Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be

denoted as adjusted measures and exclude the impact from restructuring costs consisting of: (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we incurred costs to convert to a modernized version of our established platform as opposed to completing the implementation of an Enterprise Resource Planning (ERP) system; (2) professional fees related to our three-year strategic plans; (3) restructuring expenses within our Brakes Group operations; (4) severance charges related to restructuring; and (5) foreign non-income based taxes. In addition, fiscal 2018 results of operations are impacted by business technology transformation initiative costs, facility closure charges, multiemployer pension (MEPP) withdrawal charges and debt extinguishment charges, which are also excluded from our non-GAAP financial measures.

The non-GAAP financial measures presented in this report also exclude the impact of the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. All acquisition-related costs in fiscal 2018 and 2017 that have been excluded relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition), discussed in Note 4, “Acquisitions.” The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs.

The non-GAAP financial measures presented in this report further exclude certain impacts of the Tax Cuts and Jobs Act of 2017 (the Tax Act) enacted on December 22, 2017. The impact for fiscal 2018 includes: a provisional estimate of a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets due to the changes in tax rates. Other tax-related items impacting results of operations include foreign withholding taxes on repatriated earnings, net of foreign tax credits, and a benefit from contributions made to fund Sysco’s tax-qualified United States (U.S.) pension plan (the U.S. Retirement Plan).

The fiscal 2018 and fiscal 2017 items described above and excluded from our non-GAAP measures are collectively referred to as “Certain Items.” In addition, our three-year plan that ended in fiscal 2018, included an adjusted return on invested capital target that excluded the Brakes Acquisition, and therefore, our invested capital is adjusted for the accumulation of debt incurred for the Brakes Acquisition that would not have been borrowed absent this acquisition.

Sysco’s fiscal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year ending June 30, 2018 for fiscal 2018, a 52-week year ending July 1, 2017 for fiscal 2017, and a 53-week year ending July 2, 2016 for fiscal 2016. Because fiscal 2016 contained one additional week as compared to fiscal 2017, our Consolidated Results of Operations for fiscal 2017 are not directly comparable to fiscal 2016. Management believes that adjusting the fiscal 2016 Consolidated Results of Operations for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis. Sysco’s results of operations and related metrics within this section will be disclosed on both a 52-week and 53-week basis for fiscal 2017 as compared to fiscal 2016. This is calculated by deducting one-fourteenth of the total metric for the fourth quarter of fiscal 2016.

Any metric within this section referred to as “adjusted” will reflect the applicable impact of Certain Items. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under “Non-GAAP Reconciliations.”

Overview

Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located in North America and Europe. The company has aggregated certain of its operating segments into three reportable segments. “Other” financial information is attributable to the company’s other operating segments that do not meet the quantitative disclosure thresholds.

•	U.S. Foodservice Operations - primarily includes U.S. Broadline operations, which distribute a full line of food products, including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products;

•

International Foodservice Operations - includes operations in the Americas and Europe, which distribute a full line of food products and a wide variety of non-food products. The Americas primarily consists of operations in Canada, Bahamas, Mexico, Costa Rica and Panama, as well as our operations that distribute to international customers. Our European operations primarily consist of operations in the United Kingdom (U.K.), France, Ireland and Sweden;

•	SYGMA - our U.S. customized distribution subsidiary; and

•	Other - primarily our hotel supply operations and Sysco Labs, which includes our suite of technology solutions that help support the business needs of our customers and provide support for some of our business technology needs.

We estimate that we serve about 16% of an approximately $289 billion annual foodservice market in the U.S. based on industry data obtained from Technomic, Inc. From time to time, Technomic may revise the methodology used to calculate the size of the foodservice market and, as a result, our percentage can change not only from our sales results, but also from such revisions. We also serve certain international geographies that vary in size and amount of market share.

According to industry sources, the foodservice, or food-away-from-home, market represents approximately 51% of the total dollars spent on food purchases made at the consumer level in the U.S. as of the end of calendar 2017. Industry sources estimate the total foodservice market in the U.S. experienced a real sales increase of approximately 1.4% in both calendar year 2017 and calendar year 2016. Real sales changes do not include the impact of inflation or deflation.

Highlights and Trends

Comparison of results from fiscal 2018 to fiscal 2017:

•	Sales:

◦	increased 6.1%, or $3.4 billion, to $58.7 billion;

•	Operating income:

◦	increased 13.4%, or $275.8 million, to $2.3 billion;

◦	adjusted operating income increased 8.4%, or $196.5 million, to $2.5 billion;

•	Net earnings:

◦	increased 25.2%, or $288.3 million, to $1.4 billion;

◦	adjusted net earnings increased 22.1%, or $300.8 million, to $1.7 billion;

•	Basic earnings per share:

◦	increased 30.5%, or $0.64, to $2.74 from the comparable prior year amount of $2.10 per share;

•	Diluted earnings per share:

◦	increased 29.8%, or $0.62, to $2.70 from the comparable prior year amount of $2.08 per share; and

◦	adjusted diluted earnings per share were $3.14 in fiscal 2018, a 26.6% increase from the comparable prior year amount of $2.48 per share.

Fiscal 2015 - Fiscal 2018 Three-Year Plan Highlights

	3-year Plan Target		2018		2015		3-year Plan Change $ Results		CAGR
GAAP:
Sales	N/A		$58.7 billion		$48.7 billion		$10.0 billion
Gross profit	N/A		$11.1 billion		$8.6 billion		$2.5 billion		9.0%
Operating expense	N/A		$8.8 billion		$7.3 billion		$1.4 billion		6.1%
Operating Income	N/A		$2.3 billion		$1.2 billion		$1.1 billion		23.7%
ROIC	N/A		13.0%
Adjusted Results (Non-GAAP) (1):
Sales			$53.1 billion		$48.7 billion		$4.4 billion
Gross profit	4.0% CAGR		$9.7 billion		$8.6 billion		$1.1 billion		4.2%
Operating expense	3.0% CAGR		$7.2 billion		$6.8 billion		$463.0 million		2.2%
Operating Income	$600 - $650 million		$2.5 billion		$1.8 billion		$665.1 million		11.1%
ROIC	15.0%		20.2%

(1)

Adjusted financial results used to measure the progress on Sysco’s initial three-year plan exclude certain items, which primarily include restructuring, acquisition-related costs, loss on debt extinguishment, tax benefits from a retirement plan contribution, the impact of repatriating certain international earnings, and certain impacts of tax law changes, and also exclude the results of the Brakes Group.

Fiscal 2018 marked the completion of our initial three-year plan that was established in fiscal 2016. As a result of our efforts in connection with the three-year plan, we accelerated local case growth by 3.0%, achieved adjusted gross profit CAGR of 4.2%, and managed adjusted operating expense CAGR to 2.2%. This gap between adjusted gross profit dollar growth and adjusted expense dollar growth created adjusted operating leverage of 2.0 percentage points, which generated adjusted operating income growth of $665.1 million, exceeding the target range of $600 million to $650 million. Adjusted ROIC was 20.2%, surpassing our target of 15.0%, and we achieved a five day improvement in working capital, which was one day above the original goal. On

a GAAP basis, comparing fiscal 2018 to fiscal 2015, the company achieved gross profit CAGR of 9.0%, and operating expense CAGR of 6.1%, generating operating income growth of $1.1 billion. ROIC was 13.0%. Our operating income goal was established on an adjusted basis given Certain Item charges that were applicable in fiscal 2015, which were primarily due to termination costs in connection with the merger that had been proposed with US Foods and financing costs related to the senior notes that were issued in fiscal 2015 to fund the proposed US Foods merger. See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.

The overall macroeconomic trends continue to be positive in the U.S., and the underlying economic picture remains encouraging, including a strong employment market. This has resulted in a healthy consumer that is helping to drive a positive trend in restaurant sales. We also see continued growth with local customers, as they increase their reach through flexible menus, innovative concepts and additional delivery options to reach consumers. The U.K market continues to experience acute product inflation in the mid-to-high single digits.

Throughout fiscal 2018, we improved our customer experience through enhanced service levels, improved sales retention and higher customer loyalty, enhanced associate engagement through improved workplace safety and improved associate retention through attractive career growth opportunities. These were all key targeted steps towards achieving our initial three-year plan financial objectives.

Our sales and gross profit performance can be influenced 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 can impact our profitability. The majority of our sales are to locally managed customers and national customers. Our locally managed customers, including independent restaurant customers, comprise a greater percentage of our profitability as compared to national customers. Case growth with our locally managed broadline business is important to drive gross profit dollar growth. Our sales to national customers, including chain restaurants and multi-locational restaurants, also comprise a significant portion of our overall volumes. Gross margin on sales to our national customers is generally lower than on sales to other types of customers due to the higher volumes we sell to these customers. In fiscal 2018, we accelerated our cases with local customers through improved processes, enhanced training of our marketing associates and continued growth in our digital platform.

We offer an assortment of Sysco-branded products that we can differentiate from privately branded products, which enables us to achieve higher gross profits. As a result, we focus on sales growth for these products, now comprising 46% of U.S. Broadline sales, especially with locally managed customers. Cutting Edge Solutions, our product innovation platform, which features our exclusive product offerings, has now delivered one million cases of new, on trend, innovative products to our customers. We have experienced continued success in category management, as we introduce new categories to capture value. Inflation is a factor that contributes to the level of sales and gross profit growth and can be a factor that contributes to gross margin pressure. We experienced inflation at a rate of 2.6% for fiscal 2018. Inflation in fiscal 2018 occurred primarily in the meat, dairy, paper and disposables and frozen potatoes and vegetables categories, partially offset by modest deflation in poultry. In the fourth quarter of fiscal 2018, the meat category was no longer experiencing inflation. We expect inflation to continue for the balance of calendar 2018. Periods of high inflation, either overall or in certain product categories, can have an unfavorable effect on us and our customers, as high food costs can be difficult to pass on to our customers. A portion of the cost to obtain product includes inbound freight. These costs have risen in fiscal 2018, driven by overall industry factors such as driver shortages and adjusting to electronic regulation of hours driven.

Changes in exchange rates can impact our foreign sales as we convert them to U.S. dollars. In fiscal 2018, we experienced a foreign exchange benefit to total sales of 1.0%.

We have experienced higher operating expenses in fiscal 2018, as compared to fiscal 2017, driven by ongoing strategic investments in the business that impacted the year, including the investment in marketing associates in the U.S. and the continued investment in technology that will translate to a more enriching experience for our customers. We expect operating expenses to increase in fiscal 2019, primarily driven by anticipated growth in case volume. We also expect transportation costs to increase due to higher fuel prices and a tight labor market. We continue to make investments in Europe including the supply chain transformation occurring in the U.K., technology and other integrations within Europe.

In the second quarter of fiscal 2018, the U.S. government enacted the Tax Act, comprehensive tax legislation that decreased the federal corporate tax rate from 35% to 21%. For fiscal 2018, Sysco had a 28% tax rate, rather than 21%, because the law was enacted during the midpoint of the company’s fiscal year, requiring us to use a blended average rate. The company’s U.S. federal statutory tax rate for fiscal 2019 and beyond will be 21%, and we expect our effective tax rate to be approximately 25%. This rate is expected to be similar to the fiscal 2018 effective tax rate due to certain tax benefits that occurred in fiscal 2018 that will not fully repeat in fiscal 2019. Our fiscal 2018 effective tax rate is lower than this range as a result of capital allocation initiatives. As

discussed in Note 18, “Income Taxes,” we have recorded provisional estimates for some components of the Tax Act and will refine estimates and determine applicability for other components in future periods.

