Vice President and Chief Financial Officer Alan E. Hasty Senior Vice President, Operational Merchandising William H.D. Horton Senior Vice President, Chief Communications and Government Relations Officer G. Kent Humphries Senior Vice President, Foodservice Operations, International Ajoy H. Karna Senior Vice President, Finance R. Chris Kreidler Executive Vice President Russell T. Libby Executive Vice President, Administration and Corporate Secretary Paul T. Moskowitz Executive Vice President, Human Resources Wayne R. Shurts Executive Vice President and Chief Technology Officer Adam S. Skorecki Senior Vice President, General Counsel and Assistant Secretary Scott A. Sonnemaker Senior Vice President, Sales and Chief Customer Officer Market Presidents Thomas C. Barnes Market President, Mideast Michael K. Brawner Market President, Mid Atlantic Tim K. Brown Market President, Southeast David B. DeVane Market President, Southwest Christopher S. DeWitt Market President, Pacific Richard A. Johnston Market President, Rocky Mountains Sean T. McCausland Market President, Midwest Joseph H. Wood Market President, Northeast 4 Sysco Corporation 2015 Annual Report 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 27, 2015 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 No.) 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 $23,927,875,000 as of December 27, 2014 (based on the closing sales price on the New York Stock Exchange Composite Tape on December 26, 2014, as reported by The Wall Street Journal (Southwest Edition)). As of August 13, 2015, the registrant had issued and outstanding an aggregate of 594,917,977 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the company’s 2015 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 ITEM 1A Risk Factors ..............................................................................................................................................................................................................................................................................................5 ITEM 1B Unresolved Staff Comments .................................................................................................................................................................................................................................11 ITEM 2 Properties .................................................................................................................................................................................................................................................................................................11 ITEM 3 Legal Proceedings ...................................................................................................................................................................................................................................................................12 ITEM 4 Mine Safety Disclosures ................................................................................................................................................................................................................................................12 PART II 13 ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities ................................................................................................................................................................................................................13 ITEM 6 Selected Financial Data .................................................................................................................................................................................................................................................15 ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............15 ITEM 7A Quantitative and Qualitative Disclosures about Market Risk .....................................................................................................................39 ITEM 8 Financial Statements and Supplementary Data .................................................................................................................................................................41 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........84 ITEM 9A Controls and Procedures .............................................................................................................................................................................................................................................84 ITEM 9B Other Information .......................................................................................................................................................................................................................................................................84 PART III ITEM 10 ITEM 11 ITEM 12 ITEM 13 ITEM 14 PART IV Directors, Executive Offi cers and Corporate Governance ..............................................................................................................................85 Executive Compensation.............................................................................................................................................................................................................................................85 Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters .............................................................................................................................................................................................................................................................85 Certain Relationships and Related Transactions, and Director Independence .........................................................85 Principal Accounting Fees and Services .........................................................................................................................................................................................85 85 86 ITEM 15 Exhibits .........................................................................................................................................................................................................................................................................................................86 SIGNATURES .................................................................................................................................................................................................................................................................................................................................87 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 $48.7 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 27, 2015 for fi scal 2015, June 28, 2014 for fi scal 2014 and June 29, 2013 for fi scal 2013. We will have a 53-week year ending July 2, 2016 for fi scal 2016. 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 companies, custom-cut meat companies, lodging industry products companies, a company that distributes specialty imported products, a company that distributes to international customers and the company’s Sysco Ventures platform, a suite of technology solutions that help support the business needs of Sysco’s customers. Specialty produce companies distribute fresh produce and, on a limited basis, other foodservice products. Our specialty meat companies distribute custom-cut fresh steaks, other meat, seafood and poultry. Our lodging industry products companies distribute 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: Principal product categories Fresh and frozen meats Canned and dry products 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) TOTALS (1) Sales are less than 1% of total for years shown with a “-”. 2015 2014 2013 21% 16 13 11 11 8 7 5 4 2 1 1 100% 19% 18 13 11 10 8 7 5 4 2 2 1 100% 19% 19 14 10 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 12,800 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 27, 2015. We estimate that our sales by type of customer during the past three fi scal years were as follows: Type of Customer Restaurants Healthcare Education, government Travel, leisure, retail Other(1) TOTALS 2015 2014 2013 64% 9 8 8 11 100% 62% 9 9 8 12 100% 61% 10 8 8 13 100% (1) Other includes cafeterias that are not stand alone restaurants, bakeries, caterers, churches, civic and fraternal organizations, vending distributors, other distributors and international exports. None of these types of customers, as a group, exceeded 5% of total sales in any of the years for which information is presented. 2 SYSCO CORPORATION - Form 10-K 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” in 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 and our shared services center performs support services for employees, suppliers and customers. Members of these groups possess experience and expertise in, among other areas, customer and vendor contract administration, vendor payments, procurement and maintenance support, invoicing, cash application, accounting and fi nance, treasury, credit services, 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, including sales and use tax administration. 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. Capital Improvements To maximize productivity and customer service, we continue to modernize, expand and construct new distribution facilities. During fi scal 2015, 2014 and 2013, approximately $542.8 million, $523.2 million and $511.9 million, respectively, were invested in delivery fl eet, facilities, technology and other capital asset enhancements. From time to time, we dispose of assets in the normal course of business; we consider proceeds from these asset sales to be an offset to capital expenditures. During fi scal 2015, 2014 and 2013, capital expenditures, net of proceeds from sales of assets, were $518.4 million, $497.4 million and $496.3 million, respectively. We estimate our capital expenditures, net of proceeds from sales of assets, in fi scal 2016 should be in the range of $550 million to $600 million. During the three years ended June 27, 2015, 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 2016 capital expenditures from the same sources. SYSCO CORPORATION - Form 10-K 3 PART I ITEM 1 Business Employees As of June 27, 2015, we had approximately 51,700 employees, approximately 18% of whom were represented by unions, primarily the International Brotherhood of Teamsters. Contract negotiations are handled by each individual operating company. Approximately 37% of our union employees are covered by collective bargaining agreements that have expired or will expire during fi scal 2016 and are subject to renegotiation. Since June 27, 2015, there have been no contract renegotiations. We consider our labor relations to be satisfactory. Competition Industry sources estimate that there are more than 16,500 companies engaged in the distribution of food and non-food products to the foodservice industry in the U.S. Our customers may also choose to purchase products directly from wholesale or retail outlets, including club, cash and carry and grocery stores, or negotiate prices directly with our suppliers. Online retailers and e-commerce companies are also participants in the foodservice industry. While we compete primarily with local and regional distributors, some organizations compete with us on a multi-region basis. In addition, these local, regional and multi-regional distributors can create purchasing cooperatives and marketing groups to enhance their competitive abilities by expanding their product mix, improving purchasing power and extending their geographic capabilities. 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. Our customers are accustomed to purchasing from multiple suppliers and channels concurrently. Product needs, service requirements and price are just a few of the factors they evaluate when deciding where to purchase. Customers can choose from many broadline foodservice distributors, specialty distributors that focus on specifi c categories such as produce, meat or seafood, other wholesale channels, club stores, cash and carry stores, grocery stores and numerous online retailers. Since switching costs are very low, customers can make supplier and channel changes very quickly. There are few barriers to market entry. Existing foodservice competitors can extend their shipping distances and add truck routes and warehouses relatively quickly to serve new markets or customers. We consider our primary market to be the foodservice market in the U.S. and Canada and estimate that we serve about 17.7% of this approximately $264 billion annual market based on a measurement as of the end of calendar 2014. We believe, based upon industry trade data, that our sales to the U.S. and Canada food-away-from-home industry were the highest of any foodservice distributor during fi scal 2015. 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 7,300 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 multi-region portfolio in the U.S. and Canada, which mitigates some of the impact of regional economic declines that may occur over time. We believe our liquidity and access to capital provides us the ability to continuously invest in business improvements. We are one of the few distributors in the food-away-from-home industry in the U.S. with publicly traded equity. While our public company status provides us with some advantages over many of our competitors, including access to capital, we believe it also provides us with some disadvantages that most of them 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 U.S., 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. 4 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors 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 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. In addition, we are also subject to the U.S. False Claims Act, and similar state statutes, which prohibit the submission of claims for payment to the government that are false and the knowing retention of overpayments. 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 U.S., 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 U.S. 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 27, 2015, we operated 197 distribution facilities throughout the U.S., Bahamas, Canada, and Ireland. We have interests in joint venture operations in Costa Rica and Mexico. 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 within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and from historical trends. SYSCO CORPORATION - Form 10-K 5 PART I ITEM 1A Risk Factors 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, the impact of such infl ation on discretionary spending by consumers and our limited ability to increase prices in the current, highly competitive environment. 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. Unfavorable macroeconomic conditions in the U.S., as well as unfavorable conditions in particular local markets, may adversely affect our results of operations and fi nancial condition The foodservice distribution industry, which is characterized by relatively low profi t margins with limited demand growth expected in the near-term, is especially susceptible to negative trends and economic uncertainty. The U.S. has experienced an uneven economic environment over the past several years. In addition, our results of operations are substantially affected by local operating and economic conditions, which can vary substantially by market. 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 reducing demand for our products. • Heightened uncertainty in the fi nancial markets negatively affects consumer confi dence and discretionary spending, which 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 economic environment has adversely affected the rate of improvement in 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 fragmented and highly competitive, with local, regional, multi-regional distributors and specialty competitors. Furthermore, barriers to entry by new competitors, or geographic or product line expansion by existing competitors, are low. Additionally, increased competition from non-traditional sources (such as club stores and commercial wholesale outlets with lower cost structures), and group purchasing organizations 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 effect on our operating results and profi tability. Finally, demand for food-away-from-home products is volatile and price sensitive, imposing limits on our customers’ ability to absorb cost increases. New and increasing competitive sources may result in increased focus on pricing and on limiting price increases, or may require increased discounting. Such competition or other industry pressures may result in margin erosion and/or make it diffi cult for us to attract and retain customers. 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 Volatile fuel prices have a direct impact on our industry. We require signifi cant quantities of fuel for our delivery vehicles and are exposed to the risk associated with fl uctuations in the market price for fuel. 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. The cost of fuel affects the price paid by us for products, as well as the costs we incur 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 will be able to do so in the future. If fuel costs increase 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 forward price for diesel. If fuel prices decrease signifi cantly, these forward purchases will result in our paying higher than market costs for a portion of our diesel fuel. 6 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors Business and Operational Risks 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. 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 interruptions 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 and other agricultural conditions, water shortages, animal disease outbreaks, transportation interruptions, unavailability of fuel or increases in fuel costs, product recalls, competitive demands and natural disasters or other catastrophic events (including, but not 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. 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 public confi dence in our products, whether or not justifi ed, including adverse publicity about the quality, safety, sustainability or integrity of our products or relating to activities by our operations, employees, suppliers or agents could tarnish our reputation and diminish the value of our brand, which could adversely 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, salmonella, listeria or swine fl u) and injuries caused by food tampering could also severely injure our reputation or negatively impact public 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, would 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. Unfavorable changes to the mix of locally-managed customers versus corporate-managed customers could have a material adverse effect on our results of operations and fi nancial condition Gross margin from our corporate-managed customers is generally lower than that of our locally-managed customers because we typically sell higher volumes of products to these customers and provide a relatively lower level of value-added services than we do to locally-managed customers. If sales to our locally-managed customers do not grow at the same or a greater rate as sales to our corporate-managed customers, our operating margins may decline. Moreover, if sales to our corporate-managed customers increase at a faster pace of growth than sales to our locally-managed customers, we will become more dependent on corporate-managed customers as they begin to represent a greater proportion of our total sales. Additionally, the loss of sales to the larger of these corporate-managed 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 and/or offer expanded or additional services at the same prices. In that event, we would need to achieve additional cost savings to offset these price reductions and/or cost increases or our gross margins and profi tability could 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. We may not realize anticipated benefi ts from our operating cost reduction efforts We have implemented, and expect to implement in the future, cost reduction initiatives that we believe are necessary to position our business for future success and growth. Our future success and earnings growth will be signifi cantly impacted by 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 low growth rates. SYSCO CORPORATION - Form 10-K 7 PART I ITEM 1A Risk Factors 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 effect on our employees, customers and suppliers, which could negatively affect our sales and profi ts. 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 and the establishment of international procurement organizations. 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 thereof may have an adverse effect on our future costs or on future sales and cash fl ows from our international operations. 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. 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 adversely affect our results of operations and fi nancial condition. 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. 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 us to incur substantial increases in costs in order to comply with such laws and regulations. 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 affected. 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. 8 SYSCO CORPORATION - Form 10-K PART I ITEM 1A Risk Factors We need access to borrowed funds to grow, and any default by us under our indebtedness could have a material adverse effect on our 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. Our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position As described in Note 11, “Debt and Other Financing Arrangements,” as of June 27, 2015, we had approximately $7.3 billion of total indebtedness which included a commercial paper program allowing us to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion; a revolving credit facility supporting our United States and Canadian commercial paper programs in the amount of $1.5 billion scheduled to expire on December 29, 2018, and various other smaller bank facilities. In July 2015, we redeemed $5.0 billion in senior notes using cash on hand and the proceeds from borrowings under our commercial paper program. Our indebtedness may further increase from time to time for various reasons, including fl uctuations in operating results, working capital needs, capital expenditures, potential acquisitions or joint ventures, and we expect to incur additional indebtedness to fund our repurchase of up to $3 billion in Sysco common stock announced in June 2015. Our increased level of indebtedness and the ultimate cost of such indebtedness could have a negative impact on our liquidity, cost of future debt fi nancing and fi nancial results, and our credit ratings may be adversely affected as a result of the incurrence of additional indebtedness. 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. Our liquidity can be negatively impacted by payments required to appeal tax assessments with certain tax jurisdictions Certain tax jurisdictions require partial to full payment of audit assessments or the posting of letters of credit in order to proceed to the appeals process. Sysco has posted approximately $90 million in letters of credit to appeal the Canadian Revenue Agency assessments of transfer pricing adjustments relating to our cross border procurement activities through our former purchasing cooperative on our 2004 through 2009 fi scal years. If assessed on later years currently under examination using these same positions, we could have to pay cash or post additional letters of credit of as much as $16 million, in order to appeal these further assessments. If signifi cant further payments are required, the company’s fi nancial condition or cash fl ows could be adversely affected. 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 affect 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 an Enterprise Resource Planning (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. A cybersecurity incident and other technology disruptions could negatively affect our business and our relationships with customers We use technology 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. SYSCO CORPORATION - Form 10-K 9 PART I ITEM 1A Risk Factors 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 2015, our total contributions to these plans were approximately $38.1 million, which included payments for withdrawal liabilities of $1.4 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 $245 million as of June 27, 2015. 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 $3.2 billion as of June 27, 2015; 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 14, “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 Retirement Plan is dependent upon, among other things, the returns on the Retirement 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 Retirement 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 effect 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 effect on our liquidity. Failure to successfully renegotiate union contracts could result in work stoppages As of June 27, 2015, approximately 9,446 employees at 55 operating companies were members of 58 different local unions associated with the International Brotherhood of Teamsters and other labor organizations. In fi scal 2016, 24 agreements covering approximately 3,500 employees have expired or will expire. 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 affect our business and materially reduce earnings The future success of our operations, including the achievement of our strategic objectives, depends on our ability to identify, recruit, develop and retain qualifi ed and talented individuals, and any shortage of qualifi ed labor could signifi cantly affect our business. Our employee recruitment, development and retention efforts may not be successful, resulting in a shortage of qualifi ed individuals in future periods. Any such shortage would decrease Sysco’s ability to effectively serve our customers and achieve our strategic objectives. Such a shortage would also likely lead to higher wages for employees and a corresponding reduction in our net earnings. 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, which could otherwise have been fi nancially benefi cial to our stockholders, could be deterred. 10 SYSCO CORPORATION - Form 10-K ITEM 1B Unresolved Staff Comments None. 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 27, 2015. 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 Number of Facilities Cold Storage (Square Feet in thousands) Dry Storage (Square Feet in thousands) 2 1 1 2 17 4 3 2 15 5 3 6 1 1 1 1 1 1 2 1 3 3 1 2 1 1 3 5 1 4 6 1 7 3 3 5 1 1 5 18 1 3 185 41 228 130 1,414 275 156 52 1,236 267 95 410 100 93 177 91 134 58 318 218 320 233 95 105 121 144 199 143 121 417 325 46 407 189 176 542 2 191 406 1,130 161 628 131 28 140 88 1,273 213 110 42 974 416 92 411 109 95 171 106 113 50 255 188 300 195 69 95 121 129 154 502 108 361 308 59 475 152 156 405 - 98 426 1,241 107 419 Segment Served* BL BL BL BL, O BL, S, O BL, S, O BL, O O BL, S, O BL, S, O BL, O BL, S, O BL BL BL BL BL BL BL BL 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, O BL, S O BL BL, O BL, S, O BL BL, O SYSCO CORPORATION - Form 10-K 11 PART I ITEM 3 Legal Proceedings Location Washington Wisconsin Bahamas Alberta, Canada British Columbia, Canada Manitoba, Canada New Brunswick, Canada Newfoundland, Canada Nova Scotia, Canada Ontario, Canada Quebec, Canada Saskatchewan, Canada Ireland Northern Ireland Puerto Rico TOTALS * Segments served include Broadline (BL), SYGMA (S), and Other (O). Number of Facilities Cold Storage (Square Feet in thousands) Dry Storage (Square Feet in thousands) 1 3 1 3 8 1 2 1 1 12 7 1 6 1 1 197 134 287 90 207 309 79 57 33 39 602 129 40 230 2 8 14,025 92 299 23 199 279 74 46 41 47 525 245 54 149 8 - 12,966 Segment Served* BL BL, O BL O BL, O BL BL BL BL BL, O BL, O BL BL BL O We own approximately 22,384,000 square feet of our distribution facilities (or 82.9% of the total square feet), and the remainder is occupied under leases expiring at various dates from fi scal 2016 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 expansions, replacement or fold-out facilities for our distribution facilities in Maryland, Virginia, and Texas. These operating companies, in the aggregate, accounted for approximately 1% of fi scal 2015 sales. As of June 27, 2015, our fl eet of approximately 9,600 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 95% of these vehicles and lease the remainder. ITEM 3 Legal Proceedings In the second quarter of fi scal 2014, the company announced an agreement to merge with US Foods, Inc. (US Foods). In February 2015, following completion of its regulatory review of the proposed merger, the US Federal Trade Commission fi led a motion with the U.S. District Court for the District of Columbia (the Court) seeking a preliminary injunction to prevent the parties from closing the merger, which the Court granted on June 23, 2015. On June 26, 2015, the parties terminated the merger agreement. ITEM 4 Mine Safety Disclosures Not applicable. 