We continue to be focused on mergers and acquisitions as a part of our strategy and have completed several acquisitions in fiscal 2018, including two within U.S. Foodservice Operations and two within International Foodservice Operations. Within U.S. Foodservice Operations, we acquired HFM Foodservice (HFM), a Hawaii-based broadline distributor with approximately $290 million in annual sales. Acquiring HFM provided Sysco with direct access to the growing Hawaiian market and was in clear alignment with our strategy for disciplined, profitable growth of the business. We also acquired Doerle Food Services (Doerle), a leading Louisiana broadline distributor with approximately $250 million in annual foodservice distribution sales. Acquiring Doerle provided Sysco with a distributor that services parts of a six-state area, including Oklahoma, Texas, Arkansas, Louisiana, Mississippi and Alabama.

Within our International Foodservice Operations, we acquired Kent Frozen Foods (KFF), a U.K.-based distributor that distributes chilled, frozen, and ambient food products to the catering industry in the U.K. Acquiring KFF provided Sysco Europe with an enhanced presence with independent customers in the U.K. market. We also acquired Eko Fågel, Fisk & Mittemellan, a leading fresh fish preparation and distribution business in Stockholm, Sweden. In addition to the two acquisitions noted above, in the second quarter of fiscal 2018, we purchased the remaining 50% interest in our joint venture in Costa Rica. Sysco initially acquired a 50% interest in the foodservice company in fiscal 2015.

Strategy and Fiscal 2020 Three-Year Financial Targets

Our objective to improve the overall customer experience is a core element of our success over the past few years and will continue to be a key focus as we move forward. We have identified four strategic priorities that will accelerate our current growth and guide us into the future. These priorities are to enrich the customer experience, deliver operational excellence, optimize our business and activate the power of our people.

In fiscal 2018, we outlined our new three-year financial targets to be achieved by the end of fiscal 2020, including:

•	Reaching $650 million to $700 million of adjusted operating income growth as compared to fiscal 2017;

•	Growing earnings per share faster than operating income; and

•	Achieving 16% in adjusted return on invested capital improvement for existing businesses.

In accomplishing these goals, we believe that, by fiscal 2020, we could also achieve, as compared to fiscal 2017, (1) sales growth of 4% to 4.5%; (2) adjusted operating income growth of 9%; and (3) adjusted diluted earnings per share results in the range of $3.85 to $3.95 in fiscal 2020, representing an increase of approximately 16%. The objectives targeted in our new three-year plan include the impact of the recently enacted U.S. tax reform. The key levers to achieve these targets include an emphasis on accelerating locally managed customer case growth and driving leverage between gross profit growth and expense growth. Our operating income goal was established on an adjusted basis given Certain Item charges that were applicable in fiscal 2018, which primarily were due to restructuring and Brakes-related acquisitions costs.

See “Non-GAAP Reconciliations” for an explanation of these non-GAAP financial measures.

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:

	2018			2017			2016
Sales	100.0	%		100.0	%		100.0	%
Cost of sales	81.1			80.9			82.1
Gross profit	18.9			19.1			17.9
Operating expenses	14.9			15.4			14.3
Operating income	4.0			3.7			3.7
Interest expense	0.7			0.5			0.6
Other expense (income), net	—			—			0.2
Earnings before income taxes	3.3			3.2			2.8
Income taxes	0.9			1.1			1.0
Net earnings	2.4	%		2.1	%		1.9	%

The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:

	2018			2017
Sales	6.1	%		9.9	%
Cost of sales	6.3			8.4
Gross profit	5.0			16.8
Operating expenses	3.0			18.3
Operating income	13.4			11.0
Interest expense	30.6			(1.1	)
Other expense (income), net (1)	42.6			(114.3	)
Earnings before income taxes	10.8			23.3
Income taxes	(15.8	)		29.0
Net earnings	25.2	%		20.3	%
Basic earnings per share	30.5	%		26.5	%
Diluted earnings per share	29.8			26.8
Average shares outstanding	(3.8	)		(5.2	)
Diluted shares outstanding	(3.5	)		(5.0	)

(1)	Other expense (income), net was income of $22.7 million in fiscal 2018 and income of $15.9 million in fiscal 2017.

Segment Results

The following represents our results by reportable segments:

	52-Week Period Ended Jun. 30, 2018
	U.S. Foodservice Operations				International Foodservice Operations				SYGMA				Other				Corporate				Consolidated Totals
	(In thousands)
Sales	$	39,642,263			$	11,518,565			$	6,557,033			$	1,009,463			$	—			$	58,727,324
Sales increase (decrease)	5.4		%		8.5		%		6.1		%		3.6		%						6.1		%
Percentage of total	67.5		%		19.6		%		11.2		%		1.7		%						100.0		%
Operating income	$	3,051,991			$	193,240			$	24,318			$	39,485			$	(980,060	)		$	2,328,974
Operating income increase (decrease)	5.5		%		(20.5		)%		4.4		%		30.7		%						13.4		%
Percentage of total segments	92.2		%		5.8		%		0.7		%		1.2		%						100.0		%
Operating income as a percentage of sales	7.7		%		1.7		%		0.4		%		3.9		%						4.0		%

	52-Week Period Ended Jul. 1, 2017
	U.S. Foodservice Operations				International Foodservice Operations				SYGMA				Other				Corporate				Consolidated Totals
	(In thousands)
Sales	$	37,604,698			$	10,613,059			$	6,178,909			$	974,473			$	—			$	55,371,139
Sales increase (decrease)	(0.5		)%		95.2		%		1.3		%		(7.4		)%						9.9		%
Percentage of total	67.9		%		19.2		%		11.2		%		1.7		%						100.0		%
Operating income	$	2,891,612			$	243,116			$	23,299			$	30,218			$	(1,135,074	)		$	2,053,171
Operating income increase (decrease)	4.3		%		37.2		%		(15.2		)%		(7.3		)%						11.0		%
Percentage of total segments	90.7		%		7.6		%		0.7		%		0.9		%						100.0		%
Operating income as a percentage of sales	7.7		%		2.3		%		0.4		%		3.1		%						3.7		%

	53-Week Period Ended Jul. 2, 2016
	U.S. Foodservice Operations				International Foodservice Operations				SYGMA				Other				Corporate				Consolidated Totals
	(In thousands)
Sales	$	37,776,443			$	5,436,209			$	6,102,328			$	1,051,939			$	—			$	50,366,919
Percentage of total	75.0		%		10.8		%		12.1		%		2.1		%						100.0		%
Operating income	$	2,771,932			$	177,159			$	27,469			$	32,586			$	(1,158,646	)		$	1,850,500
Percentage of total segments	92.1		%		5.9		%		0.9		%		1.1		%						100.0		%
Operating income as a percentage of sales	7.3		%		3.3		%		0.5		%		3.1		%						3.7		%

Based on information in Note 20, “Business Segment Information” in fiscal 2018, U.S. Foodservice Operations and International Foodservice Operations represented approximately 67.5% and 19.6%, respectively, of Sysco’s overall sales, compared to 67.9% and 19.2%, respectively, in fiscal 2017. In fiscal 2018, U.S. Foodservice Operations and International Foodservice Operations represented approximately 92.2% and 5.8%, respectively, of the total segment operating income, compared to 90.7% and 7.6%, respectively in fiscal 2017. This illustrates that these segments represent a substantial majority of our total segment results when compared to other reportable segments.

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 reflected within sales and gross profit; fuel costs are reflected within operating expenses. Along with sales, operating income is the most relevant measure for evaluating segment performance and allocating resources, as operating income includes cost of goods sold, as well as the costs to warehouse and deliver goods, which are significant and relevant costs when evaluating a distribution business.

Results of U.S. Foodservice Operations

In fiscal 2018, the U.S. Foodservice Operations operating results represented approximately 67.5% of Sysco’s overall sales and 92.2% of the aggregated operating income of Sysco’s reporting segments. There are several factors that contribute to these higher operating results as compared to the 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 enable this segment to generate its relatively stronger results of operations.

The following tables set forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year:

	2018				2017				Change in Dollars				% Change
	(In thousands)
Sales	$	39,642,263			$	37,604,698			$	2,037,565			5.4	%
Gross profit	7,900,276				7,556,392				343,884				4.6
Operating expenses	4,848,285				4,664,780				183,505				3.9
Operating income	$	3,051,991			$	2,891,612			$	160,379			5.5	%
Gross profit	$	7,900,276			$	7,556,392			$	343,884			4.6	%
Adjusted operating expenses (Non-GAAP)	4,846,585				4,628,710				217,875				4.7
Adjusted operating income (Non-GAAP)	$	3,053,691			$	2,927,682			$	126,009			4.3	%

	2017				2016				Change in Dollars				% Change
	(In thousands)
Sales	$	37,604,698			$	37,776,443			$	(171,745	)		(0.5	)%
Gross profit	7,556,392				7,413,436				142,956				1.9
Operating expenses	4,664,780				4,641,504				23,276				0.5
Operating income	$	2,891,612			$	2,771,932			$	119,680			4.3	%
Gross profit	$	7,556,392			$	7,266,692			$	289,700			4.0	%
Adjusted operating expenses (Non-GAAP)	4,628,710				4,549,830				78,880				1.7
Adjusted operating income (Non-GAAP)	$	2,927,682			$	2,716,862			$	210,820			7.8	%

Sales

The following table sets forth the percentage and dollar value increase or decrease in sales over the prior year in order to demonstrate the cause and magnitude of change.

	Increase (Decrease)							Increase (Decrease)
	2018							2017
	(In millions)
Cause of change	Percentage			Dollars				Percentage			Dollars
Case volume	2.0	%		$	756.8			1.0	%		$	377.7
Inflation (deflation)	2.9			1,096.4				(0.4	)		(134.6		)
Acquisitions	0.8			300.6				0.3			100.7
Other (1)	(0.3	)		(116.2		)		(1.4	)		(515.5		)
Total sales increase	5.4	%		$	2,037.6			(0.5	)%		$	(171.7	)

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

Sales were 5.4% higher in fiscal 2018 than in fiscal 2017. The largest drivers of the increase were the impact of product cost inflation and case volume growth in our U.S. Broadline operations. Case volumes for the company’s U.S. Broadline operations (including acquisitions within the last 12 months) increased 2.9% in fiscal 2018 compared to fiscal 2017 and included a 3.6% improvement in locally managed customer case growth, along with an increase of 1.9% in national customer case volume, including chain restaurants and multi-locational restaurants. Sales from acquisitions within the last 12 months favorably impacted locally managed customer sales by 0.8%; therefore, organic local case volume, which excludes acquisitions, grew 2.8%, resulting in 17 consecutive quarters of growth.

Sales were 0.5% lower in fiscal 2017 than in fiscal 2016. The largest driver of the decrease was the extra week in fiscal 2016, which we estimate contributed 0.8% of the sales decline in fiscal 2017. Case volumes for the company’s U.S. Broadline operations including acquisitions within the last 12 months declined 1.0% in fiscal 2017 compared to fiscal 2016. We estimate that the extra week contributed 2.0% of the 1.0% case decline. Absent the impact of the extra week in fiscal 2016, case volume grew primarily from locally managed customers. Other items impacting the change in sales, but to a lesser extent, were pricing management of product cost deflation and product mix.