12 SYSCO CORPORATION - Form 10-K 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 2014: First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2015: First Quarter Second Quarter Third Quarter Fourth Quarter Common Stock Prices High Low Dividends Declared Per Share $ $ 36.05 $ 43.40 37.08 37.92 38.85 $ 41.16 41.45 38.99 31.37 $ 31.13 34.07 35.31 35.50 $ 35.82 37.81 35.84 0.28 0.29 0.29 0.29 0.29 0.30 0.30 0.30 The number of record owners of Sysco’s common stock as of August 13, 2015 was 10,877. We made the following share repurchases during the fourth quarter of fi scal 2015: ISSUER PURCHASES OF EQUITY SECURITIES Period Month #1 March 29 – April 25 Month #2 April 26 – May 23 Month #3 May 24 – June 27 TOTAL (a) Total Number of Shares Purchased(1) (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 5,168 $ 38.16 805 2,012 7,985 $ 36.61 37.58 37.86 - - - - 11,655,197 11,655,197 11,655,197 11,655,197 (1) The shares purchased in all 3 months represented shares tendered by individuals in connection with stock option exercises. The remaining authorization to purchase 11,655,197 shares from the repurchase program, included in the table above, expired on August 23, 2015. In June 2015, our Board of Directors approved a repurchase program to repurchase from time to time in the open market, through an accelerated share repurchase program or through privately negotiated transactions, shares of the company’s common stock in an amount not to exceed $3.0 billion during the two year period ending July 1, 2017, including $1.5 billion through a planned accelerated share repurchase in fi scal 2016, in addition to amounts normally repurchased to offset benefi t plan and stock option dilution. In addition to this share repurchase program approved in June, in August 2015, our Board of Directors approved the repurchase of up to 20,000,000 shares for an aggregate purchase price not to exceed $800 million. The authorization expires on August 21, 2017. 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. The Board of Directors has 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 Securities Exchange Act of 1934 (Exchange Act). 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 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 Exchange Act, 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 Retail Index was $100 on the last trading day of fi scal 2010, 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 CUMMULATIVE TOTAL RETURN ASSUMES INITIAL INVESTMENT OF $100 In $ 250 200 150 100 50 0 7/3/10 7/2/11 6/30/12 6/29/13 6/28/14 6/27/15 Sysco Corporation S&P 500 S&P 500 Food/Staple Retail Index Sysco Corporation S&P 500 S&P 500 Food/Staple Retail Index $ 100 $ 100 100 129 $ 114 101 148 $ 152 131 145 $ 158 151 172 $ 190 183 197 237 221 7/3/10 7/2/11 6/30/12 6/29/13 6/28/14 6/27/15 14 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ITEM 6 Selected Financial Data (In thousands except for per share data) Sales Operating income(1) Earnings before income taxes(1) Income taxes(1) NET EARNINGS(1) Net earnings: BASIC EARNINGS PER SHARE(1) DILUTED EARNINGS PER SHARE(1) $ $ $ $ $ Dividends declared per share Total assets Capital expenditures Current maturities of long-term debt(2) Long-term debt Total long-term debt Shareholders’ equity TOTAL CAPITALIZATION $ Ratio of long-term debt to capitalization(2) $ Fiscal Year 2015 48,680,752 $ 2014 46,516,712 $ 2013 44,411,233 $ 2012 42,380,939 $ 1,229,362 1,008,147 321,374 686,773 $ 1,587,122 1,475,624 544,091 931,533 $ 1,658,478 1,547,455 555,028 992,427 1,890,632 1,784,002 662,417 2011 39,323,489 1,931,502 1,827,454 675,424 $ 1,121,585 $ 1,152,030 $ 1.16 1.15 1.19 $ 17,989,281 $ 542,830 4,979,301 $ 2,271,825 7,251,126 5,260,224 12,511,350 $ $ 1.59 1.58 1.15 $ 13,141,113 $ 523,206 304,777 $ 2,357,330 2,662,107 5,266,695 7,928,802 $ $ 1.68 1.67 1.11 $ 12,678,208 $ 511,862 207,301 $ 2,627,544 2,834,845 5,191,810 8,026,655 $ $ 1.91 1.90 1.07 $ 12,137,207 $ 784,501 254,650 $ 2,749,304 3,003,954 4,685,040 7,688,994 $ 1.96 1.96 1.03 11,427,190 636,442 207,031 2,268,204 2,475,235 4,705,242 7,180,477 58.0% 33.6% 35.3% 39.1% 34.5% (1) Our results of operations are impacted by Certain Items, that have resulted in reduced earnings on a GAAP basis. See “Non-GAAP Reconciliations,” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, for our results on an adjusted basis that exclude Certain Items. (2) As discussed in Note 11, “Debt and Other Financing Arrangements,” our current maturities of long-term debt include senior notes issued for the proposed merger with US Foods that were required to be redeemed due to the termination of the merger agreement. We redeemed these notes in July 2015. Our fi nancial results are impacted by accounting changes and the adoption of various accounting standards. See Note 2, “Changes in Accounting” to the Consolidated Financial Statements in Item 8 for further discussion. 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 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. Other than free cash fl ow, any non-GAAP fi nancial measures will be denoted as adjusted measures and exclude the impact from multiemployer pension withdrawal charges, severance charges, integration planning, litigation costs and termination costs in connection with the merger that had been proposed with U.S. Foods, Inc. (US Foods), facility closure charges and US Foods related fi nancing costs. Additional items in fi scal 2014 include a change in estimate of self-insurance, and charges from a contingency accrual. These fi scal 2015 and 2014 items are collectively referred to as (Certain Items). Our US Foods fi nancing costs include the write off of unamortized debt issuance costs when our bridge acquisition facility was terminated upon the issuance of our senior notes in October 2014 and interest expense on those senior notes. In fi scal 2014, costs from executive retirement plans restructuring were included within Certain Items; however, because these costs in fi scal 2015 are comparable to fi scal 2014, these were not included in the Certain Items defi nition for the comparison of adjusted results for fi scal 2015 to fi scal 2014. This continues to be presented as a Certain Item in the comparison of adjusted results for fi scal 2014 to fi scal 2013. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations” and “Liquidity and Capital Resources.” Overview Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located throughout the United States (U.S.), Bahamas, Canada, Costa Rica, Ireland and Mexico and include broadline companies, SYGMA (our chain restaurant distribution subsidiary), specialty produce companies, custom-cut meat companies, hotel supply operations, a company that distributes specialty imported products, a company that distributes to international customers and our Sysco Ventures platform, which includes our suite of technology solutions that help support the business needs of our customers. SYSCO CORPORATION - Form 10-K 15 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations We consider our primary market to be the foodservice market in the U.S., Canada and Ireland and estimate that we serve about 17.7% of this approximately $264 billion annual market based on a measurement as of the end of calendar 2014. We use industry data obtained from various sources including Technomic, Inc., the Canadian Restaurant and Foodservices Association and the Irish Food Board to calculate this measurement. 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 U.S. as of the end of calendar 2014. Industry sources estimate the total foodservice market in the U.S. experienced a real sales increase of approximately 0.7% in calendar year 2014 and 1.1% in calendar year 2013. Real sales changes do not include the impact of infl ation or defl ation. Highlights The foodservice industry performance in fi scal 2015 was generally improved. Consumer confi dence and the outlook of foodservice operators are at high levels, but have decreased slightly in the summer months of 2015. Fuel prices declined during fi scal 2015 and are currently at lower levels, as compared to recent years, that may support higher consumer spending in the future. Spending at restaurants is generally improved, but customer traffi c levels are generally unchanged. Overall, the market environment appears to be modestly improved as compared to the prior two years; however, uncertainty in industry growth remains for fi scal 2016. Amid these conditions, we provided our customers with excellent service, growing our business with both our locally and corporate managed customers and stabilizing our gross margins by successfully implementing several value-added commercial initiatives. We improved our expense management performance as the year progressed, achieving greater success managing expenses in the second half of the year as compared to the fi rst half. The impact of Certain Items contributed to lower earnings in fi scal 2015 as compared to fi scal 2014, primarily from the costs associated with the merger that had been proposed with US Foods. Comparison of results from fi scal 2015 to fi scal 2014: • Sales increased 4.7%, or $2.2 billion to $48.7 billion; • Gross profi t increased 4.5%, or $370.5 million to $8.6 billion; • Operating income decreased 22.5%, or $0.4 billion, to $1.2 billion; • Adjusted operating income increased 3.4%, or $58.2 million, to $1.8 billion; • Net earnings decreased 26.3%, or $244.8 million, to $0.7 billion; • Adjusted net earnings increased 6.4%, or $66.3 million, to $1.1 billion; • Basic earnings per share in fi scal 2015 was $1.16, a 27% decrease from the comparable prior year period amount of $1.59 per share. Diluted earnings per share in fi scal 2015 was $1.15, a 27.2% decrease from the comparable prior year period amount of $1.58 per share; and • Adjusted diluted earnings per share was $1.84 in fi scal 2015, a 5.1% increase from the comparable prior year amount of $1.75 per share. See “Non-GAAP Reconciliations” for an explanation of these non-GAAP fi nancial measures. Business Transformation In fi scal 2015, we completed the three-year fi nancial objectives of our Business Transformation. These fi nancial objectives were largely designed to lower our product cost and lower our operating cost structure. We implemented a category management program to leverage our scale and develop deeper, more strategic relationships with our suppliers to drive growth and innovation. We also implemented multiple initiatives to lower our operating cost structure including a more streamlined and standard approach to the management of fl eet, labor, maintenance, procurement and supplies. Our goal for the project was to generate approximately $550 million to $650 million in annual benefi ts to be achieved by fi scal 2015. We exceeded our fi nal three-year target for annualized benefi ts. US Foods Merger Termination We sought to merge with US Foods, a leading foodservice distributor in the U.S. The merger was reviewed by the Federal Trade Commission (FTC) and in February 2015, the FTC commissioners voted 3 to 2 to authorize the FTC staff to seek a preliminary injunction from the U.S. District Court for the District of Columbia preventing the parties from closing the merger. In June 2015, the preliminary injunction was granted. Shortly thereafter, the parties involved agreed to terminate the merger agreement, as a result of which Sysco was obligated to pay $300 million to the owners of US Foods. During the review period with the FTC, Sysco created a divestiture package, comprised of the sale of 11 US Foods facilities to Performance Food Group (PFG), which was contingent on the closing of the merger. This divestiture agreement entitled PFG to receive a $25 million termination fee if the sale of the divestiture package was terminated before July 6, 2015, with each of Sysco and US Foods responsible for one half of the applicable fee. Sysco accrued for termination payments totaling $312.5 million in fi scal 2015 and paid these amounts in fi scal 2016. 16 SYSCO CORPORATION - Form 10-K The following tables outline our expenses attributable to our integration planning, litigation and termination costs and fi nancing activities, for the periods PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations presented: (In thousands) Operating expense Interest expense TOTAL Fiscal 2015 Acquisitions Mayca Distribuidores 2015 2014 $ $ 554,667 138,422 693,089 $ $ 90,571 6,790 97,361 In the fi rst quarter of fi scal 2015, we acquired a 50% interest in Mayca Distribuidores (Mayca) of Costa Rica and three other affi liates. Mayca, which has been in business since 1995, is a leading food distributor across Costa Rica. In addition to its distribution business, Mayca has a retail cash-and-carry affi liate with multiple locations, a cold-storage company and a truck-leasing company. Pacifi c Star Foodservice In the fourth quarter of fi scal 2015, we acquired a 50% interest in Pacifi c Star Foodservice, a leading foodservice distributor in Mexico. Pacifi c Star has operated since 1989 with distribution centers servicing Mexico City, Guadalajara, Monterrey and Tijuana and primarily services chain restaurants, including fast food and casual dining restaurants, casinos, theme parks, movie theaters and hotels throughout Mexico. Tannis Foodservice In the fourth quarter of fi scal 2015, we acquired Tannis Trading, Inc., a broadline foodservice distributor in Ottawa, Ontario. Tannis has a 75-year history of providing quality service to customers in Ottawa, Canada’s fourth-largest metropolitan market, and the surrounding areas. Trends and Strategy Trends General economic conditions 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 and employment metrics, such as unemployment rates, have shown some signs of improvement during fi scal 2015; however, consumer spending has been cautious. Fuel prices are currently at lower levels, as compared to recent years, that may support higher consumer spending in the future. Overall, the market environment appears to be modestly improved as compared to the prior two years; however, uncertainty in industry growth remains for fi scal 2016. One industry resource, Technomic, Inc., has projected roughly 2% real growth annually. Real growth excludes the impact of infl ation or defl ation. Our sales and gross profi t performance can be infl uenced by multiple factors including price, volume and product mix. The modest level of growth in the foodservice market has created additional competitive pricing pressures, which is, in turn, negatively impacting sales and gross profi ts. Case growth with our locally-managed Broadline business is an important contributor to gross profi t dollar growth. Our locally-managed customers, including independent restaurant customers, comprise a signifi cant portion of our overall volumes and an even greater percentage of profi tability due to the high level of value added services we typically provide to this customer group. Through focused efforts, our locally-managed case volume growth has accelerated over the past three years. Our sales to corporate-managed customers, including chain restaurants and multi-locational restaurants, also comprise a signifi cant portion of our overall volumes. Gross margin on sales to our corporate-managed customers is generally lower than sales to other types of customers due to the higher volumes we sell to these customers. Case growth for our corporate-managed customers remained strong, but competitive pricing pressure has constrained our gross margins. Infl ation is a factor that contributes to the level of sales and gross profi t growth and can be a factor that contributes to gross margin pressure. Food cost infl ation in fi scal 2015 was 3.7%, an increase from 2.1% experienced in fi scal 2014. Our infl ation rates were higher in the fi rst half of fi scal 2015, reaching levels of 6.0% at the mid-point of the fi scal year and dropping to 0.1% by the end of the fi scal year. 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 effect on us and our customers. High food costs can be diffi cult to pass on to our customers. In addition, rapid declines in prices can make it challenging to leverage our fi xed costs. Our category management initiative has helped us to manage our gross margin performance in response to several of these factors. Lastly, changes in foreign exchange rates are having a larger impact on our sales as compared to recent fi scal years. The strengthening U.S. dollar is depressing our foreign sales as we convert them to U.S. dollars. The impact of foreign exchange rates for fi scal 2015 was a 1.0% year-over-year decrease to sales growth. This impact has typically been in the range of 0% to 0.5%. SYSCO CORPORATION - Form 10-K 17 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations We have experienced higher operating expenses in fi scal 2015 as compared to fi scal 2014, primarily from increased payroll costs and integration planning, litigation and termination costs in connection with the merger that had been proposed with US Foods. We anticipate a low level of operating expenses attributable to the merger termination in the fi rst quarter of fi scal 2016. Our payroll costs have been infl uenced by higher pay in our sales organization as a result of higher gross profi ts, investment in new administrative support capabilities, higher management incentive accruals due to improved performance against our incentive targets and companies acquired within the last 12 months. Sales and gross profi t growth partially contributed to an increase in sales pay-related expenses due to increases in sales commissions and bonuses. In addition, we have increased our marketing associate headcount in certain markets in order to invest in future sales growth. In October 2014, we secured long-term fi nancing for the proposed merger with US Foods; therefore, interest expense increased in fi scal 2015 as compared to fi scal 2014. The October 2014 senior notes contained mandatory redemption features providing that, if the merger agreement were terminated on or prior to October 8, 2015, we were required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus accrued interest. In June 2015, we terminated the merger agreement and redeemed the senior notes in July 2015 using cash on hand and the proceeds from borrowings under our commercial paper facility. In fi scal 2016, we will recognize several charges from the redemption of these senior notes including $50.0 million in premium fees, $29 million in unamortized debt issuance costs and $18.0 million in unamortized bond discounts each of which had resulted from the issuance of the senior notes in October 2014. We had hedged $1.25 billion of this debt by swapping the fi xed rates to fl oating rates with the goal of reducing overall borrowing cost. We terminated these swaps in July 2015 and will recognize a gain of $10.0 million from the fair value adjustment that had been recorded on the underlying debt. Our interest expense on the notes was treated as a Certain Item in fi scal 2015, since the proposed merger had not closed. Similarly, these charges and gain associated with the repayment of these notes will be presented as Certain Items in fi scal 2016. As discussed in Note 9, “Derivative Financial Instruments,” two forward starting swap agreements used to hedge interest rate risk exposure on our October 2014 senior notes issuance were previously terminated and were paid in the amount of $188.8 million. The resulting amounts recorded as a loss are currently amortizing into interest expense at a rate of $2.5 million per quarter for the next 9 years and $1.1 million per quarter thereafter for another 19 years. These amounts will continue to amortize into interest expense as the amount hedged is anticipated to remain within our capital structure. Following the termination of the merger agreement, we announced a $3 billion, two-year share repurchase program. We intend to execute the fi rst half of this program through an accelerated repurchase program near the end of fi rst quarter of fi scal 2016. We expect to issue $2.0 billion of debt at approximately the same time and we intend to use a majority of the proceeds to fund these repurchases. These actions will lower our basic and diluted shares outstanding providing an expected earnings per share benefi t of approximately $0.03 to $0.04 per share. This estimate includes a 4% to 5% reduction in average shares outstanding, partially offset by higher interest expense from the new debt issuance. Because the share repurchase will take place near the end of the fi rst quarter of fi scal 2016, we will not realize a full-year’s benefi t from the reduction in shares in fi scal 2016; however, the full-year benefi t will be realized in fi scal 2017. Sysco’s fi scal year ends on the Saturday nearest to June 30th. We will have a 53-week year ending July 2, 2016 for fi scal 2016, and this additional week will be presented as a Certain Item in fi scal 2016. Strategy We are focused on optimizing our core broadline business in the U.S., Bahamas, Canada, Costa Rica, Ireland and Mexico, 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 components of our strategy to help us achieve our mission and vision as follows: • 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 7,300 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 multi-regional presence in the U.S. and Canada. In addition, we have a portfolio of businesses spanning broadline, chain restaurant distribution, specialty produce, specialty meat, 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: We continually strive to improve productivity and reduce costs. From implementing an integrated software system to leveraging the power of our end-to-end supply chain, we continue to look for ways to improve our service to our customers and lower costs. • 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, joint ventures and sales of assets and businesses. 18 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations • 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. In fi scal 2016, to further our strategy, we see opportunities to further accelerate case growth, especially with our locally-managed sales customers through improved product and service differentiation combined with enhanced sales and technology capabilities. We will continue to build on our success in stabilizing gross margin through enhanced product innovation, growing privately-branded product sales and improving pricing analytics and support. There continues to be opportunity to improve our productivity and reduce overhead costs in our supply chain organization and administrative areas of our business. We will continue to invest in our business to fully realize the benefi ts and improve our return on invested capital. 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 2015 2014 2013 100.0% 82.4 17.6 15.0 2.6 0.5 (0.1) 2.2 0.7 1.5% 100.0% 82.4 17.6 14.2 3.4 0.2 (0.0) 3.2 1.2 2.0% 100.0% 82.0 18.0 14.3 3.7 0.3 (0.0) 3.4 1.2 2.2% 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(1) 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 $33.6 million in fiscal 2015, $12.2 million in fiscal 2014 and $17.5 million in fiscal 2013. Sales 2015 2014 4.7% 4.7 4.5 11.0 (22.5) 105.9 174.4 (31.7) (40.9) (26.3)% (27.0)% (27.2) 1.0 1.1 4.7% 5.3 2.3 4.0 (4.3) (3.7) (29.9) (4.6) (2.0) (6.1)% (5.4)% (5.4) (0.6) (0.4) Sales for fi scal 2015 were 4.7% higher than fi scal 2014. Sales for fi scal 2015 increased as a result of product cost infl ation and the corresponding increase in selling prices, case volume growth, and sales from acquisitions that occurred within the last 12 months. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 3.7% during fi scal 2015, driven mainly by infl ation in the meat, seafood and dairy categories. Case volumes including acquisitions within the last 12 months improved 2.6% in fi scal 2015. Case volumes excluding acquisitions within the last 12 months improved 2.4% in fi scal 2015. Our case volumes represent our results from our Broadline and SYGMA segments combined. Sales from acquisitions within the last 12 months favorably impacted sales by 0.6% in fi scal 2015. The changes in the exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 1.0% in fi scal 2015. Sales for fi scal 2014 were 4.7% higher than fi scal 2013. Sales for fi scal 2014 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 2014 was greater with our corporate-managed customers as compared to sales growth with our locally-managed customers. We believe our locally-managed customer sales SYSCO CORPORATION - Form 10-K 19 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations growth was negatively infl uenced by less favorable consumer sentiment. Case volumes excluding acquisitions within the last 12 months improved 2.2% in fi scal 2014. Our case volumes represent our results from our Broadline and SYGMA segments combined. Sales from acquisitions within the last 12 months favorably impacted sales by 1.4%% for fi scal 2014. Case volumes including acquisitions within the last 12 months improved approximately 3.4% in fi scal 2014. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 2.1% during fi scal 2014. 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 2013. 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 2015 vs. Fiscal 2014 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: (Dollars in thousands) Gross profi t Operating expenses OPERATING INCOME Gross profi t Adjusted operating expenses (Non-GAAP) ADJUSTED OPERATING INCOME (NON-GAAP) 2015 8,551,516 $ 7,322,154 1,229,362 $ 8,551,516 $ 6,759,687 1,791,829 $ $ $ $ $ 2014 8,181,035 $ 6,593,913 1,587,122 $ 8,181,035 $ 6,447,405 1,733,630 $ Change in Dollars 370,481 728,241 (357,760) 370,481 312,282 58,199 % Change 4.5% 11.0% (22.5 )% 4.5% - 3.4% The decrease in operating income was impacted by an increase of $416.0 million in operating expenses attributable to Certain Items. Adjusted operating income increased due to gross profi t dollar growth partially offset by increased expenses from greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profi t, investment in administrative support capabilities and acquired operations. Gross profi t dollars increased in fi scal 2015 as compared to fi scal 2014 primarily due to increased sales volumes, stronger relative mix of sales to our locally-managed customers and benefi ts from category management. Gross margin, which is gross profi t as a percentage of sales, was 17.57% in fi scal 2015, a decline of 2 basis points from the gross margin of 17.59% in fi scal 2014. Increased competition resulting from a slow-growth market and volatile infl ation has pressured our gross margins; however, sales and mix, as well as our category management initiative have helped us stabilize our gross margin performance. Infl ation in fi scal 2015 was 3.7%, an increase from 2.1% experienced in fi scal 2014. Our infl ation rates were higher in the fi rst half of fi scal 2015, reaching 6.0% at the mid-point of the fi scal year and dropping to 0.1% by the end of the fi scal year. Fiscal 2015 infl ation was seen primarily in the meat, dairy and poultry categories. Operating expenses for fi scal 2015 increased 11.0%, or $728.2 million, over fi scal 2014. Adjusted operating expenses for fi scal 2015 increased 4.8%, or $312.3 million, over fi scal 2014. These increases in adjusted operating expenses were primarily due to increased expenses from greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profi t, investment in administrative support capabilities and acquired operations. Partially offsetting this increase, was a reduction in fuel costs and provisions for losses on receivables. Sysco’s operating expenses were impacted by Certain Items, which resulted in an increase in operating expenses of $416 million in fi scal 2015 as compared to fi scal 2014. More information on the rationale of the use of adjusted operating expense and adjusted operating income and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” Operating Expenses Impacting Adjusted Operating Income Our operating expenses increased in fi scal 2015 as compared to fi scal 2014 partially due to greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profi t, investment in administrative support capabilities and acquired operations. Pay-related expenses, which represent a signifi cant portion of our operating costs, increased by $349.3 million in fi scal 2015 over fi scal 2014. Factors contributing to the increase in 2015 include increase in expense related to management incentive accruals of $103.5 million, higher pay in our sales organization largely as a result of higher gross profi ts, higher costs due to investment in new administrative support capabilities and companies acquired in the last 12 months. The amounts for companies acquired within the last 12 months include our new, consolidated joint ventures, such as our 50% interest in a foodservice company in Costa Rica. Sales and gross profi t growth partially contributed to an increase in sales pay-related expenses due to increases in sales commissions and bonuses. In addition, we have increased our marketing associate headcount in certain markets in order to invest in future sales growth. Our expense related to management incentive accruals will vary based on how the company’s performance compares to incentive targets. Our fi scal 2015 fi nancial performance trended more favorably relative to the applicable management incentive targets as compared to fi scal 2014. Consequently, expense is higher period over period. 