Operating Income

Operating income increased by 5.5% in fiscal 2018 over fiscal 2017, primarily due to our gross profits growing at a faster pace than operating expenses.

Gross profit dollars increased in fiscal 2018, as compared to fiscal 2017, primarily due to a customer mix that has continued to improve as we accelerated local case growth as compared to national cases. Additionally, growth in sales of Sysco-branded products contributed positively to gross profit dollar growth. Our case growth for Sysco-branded sales to local customers increased 61 basis points for fiscal 2018. The change in product costs, an internal measure of inflation or deflation, was estimated as inflation of 2.6% during fiscal 2018 for our U.S. Broadline operations. Inflation in fiscal 2018 occurred primarily in the meat, dairy, paper and disposables, produce and frozen potatoes and vegetables categories, partially offset by modest deflation in poultry. Partially offsetting the gross profit increase was an increase in inbound freight costs that have risen due to overall industry factors such as driver shortages and adjusting to electronic regulation of hours driven.

Operating expenses increased in fiscal 2018, as compared to fiscal 2017, primarily due to increased supply chain costs in both transportation and warehouse. These costs were largely due to a combination of a tight labor market, rising fuel costs, weather impacts through the year and ramp up costs for new business. Our ongoing investment in our selling organization to help grow the business has also contributed to the increase in operating expenses.

Operating income increased by 4.3% in fiscal 2017 over fiscal 2016, primarily due to our gross profits growing at a faster pace than operating expenses. Higher gross profits were achieved as we managed the deflationary environment in the first part of the year and operating expense increases were limited, reflecting favorable expense management. We estimate that the extra week in fiscal 2016 partially offset, by 2.0%, the year-over-year operating income growth.

Gross profit dollars increased in fiscal 2017, as compared to fiscal 2016, primarily due to effective management of deflation, a more beneficial mix of local customer case growth and increased sales of Sysco-branded products to local customers. Our case growth for Sysco-branded sales to local customers increased 62 basis points for fiscal 2017. The change in product costs, an internal measure of inflation or deflation, was estimated as deflation of 0.4% during fiscal 2017 for our U.S. Broadline

operations. Deflation in fiscal 2017 occurred primarily in the meat, dairy and produce categories, partially offset by modest inflation in other categories.

Operating expenses increased in fiscal 2017, as compared to fiscal 2016, primarily due to costs associated with multiemployer pension plan withdrawal costs in fiscal 2017 and indirect spend. These increases were partially offset by the impact of the extra week in fiscal 2016, reduced fuel costs and pay-related expenses. Indirect spend includes costs such as fleet maintenance and supplies.

Results of International Foodservice Operations

In fiscal 2018, the International Foodservice Operations operating results represented approximately 19.6% of Sysco’s overall sales and 5.8% of the aggregated operating income of Sysco’s segments, which excludes corporate expenses and adjustments.

The following tables set forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year:

	2018				2017				Change in Dollars				% Change
	(In thousands)
Sales	$	11,518,565			$	10,613,059			$	905,506			8.5	%
Gross profit	2,436,968				2,275,819				161,149				7.1
Operating expenses	2,243,728				2,032,703				211,025				10.4
Operating income	$	193,240			$	243,116			$	(49,876	)		(20.5	)%
Gross profit	$	2,436,968			$	2,275,819			$	161,149			7.1	%
Adjusted operating expenses (Non-GAAP)	2,117,057				1,929,350				187,707				9.7
Adjusted operating income (Non-GAAP)	$	319,911			$	346,469			$	(26,558	)		(7.7	)%

	2017				2016				Change in Dollars				% Change
	(In thousands)
Sales	$	10,613,059			$	5,436,209			$	5,176,850			95.2	%
Gross profit	2,275,819				938,942				1,336,877				142.4
Operating expenses	2,032,703				761,783				1,270,920				166.8
Operating income	$	243,116			$	177,159			$	65,957			37.2	%
Adjusted gross profit (Non-GAAP) (1)	$	941,967			$	920,256			$	21,711			2.4	%
Adjusted operating expenses (Non-GAAP) (1)	738,555				738,210				345				—
Adjusted operating income (Non-GAAP) (1)	$	203,412			$	182,046			$	21,366			11.7	%

(1) Fiscal 2017 excludes the impact of the Brakes Acquisition.

Sales

The following table sets forth the percentage and dollar value increase or decrease in sales over the comparable prior year period in order to demonstrate the cause and magnitude of change.

	Increase (Decrease)							Increase (Decrease)
	2018							2017
	(In millions)
Cause of change	Percentage			Dollars				Percentage			Dollars
Inflation	3.9	%		$	417.6			—	%		$	—
Acquisitions (1)	0.5			50.9				99.0			5,273.8
Foreign currency	5.1			537.2				(0.7	)		(38.5		)
Other (2)	(0.9	)		(100.2		)		(3.1	)		(58.4		)
Total sales increase	8.6	%		$	905.5			95.2	%		$	5,176.9

(1)	The impact of the Brakes Acquisition is included within this line only for fiscal 2017.

(2)	The impact of volumes as a component of sales growth from international operations are included within "Other." Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent comparable basis.

Sales were 8.5% higher in fiscal 2018 than in fiscal 2017. The increase for fiscal 2018 was primarily due to favorable changes in exchange rates used to translate our foreign sales into U.S. dollars, as well as product cost inflation in Europe and Canada and a modest increase in volumes in our Canadian operations. The increase was partially offset by a small decline in volumes in Europe due to softer market conditions.

Sales were 95.2% higher in fiscal 2017 than in fiscal 2016. The increase for fiscal 2017 was primarily due to the acquisition of the Brakes Group, which added $5.2 billion during the year. The increase was partially offset by the impact of the extra week in fiscal 2016, a small decline in volume, primarily in Canada, and unfavorable changes in exchange rates used to translate our foreign sales into U.S. dollars. We had a modest decrease in sales in Canada due to softer market conditions.

Operating Income

Operating income decreased by 20.5% in fiscal 2018 from fiscal 2017, primarily as a result of the strategic investments we are making in our European supply chain. We continue to focus on executing against our long-term plans by investing in necessary capabilities across the International Foodservice business.

Gross profit dollars increased $161.1 million in fiscal 2018, as compared to fiscal 2017, primarily due to a combination of product costs increasing and currency translation in the U.K. along with local case growth in our Canadian operations.

Operating expenses increased $211.0 million in fiscal 2018, as compared to fiscal 2017, primarily due to supply chain transformation costs in the U.K. and increased supply chain costs in Canada. The supply chain transformation work in the U.K. to transition from a single temperature warehouse and fleet into a multi-temperature network is progressing well. In Canada, the increase in supply chain costs was driven by increased case volumes and the resulting increase in transportation costs. We have concluded the merger of Brake France and Davigel to form Sysco France, which will provide new capabilities and the unique multi-temperature service that will better adapt to our customers’ growing needs, as well as access to new customer segments. Integration of these businesses in France will continue through fiscal 2019. Additionally, the integration of Pallas and Brakes in Ireland is nearly complete, and we have achieved strong cost synergies throughout the year. Across Europe, we are also making technology investments to improve the infrastructure and to enhance our suite of customer facing tools. In Mexico, we absorbed the cost of adding a new large customer during the year.

Operating income increased by 37.2% in fiscal 2017 from fiscal 2016, primarily attributable to the Brakes Acquisition. The Brakes Group is progressing in its supply chain transformational efforts as it moves to multi-temperature capability across the U.K. Growth in France remains steady. Excluding the Brakes Group, non-GAAP operating income, adjusted for the impact of the extra week in fiscal 2016, increased 11.7% in fiscal 2017 as compared to fiscal 2016, primarily from managing costs effectively in Canada within a deflationary and somewhat softer market environment. Our joint venture in Costa Rica also experienced improved operating income performance.

Gross profit dollars increased $1.3 billion in fiscal 2017 as compared to fiscal 2016, primarily due to the Brakes Acquisition. Adjusted gross profit dollars, excluding the impact of Brakes and on a comparable 52 week basis, increased 2.4%. Adjusted gross profit dollar growth was higher due to improved sales execution and implementation of our customer focused initiatives, such as category management and revenue management in our Canadian operations.

Operating expenses increased $1.3 billion in fiscal 2017 as compared to fiscal 2016, largely due to the Brakes Acquisition. Adjusted operating expenses excluding Brakes were flat in fiscal 2017, as compared to fiscal 2016, as a result of our effectively managing costs by streamlining administrative expenses to improve productivity in the Canadian business.

Results of SYGMA and Other Segment

SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations.

Sales

Sales were 6.1% higher in fiscal 2018 than in fiscal 2017. The increase for fiscal 2018 was primarily attributable to case growth and product cost inflation. Case growth was primarily the result of increased volume from existing customers, as well as new business acquired during the year. SYGMA experienced product cost inflation of 2.5% during fiscal 2018.

Sales were 1.3% higher in fiscal 2017 than in fiscal 2016. The increase for fiscal 2017 was primarily attributable to case growth. Case growth was primarily the result of increased volume from existing customers, with additional new business also contributing to such growth.

Operating Income

Operating income increased by 4.4% in fiscal 2018, as compared to fiscal 2017, primarily driven by sales growth and partially offset by operating expense growth exceeding gross profit dollar growth. Gross profit dollars increased 8.5%, driven by higher product margins, while operating expenses increased 8.7% in fiscal 2018, as compared to fiscal 2017. Operating expenses increased in fiscal 2018 largely due to increased transportation expenses resulting from driver hiring challenges and outsourced delivery costs to meet the high service level expectations of our customers.

Operating income decreased by 15.2% in fiscal 2017 as compared to fiscal 2016, primarily driven by operating expense growth exceeding gross profit dollar growth. Gross profit dollars increased 3.3%, while operating expenses increased 4.5% in fiscal 2017 as compared to fiscal 2016. Gross profit dollar growth was lower due to higher product margins. Operating expenses increased in fiscal 2017 largely due to higher pay-related expenses.

“Other” segment information is attributable to the company’s other operating segments that do not meet the quantitative disclosure thresholds, primarily including our hotel supply operations and Sysco Labs, which includes our suite of technology solutions that help support the business needs of our customers and provides support for some of our business technology needs.

Operating income increased 30.7%, or $9.3 million, in fiscal 2018, as compared to fiscal 2017. The increase was primarily attributable to favorable results from our hotel supply operations and improved results from Sysco Labs.

Operating income decreased 7.3%, or $2.4 million, in fiscal 2017, as compared to fiscal 2016. The decrease was primarily attributable to the extra week applicable to fiscal 2016, partially offset by favorable results from our hotel supply operations.

Corporate Expenses

Corporate expenses in fiscal 2018 decreased $155.0 million, or 13.7%, as compared to fiscal 2017, due primarily to the favorable comparison of depreciation expense. During fiscal 2017, we incurred $184.1 million of depreciation expense on our previous ERP system, which became fully depreciated at the end of fiscal 2017. A portion of this depreciation expense was included in Certain Items during fiscal 2017. The decrease in depreciation expenses, along with a reduction in our estimates for our reserves for our self-insurance program (which covers portions of workers’ compensation, general and vehicle liability), were partially offset by an increase in business technology costs.

Included in corporate expenses are Certain Items that totaled $91.0 million in fiscal 2018, as compared to $159.2 million in fiscal 2017. Certain Items impacting fiscal 2018 were primarily expenses associated with our business technology transformation

initiatives, professional fees on three-year financial objectives, Brakes integration costs and severance charges. Certain Items impacting fiscal 2017 were primarily expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we recorded accelerated depreciation of $111.3 million on our existing ERP system, and we incurred expenses of $11.2 million in fiscal 2017 to convert to a modernized version of our established platform.

Corporate expenses in fiscal 2017 decreased $23.6 million, or 2.0%, as compared to fiscal 2016, due primarily to lower pay-related expenses, partially offset by an increase in our estimates for our reserves for our self-insurance program (which covers portions of workers’ compensation, general and vehicle liability), resulting from wage increases and unfavorable claims developments.

Interest Expense

Interest expense increased $92.6 million in fiscal 2018, as compared to fiscal 2017, due to the partial redemption of senior notes and debentures due 2027, 2028, 2035 and 2039 pursuant to a tender offer in fiscal 2018. Interest charges related to the redemption costs noted above are considered Certain Items. Excluding Certain Items, our interest expense increased $39.5 million in fiscal 2018 from fiscal 2017, due to higher borrowing levels attributable to senior notes issued in fiscal 2018 and fiscal 2017 primarily to fund a $330 million pension contribution and to pay off our then outstanding commercial paper borrowings.

Interest expense decreased $3.3 million for fiscal 2017, as compared to fiscal 2016 due to Certain Item interest costs specific to fiscal 2016, partially offset by higher relative debt levels in fiscal 2017. Fiscal 2016 included a loss of $86.5 million in connection with the redemption of the notes issued in fiscal 2015 to fund the merger that was proposed with US Foods. These items, along with interest expense incurred in fiscal 2016 through the date the senior notes were redeemed and interest cost incurred from financing the Brakes Acquisition, are included in our Certain Items. Excluding Certain Items, our interest expense increased $120.7 million for fiscal 2017 from fiscal 2016 due to higher debt balances from senior notes that were issued in fiscal 2016 and commercial paper borrowings issued in fiscal 2017.

Net Earnings

Net earnings increased 25.2% in fiscal 2018, as compared to the prior year, due primarily to the items noted above, as well as items impacting our income taxes that are discussed in Note 18, “Income Taxes.” Adjusted net earnings increased 22.1% in fiscal 2018, primarily due to strong local case growth, gross margin expansion and reduced administrative expense, partially offset by increased supply chain costs and interest expense, which resulted in earnings growth that exceeded our operating income growth.

Net earnings increased 20.3% in fiscal 2017 as compared to the prior year due primarily to the items noted above, as well as items impacting our income taxes that are discussed in Note 18, “Income Taxes.” Adjusted net earnings increased 11.9% in fiscal 2017, primarily due to strong local case growth, gross profit growth with margin expansion, strong expense management and the results of Sysco Europe, partially offset by increased interest expense, which resulted in earnings growth that was lower than our operating income growth. Adjusted net earnings, on a comparable 52-week basis and excluding Brakes, increased 8.0% in fiscal 2017 as compared to fiscal 2016.

Earnings Per Share

Basic earnings per share in fiscal 2018 were $2.74, a 30.5% increase from the comparable prior year amount of $2.10 per share. Diluted earnings per share in fiscal 2018 were $2.70, a 29.8% increase from the fiscal 2017 amount of $2.08 per share. Adjusted diluted earnings per share in fiscal 2018 were $3.14, a 26.6% increase from the fiscal 2017 amount of $2.48 per share. These results were primarily attributable to the factors discussed above related to net earnings and a decrease in outstanding shares that resulted from our share repurchases in fiscal 2018 and fiscal 2017.

Basic earnings per share in fiscal 2017 were $2.10, a 26.5% increase from the comparable prior year amount of $1.66 per share. Diluted earnings per share in fiscal 2017 were $2.08, a 26.8% increase from the fiscal 2016 amount of $1.64 per share. Adjusted diluted earnings per share in fiscal 2017 were $2.48, an 18.1% increase from the fiscal 2016 amount of $2.10 per share. Adjusted diluted earnings per share, on a comparable 52-week basis and excluding Brakes, were $2.34, a 13.8% increase from the fiscal 2016 amount of $2.06 per share. These results were primarily attributable to the factors discussed above related to net earnings and a decrease in outstanding shares that resulted from our share repurchases in fiscal 2017 and fiscal 2016.

Non-GAAP Reconciliations

Our discussion below and elsewhere herein of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from restructuring costs consisting of: (1) expenses associated with our revised business technology strategy announced in fiscal 2016, as a result of which we incurred costs to convert to a modernized version of our established platform as opposed to completing the implementation of an ERP; (2) professional fees related to our three-year strategic plans; (3) restructuring expenses within our Brakes Group operations; (4) severance charges related to restructuring; and (5) foreign non-income based taxes. In addition, fiscal 2018 results of operations are impacted by business technology transformation initiative costs, facility closure charges, MEPP withdrawal charges and debt extinguishment charges, which are also excluded from our non-GAAP financial measures.

The non-GAAP financial measures presented in this report also exclude the impact of the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. All acquisition-related costs in fiscal 2018 and 2017 that have been excluded relate to the Brakes Acquisition, discussed in Note 4, “Acquisitions.” The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs.

The non-GAAP financial measures presented in this report further exclude the impact of the Tax Act enacted on December 22, 2017. The impact for fiscal 2018 includes: a provisional estimate of a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries and a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets due to the changes in tax rates. Other tax-related items impacting results of operations include foreign withholding taxes on repatriated earnings, net of foreign tax credits and a benefit from contributions made to fund Sysco’s U.S. Retirement Plan.

The fiscal 2018 and fiscal 2017 items described above and excluded from our non-GAAP measures are collectively referred to as “Certain Items.” In addition, with respect to the adjusted return on invested capital targets, our invested capital is adjusted for the accumulation of debt incurred for the Brakes Acquisition that would not have been borrowed absent this acquisition.

Management believes that adjusting its operating expenses, operating income, operating margin as a percentage of sales, interest expense, net earnings and diluted earnings per share to remove these Certain Items provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations and facilitates comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated, and which as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity. Sysco’s fiscal year ends on the Saturday nearest to June 30th. This resulted in a 52-week year ending June 30, 2018 for fiscal 2018, a 52-week year ending July 1, 2017 for fiscal 2017, and a 53-week year ending July 2, 2016 for fiscal 2016. Because the fourth quarter of fiscal 2016 contained an additional week as compared to fiscal 2017, our Consolidated Results of Operations for fiscal 2017, and any related case growth metrics, are not directly comparable to fiscal 2016. Management believes that adjusting the fiscal 2016 results for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis. As a result, the operating metrics for fiscal 2017 presented in the tables below reflect a comparison to fiscal 2016 as adjusted by one-fourteenth of the total metric for the fourth quarter. Failure to make these adjustments causes the year-over-year changes in these metrics to be understated.

Although Sysco has a history of growth through acquisitions, the Brakes Group is significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is also excluding from certain of its non-GAAP financial measures for the relevant periods, solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s adjusted results for fiscal 2017 and 2016. As the Brakes Acquisition took place at the beginning of fiscal 2017, and given the significance of the Brakes Acquisition, management believes that presenting Sysco’s adjusted financial measures, excluding the Brakes Group operating results (including, for this purpose, Brakes Group financing costs, which are not included in the Brakes Group operating results and are also not Certain Items), enhances comparability of the period over period financial performance of Sysco’s legacy business and allows investors to more effectively measure Sysco’s results against the financial goals under Sysco’s initial three-year strategic plan that concluded in fiscal 2018.

The company uses these non-GAAP measures when evaluating its financial results, as well as for internal planning and forecasting purposes. These financial 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 financial 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 for the impact

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.

	2018				2017				Change in Dollars				% Change
	(In thousands, except for share and per share data)
Operating expenses (GAAP)	$	8,756,417			$	8,504,336			$	252,081			3.0	%
Impact of MEPP charge	(1,700		)		(35,600		)		33,900				(95.2	)
Impact of restructuring costs (1)	(109,524		)		(161,011		)		51,487				(32.0	)
Impact of acquisition-related costs (2)	(108,136		)		(102,049		)		(6,087		)		6.0
Operating expenses adjusted for Certain Items (Non-GAAP)	$	8,537,057			$	8,205,676			$	331,381			4.0	%
Operating income (GAAP)	$	2,328,974			$	2,053,171			$	275,803			13.4	%
Impact of MEPP charge	1,700				35,600				(33,900		)		(95.2	)
Impact of restructuring costs (1)	109,524				161,011				(51,487		)		(32.0	)
Impact of acquisition-related costs (2)	108,136				102,049				6,087				6.0
Operating income adjusted for Certain Items (Non-GAAP)	$	2,548,334			$	2,351,831			$	196,503			8.4	%
Interest expense (GAAP)	$	395,483			$	302,878			$	92,605			30.6	%
Impact of loss on extinguishment of debt	(53,104		)		—				(53,104		)		NM
Interest expense adjusted for Certain Items (Non-GAAP)	$	342,379			$	302,878			$	39,501			13.0	%
Net earnings (GAAP)	$	1,430,766			$	1,142,503			$	288,263			25.2	%
Impact of MEPP charge	1,700				35,600				(33,900		)		(95.2	)
Impact of restructuring costs (1)	109,524				161,011				(51,487		)		(32.0	)
Impact of acquisition-related costs (2)	108,136				102,049				6,087				6.0
Impact of loss on extinguishment of debt	53,104				—				53,104				NM
Tax impact of MEPP charge	(573		)		(11,903		)		11,330				(95.2	)
Tax impact of restructuring costs (5)	(34,024		)		(51,184		)		17,160				(33.5	)
Tax impact of acquisition-related costs (5)	(26,172		)		(19,003		)		(7,169		)		37.7
Tax impact of loss on extinguishment of debt	(18,225		)		—				(18,225		)		NM
Tax impact of U.S. Retirement Plan contribution	(44,424		)		—				(44,424		)		NM
Impact of US transition tax	80,000				—				80,000				NM
Impact of US balance sheet remeasurement from tax law change	(14,477		)		—				(14,477		)		NM
Impact of France, U.K. and Sweden tax law changes	(9,706		)		—				(9,706		)		NM
Impact of repatriation of certain international earnings (4)	24,208				—				24,208				NM
Net earnings adjusted for Certain Items (Non-GAAP)	$	1,659,837			$	1,359,073			$	300,764			22.1	%
Diluted earnings per share (GAAP)	$	2.70			$	2.08			$	0.62			29.8	%
Impact of MEPP charge	—				0.06				(0.06		)		NM
Impact of restructuring costs (1)	0.21				0.29				(0.08		)		(27.6	)
Impact of acquisition-related costs (2)	0.20				0.19				0.01				5.3
Impact of loss on extinguishment of debt	0.10				—				0.10				NM
Tax impact of MEPP charge (3)	—				(0.02		)		0.02				NM
Tax impact of restructuring costs (3)	(0.06		)		(0.09		)		0.03				(33.3	)
Tax impact of acquisition-related costs (3)	(0.05		)		(0.03		)		(0.02		)		66.7
Tax impact of loss on extinguishment of debt	(0.03		)		—				(0.03		)		NM
Tax impact of U.S. Retirement Plan contribution	(0.08		)		—				(0.08		)		NM
Impact of US transition tax	0.15				—				0.15				NM

	2018				2017				Change in Dollars				% Change
	(In thousands, except for share and per share data)
Impact of US balance sheet remeasurement from tax law change	(0.03		)		—				(0.03		)		NM
Impact of France, U.K. and Sweden tax law changes	(0.02		)		—				(0.02		)		NM
Impact of repatriation of certain international earnings (4)	0.05				—				0.05				NM
Diluted EPS adjusted for Certain Items (Non-GAAP) (5)	$	3.14			$	2.48			$	0.66			26.6	%

(1)

Fiscal 2018 includes business technology transformation initiative costs, restructuring expenses within our Brakes Group operations, professional fees on three-year financial objectives, severance charges related to restructuring, costs to convert to legacy systems in conjunction with our revised business technology strategy and facility closure charges. Fiscal 2017 includes $111 million in accelerated depreciation associated with our revised business technology strategy and $46 million related to restructuring expenses within our Brakes operations, costs to convert to legacy systems in conjunction with our revised business technology strategy, professional fees on 3-year financial objectives and severance charges.