20 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Cost per case is an important metric management uses to measure our expense performance. This metric is calculated by dividing the total operating expense of our North American Broadline companies by the number of cases sold. Adjusted cost per case is calculated similarly; however, the operating expense component excludes severance and multiemployer pension withdrawal charges, which are the Certain Items applicable to these companies, divided by the number of cases sold. Our corporate expenses are not included in the cost per cases metrics because the metric is a measure of effi ciency in our operations. We seek to grow our sales and either minimize or reduce our costs on a per case basis. Our cost per case and adjusted cost per case increased $0.04 per case in fi scal 2015 as compared to fi scal 2014. The impact of foreign exchange rates lowered our cost per case results by $0.05 per case for fi scal 2015 as compared to fi scal 2014, which partially offset the rate of increase occurring primarily from increased pay-related expenses. We are focused on driving improvement across our operations with multiple initiatives that implement best practices, enhance our operating training programs and improve our ability to measure and analyze our performance. More information on the rationale for the use of adjusted operating income and adjusted cost per case and reconciliations can be found under “Non-GAAP Reconciliations.” Certain Items within Operating Expenses Sysco’s operating expenses are impacted by Certain Items, which are expenses that can be diffi cult to predict, can be unanticipated or do not represent core operating expenses. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.” Our signifi cant Certain Items applicable for fi scal 2015 included costs related to integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods. Our signifi cant Certain Items applicable for fi scal 2014 related to costs in connection with the then proposed merger with US Foods, a change in estimate of our self-insurance reserve and a liability for a settlement. We incurred costs in connection with the proposed merger with US Foods announced in the second quarter of fi scal 2014 primarily from integration planning, litigation costs and termination costs. These costs totaled $554.7 million in fi scal 2015 and $90.6 million in fi scal 2014. Our self-insurance program covers 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. 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. In the second quarter of fi scal 2014, based on the historical trends of increased costs primarily attributable to our workers’ compensation claims, we increased our estimates of our self-insurance reserve to a higher point in an estimated range of liability as opposed to our past position at the lower end of the range. This resulted in a charge of $23.8 million in fi scal 2014. During the fi rst quarter of fi scal 2014, Sysco was made aware of certain alleged violations of California law relating to its use of remote storage units in the delivery of products. These are commonly referred to as drop sites. As of June 28, 2014, we recorded a liability for a settlement of $20 million. In July 2014, Sysco agreed to a $19.4 million settlement, which includes a payment of $15.0 million in penalties, $3.3 million to fund four California Department of Public Health investigator positions for fi ve years, a $1.0 million donation to food banks across California, and $0.1 million in legal fees. In the fi rst quarter of fi scal 2014, we eliminated the use of drop sites across Sysco. During fi scal 2014, we introduced mandatory, annual food safety training for all employees across Sysco. We are implementing additional and improved food safety reporting, monitoring and compliance controls across our operations to ensure adherence to our policies. Fiscal 2014 vs. Fiscal 2013 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: (Dollars in thousands) Gross profi t Operating expenses OPERATING INCOME Gross profi t Adjusted operating expenses (Non-GAAP) ADJUSTED OPERATING INCOME (NON-GAAP) 2014 8,181,035 $ 6,593,913 1,587,122 $ 8,181,035 $ 6,444,076 1,736,959 $ $ $ $ $ 2013 7,996,607 $ 6,338,129 1,658,478 $ 7,996,607 $ 6,243,414 1,753,193 $ Change in Dollars 184,428 255,784 (71,356) 184,428 200,662 (16,234) % Change 2.3% 4.0 (4.3 )% 2.3% 3.2 (0.9)% The decrease in operating income was impacted by an increase in $55.1 million in operating expenses attributable to Certain Items. Operating income and adjusted operating income for fi scal 2014 were lower than fi scal 2013 primarily from a lower rate of growth in our gross profi t, increased expenses from higher case volumes, some of which is attributable to our acquired operations, increased depreciation and amortization, increased delivery costs and higher corporate expenses. These were partially offset by lower Business Transformation Project expenses and benefi ts from Business Transformation Project initiatives. As a percentage of sales, we experienced favorable expense management due in part to benefi ts from our Business Transformation Project initiatives. Gross profi t dollars increased in fi scal 2014 as compared to fi scal 2013 primarily due to increased sales volumes. The fi rst half of fi scal 2014 contained weaker gross profi t growth of 1.2% as compared to the same period in fi scal 2013. Infl ation and locally-managed customers case growth was lower in the fi rst half of fi scal 2014. Infl ation increased as did local-managed customers case growth in the second half of fi scal 2014. Gross profi ts grew at a greater SYSCO CORPORATION - Form 10-K 21 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations rate of 3.4% in the second half of fi scal 2014 as compared to the same time period in fi scal 2013 as result of these factors and in part from our Business Transformation Project initiatives. Gross margin, which is gross profi t as a percentage of sales, was 17.59% in fi scal 2014, a decline of 42 basis points from the gross margin of 18.01% in fi scal 2013. This decline in gross margin was partially the result of weak restaurant traffi c and increased competition resulting from a slow-growth market. Increased sales to lower margin corporate-managed customers also contributed to the decline in fi scal 2014. Our infl ation rates were relatively stable over the fi rst three quarters of fi scal 2014, however it increased in the fourth quarter, all quarters being compared to the past year. Fourth quarter fi scal 2014 infl ation was seen primarily in the meat, seafood and dairy categories which represent more than one-third of our annual sales. Operating expenses for fi scal 2014 increased 4.0%, or $255.8 million, over fi scal 2013. Adjusted operating expenses for fi scal 2014 increased 3.2%, or $200.7 million, over fi scal 2013. These increases were primarily due to increased expenses from higher case volumes, some of which is attributable to our acquired operations, increased depreciation and amortization, increased delivery costs and higher corporate expenses. These were partially offset by lower Business Transformation Project expenses and benefi ts from Business Transformation Project initiatives. We believe favorable expense management, partially from our Business Transformation Project initiatives, helped to keep our operating expense increases from being greater. Sysco’s operating expenses are impacted by certain charges and adjustments, which we refer to as Certain Items, and which resulted in an increase in operating expenses of $55.1 million in fi scal 2014 as compared to fi scal 2013. More information on the rationale of the use of adjusted operating expenses and adjusted operating income and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations”. Operating Expenses Impacting Adjusted Operating Income Our operating expenses increased in fi scal 2014 as compared to fi scal 2013 partially due to expenses from our acquired operations, expenses attributable to volume growth and increased delivery costs. Pay-related expenses represent a signifi cant portion of our operating costs, contributed to the increase in each of these three categories of expenses and contributed to cost increases in our corporate expenses. Pay-related expenses, excluding labor costs associated with our Business Transformation Project, US Foods integration planning and retirement-related expenses, increased by $74.4 million in fi scal 2014 over fi scal 2013. The increase was primarily due to costs from companies acquired in the last 12 months as well as increased delivery and warehouse compensation, partially attributable to case growth. Pay-related costs have also increased at our corporate offi ce as certain employee costs attributed to our Business Transformation Project in fi scal 2013 were no longer attributed to the Business Transformation Project in fi scal 2014 due to a change in allocation methodology. In fi scal 2013, we allocated internal associates based upon estimates of the percentage of time they spent on the project. In fi scal 2014, only associates that were dedicated full time to the project are included in Business Transformation Project costs. These increases were partially offset by reduced sales compensation, information technology compensation and lower provisions for management incentive plans. Benefi ts from our Business Transformation Project initiatives helped in lowering the rate of growth in these expenses particularly in our sales area for fi scal 2014. During fi scal 2013, we streamlined our sales management organization and modifi ed marketing associate compensation plans. Fiscal 2014 was also impacted by a reduction in pay in the information technology area, resulting from the restructuring of this department in fi scal 2013, which reduced headcount in this area. Depreciation and amortization expense, excluding the increase related to our Business Transformation Project described below, increased by $32.8 million in fi scal 2014 over fi scal 2013. The increase was primarily related to depreciation on assets that were not placed in service in fi scal 2013 that were in service in fi scal 2014. Our retirement-related expenses consist primarily of costs from our Retirement Plan, SERP and our defi ned contribution plans. As a part of our Business Transformation Project initiatives, our Retirement Plan was substantially frozen and the SERP was completely frozen in fi scal 2013, and our defi ned contribution plans were enhanced with greater benefi ts. The net impact in fi scal 2014 of our retirement-related expenses as compared to fi scal 2013 was a decrease of $86.8 million, consisting of a $133.6 million decrease in our net company-sponsored pension costs and approximately $6.2 million for other costs, partially offset by $53.0 million increased costs from our defi ned contribution plans. In addition to the increases in our corporate offi ce expenses from pay-related expenses noted above, other sources of cost increases in fi scal 2014 as compared to fi scal 2013 were due to increasing the capabilities of various departments within our corporate offi ce. A subset of our business technology costs was attributable to our Business Transformation Project. Expenses related to our Business Transformation Project, inclusive of pay-related and software amortization expense, were $277 million in fi scal 2014 and $330.5 million in fi scal 2013, representing a decrease of $53.5 million. The decrease in fi scal 2014 resulted from a reduction in certain employee costs that were attributed to our Business Transformation Project in fi scal 2013 that were no longer attributed to the Business Transformation Project in fi scal 2014 due to a change in allocation methodology. In fi scal 2013, we allocated internal associates based upon estimates of the percentage of time they spent on the project. In fi scal 2014, only associates that were dedicated full time to the project are included in Business Transformation Project costs. Additional contributors to the decreases include an increased level of capitalization on amounts spent for system improvements to enhance stability and scalability and reduced level of spend with consultants as compared to the comparable period in fi scal 2013. The decrease in fi scal 2014 was partially offset by an increase in depreciation and amortization expense related to the Business Transformation Project of $10.7 million in fi scal 2014 over fi scal 2013. Our cost per case decreased $0.10 per case in fi scal 2014 as compared to fi scal 2013. Our adjusted cost per case calculated on a non-GAAP basis decreased $0.06 in fi scal 2014 as compared to fi scal 2013, primarily from reduced pay-related expenses from our sales and information technology areas and lower retirement-related expenses, partially offset by increased costs from delivery pay-related expenses. More information on the rationale for the use of adjusted operating expenses and adjusted cost per case and reconciliations can be found under “Non-GAAP Reconciliations.” 22 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Certain Items Within Operating Expenses Our signifi cant Certain Items applicable for fi scal 2014 included costs in connection with the then proposed merger with US Foods, a change in the estimate of our self-insurance reserve and a liability for a settlement, which were described in greater detail above. Our signifi cant Certain Items applicable for fi scal 2013 related to withdrawal liabilities from multiemployer pension plans, severance charges and costs from restructuring executive retirement plans. 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, we recorded a provision $41.9 million, related to multiemployer pension plan withdrawals. Net Earnings Net earnings decreased 26.3% in fi scal 2015 from fi scal 2014 due primarily to the changes in operating income discussed above, including the impact of Certain Items, which included increased interest expense of $131.6 million in fi scal 2015 that related to the fi nancing of our proposed merger with US Foods. These amounts include the write off of unamortized debt issuance costs when our bridge acquisition facility was terminated upon the issuance of our senior notes in October 2014 and interest expense on those senior notes. Excluding this interest expense, adjusted interest expense decreased by $0.6 million. Adjusted net earnings increased $66.3 million, or 6.4%, during fi scal 2015. Net earnings for fi scal 2014 decreased 6.1% compared to fi scal 2013. This decrease was primarily due to changes in operating income discussed above. Adjusted net earnings decreased 1.8% during fi scal 2014. The effective tax rate of 31.9% for fi scal 2015 was favorably impacted by lower earnings in the U.S. primarily due to costs associated with the termination of the US Foods proposed merger. The lower U.S. earnings resulted in a more signifi cant favorable impact on the effective tax rate from the indefi nitely reinvested foreign earnings due to lower foreign statutory tax rates as compared to the domestic tax rate. The additional cost associated with the proposed US Foods merger resulted in lower state taxes. For future periods, we would expect our normalized tax rate to be in the range of 36% to 37%. The effective tax rate of 36.9% for fi scal 2014 was negatively impacted primarily by two items. First, a non-deductible penalty, that the company incurred, had an unfavorable tax impact of $6.2 million. Second, we recorded net tax expense of $5.2 million for tax and interest related to various federal, foreign and state uncertain tax positions. This negative impact was partially offset by the recording of $5.7 million of tax benefi t related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. 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 2013 was 35.9%. 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. Earnings Per Share Basic earnings per share in fi scal 2015 were $1.16, a 27.0% decrease from the fi scal 2014 amount of $1.59 per share. Diluted earnings per share in fi scal 2015 were $1.15, a 27.2% decrease from the fi scal 2014 amount of $1.58 per share. This decrease was primarily the result of the factors discussed above and due to greater shares outstanding during fi scal 2015 as compared to fi scal 2014. As discussed below in “liquidity and capital resources - fi nancing activities,” we chose not to repurchase any shares in fi scal 2015 due to the proposed US Foods merger. Our shares outstanding have increased primarily as a result of stock option exercises and restricted stock unit grants to employees. This resulted in lowering our earnings per share amounts by $0.02 per share. Adjusted diluted earnings per share in fi scal 2015 were $1.84, an increase of 5.1% from the comparable prior year period amount of $1.75. Basic earnings per share in fi scal 2014 were $1.59, a 5.4% decrease from the fi scal 2013 amount of $1.68 per share. Diluted earnings per share in fi scal 2014 were $1.58, a 5.4% decrease from the fi scal 2013 amount of $1.67 per share. This decrease was primarily the result of the factors discussed above. Adjusted diluted earnings per share in fi scal 2014, based on the Certain Items defi nition for the fi scal 2014 and fi scal 2013 years, were $1.76, a decrease of 1.1% from the comparable prior year period amount of $1.78. All earnings per share metrics for fi scal 2014 were partially impacted by a greater number of shares outstanding. Sysco experienced a greater number of stock option exercises in fi scal 2014 as compared to fi scal 2013, which increased the number of shares outstanding. Non-GAAP Reconciliations and Adjusted Cost per Case Sysco’s results of operations are impacted by multiemployer pension withdrawal charges, severance charges, integration planning, litigation costs and termination costs in connection with the merger that had been proposed with US Foods, facility closure charges and US Foods related fi nancing costs. Additional items in fi scal 2014 include a change in estimate of self-insurance, and charges from a contingency accrual. These fi scal 2015 and 2014 items are collectively referred to as (Certain Items). Our US Foods fi nancing costs include the write off of unamortized debt issuance costs when our bridge acquisition facility was terminated upon the issuance of our senior notes in October 2014 and interest expense on those senior notes. In fi scal 2014, costs from executive retirement plans restructuring were included within Certain Items; however, because these costs in fi scal 2015 are comparable to fi scal 2014, these were not included in the Certain Items defi nition for the comparison of adjusted results for fi scal 2015 to fi scal 2014. This continues to be SYSCO CORPORATION - Form 10-K 23 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations presented as a Certain Item in the comparison of adjusted results for fi scal 2014 to fi scal 2013. Management believes that adjusting its operating expenses, operating income, interest expense, net earnings and diluted earnings per share to remove the impact of these charges provides an important perspective of 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. 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 for GAAP measures 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 table below, each period presented is adjusted to remove the costs described above. In the table below, individual components of diluted earnings per share may not add to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. Set forth below is a reconciliation of actual operating expenses, operating income, interest expense, net earnings and diluted earnings per share to adjusted results for these measures for fi scal 2015 and fi scal 2014: $ $ $ $ $ $ $ $ $ $ $ $ 2014 2015 Change in Dollars % Change(3) $ (In thousands, except for share and per share data) Operating expenses (GAAP) Impact of MEPP charge Impact of severance charges Impact of US Foods merger costs Impact of change in estimate of self insurance Impact of contingency accrual Impact of facility closure charges Impact of Certain Items on operating expenses ADJUSTED OPERATING EXPENSES (NON-GAAP) Operating Income (GAAP) Impact of Certain Items on operating income ADJUSTED OPERATING INCOME (NON-GAAP) Interest expense (GAAP) Impact of US Foods fi nancing costs ADJUSTED INTEREST EXPENSE (NON-GAAP) Net earnings (GAAP)(1) Impact of MEPP charge Impact of severance charge Impact of US Foods merger costs Impact of change in estimate of self insurance Impact of contingency accrual Impact of facility closure charges Impact of US Foods Financing Costs ADJUSTED NET EARNINGS (NON-GAAP)(1) Diluted earnings per share (GAAP)(1) Impact of severance charge Impact of US Foods merger costs Impact of change in estimate of self insurance Impact of contingency accrual Impact of US Foods Financing Costs ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP)(1)(2) $ Diluted shares outstanding (1) The net earnings and diluted earnings per share impacts are shown net of tax. The aggregate tax impact of adjustments for Certain Items was $287.5 million and $55.8 million for fiscal 2015 and fiscal 2014, respectively. Amounts are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction. In FY14, the impact of the charge from a contingency accrual contained an estimated non-deductible portion. Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings for Certain Items divided by diluted shares outstanding. 6,593,913 (1,451) (7,202) (90,571) (23,841) (20,000) (3,443) (146,508) 6,447,405 1,587,122 146,508 1,733,630 123,741 (6,790) 116,951 931,533 916 4,546 57,176 15,050 18,156 2,173 4,286 1,033,836 1.58 0.01 0.10 0.03 0.03 0.01 1.75 590,216,220 7,322,154 - (5,598) (554,667) - - (2,203) (562,468) 6,759,686 1,229,362 562,468 1,791,830 254,807 (138,422) 116,385 686,773 - 3,302 327,149 - - 1,299 81,643 1,100,166 1.15 0.01 0.55 - - 0.14 1.84 596,849,034 728,241 1,451 1,604 (464,096) 23,841 20,000 1,240 (415,960) 312,281 (357,760) 415,960 58,200 131,066 (131,632) (566) (244,760) (916) (1,244) 269,973 (15,050) (18,156) (874) 77,357 66,330 (0.43) - 0.45 (0.03) (0.03) 0.13 0.09 11.0% NM (22.3) NM NM NM (36.0) NM 4.8% (22.5)% NM 3.4% 105.9% NM (0.5)% (26.3)% NM (27.4) NM NM NM (40.2) NM 6.4% (27.2)% - NM NM NM NM 5.1% $ $ $ $ $ $ $ $ $ $ $ $ $ $ (2) $ $ (3) NM represents that the percentage change was not meaningful. 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 2014 and fi scal 2013: $ $ $ $ $ $ $ $ $ $ 2014 2013 4.0% 3.2% (4.3)% (84.1) (96.5) (69.0) NM NM NM NM 30.2 Change in Dollars % Change(3) $ (In thousands, except for share and per share data) Operating expenses (GAAP) Impact of restructuring executive retirement plans Impact of MEPP charges Impact of severance charges Impact of US Foods merger costs Impact of FY13 acquisition-related charge Impact of change in estimate of self insurance Impact of contingency accrual Impact of facility closure charges ADJUSTED OPERATING EXPENSES (NON-GAAP) Operating Income (GAAP) Impact of restructuring executive retirement plans Impact of MEPP charges Impact of severance charges Impact of US Foods merger costs Impact of FY13 acquisition-related charge Impact of change in estimate of self insurance Impact of contingency accrual Impact of facility closure charges ADJUSTED OPERATING INCOME (NON-GAAP) Interest Expense (GAAP) Impact of US Foods fi nancing costs ADJUSTED INTEREST EXPENSE (NON-GAAP) Net earnings (GAAP)(1) Impact of restructuring executive retirement plans Impact of MEPP charges Impact of severance charges Impact of US Foods merger costs Impact of FY13 acquisition-related charge Impact of change in estimate of self insurance Impact of contingency accrual Impact of facility closure charges Impact of US Foods fi nancing costs ADJUSTED NET EARNINGS (NON-GAAP)(1) Diluted earnings per share (GAAP)(1) Impact of restructuring executive retirement plans Impact of MEPP charges Impact of severance charges Impact of US Foods merger costs Impact of FY13 acquisition-related charge Impact of change in estimate of self insurance Impact of contingency accrual Impact of US Foods fi nancing costs ADJUSTED DILUTED EARNINGS PER SHARE (NON-GAAP)(1)(2) Diluted shares outstanding (1) The net earnings and diluted earnings per share impacts are shown net of tax, except as noted below. The aggregate tax impact of adjustments for Certain Items was $67.2 million and $37.8 million for fiscal 2014 and fiscal 2013, respectively. The fiscal 2014 acquisition-related charge had no tax impact. Amounts are calculated by multiplying the operating income impact of each item by the respective year’s effective tax rate with the exception of the impact of the charges from an estimate of a contingency accrual, which had an estimated non-deductible portion. Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings for Certain Items divided by diluted shares outstanding. 