(2)	Fiscal 2018 and fiscal 2017 include $67 million and $76 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of our Brakes Group operations, and $18 million and $24 million in integration costs, respectively. Fiscal 2018 includes a $14 million write-off for an intangible asset due to restructuring in France.

(3)	The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred. The Brakes Acquisition also resulted in non-recurring tax expense in fiscal 2017, primarily from non-deductible transaction costs.

(4)	Represents the expense from foreign withholding tax incurred obtained through the repatriation of certain international earnings, partially offset by tax credits.

(5)	Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.

NM represents that the percentage change is not meaningful.

	2017				2016				Change in Dollars				% Change
	(In thousands, except for share and per share data)
Sales (GAAP)	$	55,371,139			$	50,366,919			$	5,004,220			9.9	%
Impact of Brakes	(5,170,787		)		—				(5,170,787		)		NM
Less 1 week fourth quarter sales	—				(974,849		)		974,849				NM
Comparable sales using a 52 weeks basis and excluding the impact of Brakes (Non-GAAP)	$	50,200,352			$	49,392,070			$	808,282			1.6	%
Gross Profit (GAAP)	$	10,557,507			$	9,040,472			$	1,517,035			16.8	%
Impact of Brakes	(1,333,852		)		—				(1,333,852		)		NM
Less 1 week fourth quarter gross profit	—				(178,774		)		178,774				NM
Comparable gross profit using a 52 week basis and excluding the impact of Brakes (Non-GAAP)	$	9,223,655			$	8,861,698			$	361,957			4.1	%
Gross margin (GAAP)	19.1		%		17.9		%						112 bps
Impact of Brakes	0.7				—								69 bps
Less 1 week fourth quarter sales	—				—								-1 bps
Gross margin using a 52 week basis and excluding the impact of Brakes (Non-GAAP)	18.4		%		17.9		%						43 bps
Operating expenses (GAAP)	$	8,504,336			$	7,189,972			$	1,314,364			18.3	%
Impact of MEPP charge	(35,600		)		—				(35,600		)		NM
Impact of restructuring costs (1)	(161,011		)		(123,134		)		(37,877		)		30.8
Impact of acquisition-related costs (2)	(102,049		)		(35,614		)		(66,435		)		NM
Operating expenses adjusted for Certain Items (Non-GAAP)	$	8,205,676			$	7,031,224			$	1,174,452			16.7	%

	2017				2016				Change in Dollars				% Change
	(In thousands, except for share and per share data)
Impact of Brakes	$	(1,282,800	)		$	—			$	(1,282,800	)		NM
Impact of Brakes restructuring costs (3)	13,732				—				13,732				NM
Impact of Brakes acquisition-related costs (2)	78,273				—				78,273				NM
Less 1 week fourth quarter operating expense	—				(133,899		)		133,899				NM
Operating expenses adjusted for Certain Items, extra week and excluding the impact of Brakes (Non-GAAP)	$	7,014,881			$	6,897,325			$	117,556			1.7	%
Operating income (GAAP)	$	2,053,171			$	1,850,500			$	202,671			11.0	%
Impact of MEPP charge	35,600				—				35,600				NM
Impact of restructuring costs (1)	161,011				123,134				37,877				30.8
Impact of acquisition-related costs (2)	102,049				35,614				66,435				NM
Operating income adjusted for Certain Items (Non-GAAP)	$	2,351,831			$	2,009,248			$	342,583			17.1	%
Impact of Brakes	(51,053		)		—				(51,053		)		NM
Impact of Brakes restructuring costs (3)	(13,732		)		—				(13,732		)		NM
Impact of Brakes acquisition-related costs (2)	(78,273		)		—				(78,273		)		NM
Less 1 week fourth quarter operating income	—				(44,876		)		44,876				NM
Operating income adjusted for Certain Items, extra week and excluding the impact of Brakes (Non-GAAP)	$	2,208,773			$	1,964,372			$	244,401			12.4	%
Operating margin (GAAP)	3.71		%		3.67		%						4 bps
Operating margin excluding Certain Items (Non-GAAP)	4.25		%		3.99		%						26 bps
Operating margin excluding Certain Items, extra week and Brakes (Non-GAAP)	4.40		%		3.98		%						42 bps
Interest expense (GAAP)	$	302,878			$	306,146			$	(3,268	)		(1.1	)%
Impact of acquisition financing costs (3)	—				(123,990		)		123,990				NM
Interest expense adjusted for Certain Items (Non-GAAP)	$	302,878			$	182,156			$	120,722			66.3	%
Less 1 week fourth quarter other (income) expenses	—				(3,975		)		3,975				NM
Interest expenses adjusted for Certain Items and extra week (Non-GAAP)	$	302,878			$	178,181			$	124,697			70.0	%
Other (income) expense (GAAP)	$	(15,937	)		$	111,347			$	(127,284	)		NM
Impact of foreign currency remeasurement and hedging	—				(146,950		)		146,950				NM
Other (income) expense adjusted for Certain Items (Non-GAAP)	$	(15,937	)		$	(35,603	)		$	19,666			(55.2	)%
Less 1 week fourth quarter other (income) expense	—				403				(403		)		NM
Other (income) expense adjusted for Certain Items, extra week and Brakes (Non-GAAP)	$	(15,937	)		$	(35,200	)		$	19,263			(54.7	)%
Net earnings (GAAP)	$	1,142,503			$	949,622			$	192,881			20.3	%
Impact of MEPP charge	35,600				—				35,600				NM
Impact of restructuring costs (1)	161,011				123,134				37,877				30.8
Impact of acquisition-related costs (2)	102,049				35,614				66,435				NM
Impact of acquisition financing costs	—				123,990				(123,990		)		NM
Impact of foreign currency remeasurement and hedging	—				146,950				(146,950		)		NM
Tax impact of MEPP charge	(11,903		)		—				(11,903		)		NM
Tax impact of restructuring costs (5)	(51,184		)		(47,333		)		(3,851		)		8.1
Tax impact of acquisition-related costs (5)	(19,003		)		(13,690		)		(5,313		)		38.8
Tax impact of acquisition financing costs (5)	—				(47,662		)		47,662				NM

	2017				2016				Change in Dollars				% Change
	(In thousands, except for share and per share data)
Tax impact of foreign currency remeasurement and hedging	—				(56,488		)		56,488				NM
Net earnings adjusted for Certain Items (Non-GAAP)	$	1,359,073			$	1,214,137			$	144,936			11.9	%
Impact of Brakes	(46,988		)		—				(46,988		)		NM
Impact of Brakes restructuring costs (3)	(11,794		)		—				(11,794		)		NM
Impact of Brakes acquisition-related costs (2)	(67,221		)		—				(67,221		)		NM
Impact of interest expense on debt issued for the Brakes acquisition (6)	83,633				—				83,633				NM
Tax impact of interest expense on debt issued for the Brakes acquisition (5)	(33,880		)		—				(33,880		)		NM
Less 1 week fourth quarter net earnings	—				(26,119		)		26,119				NM
Net earnings adjusted for Certain Items, extra week and Brakes (Non-GAAP)	$	1,282,823			$	1,188,018			$	94,805			8.0	%
Diluted earnings per share (GAAP) (1)	$	2.08			$	1.64			$	0.44			26.8	%
Impact of MEPP charge	0.06				—				0.06				NM
Impact of restructuring costs (1)	0.29				0.21				0.08				38.1
Impact of acquisition-related costs (2)	0.19				0.06				0.13				NM
Impact of foreign currency remeasurement and hedging	—				0.25				(0.25		)		NM
Impact of acquisition financing costs (3)	—				0.21				(0.21		)		NM
Tax impact of MEPP charge	(0.02		)		—				(0.02		)		NM
Tax impact of restructuring costs (5)	(0.09		)		(0.08		)		(0.01		)		12.5
Tax impact of acquisition-related costs (5)	(0.03		)		(0.02		)		(0.01		)		50.0
Tax impact of acquisition financing costs (5)	—				(0.08		)		0.08				NM
Tax impact of foreign currency remeasurement and hedging	—				(0.10		)		0.10				NM
Diluted EPS adjusted for Certain Items (Non-GAAP) (4)	$	2.48			$	2.10			$	0.38			18.1	%
Impact of Brakes	(0.09		)		—				(0.09		)		NM
Impact of Brakes restructuring costs (3)	(0.02		)		—				(0.02		)		NM
Impact of Brakes acquisition-related costs (2)	(0.12		)		—				(0.12		)		NM
Impact of interest expense on debt issued for the Brakes acquisition (6)	0.15				—				0.15				NM
Tax impact of interest expense on debt issued for the Brakes acquisition (5)	(0.06		)		—				(0.06		)		NM
Total impact of Brakes Certain Items	$	(0.05	)		$	—			$	(0.05	)		NM
Total Brakes accretion (Non-GAAP)	(0.14		)		—				(0.14		)		NM
Less 1 week impact of fourth quarter diluted earnings per share	—				(0.05		)		0.05				NM
Diluted EPS adjusted for Certain Items, extra week and Brakes (Non-GAAP) (4)	$	2.34			$	2.06			$	0.29			13.8	%
Diluted EPS adjusted for Certain Items (Non-GAAP) (4)	$	2.48			$	2.10			$	0.38			18.1	%
Less 1 week impact of fourth quarter diluted earnings per share	—				(0.05		)		0.05				NM
Diluted EPS adjusted for Certain Items and extra week (Non-GAAP) (4)	$	2.48			$	2.06			$	0.42			20.4	%

(1)	Fiscal 2017 includes $111 million in accelerated depreciation associated with our revised business technology strategy and $46 million related to professional fees on 3-year financial objectives, restructuring expenses within our Brakes Group operations, costs to convert to legacy systems in conjunction with our revised business technology strategy and severance charges related to restructuring.

(2)	Fiscal 2017 includes $76 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group and $24 million in integration costs.

(3)	Includes Brakes Acquisition restructuring charges.

(4)	Individual components of diluted earnings per share may not add to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.

(5)	The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred. The adjustments also include $7 million in non-deductible transaction costs and $4 million in other one-time costs related to the Brakes Acquisition.