6,593,913 (3,329) (1,451) (7,202) (90,571) - (23,841) (20,000) (3,443) 6,444,076 1,587,122 3,329 1,451 7,202 90,571 - 23,841 20,000 3,443 1,736,959 123,741 (6,790) 116,951 931,533 2,102 916 4,546 57,176 - 15,050 18,156 2,173 4,286 1,035,938 1.58 - - 0.01 0.10 - 0.03 0.03 0.01 1.76 590,216,220 6,338,129 (20,990) (41,876) (23,206) - (5,998) - - (2,645) 6,243,414 1,658,478 20,990 41,876 23,206 - 5,998 - - 2,645 1,753,193 128,495 - 128,495 992,427 13,461 26,855 14,882 - 5,998 - - 1,696 - 1,055,319 1.67 0.02 0.05 0.03 - 0.01 - - - 1.78 592,675,110 255,784 17,661 40,425 16,004 (90,571) 5,998 (23,841) (20,000) (798) 200,662 (71,356) (17,661) (40,425) (16,004) 90,571 (5,998) 23,841 20,000 798 (16,234) (4,754) (6,790) (11,544) (60,894) (11,359) (25,939) (10,336) 57,176 (5,998) 15,050 18,156 477 4,286 (19,381) (0.09) (0.02) (0.05) (0.02) 0.10 (0.01) 0.03 0.03 0.01 (0.02) (84.4) (96.6) (69.5) NM NM NM NM 28.1 NM (1.8)% (5.4)% NM NM (66.7) NM NM NM NM NM (1.1)% (84.1) (96.5) (69.0) NM NM NM NM 30.2 (0.9)% (3.7)% NM (9.0)% (6.1)% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (2) $ $ $ (3) NM represents that the percentage change was not meaningful. SYSCO CORPORATION - Form 10-K 25 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Cost per case is an important metric management uses to measure our expense performance. This metric is calculated by taking the total operating expense of our North American Broadline companies, divided by the number of cases sold. Adjusted cost per case is calculated similarly, however the operating expense component excludes charges from, multiemployer pension plans and severance, which are the Certain Items applicable to these companies, divided by the number of cases sold. Our corporate expenses are not included in the cost per cases metrics because the metric is a measure of effi ciency in our operations. We seek to grow our sales and either minimize or reduce our costs on a per case basis. Our North American Broadline companies represent approximately 80% of our total sales and 75% of our total operating expenses prior to corporate expenses. Sysco considers adjusted cost per case to be a measure that provides useful information to management and investors about Sysco’s expense management. An analysis of any non-GAAP fi nancial measure should be used in conjunction with results presented in accordance with GAAP. In the table that follows, the change in adjusted cost per case is reconciled to cost per case for the periods presented. Fiscal 2015 change from Fiscal 2014 Fiscal 2014 change from Fiscal 2013 Increase (decrease) in cost per case Impact of Certain Items(1) INCREASE (DECREASE) IN ADJUSTED COST PER CASE (NON-GAAP BASIS) $ $ 0.04 - 0.04 $ $ (0.10) 0.04 (0.06) (1) For all periods, the impact of Certain Items excludes charges from multiemployer pension plans and severance. For the fiscal 2015 comparison to fiscal 2014, our Certain Items charges were not significant enough to contribute a different adjusted cost per case result from the reported increase in cost per case. For the fiscal 2014 comparison to fiscal 2013, the majority of the impact relates to multiemployer pension plans in the amount of $0.04 per case attributable to charges taken in fiscal 2014 that did not recur at the same magnitude in fiscal 2013, and the remainder relates to severance charges. Segment Results We have aggregated our operating companies into two reporting segments, Broadline and SYGMA, as defi ned in the accounting literature 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 and adjustments generally include all expenses of the corporate offi ce and Sysco’s shared service center. These also include all share-based compensation costs and integration planning, litigation costs and termination costs in connection with the merger that had been proposed US Foods. 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 Operating Income as a Percentage of Sales 2015 2014 2013 6.6% 0.3 2.6 6.6% 0.6 3.0 6.7% 0.9 3.2 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 or decrease over the prior year and should be read in conjunction with Note 21, “Business Segment Information” to the Consolidated Financial Statements in Item 8: 2015 Operating Income Sales 2014 Operating Income Sales Broadline SYGMA Other (1) SYGMA had operating income of $20.5 million in fiscal 2015, $38.0 million in fiscal 2014 and $52.0 million in fiscal 2013. 5.0% (1.6) 12.6 5.8% (46.1)(1) (4.6) 4.3% 6.9 6.6 2.8% (26.9)(1) 2.2 26 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 and adjustments of $1.5 billion in fi scal 2015, $1.0 billion in fi scal 2014 and $894.3 million in fi scal 2013 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: 2015 2014 2013 Sales 79.4% 12.5 10.8 (2.7) 100.0% Segment Operating Income 94.3% 0.7 5.0 - 100.0% Sales 79.1% 13.3 10.1 (2.5) 100.0% Segment Operating Income 93.1% 1.5 5.4 - 100.0% Sales 79.4% 13.0 9.9 (2.3) 100.0% Segment Operating Income 92.5% 2.0 5.5 - 100.0% Broadline SYGMA Other Intersegment sales TOTAL Broadline Segment The Broadline reportable segment is an aggregation of the company’s U.S. and International Broadline segments located in Bahamas, Canada, Costa Rica and Ireland. 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. Broadline operations have signifi cantly higher operating margins than the rest of Sysco’s operations. In fi scal 2015, the Broadline operating results represented approximately 79.4% of Sysco’s overall sales and 94.3% of the aggregate operating income of Sysco’s segments, which excludes corporate expenses. There are several factors that 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 for fi scal 2015 were 5.0% higher than fi scal 2014. Sales for fi scal 2015 increased as a result of product cost infl ation and the resulting increase in selling prices, case volume growth, and sales from acquisitions that occurred within the last 12 months. Our case volume growth in fi scal 2015 with our locally-managed customers was strong and corporate-managed customer volumes increased as well. Sales from acquisitions within the last 12 months favorably impacted sales by 0.5% in fi scal 2015. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 3.8% during fi scal 2015, driven mainly by infl ation in the meat, seafood and dairy categories. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 1.3% in fi scal 2015. Sales for fi scal 2014 were 4.3% higher than fi scal 2013. Sales for fi scal 2014 increased as a result of sales from acquisitions that occurred within the last 12 months, case volume growth and product cost infl ation and the resulting increase in selling prices. Our sales growth in fi scal 2014 was greater with our corporate-managed customers as compared to sales growth with our locally-managed customers. The disparity in the growth rate between these customer types moderated in the last half of fi scal 2014 with locally-managed sales growth trending at similar rates as corporate-managed customers. Sales from acquisitions within the last 12 months favorably impacted sales by 1.7% in fi scal 2014. Changes in product costs, an internal measure of infl ation or defl ation, were estimated as infl ation of 2.0% during fi scal 2014, driven mainly by infl ation in the meat, seafood and dairy categories. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.8% in fi scal 2014. Operating Income Fiscal 2015 vs. Fiscal 2014 Operating income increased by 5.8% in fi scal 2015 over fi scal 2014. We experienced growth in our gross profi ts due to increased sales volumes, stronger relative mix of sales for our locally-managed customers and benefi ts from our category management initiative. Operating expenses increased from greater case volumes, higher incentive accruals, higher pay for our sales organization as a result of higher gross profi t, investment in administrative support capabilities and acquired operations. Gross profi ts increased in fi scal 2015 as compared to fi scal 2014 and gross margins were steady. Increased competition resulting from a slow-growth market and volatile infl ation has pressured our gross margins; however, sales and mix, as well as our category management initiative, have helped us stabilize our gross margin performance. Our infl ation rates were higher in the fi rst half of fi scal 2015, reaching levels of 6% at the mid-point of the fi scal year and dropping to minimal amounts by the end of the fi scal year. Fiscal 2015 infl ation was seen primarily in the meat, dairy and poultry categories. SYSCO CORPORATION - Form 10-K 27 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating expenses for the Broadline segment increased in fi scal 2015 as compared to fi scal 2014. The increase in expenses for fi scal 2015 as compared to fi scal 2014 was driven largely by higher sales costs, increased expense related to management incentive accruals and costs from companies acquired within the last 12 months. Partially offsetting these increases were decreases in fuel costs. Sales and gross profi t growth partially contributed to an increase in sales pay-related expenses due to increases in sales commissions and bonuses. In addition, we have increased our marketing associate headcount in certain markets in order to invest in future sales growth. Our cost per case and adjusted cost per case increased $0.04 per case in fi scal 2015 as compared to fi scal 2014. The impact of foreign exchange rates lowered our cost per case results by $0.05 per case for fi scal 2015 as compared to fi scal 2014, which partially offset the rate of increase occurring primarily from increased pay-related expenses partially offset by lower fuel costs. Fiscal 2014 vs. Fiscal 2013 Operating income increased by 2.8% in fi scal 2014 from fi scal 2013. This increase was driven by operating expenses increasing more than gross profi t dollars. Gross profi t dollars increased in fi scal 2014 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 infl ation, increased growth from corporate-managed customers and, in part, from our Business Transformation Project Initiative. 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 2014. Based on our product sales mix during fi scal 2014, we were most impacted by higher levels of infl ation in the poultry and meat product categories. Operating expenses for the Broadline segment increased in fi scal 2014 as compared to fi scal 2013. The expense increases in fi scal 2014 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 that 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 2013 that were in service in fi scal 2014, primarily from new facilities, property from new acquisitions and expansions. In fi scal 2014 and fi scal 2013, we recorded provisions of $1.5 million and $41.9 million, respectively, related to multiemployer pension plan withdrawals. Our fi scal 2014 cost per case, excluding charges related to withdrawals from multiemployer pension plans, decreased as compared to fi scal 2013 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. SYGMA Segment SYGMA operating companies distribute a full line of food products, a wide variety of non-food products and customer-specifi c proprietary 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 1.6% lower in fi scal 2015 than in fi scal 2014. The decrease was primarily due to the resignation of several unprofi table accounts, lost customers and lower fuel surcharges. Partially offsetting these decreases were increases from product cost infl ation (and the resulting increase in selling prices) and case volume increases from existing customers. We expect similar sales results in fi scal 2016 due to the continued impact of these resignations, as well as competitive pricing pressures. SYGMA intends to add business with new and existing customers to profi tably grow this segment’s results. Sales were 6.9% greater in fi scal 2014 than in fi scal 2013. The increase was primarily due to new customers. Other contributors to the increase were product cost infl ation and the resulting increase in selling prices and case volume increases from existing customers. Operating Income Operating income decreased by 46.1% in fi scal 2015 from fi scal 2014. Gross profi t dollars decreased 3.3% while operating expenses increased 7.3% in fi scal 2015 over fi scal 2014. Gross profi t dollar growth was lower primarily due to reduced fuel surcharges and lower margins as a result of the competitive market environment. Operating expenses increased in fi scal 2015 largely due to increased warehouse and delivery costs, including pay-related expenses, partially resulting from efforts to increase driver retention and manage warehouse employee shortages. Operating income is expected to improve in fi scal 2016 as compared to fi scal 2015 due to improved profi tability from resigning less profi table customers and improved productivity. 28 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Operating income decreased by 26.9% in fi scal 2014 from fi scal 2013. Gross profi t dollars increased 2.8% while operating expenses increased 6.5% in fi scal 2014 over fi scal 2013. These gross profi t results largely refl ect the sluggish sales environment that existed at that time. Operating expenses increased in fi scal 2014 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. Other Segment “Other” fi nancial information is attributable to our other operating segments, including our specialty produce, our custom-cut meat operations, lodging industry products segments, a company that distributes specialty imported products, a company that distributes to international customers and our Sysco Ventures platform, our suite of technology solutions that help support the business needs of our 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 some of the operating companies within this segment in 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 2015, in the aggregate, the “Other” segment represented approximately 10.8% of Sysco’s overall sales and 5.0% of the aggregate operating income of Sysco’s segments, which excludes corporate expenses and adjustments. Operating income decreased 4.6%, or $6.5 million, in fi scal 2015 as compared to fi scal 2014. The decrease in operating income was largely due to startup costs from our Iowa Premium Beef operations, partially offset by increased earnings from our specialty produce and custom-cut meat segments. Operating income decreased 2.2% for fi scal 2014 over fi scal 2013. The decrease in operating income was largely due to startup costs from our Sysco Ventures operations, partially offset by increased earnings from our specialty produce and lodging industry products segments. Additionally, retirement- related expenses were greater for these companies for fi scal 2014 as our enhanced defi ned contribution plan became effective January 1, 2013, and some of these operations were not a part of prior benefi t plans. Liquidity and Capital Resources Highlights Comparisons of the cash fl ows from fi scal 2015 to fi scal 2014: • Cash fl ows from operations were $1.6 billion this year compared to $1.5 billion last year. • Net capital expenditures totaled $518.4 million this year compared to $497.4 million last year. • Free cash fl ow was $1.0 billion this year compared to $995.4 million last year (see Non-GAAP reconciliation below under the heading “Free Cash Flow”). • Cash used for acquisition of businesses was $115.9 million this year compared to $79.3 million last year. • Net bank borrowings were a net repayment of $130.0 million this year compared to a net borrowing of $34.5 million last year. • Proceeds from exercises of share-based compensation awards were $240.2 million this year compared to $255.6 million last year. • Treasury stock purchases were zero this year compared to $332.4 million last year. • Dividends paid were $695.3 million this year compared to $667.2 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. SYSCO CORPORATION - Form 10-K 29 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. 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 to prevent a signifi cant unfavorable impact on our cash fl ows from operations. As of June 27, 2015, we had $5.1 billion in cash and cash equivalents, approximately 4% of which was held by our international subsidiaries generated from our earnings of international operations. This percentage is lower than previous years because of proceeds from our senior notes offering, which we borrowed to fund the then proposed US Foods merger. Since the senior notes were redeemed subsequent to June 27, 2015, due to the termination of the merger agreement, we would expect this percentage to return to historical levels, such as 32%, which was the percentage as of June 28, 2014. If these earnings were transferred among countries or repatriated to the U.S., such amounts may be subject to additional tax obligations; however, we do not currently anticipate the need to repatriate this cash. We believe the following sources will be 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 line of credit; and • our ability to access capital from fi nancial markets, including issuances of debt securities, either privately or under a shelf registration statement to be fi led with the Securities and Exchange Commission (SEC) in the fi rst quarter of fi scal 2016. 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. Cash Flows Operating Activities Fiscal 2015 vs. Fiscal 2014 We generated $1.6 billion in cash fl ow from operations in fi scal 2015, as compared to $1.5 billion in fi scal 2014. This increase of $62.7 million, or 4.2%, was largely attributable to favorable comparisons on accrued expenses, partially offset by unfavorable comparisons on the cash impact of our Certain Items that increased $148.9 million year-over-year. Other unfavorable comparisons were a decrease in other long-term liabilities and the impact of timing for pension contributions, as well as increased working capital needs. Included in the change in accrued expenses was a favorable comparison of incentive accruals due to better performance against incentive targets in fi scal 2015. Our Certain Items increased primarily from integration planning, litigation and termination costs in connection with the merger that had been proposed with US Foods. Our merger termination fees of $312.5 million, payable to US Foods and PFG, were accrued as of June 27, 2015, and were paid in the July 2015. Included in the change in other long-term liabilities was a negative comparison on pension expense and contributions, which contributed $90.4 million to the unfavorable comparison on cash fl ow from operations for fi scal 2015 to fi scal 2014. Pension income was $15.3 million and pension contributions were $75.1 million, including a $50 million contribution to our Retirement Plan in fi scal 2015, which resulted in a decrease to other long-term liabilities. Pension expense was $4.8 million and pension contributions were $24.8 million in fi scal 2014, which resulted in a decrease to other long-term liabilities. Changes in working capital, specifi cally accounts receivable, inventory and accounts payable, had a net unfavorable comparison of $25.0 million on the comparison of cash fl ow from operations for fi scal 2015 to fi scal 2014. There was a favorable comparison on inventory and accounts receivable, which was partially offset by unfavorable comparisons on accounts payable. Accounts receivable increased in both periods as a result of increases in sales; however, the level of increase in fi scal 2015 was less than fi scal 2014 due to improved collection efforts. Inventory increased in both periods as a result of increases in sales. However, inventory turnover improved in fi scal 2015, as compared to fi scal 2014. Accounts payable increased in both periods as a result of increases in sales. The year-over-year impact of the change in accounts payable is unfavorable to cash fl ow from operations due to working capital improvements that were at a greater magnitude in fi scal 2014 as compared to fi scal 2015. 30 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2014 vs. Fiscal 2013 We generated $1.49 billion in cash fl ow from operations in fi scal 2014, as compared to $1.51 billion in fi scal 2013. The decrease of $18.8 million or 1.2%, was largely attributable to a negative comparison on pension expense and contributions, reduced net earnings, a negative comparison on multiemployer pension withdrawal provisions and payments and an unfavorable comparison on prepaid expenses. Partially offsetting these unfavorable comparisons was a favorable comparison on working capital, several signifi cant accruals in fi scal 2014 and an increase in non-cash depreciation and amortization. Included in the change in other long-term liabilities was a negative comparison on pension expense and contributions, which contributed $65 million to the unfavorable comparison on cash fl ow from operations for fi scal 2014 to fi scal 2013. Pension expense was $4.8 million and pension contributions were $24.8 million in fi scal 2014, which resulted in a decrease to other long-term liabilities. Pension expense was $138.3 million and pension contributions were $93.6 million in fi scal 2013, which resulted in an increase to other long-term liabilities. Included in the change in accrued expenses was a negative comparison of $49.4 million on multiemployer withdrawal provisions and payments. Fiscal 2014 included a provision for multiemployer pension withdrawal of $1.5 million and payments of $40.8 million, which resulted in a decrease to accrued expenses. Fiscal 2013 included a provision for multiemployer pension withdrawal of $41.9 million and payments of $31.8 million, which resulted in an increase to accrued expenses. Partially offsetting the unfavorable impact of the multiemployer accrual comparison were several signifi cant accruals unique to fi scal 2014, which contributed $48.5 million to cash fl ow from operations for fi scal 2014 to fi scal 2013. Changes in working capital, specifi cally accounts receivable, inventory and accounts payable, had a favorable comparison of $129.7 million on the comparison of cash fl ow from operations for fi scal 2014 to fi scal 2013. There was a favorable comparison on accounts payable, which was partially offset by unfavorable comparisons on accounts receivable and inventory. Accounts receivable increased in both periods as a result of increases in sales. Our sales growth in fi scal 2014 was greater with our corporate-managed customers and payment terms for these types of customers are traditionally longer than average. This mix of longer-term receivables contributed to the unfavorable comparison on cash fl ow from fi scal 2014 to fi scal 2013. Inventory increased in both periods as a result of increases in sales. However, inventory turnover improved in fi scal 2014, as compared to a deterioration of inventory turnover in fi scal 2013, due to working capital improvements in inventory. Fiscal 2014 also included an increase in inventory in transit, which offset the favorable comparison due to working capital improvements, resulting in an overall unfavorable comparison on cash fl ow from fi scal 2014 to fi scal 2013. Accounts payable increased in both periods as a result of increases in sales. The year-over-year impact of the change in accounts payable is favorable to cash fl ow from operations due to working capital improvements in accounts payable as well as an increase in fi scal 2014 in accounts payable related to inventory in transit. Investing Activities Fiscal 2015 capital expenditures included: • fl eet replacements; • investments in technology. • replacement or signifi cant expansion of facilities in Arizona, California, Iowa and Virginia; and • construction of fold-out facilities in Ireland. Fiscal 2014 capital expenditures included: • fl eet replacements; • construction of fold-out facilities in Ontario, Canada and Ireland; • replacement or signifi cant expansion of facilities in Arizona, California, Pennsylvania and Virginia; and • investments in technology. 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 Georgia; British Columbia, Canada; Massachusetts and South Carolina; and • investments in technology. The level of capital expenditures in fi scal 2015 was mostly consistent with fi scal 2014, representing a small increase of $19.6 million. Capital expenditures in fi scal 2014 increased by $11.3 million from fi scal 2013. Capital expenditures in fi scal 2014 and 2013 for our Business Transformation Project were $33.4 million and $20.0 million, respectively. SYSCO CORPORATION - Form 10-K 31 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations We estimate our capital expenditures, net of proceeds from sales of assets, in fi scal 2016 should be in the range of $550 million to $600 million. Fiscal 2016 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 2015, in the aggregate, the company paid cash of $115.9 million for operations acquired during fi scal 2015 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2015, we acquired for cash a broadline company in Ontario, Canada; a joint venture interest in a foodservice distribution company in Mexico; a joint venture interest in a foodservice distribution company in Costa Rica and a specialty seafood company in New Jersey. During fi scal 2014, in the aggregate, the company paid cash of $79.3 million for operations acquired during fi scal 2014 and for contingent consideration related to operations acquired in previous fi scal years. During fi scal 2014, we acquired for cash a specialty meat company in Maryland and broadline operations in Missouri, Ohio and Philadelphia. 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 broadline operations in Bahamas, California, Ohio, Quebec, Canada, Northern Ireland; specialty seafood companies in Ontario, Canada, Florida and Houston; specialty produce in Ireland and our Sysco Ventures startup in California. 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 and sales 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. However, free cash fl ow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments. As a result of increased cash provided by operating activities, partially offset by increased capital spending and decreased proceeds from sales of plant and equipment, free cash fl ow for fi scal 2015 increased 4.2%, or $41.7 million, to $1.0 billion as compared to fi scal 2014. Increased cash provided by operating activities, partially offset by increased capital spending, resulted in free cash fl ow for fi scal 2014 decreasing 2.0%, or $19.9 million, to $995.4 million as compared to fi scal 2013. 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 table that follows, 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 $ $ $ $ 2015 2014 1,555,484 (542,830) 24,472 1,037,126 2014 1,492,815 (523,206) $ $ $ 1,492,815 (523,206) 25,790 995,399 2013 1,511,594 (511,862) 25,790 $ 995,399 15,527 1,015,259 $ Change in Dollars 62,669 $ (19,624) (1,318) 41,727 $ % Change 4.2 3.8 (5.1) 4.2 Change in Dollars $ (18,779) (11,344) 10,263 (19,860) % Change (1.2) 2.2 66.1 (2.0) Proceeds from exercises of share-based compensation awards were $240.2 million in fi scal 2015, $255.6 million in fi scal 2014 and $628.7 million in fi scal 2013. The level of proceeds in each year is directly related to the number of options exercised in each year. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price. 32 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations We traditionally have engaged in Board-approved share repurchase programs. No shares were acquired in fi scal 2015 due to the proposed US Foods merger. The number of shares acquired and their cost during 2014 and 2013 were 10,059,000 shares for $332.4 million in fi scal 2014 and 21,672,403 shares for $721.6 million in fi scal 2013. No additional shares were repurchased through August 13, 2015, resulting in a remaining authorization by our Board of Directors to repurchase up to 11,655,197 shares from a repurchase program that expired on August 23, 2015. In June 2015, our Board of Directors approved a repurchase program to repurchase from time to time in the open market, through an accelerated share repurchase program or through privately negotiated transactions, shares of the company’s common stock in an amount not to exceed $3.0 billion during the two year period ending July 1, 2017, including $1.5 billion through a planned accelerated share repurchase in fi scal 2016, in addition to amounts normally repurchased to offset benefi t plan and stock option dilution. In addition to the share repurchase program approved in June, in August 2015, our Board of Directors approved the repurchase of up to 20,000,000 shares for an aggregate purchase price not to exceed $800 million. The authorization expires on August 21, 2017. Beyond our $3.0 billion share repurchase program approved in June 2015, our share repurchase strategy is to purchase enough shares to keep our average shares outstanding relatively constant over time. The number of shares we repurchase in fi scal 2016 will be dependent on many factors, including the level of future stock option exercises as well as competing uses for available cash. We have made dividend payments to our shareholders in each fi scal year since our company’s 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 2015 and fi scal 2014 primarily due to increased expenses from our Certain Items. Dividends paid were $695.3 million, or $1.17 per share, in fi scal 2015, $667.2 million, or $1.14 per share, in fi scal 2014 and $648.3 million, or $1.10 per share, in fi scal 2013. In May 2015, we declared our regular quarterly dividend for the fi rst quarter of fi scal 2016 of $0.30 per share, which was paid in July 2015. 