(6)	Represents the expense from foreign withholding tax incurred obtained through the repatriation of certain international earnings, partially offset by tax credits.

(7)	Sysco Corporation issued debt to fund the Acquisition. The interest expense arising from the debt issued is attributed to the incremental impact of Brakes operating results, even though it is not a direct obligation of the Brakes Group and is not considered a Certain Item.

NM represents that the percentage change is not meaningful.

Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for the periods presented:

U.S. FOODSERVICE OPERATIONS	2018				2017				Change in Dollars				%/bps Change
Operating expenses (GAAP)	$	4,848,285			$	4,664,780			$	183,505			3.9	%
Impact of MEPP charge	(1,700		)		(35,600		)		33,900				(95.2	)
Impact of restructuring costs	—				(470		)		470				NM
Operating expenses adjusted for Certain Items (Non-GAAP)	$	4,846,585			$	4,628,710			$	217,875			4.7	%
Operating income (GAAP)	$	3,051,991			$	2,891,612			$	160,379			5.5	%
Impact of MEPP charge	1,700				35,600				(33,900		)		(95.2	)
Impact of restructuring costs	—				470				(470		)		NM
Operating income adjusted for Certain Items (Non-GAAP)	$	3,053,691			$	2,927,682			$	126,009			4.3	%
INTERNATIONAL FOODSERVICE OPERATIONS
Operating expenses (GAAP)	$	2,243,728			$	2,032,703			$	211,025			10.4	%
Impact of restructuring costs (1)	(36,667		)		(25,080		)		(11,587		)		46.2
Impact of acquisition-related costs (2)	(90,004		)		(78,273		)		(11,731		)		15.0
Operating expenses adjusted for Certain Items (Non-GAAP)	$	2,117,057			$	1,929,350			$	187,707			9.7	%
Operating income (GAAP)	$	193,240			$	243,116			$	(49,876	)		(20.5	)%
Impact of restructuring costs (1)	36,667				25,080				11,587				46.2
Impact of acquisition related costs (2)	90,004				78,273				11,731				15.0
Operating income adjusted for Certain Items (Non-GAAP)	$	319,911			$	346,469			$	(26,558	)		(7.7	)%
CORPORATE
Operating expenses (GAAP)	$	953,566			$	1,127,807			$	(174,241	)		(15.4	)%
Impact of restructuring costs (3)	(72,857		)		(135,461		)		62,604				(46.2	)
Impact of acquisition-related costs (4)	(18,132		)		(23,776		)		5,644				(23.7	)
Operating expenses adjusted for Certain Items (Non-GAAP)	$	862,577			$	968,570			$	(105,993	)		(10.9	)%
Operating income (GAAP)	$	(980,060	)		$	(1,135,074	)		$	155,014			(13.7	)%
Impact of restructuring costs (3)	72,857				135,461				(62,604		)		(46.2	)
Impact of acquisition-related costs (4)	18,132				23,776				(5,644		)		(23.7	)
Operating income adjusted for Certain Items (Non-GAAP)	$	(889,071	)		$	(975,837	)		$	86,766			(8.9	)%

(1)	Includes Brakes Acquisition-related restructuring charges, facility closure charges and other severance charges related to restructuring.

(2)	Fiscal 2018 and fiscal 2017 include $67 million and $76 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group. Fiscal 2018 includes a $14 million write-off for an intangible asset due to restructuring in France.

(3)

Fiscal 2018 includes business technology transformation initiative costs, professional fees on three-year financial objectives, severance charges related to restructuring, costs to convert to legacy systems in conjunction with our revised business technology strategy and facility closure charges. Fiscal 2017 includes $111 million in accelerated depreciation associated with our revised business technology strategy and $46 million related to restructuring expenses within our Brakes Group operations, costs to convert to legacy systems in conjunction with our revised business technology strategy, professional fees on 3-year financial objectives and severance charges.

(4)	Fiscal 2018 and fiscal 2017 include $18 million and $24 million, respectively, related to integration costs from the Brakes Acquisition.

NM represents that the percentage change is not meaningful.

U.S. FOODSERVICE OPERATIONS	2017				2016				Change in Dollars				%/bps Change
Sales	$	37,604,698			$	37,776,443			$	(171,745	)		(0.5	)%
Less 1 week fourth quarter sales	—				(728,270		)		728,270				NM
Comparable sales using a 52 week basis (Non-GAAP)	$	37,604,698			$	37,048,173			$	556,525			1.5	%
Gross Profit	$	7,556,392			$	7,413,436			$	142,956			1.9	%
Less 1 week fourth quarter sales	—				(146,744		)		146,744				NM
Comparable gross profit using a 52 week basis (Non-GAAP)	$	7,556,392			$	7,266,692			$	289,700			4.0	%
Gross Margin	20.09		%		19.62		%						47 bps
Less 1 week fourth quarter sales	—				0.01								NM
Comparable gross margin using a 52 week basis (Non-GAAP)	20.09		%		19.61		%						48 bps
Operating expenses (GAAP)	$	4,664,780			$	4,641,504			$	23,276			0.5	%
Impact of MEPP charge	(35,600		)		—				(35,600		)		NM
Impact of restructuring costs	(470		)		(3,351		)		2,881				(86.0	)
Operating expenses adjusted for Certain Items (Non-GAAP)	$	4,628,710			$	4,638,153			$	(9,443	)		(0.2	)%
Less 1 week fourth quarter operating expenses	—				(88,323		)		88,323				NM
Operating expenses adjusted for extra week (Non-GAAP)	$	4,628,710			$	4,549,830			$	78,880			1.7	%
Operating income (GAAP)	$	2,891,612			$	2,771,932			$	119,680			4.3	%
Impact of MEPP charge	35,600				—				35,600				NM
Impact of restructuring costs	470				3,351				(2,881		)		(86.0	)
Operating income adjusted for Certain Items (Non-GAAP)	$	2,927,682			$	2,775,283			$	152,399			5.5	%
Less 1 week fourth quarter operating income	—				(58,421		)		58,421				NM
Operating income adjusted for extra week (Non-GAAP)	$	2,927,682			$	2,716,862			$	210,820			7.8	%
INTERNATIONAL FOODSERVICE OPERATIONS
Sales	$	10,613,059			$	5,436,209			$	5,176,850			95.2	%
Impact of Brakes	(5,170,787		)		—				(5,170,787		)		NM
Less 1 week fourth quarter sales	—				(108,097		)		108,097				NM
Comparable sales using a 52 week basis (Non-GAAP)	$	5,442,272			$	5,328,112			$	114,160			2.1	%
Gross Profit	$	2,275,819			$	938,942			$	1,336,877			NM
Impact of Brakes	(1,333,852		)		—				(1,333,852		)		NM
Less 1 week fourth quarter sales	—				(18,686		)		18,686				NM
Comparable gross profit using a 52 week basis (Non-GAAP)	$	941,967			$	920,256			$	21,711			2.4	%

Gross Margin	21.44		%		17.27		%						417 bps
Impact of Brakes	4.14				—								NM
Less 1 week fourth quarter sales	—				—								NM
Comparable gross margin using a 52 week basis (Non-GAAP)	17.30		%		17.27		%						3 bps
Operating expenses (GAAP)	$	2,032,703			$	761,783			$	1,270,920			NM
Impact of restructuring costs (1)	(25,080		)		(8,945		)		(16,135		)		NM
Impact of acquisition-related costs (2)	(78,273		)		—				(78,273		)		NM
Operating expenses adjusted for Certain Items (Non-GAAP)	$	1,929,350			$	752,838			$	1,176,512			NM
Impact of Brakes	(1,282,800		)		—				(1,282,800		)		NM
Impact of Brakes restructuring costs	13,732				—				13,732				NM
Impact of Brakes acquisition-related costs	78,273				—				78,273				NM
Less 1 week fourth quarter operating expenses	—				(14,628		)		14,628				NM
Operating expenses adjusted for extra week (Non-GAAP)	$	738,555			$	738,210			$	345			—	%
Operating income (GAAP)	$	243,116			$	177,159			$	65,957			37.2	%
Impact of restructuring costs (1)	25,080				8,945				16,135				NM
Impact of acquisition related costs (2)	78,273				—				78,273				NM
Operating income adjusted for Certain Items (Non-GAAP)	$	346,469			$	186,104			$	160,365			86.2	%
Impact of Brakes	(51,053		)		—				(51,053		)		NM
Impact of Brakes restructuring costs	(13,732		)		—				(13,732		)		NM
Impact of Brakes acquisition-related costs	(78,273		)		—				(78,273		)		NM
Less 1 week fourth quarter operating income	—				(4,058		)		4,058				NM
Operating income adjusted for extra week (Non-GAAP)	$	203,411			$	182,046			$	21,365			11.7	%

(1)	Fiscal 2017 includes Brakes Acquisition-related restructuring charges and other severance charges related to restructuring.

(2)	Fiscal 2017 includes $76 million related to intangible amortization expense from the Brakes Acquisition, which is included in the results of the Brakes Group.

NM represents that the percentage change is not meaningful.

Three-Year Financial Targets

Sysco management considers adjusted ROIC to be a measure that provides useful information to management and investors in evaluating the efficiency and effectiveness of the company’s long-term capital investments. We calculate ROIC as net earnings divided by (i) stockholder’s equity at the beginning of the year and at the end of each fiscal quarter during the year, excluding the impact of foreign currency translation adjustments; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year. All components of our adjusted ROIC calculation would be impacted by Certain Items. As a result, we calculate adjusted ROIC as adjusted net earnings divided by (i) stockholders’ equity, computed as the average of adjusted stockholders’ equity at the beginning of the year and at the end of each fiscal quarter during the year; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year. With respect to the adjusted return on invested capital targets, our invested capital is adjusted for the accumulation of debt incurred for the Brakes Acquisition that would not have been borrowed absent this acquisition.

	2018
Net earnings (GAAP)	$	1,430,766
Impact of Certain Items on net earnings	229,071
Adjusted net earnings (Non-GAAP)	$	1,659,837
Impact of Brakes	6,544
Adjusted net earnings excluding Brakes (Non-GAAP)	$	1,653,293
Invested Capital (GAAP)	$	11,042,773
Adjustments to invested capital (1)	275,125
Adjusted Invested capital (Non-GAAP)	$	11,317,898
Impact of Brakes	3,115,912
Adjusted invested capital excluding Brakes	$	8,201,986
Return on invested capital (GAAP)	13.0		%
Return on invested capital (Non-GAAP)	14.7		%
Return on invested capital excluding Brakes (Non-GAAP)	20.2		%

(1) Shareholders’ equity adjustments include the impact of Certain Items from earnings and removal of foreign currency adjustments that arose in the fiscal year.

In addition, we have targets and expectations under our new three-year plan that are based on adjusted results, including an adjusted ROIC target of 16%. We cannot predict with certainty when we will achieve these results or whether the calculation of our ROIC in such future period will be on an adjusted basis due to the effect of Certain Items, which would be excluded from such calculation. Due to these uncertainties, to the extent our future calculation of ROIC is on an adjusted basis excluding Certain Items, we cannot provide a quantitative reconciliation of this non-GAAP measure to the most directly comparable GAAP measure without unreasonable effort. However, we would expect to calculate adjusted ROIC, if applicable, in the same manner as we have calculated this historically.