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 13, 2015, 29,477,835 shares remained available for issuance under this registration statement. Debt Activity and Borrowing Availability Our debt activity, including issuances and repayments, and our borrowing availability is described in Note 11, “Debt and Other Financing Arrangements.” Our outstanding borrowings at June 27, 2015, and repayment activity since the close of fi scal 2015, are disclosed within that note. Updated amounts through August 13, 2015, include: • $744.0 million outstanding from our commercial paper program • No amounts outstanding from the credit facility supporting the company’s U.S. and Canadian commercial paper programs. Our aggregate commercial paper issuances and short-term bank borrowings had a weighted average interest rate of 0.54%, for fi scal 2015 and 0.16% for each of fi scal 2014 and 2013 respectively. In the fi rst quarter of fi scal 2016, we intend to fi le 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. Other Considerations Multiemployer Plans Our exposure to multiemployer defi ned benefi t plans is discussed in Note 15, “Multiemployer Employee Benefi t Plans,” including our estimate of our share of withdrawal liability for these plans. An update of this amount through August 13, 2015, based on the latest available information, is unchanged from the amount disclosed in Note 15. Potential Contingencies Impacting Liquidity 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. Sysco has posted approximately $90 million in letters of credit, representing a partial payment of the audit assessments, in order to appeal the Canadian Revenue Authority assessments of transfer pricing adjustments relating to our cross border procurement activities through our former purchasing cooperative on our fi scal 2004 through fi scal 2009 fi scal years. We are protesting these adjustments through appeals. We could have to pay cash or post additional letters of credit of as much as $16.0 million, in order to appeal these assessments. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. SYSCO CORPORATION - Form 10-K 33 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations The following table sets forth, as of June 27, 2015, 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 $ 526,291 $ 266,972 $ (In thousands) Recorded Contractual Obligations: Principal payments of long-term debt Mandatory senior note redemption premium Merger-termination payments Other debt repayments Capital leases obligations Deferred compensation(1) Pension Plan(2) SERP and other postretirement plans(3) Unrecognized tax benefi ts and interest(4) Unrecorded Contractual Obligations: Interest payments related to debt(5) Operating lease obligations Purchase obligations(6) 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) The estimated contributions through fiscal 2024 to meet ERISA minimum funding requirements based on actuarial assumptions include the extension of funding relief included in the Highway and 7,271,831 $ 50,000 312,500 69,542 32,939 82,925 44,900 306,424 70,992 5,002,972 $ 50,000 312,500 69,542 4,971 7,288 143,851 47,559 3,823,783 9,561,726 $ 196,223 5,032,523 14,924,039 $ 929,849 45,670 1,491 2,722,330 66,013 1,098,488 1,986,711 $ 36,981 108,761 653,272 $ 12,479 54,506 44,900 157,839 9,543 11,945 5,946 9,186 28,268 70,992 1,453,240 1,475,596 61,409 58,908 215,523 164,017 $ (3) Transportation Funding Act of 2014. 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 2025, based on actuarial assumptions. (4) Unrecognized tax benefits relate to uncertain tax positions recorded under accounting standards related to uncertain tax positions. As of June 27, 2015, we had a liability of $37.5 million for unrecognized tax benefits for all tax jurisdictions and $33.4 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 27, 2015, 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 27, 2015. (5) (6) For purposes of this table, purchase obligations include agreements for purchases of product in the normal course of business, for which all significant terms have been confirmed, including minimum quantities resulting from our category management initiative. As we progress with this initiative, our purchase obligations are increasing. 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 2019 (See discussion under Note 20, “Commitments and Contingencies”, to the Notes to Consolidated Financial Statements in Item 8) 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 27, 2015 were $39 million. This amount is not included in the table above. 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 position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to the 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. In these instances, a specifi c allowance for doubtful accounts is recorded to reduce the receivable to the net amount reasonably expected to be collected. Allowances are recorded for all other receivables based on an analysis of historical trends of write-offs and recoveries. 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. 34 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 2015 net pension costs for the Retirement Plan, which was determined as of the June 28, 2014 measurement date, decreased 58 basis points to 4.74%. The discount rate for determining fi scal 2015 net pension costs for the SERP, which was determined as of the June 28, 2014 measurement date, decreased 35 basis points to 4.59%. The combined effect of these discount rate changes increased our net company-sponsored pension costs for all plans for fi scal 2015 by an estimated $7 million. The discount rate for determining fi scal 2016 net pension costs for the Retirement Plan, which was determined as of the June 27, 2015 measurement date, increased 10 basis points to 4.84%. The discount rate for determining fi scal 2016 net pension costs for the SERP, which was determined as of the June 27, 2015 measurement date, increased 4 basis points to 4.63%. The combined effect of these discount rate changes will decrease our net company-sponsored pension costs for all plans for fi scal 2016 by an estimated $1 million. A 100 basis point increase (or decrease) in the discount rates for fi scal 2015 would decrease (or increase) Sysco’s net company-sponsored pension cost by approximately $11 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. The expected long-term rate of return on plan assets of the Retirement Plan was 7.75% for fi scal 2015 and fi scal 2014. 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 8.3%, 6.3%, 11.1%, and 7.7%, over the 20-year, 10-year, 5-year and 1-year periods ended December 31, 2014, respectively. In addition, in seven 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 7.25% for fi scal 2016. A 100 basis point increase (decrease) in the assumed rate of return for fi scal 2015 would decrease (increase) Sysco’s net company-sponsored pension costs for fi scal 2015 by approximately $30 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 27, 2015 was a charge, net of tax, of $705.3 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 28, 2014 was a charge, net of tax, of $686.0 million. We made cash contributions to our company-sponsored pension plans of $75.1 million and $24.8 million in fi scal years 2015 and 2014, respectively. Our contributions in fi scal 2015 include a $50.0 million contribution to the Retirement Plan that was voluntary, as there was no minimum required contribution for the calendar 2014 plan year to meet ERISA minimum funding requirements. There was no contribution to the Retirement Plan in fi scal 2014, as there was no minimum required contribution for the calendar 2013 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 2016. The estimated fi scal 2016 contributions to fund benefi t payments for the SERP plan are approximately $28 million. SYSCO CORPORATION - Form 10-K 35 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 calculate 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. 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 13 operating segments as described in Note 21, “Business Segment Information,” to the Consolidated Financial Statements in Item 8. The components within each of our 13 operating segments have similar economic characteristics and therefore are aggregated into 13 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 13 operating segments. We primarily 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 2015, 2014 or 2013. Our past estimates of fair value for fi scal 2014 and 2013 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 2015 assessment, our estimates of fair value did not require additional analysis. However, we would have performed additional analysis to determine if an impairment existed for our Costa Rican Broadline 36 SYSCO CORPORATION - Form 10-K PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and European Broadline reporting units if our estimates of fair value were decreased by 14% to 15%, respectively. As of June 27, 2015, these reporting units had goodwill aggregating $218.2 million. For the remainder of our reporting units, which as of June 27, 2015 had goodwill aggregating $1.8 billion, we would have performed additional analysis to determine if an impairment existed for a reporting unit if the estimated fair value of these reporting units had declined by greater than 25%. Certain reporting units (Caribbean Broadline, European Broadline, specialty produce, custom-cut meat, lodging industry products, imported specialty products, international distribution operations and our Sysco Ventures platform) have a greater proportion of goodwill recorded to estimated fair value as compared to the U.S. Broadline, Canada 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 U.S. Broadline, Canadian Broadline and SYGMA reporting units. In addition, these businesses also have lower levels of cash fl ow than the U.S. 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 Sysco provides compensation benefi ts to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, a non-employee director plan and the Employees’ Stock Purchase Plan. As of June 27, 2015, 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 2.42 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 or non-employee directors 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. 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. SYSCO CORPORATION - Form 10-K 37 PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. These statements are based on management’s current expectations and estimates. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identifi ed by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ signifi cantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. In addition to the Risk Factors discussed in Part I, Item 1A of this Form 10-K, 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. Our expectations regarding cost per case may be impacted by factors beyond our control, including actions by our competitors and/or customers. 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, available cash and the success of our various strategic initiatives. Our expectations regarding earnings per share and various items impacting earnings is subject to a number of factors, including our ability to manage operating expenses and the impact of Certain Items. Our plans with respect to growth in international markets and adjacent areas that complement our core business are subject to our other strategic initiatives, the allocation of resources, and plans and economic conditions generally. Legal proceedings and the adequacy of insurance are impacted by events, circumstances and individuals beyond the control of Sysco. The need for additional borrowing or other capital is impacted by various factors, including capital expenditures or acquisitions in excess of those currently anticipated, levels of stock repurchases, 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. Capital expenditures may vary from those projected based on changes in business plans and other factors, including risks related to the timing and successful completions of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Our ability to fi nance capital expenditures as anticipated may be infl uenced by our results of operations, our borrowing capacity, share repurchases, dividend levels and other factors. Expectations regarding tax rates and the transfer of cash held in foreign jurisdictions are subject to various factors beyond our control and decisions of management throughout the fi scal year that are subject to change based on Sysco’s business needs. 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. 38 SYSCO CORPORATION - Form 10-K PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 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 2015 As of June 27, 2015, we had no commercial paper outstanding. Total debt as of June 27, 2015 was $7.3 billion, of which approximately 74% was at fi xed rates of interest, including the impact of our interest rate swap agreement. Included in the total debt amount is $5.0 billion in senior notes that were issued in October 2014, for the proposed merger with US Foods. The October 2014 senior notes contained mandatory redemption features providing that, on the earlier of the merger agreement termination date or October 8, 2015, we were required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus accrued interest. In June 2015, we terminated the merger agreement and redeemed the senior notes in July 2015 using cash on hand and the proceeds from borrowings under our commercial paper facility. In August 2013, we entered into an interest rate swap agreement that effectively converted $500.0 million of fi xed rate debt maturing in fi scal 2018 to fl oating rate debt. In October 2014, we also entered into interest rate swap agreements that effectively converted $500.0 million of the new senior notes maturing on October 2, 2017 and $750.0 million of the new senior notes maturing on October 2, 2019 to fl oating rate debt (2014 swaps). These transactions were entered into with the goal of reducing overall borrowing cost. The major risks from interest rate derivatives include changes in 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. These transactions were designated as fair value hedges since the swaps hedge against the change in fair value of fi xed rate debt resulting from changes in interest rates. Our 2014 swaps were terminated in July 2015. Details of our outstanding swap agreements at June 27, 2015, are below: Maturity Date of Swap October 2, 2017 February 12, 2018 October 2, 2019 Notional Value (in millions) 500 $ 500 750 Fixed Coupon Rate on Hedged Debt Floating Interest Rate on Swap Floating Rate Reset Terms Location of Fair Value on Balance Sheet 1.45% Three-month LIBOR Every three months in arrears Other assets Other assets 5.25% Six-month LIBOR 2.35% Three-month LIBOR Every three months in advance Other assets Every six months in advance Fair Value of Asset (Liability) (in thousands) $ 2,419 4,275 5,903 In January 2014, in contemplation of securing fi nancing and hedging interest rate risk relating to our assumption or refi nancing of the net debt of US Foods that was scheduled to occur upon closing of the proposed merger (discussed in Note 4, “Acquisitions”), we entered into two forward starting swap agreements with notional amounts totaling $2.0 billion. We designated these derivatives as cash fl ow hedges of the variability in the cash outfl ows of interest payments on 10-year and 30-year debt issued in fi scal 2015. In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing on October 2, 2024 and $1 billion senior notes maturing October 2, 2044, we terminated these swaps, locking in the effective yields on the related debt. Cash of $58.9 million was paid to settle the 10-year swap in September 2014, and cash of $129.9 million was paid to settle the 30-year swap in October 2014. SYSCO CORPORATION - Form 10-K 39 PART II ITEM 7A Quantitative and Qualitative Disclosures About Market Risk The following tables present our interest rate position as of June 27, 2015. All amounts are stated in United States (U.S.) dollar equivalents. (Dollars in thousands) U.S. $ Denominated: Fixed Rate Debt 2016 2017 2018 Interest Rate Position as of June 27, 2015 Principal Amount by Expected Maturity Average Interest Rate 2019 2020 Thereafter Total Fair Value $ 3,713,525 $ 4,258 $ 3,017 $ 250,874 $ 1,399 $ 1,460,334 $ 5,433,407 $ 5,675,462 Average Interest Rate 3.8% 3.6% 4.4% 5.5% Floating Rate Debt (1) $ 1,254,138 $ 21,794 $ 503,875 $ 15,094 $ 2.0% 3.9% 5.4% 2.9% Average Interest Rate Canadian $ Denominated: Fixed Rate Debt 6.1% - - 5.1% - - 4.5% $ 1,794,901 $ 1,794,902 3.0% 10,717 $ 17,590 $ 18,374 $ $ $ 1,456 $ 1,475 $ 1,325 $ 1,268 $ 1,350 Average Interest Rate 8.3% 8.3% 9.0% 9.6% 9.7% 9.8% 9.5% (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 27, 2015 Notional Amount by Expected Maturity Average Interest Swap Rate 2016 2017 2018 2019 2020 Thereafter Total $ 1,250,000 $ - $ 500,000 $ - $ - $ - $ 1,750,000 (1) (2) 3.2% 5.25% - - - - - - (Dollars in thousands) Interest Rate Swaps Related To Debt: Pay Variable/Receive Fixed Average Variable Rate Paid: Rate A Plus Rate B Plus Fixed Rate Received Rate A – six-month LIBOR Rate B – three-month LIBOR (1) 0.22% for notional amount of $500,000 maturing on October 2, 2017 and .046% for notional amount of $750,000 maturing on October 2, 2019 (2) 1.45% for notional amount of $500,000 maturing on October 2, 2017 and 2.35% for notional amount of $750,000 maturing on October 2, 2019 In August 2015, the company entered into two forward starting swap agreements with notional amounts totaling $500 million. The company designated these derivatives as cash fl ow hedges to reduce interest rate exposure on forecasted 10-year debt due to changes in the benchmark interest rates for debt the company expects to issue in fi scal 2016. 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 exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 1.0% in fi scal 2015 when compared to fi scal 2014. The exchange rate used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.7% in fi scal 2014 when compared to fi scal 2013. The impact to our operating income, net earnings and earnings per share was not material in fi scal 2015 or fi scal 2014. A 10% unfavorable change in the fi scal 2015 weighted year-to-date exchange rate and the resulting impact on our fi nancial statements would have negatively impacted fi scal 2015 sales by 1.2% 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 2015 fuel costs related to outbound deliveries represented approximately 0.6% of sales. For fi scal 2014 and fi scal 2013, these costs represented approximately 0.7% of sales. 40 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Our activities to mitigate fuel costs include routing optimization with the goal of reducing miles driven, 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. As of June 27, 2015, we had forward diesel fuel commitments totaling approximately $99.3 million through June 2016. These contracts will lock in the price of approximately 40% to 45% of our fuel purchase needs for the contracted periods at prices slightly lower than the current market price for diesel. Our remaining fuel purchase needs will occur at market rates unless contracted for a fi xed price at a later date. Using current, published quarterly market price projections for diesel and estimates of fuel consumption, a 10% unfavorable change in diesel prices from the market price would result in a potential increase of approximately $15 million in our fuel costs on our non-contracted volumes. 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, 2014) would not have a material impact on our anticipated future contributions for fi scal 2016; however, this unfavorable change would increase our pension expense for fi scal 2016 by $31.0 million and would reduce our shareholders’ equity on our balance sheet as of June 27, 2015 by $300.3 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 .....................................................................................................................................................................42 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting .............................................................43 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements ...............................................................................44 Consolidated Balance Sheets .......................................................................................................................................................................................................................................................................................45 Consolidated Results of Operations .....................................................................................................................................................................................................................................................................46 Consolidated Statements of Comprehensive Income....................................................................................................................................................................................................................46 Changes in Consolidated Shareholders’ Equity.....................................................................................................................................................................................................................................47 Consolidated Cash Flows ...................................................................................................................................................................................................................................................................................................48 Notes to Consolidated Financial Statements ............................................................................................................................................................................................................................................49 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 41 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 27, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, management concluded that, as of June 27, 2015, 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 27, 2015. 42 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 27, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Sysco Corporation and subsidiaries’ 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) prove 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 and subsidiaries maintained, in all material respects, effective internal control over fi nancial reporting as of June 27, 2015, 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 27, 2015 and June 28, 2014, and the related consolidated results of operations, and statements of comprehensive income, changes in shareholders’ equity, and cash fl ow for each of the three years in the period ended June 27, 2015 of Sysco Corporation and subsidiaries and our report dated August 24, 2015 expressed an unqualifi ed opinion thereon. Houston, Texas August 24, 2015 SYSCO CORPORATION - Form 10-K 43 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 27, 2015 and June 28, 2014, and the related consolidated results of operations, and statements of comprehensive income, changes in shareholders’ equity and cash fl ows for each of the three years in the period ended June 27, 2015. 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 as of June 27, 2015 and June 28, 2014, and the consolidated results of its operations and its cash fl ows for each of the three years in the period ended June 27, 2015, 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 27, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 24, 2015 expressed an unqualifi ed opinion thereon. Houston, Texas August 24, 2015 44 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 $41,720 and $49,902 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 Current maturities of long-term debt Total current liabilities Other liabilities Long-term debt Deferred income taxes Other long-term liabilities Total other liabilities Noncontrolling interest 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, 170,857,231 and 179,050,186 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 27, 2015 June 28, 2014 $ $ $ $ $ 5,130,044 3,353,381 2,691,823 135,254 93,039 90,763 11,494,304 3,982,143 1,959,817 154,809 168,274 229,934 2,512,834 413,046 3,398,713 2,602,018 141,225 83,745 43,225 6,681,972 3,985,618 1,950,672 177,227 145,412 200,212 2,473,523 17,989,281 $ 13,141,113 70,751 $ 2,881,953 1,467,610 4,979,301 9,399,615 2,271,825 81,591 934,722 3,288,138 41,304 - 70,975 2,831,028 1,160,850 304,777 4,367,630 2,357,330 121,580 1,027,878 3,506,788 - - 765,175 1,213,999 8,751,985 (923,197) (4,547,738) 5,260,224 17,989,281 $ 765,175 1,139,218 8,770,751 (642,663) (4,765,786) 5,266,695 13,141,113 SYSCO CORPORATION - Form 10-K 45 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 outstanding Diluted shares outstanding Dividends declared per common share See Notes to Consolidated Financial Statements June 27, 2015 June 28, 2014 June 29, 2013 Year Ended $ $ $ $ 48,680,752 40,129,236 8,551,516 7,322,154 1,229,362 254,807 (33,592) 1,008,147 321,374 686,773 $ $ 46,516,712 $ 38,335,677 8,181,035 6,593,913 1,587,122 123,741 (12,243) 1,475,624 544,091 931,533 $ 44,411,233 36,414,626 7,996,607 6,338,129 1,658,478 128,495 (17,472) 1,547,455 555,028 992,427 $ 1.16 1.15 $ 1.59 1.58 1.68 1.67 592,072,308 596,849,034 585,988,084 590,216,220 1.19 $ 1.15 $ 589,397,807 592,675,110 1.11 Consolidated Statements of Comprehensive Income (In thousands) Net earnings Other comprehensive (loss) income: Foreign currency translation adjustment Items presented net of tax: Amortization of cash fl ow hedges Change in fair value 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 (loss) gain, net arising in current year Total other comprehensive (loss) income COMPREHENSIVE INCOME See Notes to Consolidated Financial Statements Year Ended June 27, 2015 June 28, 2014 June 29, 2013 $ 686,773 $ 931,533 $ 992,427 (232,185) (3,106) (33,191) 5,116 (34,111) 6,949 11,972 - (563) (37,712) (280,534) 406,239 $ 385 (82,215) 6,970 9,968 - 214 (127,942) (195,726) 735,807 $ 386 - 11,310 44,610 88 (33,203) 225,929 215,929 1,208,356 $ 46 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 $ 939,179 $ 8,175,230 $ 992,427 (662,866) 179,228,383 $ (4,531,678) $ 4,685,040 992,427 765,174,900 $ 765,175 $ 1,059,624 Shares (In thousands except for share data) 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 Net earnings Foreign currency translation adjustment Amortization of cash fl ow hedges, net of tax Change in fair value 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 28, 2014 Net earnings Foreign currency translation adjustment Amortization of cash fl ow hedges, net of tax Change in fair value 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 Share-based compensation awards BALANCE AS OF JUNE 27, 2015 See Notes to Consolidated Financial Statements 765,174,900 $ 765,175 $ (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 $ 8,512,786 $ 931,533 (446,937) 179,068,430 $ (4,698,838) $ 5,191,810 931,533 (3,106) 385 (82,215) 16,938 (127,728 ) (673,568) 9,834,000 (324,665) (3,106) 385 (82,215) 16,938 (127,728) (673,568) (324,665) 686,773 (705,539) (232,185) 5,116 (34,111) 18,921 (38,275) 686,773 (232,185) 5,116 (34,111) 18,921 (38,275) (705,539) 74,781 (8,192,955) 218,048 292,829 1,213,999 $ 8,751,985 $ (923,197) 170,857,231 $ (4,547,738) $ 5,260,224 SYSCO CORPORATION - Form 10-K 47 79,594 (9,852,244) 257,717 337,311 765,174,900 $ 765,175 $ 1,139,218 $ 8,770,751 $ (642,663) 179,050,186 $ (4,765,786) $ 5,266,695 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: Share-based compensation expense Depreciation and amortization Amortization of debt issuance and other debt-related costs 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 (Increase) decrease in prepaid expenses and other current assets Increase in accounts payable Increase in accrued expenses (Decrease) in accrued income taxes (Increase) decrease in other assets (Decrease) increase 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 (Increase) 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 paid for settlement of cash fl ow hedges Proceeds from stock option exercises Treasury stock purchases Dividends paid Excess tax benefi ts from share-based compensation arrangements Net cash provided by (used for) fi nancing activities Effect of exchange rates on cash Net increase (decrease) 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 June 27, 2015 June 28, 2014 June 29, 2013 Year Ended $ 686,773 $ 931,533 $ 992,427 73,766 553,021 27,943 (4,705) 17,996 (24,205) (11,741) (125,232) (10,508) 72,516 464,403 (32,843) (10,745) (105,501) (15,454) 1,555,484 (542,830) 24,472 (115,862) (20,126) (654,346) (129,999) 5,041,032 (354,007) (30,980) (188,840) 240,176 - (695,274) 15,454 3,897,562 (81,702) 4,716,998 413,046 $ 5,130,044 $ 74,328 547,776 8,286 (30,665) 34,429 2,875 (236,320) (195,845) (24,787) 392,720 55,838 (18,672) 23,552 (63,753) (8,480) 1,492,815 (523,206) 25,790 (79,338) (84) (576,838) 34,499 36,830 (229,507) (22,175) - 255,613 (332,381) (667,217) 8,480 (915,858) 642 761 412,285 413,046 $ 70,147 510,061 2,487 (28,129) 35,243 2,485 (193,755) (180,277) 21,704 204,861 67,015 (38,017) 182 49,716 (4,556) 1,511,594 (511,862) 15,527 (397,447) (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 $ 192,939 $ 376,508 128,861 $ 591,334 131,665 620,132 48 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 197 distribution facilities located throughout the United States (U.S.), Bahamas, Canada and Ireland. Sysco’s fi scal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year ending June 27, 2015 for fi scal 2015, June 28, 2014 for fi scal 2014 and June 29, 2013 for fi scal 2013. 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. In these instances, a specifi c allowance for doubtful accounts is recorded to reduce the receivable to the net amount reasonably expected to be collected. Allowances are recorded for all other receivables based on an analysis of historical trends of write-offs and recoveries. 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 are capitalized within plant and equipment during the application development stages 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 $0.9 million in fi scal 2015, $1.1 million in fi scal 2014 and $4.2 million in fi scal 2013. SYSCO CORPORATION - Form 10-K 49 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 using 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 13 operating segments as described in Note 21, “Business Segment Information.” The components within each of the 13 operating segments have similar economic characteristics and therefore are aggregated into 13 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 two 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 27, 2015 and June 28, 2014 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 at their gross values. 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 from inception of the hedges to their settlement, at which time 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 ability and intent to hold 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 $162.8 million and $161.9 million at June 27, 2015 and June 28, 2014, respectively. Treasury Stock The company records treasury stock purchases at cost. Shares removed from treasury are valued at cost using the average cost method. 50 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 $2.6 billion in fi scal 2015, $2.6 billion in fi scal 2014 and $2.5 billion in fi scal 2013. 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 51 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 acquisition 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. Noncontrolling interest In fi scal 2015, Sysco acquired a 50% interest in a foodservice company in Costa Rica. It was determined that consolidation of the entity was appropriate and, therefore, the fi nancial position, results of operations and cash fl ows for this company have been included in Sysco’s fi nancial statements. The value of the 50% noncontrolling interest is considered redeemable due to certain features of the investment agreement and has been presented as mezzanine equity, which is outside of permanent equity, in the consolidated balance sheets. The income attributable to the noncontrolling interest is located within other expense (income), net in the consolidated results of operations, as this amount is not material. The non-cash add back for the change in the value of the noncontrolling interest is located within Other non-cash items on the consolidated cash fl ows. NOTE 2 Changes in Accounting 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 was fi scal 2015 for Sysco. The company’s adoption of this guidance did not have a material impact on the company’s balance sheets, results of operations or cash fl ows. Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. We adopted this standard for the fi scal year ended June 27, 2015. Although the new guidance had no impact on the company’s results of operations, the debt issuance costs presented as assets within the company’s consolidated balance sheet as of June 28, 2014, of $26.8 million has been reclassifi ed as reductions of the related debt liability as a result of early adoption. Practical Expedient for the Measurement Date of an Employer’s Defi ned Benefi t Obligation and Plan Assets In April 2015, the FASB issued ASU 2015-04, “Compensation-Retirement Benefi ts (Topic 715), Practical Expedient for the Measurement Date of an Employer’s Defi ned Benefi t Obligation and Plan Assets.” The amendments in this ASU provide a practical expedient for employers with fi scal year-ends that do not fall on a month-end by permitting those employers to measure defi ned benefi t plan assets and obligations as of the month-end that is closest to the entity’s fi scal year-end. Sysco early adopted this standard in fi scal 2015 using a June 30th measurement date as a practical expedient. The adoption did not have a material impact on the fi nancial position of Sysco. 52 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data NOTE 3 New Accounting Standards Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update amends ASC 205, “Presentation of Financial Statements,” and ASC 360, “Property, Plant, and Equipment,” primarily to change the criteria for when a disposal is required to be reported as a discontinued operation. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the entity’s operations or fi nancial results. The amendments in this update specify presentation and disclosure requirements for discontinued operations as well as disclosure requirements for other disposals that do not qualify as discontinued operations. The amendments in this update are effective for all disposals or classifi cations as held for sale, including upon acquisition, of a component of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years, which is fi scal 2016 for Sysco. Early adoption is permitted. Sysco will implement on any related transactions, prospectively. Revenue from Contracts with Customers In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This update creates ASC 606, “Revenue from Contracts with Customers,” and supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” Additionally, other sections of the ASC were amended to be consistent with the guidance in this update. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that refl ects the consideration to which the entity expects to be entitled in exchange for those goods and services. A fi ve-step revenue recognition model is to be applied to achieve this core principle. ASC 606 also specifi es comprehensive disclosures to help users of fi nancial statements understand the nature, amount, timing and uncertainty of revenue that is recognized. The amendments in this update are effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, which is fi scal 2019 for Sysco. Early adoption is not permitted. Sysco is currently evaluating the impact this update will have on its fi nancial statements. Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.” This ASU provides guidance on determining when and how to disclose going-concern uncertainties in the fi nancial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the fi nancial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This guidance is effective for fi scal years—and interim periods within those fi scal years—beginning after December 15, 2016, with early adoption permitted. The Company is currently reviewing the provisions of the new standard and whether it will early adopt. NOTE 4 Acquisitions During fi scal 2015, in the aggregate, the company paid cash of $115.9 million, net of cash acquired, for acquisitions made during fi scal 2015 and for contingent consideration related to acquisitions made in previous fi scal years. During fi scal 2015, Sysco acquired for cash a broadline company in Ontario, Canada; a joint venture interest in a foodservice distribution company in Mexico; a joint venture interest in a foodservice distribution company in Costa Rica and a specialty seafood company in New Jersey. The fi scal 2015 acquisitions were immaterial, individually and in the aggregate, to the consolidated fi nancial statements. Certain acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years only in the event that certain operating results are attained. As of June 27, 2015, aggregate contingent consideration amounts outstanding relating to completed acquisitions were $39.0 million, of which $29.4 million was recorded as earnout liabilities as of June 27, 2015. In the second quarter of fi scal 2014, the company announced an agreement to merge with US Foods, Inc. (US Foods). In February 2015, following completion of its regulatory review of the proposed merger, the US Federal Trade Commission (FTC) fi led a motion with the U.S. District Court for the District of Columbia (the Court) seeking a preliminary injunction to prevent the parties from closing the merger, which the Court granted on June 23, 2015. On June 26, 2015, the parties terminated the merger agreement, as a result of which Sysco was obligated to pay $300 million to the owners of US Foods. During the review period with the FTC, Sysco created a divestiture package, comprised of the sale of 11 US Foods facilities to Performance Food Group (PFG), which was contingent on the closing of the merger. This divestiture agreement entitled PFG to receive a $25 million termination fee if the sale of the divestiture package was terminated before July 6, 2015, with each of Sysco and US Foods responsible for one half of the applicable fee. Sysco accrued for termination payments totaling $312.5 million in fi scal 2015 and paid these amounts in fi scal 2016. SYSCO CORPORATION - Form 10-K 53 PART II ITEM 8 Financial Statements and Supplementary Data At the time of the merger announcement, Sysco secured a fully committed bridge fi nancing that could be used for funding a portion of the purchase price. In contemplation of issuing long-term fi nancing for this proposed merger, in January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2 billion to reduce interest rate exposure on 10-year and 30-year debt that was anticipated to be issued. In October 2014, Sysco obtained long-term fi nancing for this proposed merger by completing a six-part senior notes offering totaling $5 billion. At the same time, (i) the bridge fi nancing was terminated and (ii) the forward starting interest rate swaps were terminated and cash settlement of these swaps was made. Concurrent with the issuance of the new senior notes, Sysco entered into new interest rate swap agreements that effectively converted two series of the senior notes totaling $1.25 billion to fl oating rate debt. These swaps were designated as fair value hedges. These senior notes contained mandatory redemption features providing that, on the earlier of the merger agreement termination date or October 8, 2015, the company was required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus accrued interest. These notes were redeemed in July 2015. Detailed discussion of these transactions is located in Note 9, “Derivative Financial Instruments”, and Note 11, “Debt and Other Financing Arrangements.” NOTE 5 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. The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. • Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value due to the short-term maturities of these instruments. 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 9, “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 other assets and accrued expenses as Level 2 measurements in the tables below. The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of June 27, 2015 and June 28, 2014: Assets and Liabilities Measured at Fair Value as of June 27, 2015 Level 1 Level 2 Level 3 Total $ $ $ $ 4,677,735 $ 168,274 - 4,846,009 $ 63,689 $ - 12,597 76,286 $ - $ - - $ 1,257,127 $ 503,379 1,760,506 $ - $ - - - $ - $ - - $ 4,741,424 168,274 12,597 4,922,295 1,257,127 503,379 1,760,506 (In thousands) Assets: Cash and cash equivalents Cash equivalents Restricted cash Other assets Interest rate swap agreement TOTAL ASSETS AT FAIR VALUE Liabilities: Current portion of long-term debt Long-term debt TOTAL LIABILITIES AT FAIR VALUE 54 SYSCO CORPORATION - Form 10-K (In thousands) Assets: Cash and cash equivalents Cash equivalents Restricted cash Other assets Interest rate swap agreement TOTAL ASSETS AT FAIR VALUE Liabilities: Accrued expenses Interest rate swap agreements TOTAL LIABILITIES AT FAIR VALUE PART II ITEM 8 Financial Statements and Supplementary Data Assets and Liabilities Measured at Fair Value as of June 28, 2014 Level 1 Level 3 Level 2 Total $ $ $ $ 2,770 $ 131,966 $ 145,412 - - 148,182 $ 4,828 136,794 $ - $ - $ 133,466 $ 133,466 $ - $ - - - $ - $ - $ 134,736 145,412 4,828 284,976 133,466 133,466 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 $7.6 billion and $3.0 billion as of June 27, 2015 and June 28, 2014, respectively. The carrying value of total debt was $7.3 billion and $2.7 billion as of June 27, 2015 and June 28, 2014, respectively. NOTE 6 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 NOTE 7 Plant and Equipment 2015 2014 2013 $ $ 49,902 $ 17,996 (25,719) (459) 41,720 $ 47,345 $ 34,429 (31,721) (151) 49,902 $ 42,919 35,243 (30,824) 7 47,345 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 Total plant and equipment at cost Accumulated depreciation TOTAL PLANT AND EQUIPMENT, NET June 27, 2015 June 28, 2014 Estimated Useful Lives $ 441,939 $ 3,877,817 2,836,554 1,234,138 8,390,448 (4,408,305) 3,982,143 $ $ 431,694 3,816,387 2,726,415 1,109,379 8,083,875 (4,098,257) 3,985,618 10-30 years 3-10 years 3-7 years The capitalized direct costs for the internal use software portion of the company’s Enterprise Resource Planning system are included within “computer hardware and software” in the table above in the amount of $293.8 million and $355.2 million, net of accumulated amortization, as of June 27, 2015 and June 28, 2014, respectively. The majority of this internal use software was placed into service and began amortization in August of fi scal 2013. Depreciation expense, including amortization of capital leases, for the past three years was $495.8 million in 2015, $493.8 million in 2014 and $473.5 million in 2013. SYSCO CORPORATION - Form 10-K 55 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 8 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) Broadline SYGMA Other Total Carrying amount as of June 29, 2013 $ 1,123,419 $ 32,609 $ 728,207 $ 1,884,235 Goodwill acquired during year Currency translation/other Carrying amount as of June 28, 2014 Goodwill acquired during year Currency translation/other CARRYING AMOUNT AS OF JUNE 27, 2015 $ 48,425 3,649 1,175,493 79,802 (78,524) 1,176,771 $ - - 14,408 (45) 62,833 3,604 32,609 742,570 1,950,672 - - 32,609 $ 8,408 (541) 750,437 $ 88,210 (79,065) 1,959,817 Amortizable intangible assets acquired during fi scal 2015 were $27.7 million with a weighted-average amortization period of 7.9 years. By intangible asset category, the amortizable intangible assets acquired during fi scal 2015 were customer relationships of $19.5 million with a weighted-average amortization period of 9.4 years, non-compete agreements of $4.3 million with a weighted-average amortization period of 4.6 years and other intangibles of $3.9 million with a weighted-average amortization period of 4.0 years. The following table presents details of the company’s amortizable intangible assets: (In thousands) Customer relationships Non-compete agreements Trademarks Other TOTAL AMORTIZABLE INTANGIBLE ASSETS $ $ Gross Carrying Amount June 27, 2015 Accumulated Amortization Net Gross Carrying Amount June 28, 2014 Accumulated Amortization 236,916 $ 33,436 10,768 13,437 (130,506) $ 106,410 $ (14,525) (4,117) (4,871) 18,911 6,651 8,566 246,019 $ 33,164 12,063 13,498 (124,223) $ (10,629) (3,200) (2,070) Net 121,796 22,535 8,863 11,428 294,557 $ (154,019) $ 140,538 $ 304,744 $ (140,122) $ 164,622 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 27, 2015 June 28, 2014 $ $ 13,304 $ 966 14,271 $ 11,639 966 12,605 Amortization expense for the past three years was $40.0 million in 2015, $42.2 million in 2014 and $32.1 million in 2013. The estimated future amortization expense for the next fi ve fi scal years on intangible assets outstanding as of June 27, 2015 is shown below: (In thousands) 2016 2017 2018 2019 2020 $ Amount 33,570 29,264 26,162 16,245 12,215 NOTE 9 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 fi scal 2014, the company 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. In October 2014, Sysco obtained long-term fi nancing for the proposed US Foods merger by completing a six-part senior notes offering totaling $5 billion. At the same time of these note issuances, the company entered into interest rate swap agreements that effectively converted $500 million of senior notes maturing in fi scal 2018 and $750 million of senior notes maturing in fi scal 2020 to fl oating rate debt. These are collectively referred to as the 2015 swaps. See Note 11, “Debt and Other Financing Arrangements,” for further discussion of the senior notes issuance. These transactions were designated as fair value hedges against the changes in fair value of fi xed rate debt resulting from changes in interest rates. Subsequent to fi scal 2015, we terminated our 2015 swaps in connection with the redemption of the senior notes. 56 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data In January 2014, the company entered into two forward starting swap agreements with notional amounts totaling $2.0 billion in contemplation of securing long-term fi nancing for the proposed US Foods merger or for other long-term fi nancing purposes in the event the merger did not occur. The company designated these derivatives as cash fl ow hedges to reduce interest rate exposure on forecasted 10-year and 30-year debt due to changes in the benchmark interest rates for debt the company issued in fi scal 2015. In September 2014, in conjunction with the pricing of the $1.25 billion senior notes maturing in fi scal 2025 and the $1 billion senior notes maturing in fi scal 2045, the company terminated these swaps, locking in the effective yields on the related debt. Cash of $58.9 million was paid to settle the 10-year swap in September 2014, and cash of $129.9 million was paid to settle the 30-year swap in October 2014. The cash payments are located within the line Cash paid for settlement of cash fl ow hedge within fi nancing activities in the statement of consolidated cash fl ows. The cumulative losses recorded in Accumulated other comprehensive (loss) income related to these swaps will continue to be amortized through interest expense over the term of the originally issued debt as the amount hedged is anticipated to remain within our capital structure. In August 2015, the company entered into two forward starting swap agreements with notional amounts totaling $500 million. The company designated these derivatives as cash fl ow hedges to reduce interest rate exposure on forecasted 10-year debt due to changes in the benchmark interest rates for debt the company expects to issue in fi scal 2016. The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of each fi scal year-end are as follows: (In thousands) Interest rate swap agreements: June 27, 2015 June 28, 2014 Asset Derivatives Liability Derivatives Balance Sheet Location Fair Value Balance Sheet Location Fair Value Other assets $ Other assets 12,597 4,828 Accrued expenses $ Accrued expenses - 133,466 The location and effect of derivative instruments and related hedged items on the consolidated comprehensive income for each fi scal year presented on a pretax basis are as follows: Location of (Gain) or Loss Recognized in Comprehensive Income Amount of (Gain) or Loss Recognized in Comprehensive Income 2014 2013 2015 (In thousands) Fair Value Hedge Relationships: Interest rate swap agreements Cash Flow Hedge Relationships: Forward starting interest rate swap agreements Forward starting interest rate swap agreements (1) (1) Represents amortization of losses on forward starting interest rate swap agreements that were previously settled. Other comprehensive income Interest expense $ Interest expense (21,960) $ (10,879) $ (4,492) - 133,466 8,305 625 N/A 626 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 rates. Hedge ineffectiveness is recorded directly in earnings within interest expense and was immaterial for fi scal 2015, fi scal 2014 and fi scal 2013. The interest rate swaps do not contain credit-risk-related contingent features. NOTE 10 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 2015 2014 2013 $ $ 194,476 $ 367,025 (368,189) 193,312 $ 147,598 $ 375,267 (328,389) 194,476 $ 129,749 352,374 (334,525) 147,598 SYSCO CORPORATION - Form 10-K 57 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 11 Debt and Other Financing Arrangements Sysco’s debt consists of the following: June 27, 2015 June 28, 2014 $ (In thousands) Commercial paper, interest averaging 0.2% as of June 28, 2014 Senior notes, interest at 0.55%, maturing in fi scal 2015 Senior notes, interest at 5.25%, maturing in fi scal 2018(1) Senior notes, interest at 5.375%, maturing in fi scal 2019(1) Senior notes, interest at 2.6%, maturing in fi scal 2022(1) Debentures, interest at 7.16%, maturing in fi scal 2027(2) Debentures, interest at 6.5%, maturing in fi scal 2029(1) Senior notes, interest at 5.375%, maturing in fi scal 2036(1) Senior notes, interest at 6.625%, maturing in fi scal 2039(1) Senior notes, interest at 1.45%, maturing in fi scal 2018(1), (3) Senior notes, interest at 2.35% maturing in fi scal 2020(1), (3) Senior notes, interest at 3.00% , maturing in fi scal 2022(1), (3) Senior notes, interest at 3.50% , maturing in fi scal 2025(1), (3) Senior notes, interest at 4.35%, maturing in fi scal 2035(1), (3) Senior notes, interest at 4.50%, maturing in fi scal 2045(1), (3) Notes payable, capital leases, and other debt, interest averaging 2.81% and maturing at various dates to fi scal 2026 as of June 27, 2015 and 2.59% and maturing at various dates to fi scal 2029 as of June 28, 2014 Total debt Less current maturities of long-term debt Less notes payable NET LONG-TERM DEBT (1) Represents senior notes that 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 - $ - 502,608 248,824 444,212 50,000 223,610 496,775 244,415 500,801 752,070 745,136 1,239,116 742,664 981,813 129,999 299,015 502,521 248,509 443,384 50,000 223,505 495,636 244,180 - - - - - - 149,833 7,321,877 (4,979,301) (70,751) 2,271,825 96,333 2,733,082 (304,777) (70,975) 2,357,330 $ $ 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. (2) This debenture is not subject to any sinking fund requirement and is no longer redeemable prior to maturity. (3) Represents senior notes that were redeemed in July 2015 under a mandatory redemption feature. As of June 27, 2015, the principal payments required to be made during the next fi ve fi scal years on long-term debt, excluding notes payable and commercial paper, are shown below: (In thousands) 2016 2017 2018 2019 2020 $ Amount 5,007,943 29,140 506,694 269,532 3,387 Commercial Paper and Revolving Credit Facility Sysco has a commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs. The facility provides for borrowings in both U.S. and Canadian dollars. Borrowings by Sysco International, ULC under the agreement are guaranteed by Sysco, and borrowings by Sysco and Sysco International, ULC under the credit agreement are guaranteed by the wholly-owned subsidiaries of Sysco that are guarantors of the company’s senior notes and debentures. The facility, in the amount of $1.5 billion, expires on December 29, 2018, but is subject to extension. As of June 27, 2015, there were no commercial paper issuances outstanding. In periods where Sysco has commercial paper borrowings, the amounts are classifi ed within long-term debt, as the program is supported by long-term revolving credit facility described above. During fi scal 2015, 2014, and 2013, aggregate outstanding commercial paper issuances ranged from approximately zero to $659.4 million, zero to $770.5 million, and zero to $330.0 million, respectively. Fixed Rate Debt In February 2013, Sysco repaid 4.2% senior notes totaling $250.0 million at maturity utilizing a combination of cash fl ow from operations and cash on hand. In March 2014, Sysco repaid 4.6% senior notes totaling $200.0 million at maturity utilizing a combination of cash fl ow from operations and commercial paper issuances. 58 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data In June 2015, Sysco repaid 0.55% senior notes totaling $300.0 million at maturity utilizing a combination of cash fl ow from operations and cash on hand. In October 2014, Sysco issued senior notes and terminated a previously outstanding unsecured bridge facility that was established in December 2013 as a potential fi nancing mechanism for funding the proposed US Foods merger until longer-term funding could be obtained. The senior notes, issued under the company’s previous February 2012 registration statement, were unsecured, were not subject to any sinking fund requirement and included a redemption provision that allowed 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. These senior notes contained mandatory redemption features providing that, on the earlier of the merger agreement termination date or October 8, 2015, Sysco was required to redeem all of the senior notes at a redemption price equal to 101% of the principal of the senior notes plus accrued interest. In June 2015, we terminated the merger agreement, and we redeemed the senior notes in July 2015 using cash on hand and the proceeds from borrowings under our commercial paper program. The senior notes were classifi ed as current maturities of long-term debt as of June 27, 2015. Details of the senior notes are below: Maturity Date October 2, 2017 October 2, 2019 October 2, 2021 October 2, 2024 October 2, 2034 October 2, 2044 Total Debt Par Value (in millions) Coupon Rate Pricing (percentage of par) $ 500 750 750 1,250 750 1,000 1.45% 2.35 3.00 3.50 4.35 4.50 99.962% 99.864 99.781 99.616 99.841 98.992 Total debt as of June 27, 2015 was $7.3 billion, of which approximately 74% was at fi xed rates with a weighted average of 4.3% and an average life of 4.37 years, and the remainder was at fl oating rates with a weighted average of 2.9% and an average life of 0.84 years. 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 27, 2015 and June 28, 2014, letters of credit outstanding were $101.0 million and $45.7 million, respectively. NOTE 12 Leases Sysco has obligations under capital and operating leases for certain distribution facilities, vehicles and computers. Total rental expense under operating leases was $104.3 million, $92.3 million, and $84.4 million in fi scal 2015, 2014 and 2013, 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 long-term operating leases are as follows: (In thousands) 2016 2017 2018 2019 2020 Thereafter NOTE 13 Other Long-Term Liabilities The following table presents details of the company’s other long-term liabilities: (In thousands) Retirement Plan Supplemental executive retirement plan Other TOTAL $ Amount 47,559 38,183 27,831 20,320 16,661 45,670 June 27, 2015 June 28, 2014 $ $ 227,352 $ 420,704 286,666 934,722 $ 270,189 438,288 319,401 1,027,878 SYSCO CORPORATION - Form 10-K 59 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 14 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 Plans 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 contributed by the participant. 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. The company also has a nonqualifi ed, unfunded Management Savings Plan (MSP) available to key management personnel who are participants in the Management Incentive Plan. Participants may defer up to 50% of their annual salary and up to 100% of their annual bonus. 