We have completed the final year of our initial three-year plan that was established in fiscal 2016 and have measured our operating income performance against our targets on an adjusted basis. The following reconciles gross profit, operating expenses and operating income cumulative growth from an adjusted to a GAAP basis.

	Year Ended
	June 30, 2018				June 27, 2015				3-year Plan Change $ Results				CAGR
Sales (GAAP)	$	58,727,324			$	48,680,752			$	10,046,572
Impact of Brakes	(5,612,400		)		—				(5,612,400		)
Sales excluding the impact of Brakes (Non-GAAP)	$	53,114,924			$	48,680,752			$	4,434,172
Gross profit (GAAP)	$	11,085,391			$	8,551,516			$	2,533,875			9.0	%
Impact of Brakes	(1,405,748		)		—				(1,405,748		)
Gross profit excluding the impact of Brakes (Non-GAAP)	$	9,679,643			$	8,551,516			$	1,128,127			4.2	%
Gross margin (GAAP)	18.88		%		17.57		%		131 bps
Impact of Brakes	0.65				—				65 bps
Gross margin excluding the impact of Brakes (Non-GAAP)	18.23		%		17.57		%		66 bps
Operating expenses (GAAP)	$	8,756,417			$	7,322,154			$	1,434,263			6.1	%
MEPP Charge	(1,700		)		—				(1,700		)
Impact of restructuring costs (1)	(109,524		)		(7,801		)		(101,723		)
Impact of acquisition-related costs (2)	(108,136		)		(554,667		)		446,531
Operating expenses adjusted for Certain Items (Non-GAAP)	$	8,537,057			$	6,759,686			$	1,777,371
Impact of Brakes	(1,427,732		)		—				(1,427,732		)
Impact of Brakes restructuring costs (3)	23,346				—				23,346
Impact of Brakes acquisition-related costs (2)	90,004				—				90,004
Operating expenses adjusted for Certain Items and excluding the impact of Brakes (Non-GAAP)	$	7,222,675			$	6,759,686			$	462,989			2.2	%
Operating leverage (GAAP) (4)													2.9	%
Operating leverage adjusted for Certain Items and excluding the impact of Brakes (Non-GAAP ) (4)													2.0	%
Operating income (GAAP)	$	2,328,974			$	1,229,362			$	1,099,612			23.7	%
MEPP Charge	1,700				—				1,700
Impact of restructuring costs (1)	109,524				7,801				101,723
Impact of acquisition-related costs (2)	108,136				554,667				(446,531		)
Operating income adjusted for Certain Items (Non-GAAP)	$	2,548,334			$	1,791,830			$	756,504
Impact of Brakes	21,985				—				21,985
Impact of Brakes restructuring costs (3)	(23,346		)		—				(23,346		)
Impact of Brakes acquisition-related costs (2)	(90,004		)		—				(90,004		)
Operating income adjusted for Certain Items and excluding the impact of Brakes (Non-GAAP)	$	2,456,969			$	1,791,830			$	665,139			11.1	%

(1)

Fiscal 2018 includes business technology transformation initiative costs, restructuring expenses within our Brakes operations, professional fees on three-year financial objectives, severance charges related to restructuring, costs to convert to legacy systems in conjunction with our revised business technology strategy and facility closure charges. Fiscal 2015 includes US Foods merger and integration planning costs.

(2)	Fiscal 2018 includes $67 million related to intangible amortization expense from the Brakes acquisition, which is included in the results of the Brakes Group and $18 million in integration costs. Fiscal 2018 includes a $14.0 million write-off for an intangible asset due to restructuring in France. Fiscal 2015 includes US Foods merger integration and termination costs.

(3)	Includes Brakes Acquisition restructuring charges.

(4)	Operating leverage is calculated as the difference between gross profit growth and operating expense growth.

Due to uncertainties in projecting Certain Items during the period covered under our new three-year strategic plan, we cannot provide a quantitative reconciliation of these non-GAAP measures to the most directly comparable GAAP measures without unreasonable effort. However, we would expect to calculate these adjusted results in the same manner as the reconciliations provided for the historical periods that are presented herein. The impact of future Certain Items could cause projected non-GAAP amounts to differ significantly from our GAAP results.

Liquidity and Capital Resources

Highlights

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

•	Cash flows from operations were $2.2 billion in fiscal 2018 and fiscal 2017;

•	Net capital expenditures totaled $665.6 million in fiscal 2018 compared to $662.7 million in fiscal 2017;

•	Free cash flow was $1.5 billion in fiscal 2018 compared to $1.6 billion in fiscal 2017 (see “Non-GAAP reconciliation” below under the heading “Free Cash Flow”);

•	Cash used for acquisition of businesses was $248.1 million in fiscal 2018 compared to $2.9 billion in fiscal 2017;

•	Dividends paid were $722.2 million in fiscal 2018 compared to $698.6 million in fiscal 2017; and

•	We repurchased $978.9 million of shares in fiscal 2018 compared to $1.9 billion in fiscal 2017.

In addition, for our senior notes:

•	We issued an aggregate of $1.0 billion and $750.0 million in new senior notes in fiscal 2018 and 2017, respectively; and

•	We repaid senior notes in the amount of $500.0 million and redeemed senior notes and debentures in the amount of $230.5 million in fiscal 2018, using cash on hand, proceeds from borrowings under our commercial paper program and a portion of net proceeds from our senior notes offering.

Sources and Uses of Cash

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

•	working capital requirements;

•	investments in facilities, systems, fleet, other equipment and technology;

•	cash dividends;

•	acquisitions compatible with our overall growth strategy;

•	contributions to our various retirement plans; and

•	debt repayments and share repurchases.

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 flows from operations and remain in a strong financial position; however, our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations. We believe our mechanisms to manage working capital, such as credit monitoring, optimizing inventory levels and maximizing payment terms with vendors, and our mechanisms to manage the items impacting our gross profits have been sufficient to limit a significant unfavorable impact on our cash flows from operations. We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations. Seasonal trends also impact our cash flows from operations and free cash

flow, as we use more cash earlier in the fiscal year and then see larger, sequential quarterly increases throughout the remainder of the year.

As of June 30, 2018, we had $552.3 million in cash and cash equivalents, approximately 68.0% of which was held by our international subsidiaries generated from our earnings of international operations. If these earnings were transferred among countries or repatriated to the U.S., such amounts may be subject to withholding and additional foreign tax obligations. Additionally, Sysco Corporation has provided intercompany loans to certain of its international subsidiaries, and when interest and principal payments are made, some of this cash will move to the U.S.

Upon the enactment of the Tax Act, Sysco’s undistributed foreign income of certain consolidated foreign subsidiaries of approximately $1.4 billion became subject to U.S. transition tax. As a result, in the fourth quarter, the company repatriated $1.0 billion of foreign earnings of certain non-U.S. subsidiaries and recognized foreign income and non-income based taxes of $50.2 million.

In December 2017, Sysco established a wholly owned captive insurance subsidiary (the Captive). The primary purpose of the Captive is to enhance Sysco’s risk financing strategies by providing Sysco the opportunity to negotiate insurance premiums in the non-retail insurance market. The Captive must maintain a sufficient level of cash to fund future reserve payments. As of June 30, 2018, we had $163.5 million of restricted cash and restricted cash equivalents primarily held by the Captive in a cash deposit account in order to meet solvency requirements.

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

•	our cash flows from operations;

•	the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility and bank line of credit; and

•	our ability to access capital from financial markets, including issuances of debt securities, either privately or under our shelf registration statement filed with the Securities and Exchange Commission (SEC).

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

Cash Flows

Operating Activities

Fiscal 2018 vs. Fiscal 2017

We generated $2.2 billion in cash flows from operations in fiscal 2018 and in fiscal 2017. These comparable amounts include year-over-year unfavorable comparisons on other long term liabilities and decreased working capital, offset by favorable comparisons on accrued income taxes and higher operating results. The cash impact of our Certain Items increased $51.8 million year-over-year. The cash impact of Certain Items will differ from the earnings impact of Certain Items, as the payments for these items may occur in a different period from the period in which the Certain Item charges were recognized in the Statement of Consolidated Results of Operations.

Included in the change in other long-term liabilities was a negative comparison, primarily from pension contributions. Pension contributions were $415.0 million in fiscal 2018, including $380.0 million in contributions to our U.S. Retirement Plan in fiscal 2018, which resulted in a decrease to other long-term liabilities. Pension contributions were $57.6 million in fiscal 2017, including a $25 million contribution to our U.S. Retirement Plan, which resulted in a decrease to other long-term liabilities. The level and timing of any contribution to our U.S. Retirement Plan in fiscal 2019 is still being determined.

Changes in working capital, specifically accounts receivable and accounts payable, had a negative impact of $279.9 million on the period over period comparison of cash flow from operations. There was an unfavorable comparison on accounts payable and accounts receivable, which was partially offset by favorable comparisons on inventory. Sales growth impacted all components of working capital; however, deflation contributed to lower levels of increase in fiscal 2018 as compared to fiscal 2017.

Our tax payments in fiscal 2018 were lower than in fiscal 2017 due to the impacts of the Tax Act, primarily due to the reduction of the U.S. federal corporate tax rate from 35% to 21% and the full expensing of qualified capital expenditures. In addition, cash taxes for fiscal 2018 were reduced due to the tax benefits derived from our $380.0 million in contributions to our U.S. Retirement Plan. Additionally, Sysco’s fourth quarter U.S. estimated federal tax payment for fiscal 2017 was deferred to the second quarter of fiscal 2018 due to a disaster area designation for companies located in the Houston area, the location of our corporate headquarters. We made tax payments of approximately $268.4 million in fiscal 2018. We expect future tax payments to grow with our earnings.

Fiscal 2017 vs. Fiscal 2016

We generated $2.2 billion in cash flows from operations in fiscal 2017 compared to cash flow generation of $2.0 billion in fiscal 2016. This increase of $251.0 million year-over-year was largely attributable to higher operating results, improved working capital management and a favorable comparison on accrued expenses and other long-term liabilities. These were partially offset by an unfavorable comparison on accrued income taxes and deferred income taxes. The cash impact of our Certain Items increased $193.9 million year-over-year. The cash impact of Certain Items will differ from the earnings impact of Certain Items, as the payments for these items may occur in a different period from the period in which the Certain Item charges were recognized in the Statement of Consolidated Results of Operations.

Included in the change in other long-term liabilities was a positive comparison primarily from pension contributions. Pension contributions were $57.6 million in fiscal 2017, including a $25.0 million contribution to our U.S. Retirement Plan in fiscal 2017, which resulted in a decrease to other long-term liabilities. Pension contributions were $157.5 million in fiscal 2016, including a $130.0 million contribution to the U.S. Retirement Plan in fiscal 2016, which resulted in a decrease to other long-term liabilities.

Changes in working capital, specifically accounts receivable and accounts payable, had a positive impact of $166.1 million on the period over period comparison of cash flow from operations, primarily from improvements in accounts payable management. This was partially offset by inventory. Sales growth impacted all components of working capital; however, deflation contributed to lower levels of increase in fiscal 2017 as compared to fiscal 2016.

The positive comparison on accrued expenses was primarily due to $312.5 million in US Foods merger termination fees that were paid in fiscal 2016, partially offset by a $39.4 million decrease from incentive payments. Our annual incentive payments, for performance in the prior fiscal year, are paid in the first quarter of each succeeding fiscal year. Incentive payments paid in fiscal 2017 were higher than amounts paid in fiscal 2016 due to larger payouts achieved from fiscal 2016 performance.