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 eligible compensation that is deferred. Certain employees are also eligible for a transition contribution, and the company may also make discretionary contributions. All company contributions to the MSP are limited by the amounts contributed by the company to the participant’s 401(k) account. Sysco’s expense related to its defi ned contribution plans was $125.4 million in fi scal 2015, $118.6 million in fi scal 2014, and $65.3 million in fi scal 2013. Defi ned Benefi t Plans Sysco maintains a qualifi ed pension plan (Retirement Plan) that pays benefi ts to participating employees at retirement, using formulas based on a participant’s years of service and compensation. During fi scal 2012, Sysco approved a plan 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 the company’s defi ned contribution 401(k) plan. In addition to receiving benefi ts upon retirement under the company’s Retirement Plan, certain key management personnel who were participants in the Management Incentive Plan are entitled to 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. 60 SYSCO CORPORATION - Form 10-K 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 PART II ITEM 8 Financial Statements and Supplementary Data Retirement Plan and the SERP. (In thousands) Change in benefi t obligation: Benefi t obligation at beginning of year Service cost Interest cost Amendments Actuarial (gain) loss, net Total disbursements 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 disbursements Fair value of plan assets at end of year FUNDED STATUS AT END OF YEAR Pension Benefi ts Other Postretirement Plans June 27, 2015 June 28, 2014 June 27, 2015 June 28, 2014 $ 3,671,708 $ 11,263 171,120 914 (86,129) (89,749) 3,679,127 2,937,519 80,225 75,133 (89,749) 3,003,128 $ (675,999) $ 3,089,022 $ 9,657 160,436 (347) 492,720 (79,780) 3,671,708 2,518,009 474,538 24,752 (79,780) 2,937,519 (734,189) 12,611 $ 536 590 - (1,050) 329 13,016 - - (329) 329 - 14,248 546 748 - (3,280) 349 12,611 - - (349) 349 - (12,611) $ (13,016) $ In order to meet a portion of its obligations under the SERP, Sysco has contributed to a rabbi trust, COLI policies on the lives of participants and interests in corporate-owned real estate assets. These assets are not included as plan assets or in the funded status amounts in the tables above and below. As they are held in a rabbi trust, these assets are available to satisfy the claims of the company’s creditors in the event of bankruptcy or insolvency of the company. The life insurance policies on the lives of the participants had carrying values of $97.2 million as of June 27, 2015 and $96.5 million as of June 28, 2014. 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 27, 2015 June 28, 2014 June 27, 2015 June 28, 2014 $ $ (27,942) $ (648,057) (675,999) $ (25,712) (708,477) (734,189) $ $ (327) $ (12,689) (13,016) $ (313) (12,298) (12,611) Pension Benefi ts Other Postretirement Plans Accumulated other comprehensive loss (income) as of June 27, 2015 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 Other Postretirement Plans Pension Benefi ts $ 50,109 $ 1,101,051 1,151,160 $ $ 730 $ (6,903) (6,173) $ Total 50,839 1,094,148 1,144,987 SYSCO CORPORATION - Form 10-K 61 PART II ITEM 8 Financial Statements and Supplementary Data Accumulated other comprehensive loss (income) as of June 28, 2014 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 Other Postretirement Plans Pension Benefi ts $ 60,306 $ 1,058,651 1,118,957 $ $ 898 $ (6,287) (5,389) $ Total 61,204 1,052,364 1,113,568 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 $3.7 billion and $3.7 billion as of June 27, 2015 and June 28, 2014, respectively. Information for plans with accumulated benefi t obligation/aggregate benefi t obligation in excess of fair value of plan assets is as follows: (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 27, 2015 and June 28, 2014 includes both the Retirement Plan and the SERP. Pension Benefi ts(1) Other Postretirement Plans June 27, 2015 June 28, 2014 June 27, 2015 June 28, 2014 $ 3,667,031 $ 3,003,128 3,660,227 2,937,519 $ 13,016 $ - 12,611 - 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 (BENEFITS) 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 2015 2014 2013 $ 11,263 $ 9,657 $ 171,120 (228,624) 11,111 19,871 - (15,259) $ 160,436 (192,795) 11,145 16,327 - 4,770 $ 70,166 148,561 (171,201) 9,899 72,624 8,293 138,342 Other Postretirement Plans 2015 2014 2013 536 $ 590 168 (434) - 860 $ 546 $ 748 168 (143) - 541 614 168 (203) 141 1,319 $ 1,261 Other changes in plan assets and benefi t obligations recognized in other comprehensive income (loss) related to company-sponsored pension plans for Pension Benefi ts 2015 2014 2013 $ $ 11,111 $ 19,871 (914) (62,270) (32,202) $ 11,145 $ 16,327 347 (210,978) (183,159) $ 18,192 72,624 (53,902) 366,957 403,871 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 62 SYSCO CORPORATION - Form 10-K 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 Actuarial (loss) gain arising in current year NET PENSION COSTS 2015 Other Postretirement Plans 2014 2013 $ $ 168 $ (434) - 1,050 784 $ 168 $ (143) - 3,280 3,305 $ 168 (203) 141 (188) (82) Amounts included in accumulated other comprehensive loss (income) as of June 27, 2015 that are expected to be recognized as components of net company-sponsored benefi t cost during fi scal 2016 are: (In thousands) Amortization of prior service cost Amortization of actuarial losses (gains) TOTAL Employer Contributions Other Postretirement Plans Pension Benefi ts $ 11,202 $ 22,186 33,388 $ $ 169 $ (481) (312) $ Total 11,371 21,705 33,076 The company made cash contributions to its company-sponsored pension plans of $75.1 million and $24.8 million in fi scal years 2015 and 2014, respectively. There were no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fi scal 2015. The $50 million contribution to the Retirement Plan in fi scal 2015 was voluntary, as there were no required contributions to meet ERISA minimum funding requirements in fi scal 2015. There are no required contributions to the Retirement Plan to meet ERISA minimum funding requirements in fi scal 2016. 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 2016 contributions to fund benefi t payments for the SERP and other postretirement plans are $27.9 million and $0.3 million, respectively. Estimated Future Benefi t Payments Estimated future benefi t payments for vested participants, based on actuarial assumptions, are as follows: (In thousands) 2016 2017 2018 2019 2020 Subsequent fi ve years Assumptions Pension Benefi ts $ 105,555 $ 115,844 126,413 137,300 148,517 906,784 Other Postretirement Plans 327 546 824 1,035 1,213 6,658 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 27, 2015 June 28, 2014 4.84% 4.63 4.84 3.89 4.74% 4.59 4.74 3.89 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 June 27, 2015 or June 28, 2014. SYSCO CORPORATION - Form 10-K 63 PART II ITEM 8 Financial Statements and Supplementary Data Weighted-average assumptions used to determine net company-sponsored pension costs and other postretirement benefi t costs for each fi scal year were: 2015 2014 2013 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. 4.74% 4.59% 4.74% 7.75% 3.89% 5.32% 4.94% 5.32% 7.75% 3.89% 4.81% 3.96%(1) 4.81% 7.75% 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 net pension costs related to the SERP for fi scal 2015 and fi scal 2014. For determining the net pension costs related to the SERP for fi scal 2013, 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 updated annually and revised as deemed appropriate. The discount rate to be used for the calculation of fi scal 2016 net company-sponsored benefi t costs for the Retirement Plan is 4.84%. The discount rate to be used for the calculation of fi scal 2016 net company-sponsored benefi t costs for the SERP is 4.63%. The discount rate to be used for the calculation of fi scal 2016 net company-sponsored benefi t costs for the Other Postretirement Plans is 4.84%. 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 2016 net company-sponsored benefi t costs for the Retirement Plan is 7.25%. 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. Over time, the company intends to decrease the risk of the Retirement Plan’s investments in order to preserve the Retirement Plan’s funded status. 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 investments 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, private equity or hedge fund 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 27, 2015 is as follows: U.S. equity International equity Long duration fi xed income High yield fi xed income Alternative investments 64 SYSCO CORPORATION - Form 10-K Target Asset Allocation Actual Asset Allocation 24% 24 27 7 18 24% 25 26 7 18 100% PART II ITEM 8 Financial Statements and Supplementary Data Sysco’s investment strategy is implemented through a combination of balanced and specialized investment managers, passive investment funds and actively- managed investment funds. U.S. equity consists of both large-cap and small-to-mid-cap 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, hedge funds, 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 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 5, “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 held by Sysco’s Retirement Plan measured at fair value. Cash and cash equivalents: Valued at amortized cost, which approximates fair value due to the short-term maturities of these investments. 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, equity and exchange-traded real estate 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. Non-exchange traded 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. The hedge funds are valued based on the hedge funds’ proportionate share of the net assets of the underlying private investment fund as determined by the underlying private investment fund’s general partner. 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, equity and exchange traded real-estate securities are included as a Level 2 measurement in the table below. The non-exchange traded real estate funds, hedge 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. SYSCO CORPORATION - Form 10-K 65 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 27, 2015: Total investments at fair value Other(4) 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 $1.4 million; the fair value of liability positions totaled $0.3 million. Include primarily plan receivables and payables, net. $ 2,080,659 $ The following table presents the fair value of the Retirement Plan’s assets by major asset category as of June 28, 2014: Assets Measured at Fair Value as of June 27, 2015 Level 1 Level 2 Level 3 Total $ - $ 21,968 $ - $ 21,968 233,525 154,598 - - - - - - - - - 388,123 $ 333,709 - 732,595 567,280 190,125 4,343 1,078 204,175 - 25,386 - - - - - - - - - 335,265 138,283 52,891 526,439 $ $ 567,234 154,598 732,595 567,280 190,125 4,343 1,078 204,175 335,265 163,669 52,891 2,995,221 7,907 3,003,128 Assets Measured at Fair Value as of June 28, 2014 Level 1 Level 2 Level 3 Total $ - $ 51,066 $ - $ 51,066 218,165 135,781 - - - - (127) - - - 777,627 - 717,022 568,419 171,617 4,907 352 102,041 114,250 - $ 353,819 $ 2,507,301 $ - - - - - - - - 995,792 135,781 717,022 568,419 171,617 4,907 225 102,041 35,403 31,204 66,607 $ $ 149,653 31,204 2,927,727 9,792 2,937,519 Total investments at fair value Other(4) FAIR VALUE OF PLAN ASSETS AT THE END OF THE 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 $0.8 million; the fair value of liability positions totaled $0.6 million. Include primarily plan receivables and payables, net. (In thousands) Cash and cash equivalents U.S. equity: U.S. large-cap(1) U.S. small-cap International equity(2) Long duration fi xed income: Corporate bonds U.S. government and agency securities Other Derivatives, net(3) High yield fi xed income(2) Alternative investments: Hedge Fund(2) Real estate(2) Private equity(2) (In thousands) Cash and cash equivalents U.S. equity: U.S. large-cap(1) U.S. small-cap International equity(2) Long duration fi xed income: Corporate bonds U.S. government and agency securities Other Derivatives, net(3) High yield fi xed income(2) Alternative investments: Real estate(2) Private equity(2) 66 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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: (In thousands) Balance, June 29, 2013 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 28, 2014 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 27, 2015 Real Estate Funds Private Equity Funds Hedge Funds $ 64,845 $ 14,375 $ 3,044 3,307 (35,793) - 1,931 1,767 13,131 - $ 35,403 $ 31,204 $ - - - - - - 8,122 1,062 93,696 - 2,438 1,780 17,469 - $ 138,283 $ 52,891 $ 12,265 - 323,000 - 335,265 Total Level 3 Measurements $ 79,220 4,975 5,074 (22,662) - 66,607 22,825 2,842 434,165 - 526,439 $ $ NOTE 15 Multiemployer Employee Benefi t Plans Defi ned Benefi t Pension Plans Sysco contributes to several multiemployer defi ned benefi t pension plans in the U.S. 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 appointed by Sysco and the other employers contributing to the plan. Approximately 10% of Sysco’s current employees are participants in such multiemployer plans as of June 27, 2015. 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 U.S. 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 U.S. 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. There were no withdrawal liability provisions recorded in fi scal 2015, $1.5 million in fi scal 2014 and $41.9 million in fi scal 2013. As of June 27, 2015, Sysco had no liabilities recorded related to certain multiemployer defi ned benefi t plans for which Sysco’s voluntary withdrawal had already occurred and had $1.4 million liabilities as of June 28, 2014. 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 SYSCO CORPORATION - Form 10-K 67 PART II ITEM 8 Financial Statements and Supplementary Data estimates its share of withdrawal liability for these plans could have been as much as $90.0 million as of June 27, 2015. 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, 2013 for a majority of the plans. As the valuation date for all of these plans was December 31, 2013, 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 2015 2014 2013 $ $ 32,097 $ 6,047 38,144 $ 30,402 $ 45,627 76,029 $ 28,816 36,923 65,739 Payments for voluntary withdrawals included in contributions were $1.4 million, $40.8 million and $31.8 million in fi scal 2015, 2014 and 2013, respectively. Individually Signifi cant Plans The information in the following tables relate 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) (1) 4/26/14 to 11/7/20 (2) 7/31/16 to 7/20/20 4/30/2017 Pension Protection Act Zone Status As of 12/31/15 As of 12/31/14 Green Green FIP/RP Status N/A Surcharge Imposed N/A Pension Fund EIN-PN 91-6145047-001 23-1511735-001 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 covers anywhere from less than 1% to 10% of the total 41-6047047-001 16-6063585-074 52-6043608-001 Implemented Implemented Implemented Implemented 8/31/2015 8/8/2017 Yellow Yellow Yellow Yellow Green Green Red Red N/A N/A N/A No 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 31, 2016 and covers approximately 5% of the total Contribution Sysco is required to pay the fund. The remaining two agreements expire July 20, 2020 and cover the remaining 95% of the total contributions Sysco is required to pay the fund. 68 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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. Pension Fund (In thousands) Western Conference of Teamsters Pension Plan Teamsters Pension Trust Fund of Philadelphia and Vicinity N.Y. 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 2015 2014 2013 23,268 $ 2,233 1,455 21,893 $ 1,977 1,444 2,068 1,874 3,073 3,214 20,561 2,256 1,399 1,624 2,976 Sysco 5% of Total Plan Contributions Year Ending 12/31/13 Year Ending 12/31/12 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. 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 $28.5 million in fi scal 2015, $29.7 million in fi scal 2014 and $30.6 million in fi scal 2013. There have been no signifi cant changes that affect the comparability of fi scal 2015, fi scal 2014 and fi scal 2013 contributions. NOTE 16 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. 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: Weighted-average basic shares outstanding Dilutive effect of share-based awards Weighted-average diluted shares outstanding BASIC EARNINGS PER SHARE: DILUTED EARNINGS PER SHARE: 2015 2014 2013 $ 686,773 $ 931,533 $ 992,427 592,072,308 4,776,726 596,849,034 585,988,084 4,228,136 590,216,220 $ $ 1.16 $ 1.15 $ 1.59 $ 1.58 $ 589,397,807 3,277,303 592,675,110 1.68 1.67 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 2,400,000, 2,100,000 and 18,200,000 for fi scal 2015, 2014 and 2013, respectively. Dividends declared were $705.5 million, $673.6 million and $654.9 million in fi scal 2015, 2014 and 2013, respectively. Included in dividends declared for each year were dividends declared but not yet paid at year-end of approximately $178.3 million, $171.6 million and $165.8 million in fi scal 2015, 2014 and 2013, respectively. SYSCO CORPORATION - Form 10-K 69 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 17 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 $406.2 million, $735.8 million and $1.2 billion in fi scal 2015, 2014 and 2013, 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) Pension and other postretirement benefi t plans: Reclassifi cation adjustments: Amortization of prior service cost Amortization of actuarial loss (gain), net TOTAL RECLASSIFICATION ADJUSTMENTS Other comprehensive income before reclassifi cation adjustments: Prior service cost arising in current year Net actuarial gain arising in current year TOTAL OTHER COMPREHENSIVE INCOME BEFORE RECLASSIFICATION ADJUSTMENTS Foreign currency translation: Other comprehensive income before reclassifi cation adjustments: Foreign currency translation adjustment Interest rate swaps: Reclassifi cation adjustments: Amortization of cash fl ow hedges N/A N/A N/A Other comprehensive income before reclassifi cation adjustments: Change in fair value of cash fl ow hedges N/A TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (In thousands) Pension and other postretirement benefi t plans: Reclassifi cation adjustments: Amortization of prior service cost Amortization of actuarial loss (gain), net TOTAL RECLASSIFICATION ADJUSTMENTS Other comprehensive income before reclassifi cation adjustments: Prior service cost arising in current year Net actuarial gain arising in current year TOTAL OTHER COMPREHENSIVE INCOME BEFORE RECLASSIFICATION ADJUSTMENTS Foreign currency translation: Other comprehensive income before reclassifi cation adjustments: Foreign currency translation adjustment Interest rate swaps: Reclassifi cation adjustments: Amortization of cash fl ow hedges Location of Expense (Income) Recognized in Net Earnings Before Tax Amount 2015 Tax Net of Tax Amount Operating expenses Operating expenses $ 11,279 $ 19,437 30,716 4,331 $ 7,464 11,795 6,948 11,973 18,921 (563) (37,712) (914) (61,221) (351) (23,509) (62,135) (23,860) (38,275) (232,185) - (232,185) Interest expense 8,305 3,189 5,116 $ $ (55,374) (310,673) $ (21,263) (30,139) $ (34,111) (280,534) Before Tax Amount 2014 Tax Net of Tax Amount 11,313 $ 16,184 27,497 4,343 $ 6,216 10,559 6,970 9,968 16,938 347 (207,698) 133 (79,756) 214 (127,942) (207,351) (79,623) (127,728) (3,106) - (3,106) Location of Expense (Income) Recognized in Net Earnings Operating expenses Operating expenses N/A N/A N/A Interest expense 625 240 385 Other comprehensive income before reclassifi cation adjustments: Change in fair value of cash fl ow hedges N/A TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (133,466) (315,801) $ (51,251) (120,075) $ (82,215) (195,726) $ 70 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Location of Expense (Income) Recognized in Net Earnings Before Tax Amount 2013 Tax Net of Tax Amount Operating expenses Operating expenses Operating expenses $ 18,360 $ 72,421 141 90,922 7,050 $ 27,811 53 34,914 11,310 44,610 88 56,008 N/A N/A N/A (53,902) 366,769 (20,699) 140,840 (33,203) 225,929 312,867 120,141 192,726 (33,191) - (33,191) (In thousands) Pension and other postretirement benefi t plans: Reclassifi cation adjustments: Amortization of prior service cost Amortization of actuarial loss (gain), net Amortization of transition obligation TOTAL RECLASSIFICATION ADJUSTMENTS Other comprehensive income before reclassifi cation adjustments: Prior service cost arising in current year Net actuarial gain arising in current year TOTAL OTHER COMPREHENSIVE INCOME BEFORE RECLASSIFICATION ADJUSTMENTS Foreign currency translation: Other comprehensive income before reclassifi cation adjustments: Foreign currency translation adjustment Interest rate swaps: Reclassifi cation adjustments: Amortization of cash fl ow hedges TOTAL OTHER COMPREHENSIVE INCOME (LOSS) $ 371,224 $ 155,295 $ The following table provides a summary of the changes in accumulated other comprehensive (loss) income for the years presented: Interest expense 626 240 386 215,929 (In thousands) Balance as of June 30, 2012 Other comprehensive income before reclassifi cation adjustments Amounts reclassifi ed from accumulated other comprehensive loss Balance as of June 29, 2013 Other comprehensive income before reclassifi cation adjustments Amounts reclassifi ed from accumulated other comprehensive loss Balance as of June 28, 2014 Other comprehensive income before reclassifi cation adjustments Amounts reclassifi ed from accumulated other comprehensive loss BALANCE AS OF JUNE 27, 2015 $ $ Pension and Other Postretirement Benefi t Plans, net of tax Foreign Currency Translation Interest Rate Swap, net of tax Total (823,901) $ 192,726 56,008 (575,167) (127,728) 16,938 (685,957) (38,275) 18,921 (705,311) $ 170,749 $ (33,191) - 137,558 (3,106) - 134,452 (232,185) - (97,733) $ (9,714) $ - 386 (9,328) (82,215) 385 (91,158) (34,111) 5,116 (120,153) $ (662,866) 159,535 56,394 (446,937) (213,049) 17,323 (642,663) (304,571) 24,037 (923,197) SYSCO CORPORATION - Form 10-K 71 PART II ITEM 8 Financial Statements and Supplementary Data NOTE 18 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, a non-employee director plan and the Employees’ Stock Purchase Plan. Stock Incentive Plans In November 2013, Sysco’s Long-term Incentive Plan (2013 Plan) was adopted and reserved up to 55,600,000 shares of Sysco common stock for share- based awards to employees, non-employee directors and key advisors. Of the 55,600,000 authorized shares, the full 55,600,000 shares may be issued as options or stock appreciation rights and up to 17,500,000 shares may be issued as restricted stock, restricted stock units or other types of stock-based awards. To date, Sysco has issued options 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 ten years. As of June 27, 2015, there were 43,562,619 remaining shares authorized and available for grant in total under the 2013 Plan, of which the full 43,562,619 shares may be issued as options or stock appreciation rights, or as a combination of up to 15,115,359 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 27, 2015. No new options will be issued under any of the prior plans, as future grants to employees will be made through the 2013 Plan or subsequently adopted plans. Awards under these plans are subject to time-based vesting with vesting periods that vary by individual grant. The contractual life of all options granted under these plans is 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. Vesting requirements for awards under these plans vary by individual grant and include either time-based vesting or vesting based on performance criteria. As of June 27, 2015, there were a total of 346,286 remaining shares authorized and available for grant 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 2015 2014 2013 3.2% 20.7% 2.0% 3.5% 20.4% 2.1% 3.7% 20.7% 0.7% 7.3 years 7.2 years 5.4 years 72 SYSCO CORPORATION - Form 10-K The following summary presents information regarding outstanding options as of June 27, 2015 and changes during the fi scal year then ended with regard to options under all stock incentive plans: PART II ITEM 8 Financial Statements and Supplementary Data Outstanding as of June 28, 2014 Granted Exercised Forfeited Expired OUTSTANDING AS OF JUNE 27, 2015 VESTED OR EXPECTED TO VEST AS OF JUNE 27, 2015 EXERCISABLE AS OF JUNE 27, 2015 Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) 29.59 38.89 29.31 29.33 33.22 31.28 31.24 28.54 5.21 $ 5.18 $ 3.05 $ 185,242 184,526 97,362 Shares Under Option 27,469,911 $ 4,497,954 (6,054,528) (85,550) (35,409) 25,792,378 25,575,542 9,902,719 $ $ $ The total number of employee options granted was 4,497,954, 5,575,645 and 6,212,716 in fi scal years 2015, 2014 and 2013, respectively. During fi scal 2015, 1,286,533 options were granted to 6 executive offi cers and 3,211,421 options were granted to approximately 173 other key employees. During fi scal 2014, 2,159,698 options were granted to 11 executive offi cers and 3,415,947 options were granted to approximately 167 other key employees. 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. The weighted average grant-date fair value of options granted in fi scal 2015, 2014 and 2013 was $5.78, $4.64 and $3.20, respectively. The total intrinsic value of options exercised during fi scal 2015, 2014 and 2013 was $21.6 million, $19.1 million and $24.1 million, respectively. Restricted Stock Units During fi scal 2015, 2014 and 2013, 1,198,588, 1,322,709 and 1,722,835 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 2015, 2014 and 2013 was $37.59, $33.39 and $29.75, respectively. The total fair value of restricted stock units vested during fi scal 2015, 2014 and 2013 was $52.5 million, $39.4 million and $27.6 million, respectively. Non-Employee Director Awards During fi scal 2015, 2014 and 2013, 37,035, 43,119 and 48,069 shares, respectively, of restricted awards were granted to non-employee directors that will vest over a one-year period. Non-employee directors may elect to receive these awards in restricted stock shares that will vest at the end of the award 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 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 2015, 2014 and 2013 was $38.89, $33.40 and $29.96, respectively. The total fair value of restricted stock shares vested and deferred units distributed during fi scal 2015, 2014 and 2013 was $1.6 million, $1.4 million and $1.9 million, respectively. Restricted stock shares are valued on their vesting date. Vested deferred units are valued on their subsequent conversion and distribution date. 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 23,949, 24,565 and 26,702 shares with a weighted-average grant date fair value of $38.26, $34.59 and $30.38 per share were issued in fi scal 2015, 2014 and 2013, 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 2015, 2014 and 2013 was $0.9 million, $0.8 million and $0.5 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 27, 2015, there were 104,605 fully vested deferred units outstanding that will convert into shares of Sysco common stock upon dates selected by the respective non-employee directors. SYSCO CORPORATION - Form 10-K 73 PART II ITEM 8 Financial Statements and Supplementary Data Summary of Non-vested Awards The following summary presents information regarding outstanding non-vested awards as of June 27, 2015 and changes during the fi scal year then ended with regard to these awards under the stock incentive plans. Award types represented include: restricted stock units granted to employees and restricted awards granted to non-employee directors. Nonvested as of June 28, 2014 Granted Vested Forfeited NONVESTED AS OF JUNE 27, 2015 Employees’ Stock Purchase Plan Weighted Average Grant Date Fair Value Per Share Shares 2,918,405 $ 1,235,940 (1,396,269) (60,422) 2,697,654 $ 31.06 37.63 30.40 32.90 34.37 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. The total number of shares which may be sold pursuant to the plan may not exceed 79,000,000 shares, of which 1,211,657 remained available as of June 27, 2015. During fi scal 2015, 1,243,275 shares of Sysco common stock were purchased by the participants, as compared to 1,315,535 shares purchased in fi scal 2014 and 1,470,271 shares purchased in fi scal 2013. The weighted average fair value of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $5.73, $5.17 and $4.78 per share during fi scal 2015, 2014 and 2013, 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 $73.8 million, $74.3 million and $70.1 million for fi scal 2015, 2014 and 2013, 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 $27.4 million, $28.1 million and $29.9 million for fi scal 2015, 2014 and 2013, respectively. As of June 27, 2015, 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 2.42 years. Cash received from option exercises and purchases of shares under the Employees’ Stock Purchase Plan was $240.2 million, $255.6 million and $628.7 million during fi scal 2015, 2014 and 2013, respectively. The actual tax benefi t realized for the tax deductions from option exercises totaled $20.7 million, $16.6 million and $24.0 million during fi scal 2015, 2014 and 2013, respectively. NOTE 19 Income Taxes Income Tax Provisions For fi nancial reporting purposes, earnings before income taxes consists of the following: (In thousands) U.S. Foreign TOTAL 2015 818,244 $ 189,903 1,008,147 $ 2014 1,287,371 $ 188,253 1,475,624 $ 2013 1,351,947 195,508 1,547,455 $ $ 74 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data The income tax provision/(benefi t) for each fi scal year consists of the following: (In thousands) U.S. 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 2015 285,807 (2,737) 38,304 321,374 $ $ $ $ 2014 433,795 55,736 54,560 544,091 $ $ 2013 439,667 69,759 45,602 555,028 2015 $ 327,639 $ (6,265) $ 321,374 $ 2014 574,760 $ (30,669) 544,091 $ 2013 582,889 (27,861) 555,028 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 state loss carryforwards Benefi t on unrecognized tax benefi ts Pension Share-based compensation Deferred compensation Self-insured liabilities Receivables Inventory Cash fl ow hedge Other Total deferred tax assets TOTAL NET DEFERRED TAX (ASSETS) June 27, 2015 June 28, 2014 $ $ 381,875 224,943 23,449 630,267 47,958 16,270 264,780 42,569 35,573 65,617 38,410 68,186 74,900 29,667 683,930 (53,663) $ $ 416,417 211,434 15,171 643,022 20,123 22,170 287,046 41,262 33,280 65,002 47,688 62,799 56,826 26,471 662,667 (19,645) The company’s net operating tax loss carryforwards as of June 27, 2015 and June 28, 2014 consisted primarily of state net operating tax loss carryforwards. The state net operating tax loss carryforwards outstanding as of June 27, 2015 expire in fi scal years 2017 through 2035. There were no valuation allowances recorded for the state tax loss carryforwards as of June 27, 2015 and June 28, 2014 because management believes it is more likely than not that these benefi ts will be realized based on utilization forecasts. 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: U.S. statutory federal income tax rate State and local income taxes, net of any applicable federal income tax benefi t Foreign tax rate differential Other 2015 2014 2013 35.00% 0.91 (2.84) (1.19) 31.88% 35.00% 2.82 (1.66) 0.71 36.87% 35.00% 2.59 (1.22) (0.50) 35.87% The effective tax rate of 31.9% for fi scal 2015 was favorably impacted by lower earnings in the U.S. primarily due to costs associated with the termination of the US Foods proposed merger. The lower U.S. earnings resulted in a more signifi cant favorable impact on the effective tax rate from the indefi nitely reinvested foreign earnings due to lower foreign statutory tax rates as compared to the domestic tax rate. The additional cost associated with the proposed US Foods merger resulted in lower state taxes. SYSCO CORPORATION - Form 10-K 75 PART II ITEM 8 Financial Statements and Supplementary Data The effective tax rate of 36.9% for fi scal 2014 was negatively impacted primarily by two items. First, a non-deductible penalty, that the company incurred, had an unfavorable tax impact of $6.2 million. Second, we recorded net tax expense of $5.2 million for tax and interest related to various federal, foreign and state uncertain tax positions. This negative impact was partially offset by the recording of $5.7 million of tax benefi t related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. 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 2013 was 35.9%. Indefi nitely reinvested earnings taxed at foreign statutory tax rates that are lower than our domestic tax rate had the impact of reducing the effective tax rate. Uncertain Tax Positions 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 Reductions due to settlements with taxing authorities UNRECOGNIZED TAX BENEFITS AT END OF YEAR 2015 49,180 $ 797 (8,001) (4,430) 37,546 $ 2014 108,337 2,128 (41,802) (19,483) 49,180 $ $ As of June 27, 2015, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefi ts was $33.4 million. The expense recorded for interest and penalties related to unrecognized tax benefi ts in fi scal 2015 was not material. As of June 28, 2014, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefi ts was $36.7 million. The expense recorded for interest and penalties related to unrecognized tax benefi ts in fi scal 2014 was $14.8 million. In the fourth quarter of fi scal 2014, we reclassifi ed a receivable that would arise upon the resolution of an unrecognized tax benefi t from a gross position in other assets to a net position in other long-term liabilities on our consolidated balance sheet due to a change in circumstances related to transfer pricing positions. If Sysco were to recognize all unrecognized tax benefi ts recorded as of June 27, 2015, approximately $27.7 million of the $37.5 million reserve would reduce the effective tax rate. If Sysco were to recognize all unrecognized tax benefi ts recorded as of June 28, 2014, approximately $35.1 million of the $49.2 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 27, 2015, 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 2009. However, in Canada, the company remains open to transfer pricing adjustments back to 2003 for some entities. 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. Other Undistributed income of certain consolidated foreign subsidiaries at June 27, 2015 amounted to $1.1 billion 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. income 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. 76 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data 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 and reasonably estimable, the losses have been accrued. Based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated 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 27, 2015, we had forward diesel fuel commitments totaling approximately $99.3 million through June 2016. 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 2019. 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 27, 2015 totaled approximately $3.4 billion. Minimum amounts committed to by year are as follows: (In thousands) 2016 2017 2018 2019 2020 2021 $ Amount 2,553,305 818,521 29,035 2,863 2,863 1,491 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 2019 and may be extended. As of June 27, 2015, the total remaining cost of the services over that period is expected to be approximately $485.5 million. A portion of this committed 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 that decrease over time. If Sysco were to terminate all of the services in fi scal 2016, the estimated termination fees incurred in fi scal 2016 would be approximately $18.1 million. NOTE 21 Business Segment Information The company has aggregated its operating companies into two reporting segments, Broadline and SYGMA, 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 U.S. and International Broadline segments located in the Bahamas, Canada, Costa Rica and Ireland. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers, hospitals, schools, hotels, industrial caterers and other venues where foodservice products are served. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. “Other” fi nancial information is attributable to the company’s other operating segments, including the company’s specialty produce, custom-cut meat operations, lodging industry segments, a company that distributes specialty imported products, a company that distributes to international customers and the company’s Sysco Ventures platform, which includes a suite of technology solutions that help support the business needs of Sysco’s customers. In fi scal 2015, our leadership structure was realigned and now our custom-cut meat operations no longer report through our U.S. broadline leadership. As a result, these operations are no longer included in our Broadline segment and now reported in “Other.” Prior year amounts have been reclassifi ed to conform to the current year presentation. SYSCO CORPORATION - Form 10-K 77 PART II ITEM 8 Financial Statements and Supplementary Data The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated fi nancial statements. Intersegment sales primarily represent products the Broadline and SYGMA operating companies procured from the specialty produce, custom-cut meat operations, imported specialty products and a company that distributes to international customers. Management evaluates the performance of each of the operating segments based on its respective operating income results. Corporate expenses and adjustments generally include all expenses of the corporate offi ce and Sysco’s shared service center. These also include all share-based compensation costs. The following table sets forth the fi nancial information for Sysco’s business segments: 2015 Fiscal Year 2014 2013 38,652,211 $ 6,076,215 5,270,518 (1,318,192) 48,680,752 $ 36,808,051 $ 6,177,804 4,678,954 (1,148,097) 46,516,712 $ 35,284,529 5,780,103 4,388,261 (1,041,660) 44,411,233 2,567,954 $ 20,521 135,885 2,724,360 (1,494,998) 1,229,362 254,807 (33,592) 1,008,147 $ 278,553 $ 29,753 54,086 362,392 218,572 580,964 $ 199,831 $ 36,948 69,193 305,972 236,858 542,830 $ 2,426,908 $ 38,048 142,419 2,607,375 (1,020,253) 1,587,122 123,741 (12,243) 1,475,624 $ 296,267 $ 28,164 41,704 366,135 189,927 556,062 $ 276,314 $ 34,671 101,128 412,113 111,093 523,206 $ 2,361,442 52,016 139,337 2,552,795 (894,317) 1,658,478 128,495 (17,472) 1,547,455 303,084 28,059 38,721 369,864 142,684 512,548 265,578 18,078 66,182 349,838 162,024 511,862 7,730,239 $ 512,044 1,415,038 9,657,321 8,331,960 17,989,281 $ 8,611,776 $ 513,587 1,379,910 10,505,273 2,635,840 13,141,113 $ 9,893,743 485,520 1,279,119 11,658,382 1,007,384 12,665,766 $ $ $ $ $ $ $ $ $ $ (In thousands) Sales: Broadline SYGMA Other Intersegment sales TOTAL Operating income: Broadline SYGMA Other Total segments Corporate expenses and adjustments Total operating income Interest expense Other expense (income), net EARNINGS BEFORE INCOME TAXES Depreciation and amortization: Broadline SYGMA Other Total segments Corporate TOTAL Capital expenditures: Broadline SYGMA Other Total segments Corporate TOTAL Assets: Broadline SYGMA Other Total segments Corporate TOTAL 78 SYSCO CORPORATION - Form 10-K The sales mix for the principal product categories for each fi scal year is as follows: (In thousands) Fresh and frozen meats Canned and dry products 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) U.S. Canada Other TOTAL Long-lived assets:(2) U.S. 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. PART II ITEM 8 Financial Statements and Supplementary Data 2015 10,080,290 $ 7,999,250 6,339,537 5,199,036 5,189,496 3,828,298 3,507,007 2,490,523 1,754,944 1,102,855 661,254 528,262 48,680,752 $ Fiscal Year 2014 8,809,148 $ 8,383,007 6,196,362 4,956,895 4,814,949 3,725,108 3,438,074 2,401,021 1,671,000 1,050,187 678,454 392,507 46,516,712 $ 2013 8,242,423 8,310,634 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 2015 Fiscal Year 2014 2013 43,146,591 $ 4,727,742 806,419 48,680,752 $ 40,612,963 $ 4,923,672 980,077 46,516,712 $ 38,985,715 4,698,814 726,704 44,411,233 3,519,610 $ 317,231 145,302 3,982,143 $ 3,520,449 $ 347,440 117,729 3,985,618 $ 3,593,346 307,605 77,120 3,978,071 $ $ $ $ $ $ NOTE 22 Supplemental Guarantor Information – Subsidiary Guarantees On January 19, 2011, the wholly-owned U.S. Broadline subsidiaries of Sysco Corporation entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. Borrowings under the company’s revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs are also covered under these guarantees. As of June 27, 2015, Sysco had a total of $7.3 billion in senior notes, debentures and commercial paper outstanding that was covered by these guarantees, including the $5 billion of senior notes issued in October 2014. See Note 11, “Debt and Other Financing Arrangements,” for further discussion of the October 2014 senior notes issuance. 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. SYSCO CORPORATION - Form 10-K 79 PART II ITEM 8 Financial Statements and Supplementary Data 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 the company’s U.S. Broadline subsidiaries) and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries. $ (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 Noncontrolling interest Shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ $ $ Sysco 4,894,387 $ 9,088,455 510,285 371,802 14,864,929 $ 5,851,364 $ 973,497 2,154,923 624,795 - 5,260,350 14,864,929 $ Sysco Condensed Consolidating Balance Sheet June 27, 2015 Other Non- Guarantor Subsidiaries Certain U.S. Broadline Subsidiaries Eliminations 4,012,924 $ 2,586,993 $ - 1,694,659 522,566 6,230,149 $ 1,658,558 $ (1,996,915) 10,121 278,458 - 6,279,927 6,230,149 $ - 1,777,199 1,618,466 5,982,658 $ 1,889,693 $ 1,023,418 106,781 113,060 41,304 2,808,402 5,982,658 $ $ Consolidated Totals 11,494,304 - 3,982,143 2,512,834 17,989,281 9,399,615 - 2,271,825 1,016,313 41,304 5,260,224 17,989,281 (9,088,455) (9,088,455) $ $ (9,088,455) (9,088,455) $ Condensed Consolidating Balance Sheet June 28, 2014 Other Non- Guarantor Subsidiaries Certain U.S. Broadline Subsidiaries Eliminations Consolidated Totals $ 254,766 $ 3,928,660 $ 2,498,546 $ - $ 8,013,214 496,953 317,208 9,082,141 $ 793,240 $ 20,107 2,321,721 680,378 5,266,695 9,082,141 $ $ $ $ - 1,783,262 524,468 6,236,390 $ 1,008,366 $ (239,539) 14,094 328,185 5,125,284 6,236,390 $ - 1,705,403 1,631,847 5,835,796 $ 2,566,024 $ 219,432 21,515 140,895 2,887,930 5,835,796 $ (8,013,214) - - (8,013,214) $ $ - - - - (8,013,214) (8,013,214) $ 6,681,972 - 3,985,618 2,473,523 13,141,113 4,367,630 - 2,357,330 1,149,458 5,266,695 13,141,113 (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 80 SYSCO CORPORATION - Form 10-K PART II ITEM 8 Financial Statements and Supplementary Data Condensed Consolidating Statement of Comprehensive Income Year Ended June 27, 2015 Other Non- Guarantor Subsidiaries Eliminations Certain U.S. Broadline Subsidiaries $ Sysco $ - - - 1,232,956 (1,232,956) 323,918 (9,496) (1,547,378) (493,263) 1,740,888 686,773 (280,534) 406,239 $ $ 32,626,221 26,572,257 6,053,964 3,709,320 2,344,644 (108,233) (3,609) 2,456,486 783,066 - 1,673,420 - 1,673,420 $ 17,477,986 $ (1,423,455) $ 14,980,434 2,497,552 2,379,878 117,674 39,122 (20,487) 99,039 31,571 (1,423,455) - - - - - - - - 67,468 (1,740,888) (1,740,888) (232,185) (164,717) $ (1,508,703) $ 232,185 Consolidated Totals 48,680,752 40,129,236 8,551,516 7,322,154 1,229,362 254,807 (33,592) 1,008,147 321,374 - 686,773 (280,534) 406,239 $ Sysco Condensed Consolidating Statement of Comprehensive Income Year Ended June 28, 2014 Other Non- Guarantor Subsidiaries Certain U.S. Broadline Subsidiaries Eliminations - $ - - 804,177 (804,177) 232,140 (7,434) (1,028,883) (379,369) 1,581,047 931,533 (195,726) 735,807 $ 30,741,979 $ 24,990,377 5,751,602 3,520,577 2,231,025 (102,086) 217 2,332,894 860,184 - 1,472,710 - 1,472,710 $ 16,979,494 $ 14,550,061 2,429,433 2,269,159 160,274 (6,313) (5,026) 171,613 63,276 - 108,337 (3,106) 105,231 $ (1,204,761) $ (1,204,761) - - - - - - - (1,581,047) (1,581,047) 3,106 (1,577,941) $ Condensed Consolidating Statement of Comprehensive Income Year Ended June 29, 2013 Other Non- Guarantor Subsidiaries Certain U.S. Broadline Subsidiaries Eliminations Sysco - $ - - 694,323 (694,323) 298,474 (12,864) (979,933) (351,474) 1,620,886 992,427 215,929 1,208,356 $ 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 - 1,505,658 $ 15,335,180 $ 13,115,225 2,219,955 2,032,899 187,056 7,442 (54) 179,668 64,440 - 115,228 (33,191) 82,037 $ (1,086,276) $ (1,086,276) - - - - - - - (1,620,886) (1,620,886) 33,191 (1,587,695) $ Consolidated Totals 46,516,712 38,335,677 8,181,035 6,593,913 1,587,122 123,741 (12,243) 1,475,624 544,091 - 931,533 (195,726) 735,807 Consolidated Totals 44,411,233 36,414,626 7,996,607 6,338,129 1,658,478 128,495 (17,472) 1,547,455 555,028 - 992,427 215,929 1,208,356 (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 (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 $ $ $ $ SYSCO CORPORATION - Form 10-K 81 Condensed Consolidating Cash Flows Year Ended June 27, 2015 Certain U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals Sysco (359,239) $ (160,234) 3,832,479 - 1,379,112 4,692,118 158,957 4,851,075 $ 2,363,836 $ (108,099) (6,022) - (2,251,109) (1,394) 27,772 26,378 $ (449,113) $ (386,013) 71,105 (81,702) 871,997 26,274 226,317 252,591 $ 1,555,484 (654,346) 3,897,562 (81,702) - 4,716,998 413,046 5,130,044 Condensed Consolidating Cash Flows Year Ended June 28, 2014 Certain U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals Sysco $ (504,119) $ (51,290) (919,627) - 1,426,402 (48,634) 207,591 158,957 $ 1,541,062 $ (171,979) 3,872 - (1,369,478) 3,477 24,295 27,772 $ 455,872 $ (353,569) (103) 642 (56,924) 45,918 180,399 226,317 $ 1,492,815 (576,838) (915,858) 642 - 761 412,285 413,046 Condensed Consolidating Cash Flows Year Ended June 29, 2013 Certain U.S. Broadline Subsidiaries Other Non- Guarantor Subsidiaries Consolidated Totals Sysco (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 $ $ $ PART II ITEM 8 Financial Statements and Supplementary Data (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 (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 82 SYSCO CORPORATION - Form 10-K NOTE 23 Quarterly Results (Unaudited) Financial information for each quarter in the years ended June 27, 2015 and June 28, 2014 is set forth below: PART II ITEM 8 Financial Statements and Supplementary Data (In thousands except for 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 Per share: BASIC NET EARNINGS DILUTED NET EARNINGS Dividends declared Market price — high/low (In thousands except for per share data) Sales Cost of sales Gross profi 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 27 December 27 March 28 June 27 Fiscal Year Fiscal 2015 Quarter Ended $ $ $ 12,445,081 $ 10,256,364 2,188,717 1,723,104 465,613 30,934 (2,188) 436,867 158,054 278,813 $ 12,087,074 $ 10,001,937 2,085,137 1,769,691 315,446 77,042 2,207 236,197 78,218 11,746,659 $ 9,689,161 2,057,498 1,730,190 327,308 69,550 (8,577) 266,335 89,380 157,979 $ 176,955 $ 12,401,938 $ 10,181,774 2,220,164 2,099,169 120,995 77,281 (25,034) 68,748 (4,278) 73,026 $ $ 0.47 0.47 0.29 39-36 $ 0.27 0.27 0.30 41-36 $ 0.30 0.30 0.30 41-38 $ 0.12 0.12 0.30 39-36 48,680,752 40,129,236 8,551,516 7,322,154 1,229,362 254,807 (33,592) 1,008,147 321,374 686,773 1.16 1.15 1.19 41-36 September 28 $ Fiscal 2014 Quarter Ended December 28 March 29 June 28 Fiscal Year 11,714,267 $ 9,648,780 2,065,487 1,587,289 478,198 30,528 (4,534) 452,204 166,614 285,590 $ 11,237,969 $ 9,273,018 1,964,951 1,613,174 351,777 29,784 (4,211) 326,204 115,369 210,835 $ 11,277,484 $ 9,282,743 1,994,741 1,662,116 332,625 32,224 3,718 296,683 115,746 180,937 $ 12,286,992 $ 10,131,136 2,155,856 1,731,334 424,522 31,205 (7,216) 400,533 146,362 254,171 $ $ $ 0.49 $ 0.48 0.28 36-31 $ 0.36 0.36 0.29 43-31 $ 0.31 0.31 0.29 37-34 $ 0.43 0.43 0.29 38-35 46,516,712 38,335,677 8,181,035 6,593,913 1,587,122 123,741 (12,243) 1,475,624 544,091 931,533 1.59 1.58 1.15 43-31 PERCENTAGE CHANGE — 2015 VS. 2014: 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 6% (3) (2) (4) (2) 8% (10) (25) (25) (25) 4% (2) (2) (3) (3) 1% (71) (71) (72) (72) 5% (23) (26) (27) (27) Financial results are impacted by accounting changes and the adoption of various accounting standards. See Note 2, “Changes in Accounting.” SYSCO CORPORATION - Form 10-K 83 PART II ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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 27, 2015. 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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it 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 27, 2015, 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 42. 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 27, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over fi nancial reporting. ITEM 9B Other Information None. 84 SYSCO CORPORATION - Form 10-K 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 2015 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 2015 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 2015 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 2015 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 2015 Annual Meeting of Stockholders under the following caption, and is incorporated herein by reference thereto: “Fees Paid to Independent Registered Public Accounting Firm.” SYSCO CORPORATION - Form 10-K 85 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 41 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. 86 SYSCO CORPORATION - Form 10-K 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 24th day of August, 2015. 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/ JOEL T. GRADE Joel T. Grade /s/ JOHN M. CASSADAY John M. Cassaday /s/ JUDITH B. CRAVEN Judith B. Craven /s/ WILLIAM J. DELANEY William J. DeLaney /s/ LARRY C. GLASSCOCK Larry C. Glasscock /s/ JONATHAN GOLDEN Jonathan Golden Senior Vice President - Finance 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 SYSCO CORPORATION - Form 10-K 87 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK Products We provide innovative solutions nationally and locally. Our customers rely on Sysco for products that meet high standards of safety, qual- ity and traceability, while keeping them at the forefront of foodservice trends. In FY2015 the implementation of our recent category management initiative resulted in the launch of 16 exceptional, exclusive solutions that differentiate Sysco from its competition and enable our customers to create tastier, healthier and more appealing menus. Locally, we increased our offerings of fresh, seasonal and artisanal foods sourced from small- to mid-sized area farms, ranches and processors to better serve customers whose business values are built on sustainability and community. Our ingredients for success: A Fresh Perspective To be our customers’ most valued and trusted business partner. That is our vision and the catalyst for the five strategic pillars that guide us to satisfy all of our valued stakeholders. Sysco’s strong operating performance in fiscal 2015 reflects efforts that are bearing fruit as we continue our quest to enrich the experience of doing business with Sysco, enhance productivity and innovation, attract and develop the industry’s best people and explore opportunities for growth. In applying our portfolio of strategic initiatives, we are trans- forming how we conduct business every day, putting customers first to help them succeed and working cohesively as One Sysco. Productivity Our functional excellence pays off for customers. Our investment in advanced tech- nology tools is driving positive change at Sysco while improving operating expenses in ways that also benefit our customers. At an iconic, busy restaurant like Lowell’s in Seattle’s Pike Place Market, which procures almost all of its products through our Sysco Market online ordering system, the ability to track the location of deliveries via our My Sysco Truck program is crucial. Sales associates and dispatchers can also track that progress. Even before our trucks hit the road, they are being loaded faster as we apply engineered labor standards to improve warehouse productivity. Stockholder Information Forward-looking Statements Statements made herein that look forward in time or that express management’s beliefs, expectations or hopes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the views of management at the time such statements are made and are subject to a number of risks, uncertainties, estimates, and assumptions that may cause actual results to differ materially from current expectations. These statements include our plans and expectations related to and the benefits and expected timing of our goals and initiatives to increase profitability, manage expenses and grow our business, and our outlook and expectations for fiscal 2016. The success of our initia- tives and expectations regarding our operating performance are subject to the general risks associated with our business, including the risks of interruption of supplies due to lack of long-term contracts, severe weather, crop conditions, work stoppages, intense competition, technology disruptions, dependence on large regional and national customers, inflation risks, the impact of fuel prices, adverse publicity, and labor issues. Risks and uncertainties also include risks impacting the economy generally, including the risks that the current general economic conditions will deteriorate, or consumer confidence in the economy may not improve and decreases in consumer spending, particularly on food-away-from-home, may not reverse. Market conditions may not improve. If sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, our gross margins may decline. Our ability to meet our long-term strategic objectives to grow the profitability of our business depends largely on the success of our various business initiatives. There are various risks related to these efforts, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings and other benefits at the levels that we anticipate. Our plans related to and the timing of any initiatives are subject to change at any time based on management’s subjective evaluation of our overall business needs. If we are unable to realize the anticipated benefits from our cost-cutting efforts, we could become cost disadvantaged in the market- place, and our competitiveness and our profitability could decrease. Capital expenditures may vary from those projected based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completions of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Periods of high inflation, 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 profit, operating income and earnings. Expanding into international markets presents unique challenges and risks, including compliance with local laws, regulations and customs and the impact of local political and economic conditions, and such expansion efforts may not be successful. Any business that we acquire may not perform as expected, and we may not realize the anticipated benefits of our acquisitions. Expectations regarding the accounting treatment of any acquisitions may change based on management’s subjective evaluation. Expectations regarding tax rates are subject to various factors beyond management’s control. For a discussion of additional factors impacting Sysco’s business, see the Company’s Annual Report on Form 10-K for the year ended June 27, 2015, as filed with the Securities and Exchange Commission, and the Company’s subsequent filings with the SEC. Sysco does not undertake to update its forward-looking statements. Form 10-K and Financial Information A copy of the fiscal 2015 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 left, 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. Corporate Offices Sysco Corporation 1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com Annual Stockholders’ Meeting The Houstonian Hotel 111 North Post Oak Lane Houston, TX 77024 November 18, 2015, at 10:00 a.m. Independent Accountants Ernst & Young LLP Houston, TX Transfer Agent & Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 1.888.CALLSYY (1.888.225.5799) www.amstock.com Investor Contact Neil Russell Vice President, Investor Relations 281.584.1308 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 46 times in that period. The current quarterly cash dividend is $0.30 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. Shareholders desiring information about the Dividend Reinvestment Plan with Optional Cash Purchase Fea- ture may obtain a brochure and enrollment form by contacting the Transfer Agent & Registrar, American Stock Transfer & Trust Company at 1.888.225.5799. X T n o t s u o H , s d n a r B e g a v a S : n g i s e D 1390 Enclave Parkway Houston, TX 77077-2099 281.584.1390 www.sysco.com View this online annual report at: www.sysco.com/OnlineAnnual2015 A Fresh Perspective 2015 Annual Report A F r e s h P e r s p e c t i v e S y s c o C o r p o r a t i o n 2 0 1 5 A n n u a l R e p o r t