Our tax payments in fiscal 2016 were lower than in fiscal 2017 due to changes in tax elections allowing us to accelerate tax deductions from method changes which, in turn, significantly reduced our estimated payments in fiscal 2016 by delaying the timing of these payments to future periods. Additionally, Sysco’s fourth quarter U.S. estimated federal tax payment for fiscal 2016 was deferred to the second quarter of fiscal 2017 due to a disaster area designation for companies located in the Houston area, the location of our corporate headquarters. We made tax payments of approximately $761.4 million in fiscal 2017, including an approximate $120 million for the deferred tax payment from the fourth quarter of fiscal 2016.

Investing Activities

Fiscal 2018 capital expenditures included:

•	fleet replacements;

•	buildings and building improvements;

•	investments in technology; and

•	warehouse equipment.

Fiscal 2017 capital expenditures included:

•	fleet replacements;

•	investments in technology;

•	replacement or significant expansion of facilities in Costa Rica, Georgia, Missouri, Maryland, and Texas; and

•	warehouse equipment.

Fiscal 2016 capital expenditures included:

•	fleet replacements;

•	investments in technology;

•	replacement or significant expansion of facilities in California, Maryland, Texas, and Virginia; and

•	construction of fold-out facilities in Ireland and Texas.

The level of capital expenditures in fiscal 2018 increased $1.4 million as compared to fiscal 2017. Capital expenditures in fiscal 2017 increased by $159.0 million.

We estimate our capital expenditures, net of proceeds from sales of assets, in fiscal 2019 to be approximately 1.2% to 1.3% of fiscal sales. Fiscal 2019 expenditures will include facility, fleet and other equipment replacements and expansions; new facility construction; and investments in technology.

During fiscal 2018, the company paid cash of $248.1 million for acquisitions, net of cash acquired, including HFM Foodservice and Doerle Food Services within U.S. Foodservice operations, and Kent Frozen Foods, Eko Fågel, Fisk & Mittemellan and the remaining 50% interest in our joint venture in Costa Rica within our International Foodservice operations.

During fiscal 2017, the company paid cash of $2.9 billion for acquisitions, net of cash acquired, including the Brakes Group and also acquired a small produce company in Sweden.

During fiscal 2016, the company paid cash of $219.2 million for acquisitions including a leading luxury personal care amenity provider in the hospitality industry, a distributor of high-quality fresh and frozen seafood based in Florida and an innovative e-commerce platform providing restaurant supplies and equipment exclusively to Sysco customers. During fiscal 2016, we paid $103.5 million and received $57.5 million for options to hedge against the impact of foreign currency fluctuations on the purchase price of the Brakes Acquisition.

Free Cash Flow

Free cash flow represents net cash provided from operating activities, less purchases of plant and equipment, plus proceeds from sales of plant and equipment. Sysco considers free cash flow to be a non-GAAP liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash, including dividend payments, share repurchases and acquisitions. However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments. As a result of our contributions to our U.S. Retirement Plan, free cash flow for fiscal 2018 decreased 5.3%, or $83.6 million, to $1.5 billion, as compared to fiscal 2017. Our cash requirements for our Certain Items were $51.8 million higher in fiscal 2018 than in fiscal 2017. As a result of increased cash provided by operating activities, free cash flow for fiscal 2017 increased 6.2%, or $92.2 million, to $1.6 billion, as compared to fiscal 2016.

Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities.

	2018				2017				Change in Dollars				% Change
	(In thousands)
Net cash provided by operating activities (GAAP)	$	2,158,632			$	2,239,354			$	(80,722	)		(3.6	)%
Additions to plant and equipment	(687,815		)		(686,378		)		(1,437		)		0.2
Proceeds from sales of plant and equipment	22,255				23,715				(1,460		)		(6.2	)
Free Cash Flow (Non-GAAP)	$	1,493,072			$	1,576,691			$	(83,619	)		(5.3	)%

	2017				2016				Change in Dollars				% Change
	(In thousands)
Net cash provided by operating activities (GAAP)	$	2,239,354			$	1,988,347			$	251,007			12.6	%
Additions to plant and equipment	(686,378		)		(527,346		)		(159,032		)		30.2
Proceeds from sales of plant and equipment	23,715				23,511				204				0.9
Free Cash Flow (Non-GAAP)	$	1,576,691			$	1,484,512			$	92,179			6.2	%

Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $268.8 million in fiscal 2018, $204.8 million in fiscal 2017 and $282.5 million in fiscal 2016. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.

We routinely engage in share repurchase programs. The number of shares acquired and their cost during fiscal 2018 were 17,930,114 shares for $978.9 million, with 35,744,589 shares repurchased in fiscal 2017 for $1.9 billion, and 44,716,180 shares repurchased in fiscal 2016 for $1.9 billion. In February 2017, our Board of Directors approved a repurchase program authorizing the repurchase of shares of the company’s common stock not to exceed $1.0 billion through the end of fiscal 2019. In November 2017, our Board of Directors approved a separate repurchase program to authorize the repurchase of the company’s common stock not to exceed $1.5 billion through the end of fiscal 2020. All share repurchases in fiscal 2018 were made under the February 2017 authorization. We repurchased approximately 1,344,000 additional shares for $93.6 million through August 10, 2018. These repurchase programs are intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans and to make opportunistic repurchases. The number of shares we repurchase during fiscal 2019 will be dependent on many factors, including the level of future stock option exercises, as well as competing uses for available cash. We intend to continue purchasing shares under our current repurchase programs through open market purchases to align with our capital allocation strategy, which will involve opportunistic purchases and purchases to offset dilution resulting from shares issued under the company’s benefit plans.

We have made dividend payments to our shareholders in each fiscal year since our company's inception. Dividends paid were $722.2 million, or $1.38 per share, in fiscal 2018, $698.6 million, or $1.28 per share, in fiscal 2017, and $698.9 million, or $1.22 per share, in fiscal 2016. In May 2018, we declared our regular quarterly dividend for the fourth quarter of fiscal 2018 of $0.36 per share, which was paid in July 2018. We expect to continue to grow our dividend in fiscal 2019.

In August 2015, we filed a universal shelf registration statement with the SEC under which we, as a well-known seasoned issuer, had the ability to issue and sell an indeterminate amount of various types of debt and equity securities. We intend to file a new universal shelf registration statement to replace our existing universal shelf registration statement in August 2018. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.

In November 2000, we filed 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 10, 2018, 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 30, 2018, and repayment activity since the close of fiscal 2018 are disclosed within those notes. Updated amounts through August 10, 2018, include:

•	$409.1 million outstanding from our commercial paper program; and

•	No amounts outstanding from the credit facility supporting the company’s U.S. commercial paper program.

Our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 1.71% for fiscal 2018, 0.97% for fiscal 2017, and 0.49% for fiscal 2016.

Included in current maturities of long-term debt as of June 30, 2018 are the 5.375% senior notes totaling $250 million, which mature in March 2019 and the 1.9% senior notes totaling $500 million, which mature in April 2019. It is our intention to fund the repayment of these notes at maturity through cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes or a combination thereof.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

The following table sets forth, as of June 30, 2018, certain information concerning our obligations and commitments to make contractual future payments:

	Payments Due by Period
																	More Than
	Total				< 1 Year				1-3 Years				3-5 Years				5 Years
	(In thousands)
Recorded Contractual Obligations:
Principal payments of long-term debt	$	8,328,612			$	750,000			$	750,000			$	1,534,150			$	5,294,462
Capital leases	108,481				38,309				41,903				18,864				9,405
Deferred compensation (1)	108,979				8,315				11,661				7,405				81,598
International pension plans	148,484				10,279				22,664				26,260				89,281
SERP and other postretirement plans (2)	319,157				31,656				63,250				64,673				159,578
Unrecognized tax benefits and interest (3)	20,654				—				—				—				—
One-time transition tax liability (4)	80,000				6,400				12,800				12,800				48,000
Unrecorded Contractual Obligations:
Interest payments related to debt (5)	3,719,918				292,583				532,766				468,596				2,425,973
Operating lease obligations	665,358				111,560				171,331				116,330				266,137
Purchase obligations (6)	3,514,546				2,963,355				479,196				48,124				23,871
Total contractual cash obligations	$	17,014,189			$	4,212,457			$	2,085,571			$	2,297,202			$	8,398,305

(1)	The estimate of the timing of future payments under the Executive Deferred Compensation Plan and Management Savings Plan involves the use of certain assumptions, including retirement ages and payout periods.

(2)	Includes estimated contributions to the unfunded Supplemental Executive Retirement Plan (SERP) and other postretirement benefit plans made in amounts needed to fund benefit payments for vested participants in these plans through fiscal 2028, based on actuarial assumptions.

(3)	Unrecognized tax benefits relate to uncertain tax positions recorded under accounting standards related to uncertain tax positions. As of June 30, 2018, we had a liability of $12.2 million for unrecognized tax benefits for all tax jurisdictions and

$8.5 million for related interest that could result in cash payment. We are not able to reasonably estimate the timing of payments or the amount by which the liability will increase or decrease over time. Accordingly, the related balances have not been reflected in the “Payments Due by Period” section of the table.

(4)	Represents a one-time transition tax liability that we are required to pay over an eight-year period beginning in the first quarter of fiscal 2019 due to provisions enacted as part of the Tax Act. As noted in Note 18, “Income Taxes,” our transition tax liability is currently a provisional estimate.

(5)	Includes payments on floating rate debt based on rates as of June 30, 2018, 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 30, 2018.

(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 periods up to fiscal 2023 (see discussion under Note 19, “Commitments and Contingencies,” to the Notes to Consolidated Financial Statements in Item 8). 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 30, 2018 were $15.6 million. This amount is not included in the table above.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses in the accompanying financial statements. Significant accounting policies employed by Sysco are presented in the notes to the financial statements.

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

Company-Sponsored Pension Plans

Amounts related to defined benefit plans recognized in the financial 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 benefits and the expected rate of return on plan assets. Our U.S. Retirement Plan is largely frozen and is only open to a small number of employees. Our SERP is frozen and is not open to any employees. Our U.K. pension plan (the U.K. Retirement Plan) is also frozen to new participants. None of these plans have a significant sensitivity to changes in discount rates. Due to the low level of active employees in our retirement plans, our assumption for the rate of increase in future compensation is not a critical assumption.

The expected long-term rate of return on plan assets of the U.S. Retirement Plan decreased 25 basis points to 7.00% for fiscal 2018. The expectations of future returns are derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, reflecting a combination of historical performance analysis and the forward-looking views of the financial 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 the U.S. Retirement Plan assets, developed using geometric/compound averaging, was approximately 6.6%, 5.9%, 9.1%, and 18.8%, over the 20-year, 10-year, 5-year and 1-year periods ended U.S. Plan, respectively. 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 U.S. Retirement Plan is 5.00% for fiscal 2019, compared to 7.00% for fiscal 2018. Investments in the portfolio have been reallocated to a higher portion of fixed income assets, resulting in a lower expected long-term rate of return. A 100 basis point increase (decrease) in the assumed rate of return in the Plan for fiscal 2019 would decrease (increase) Sysco’s net company-sponsored pension costs for fiscal 2018 by approximately $36 million.

Pension accounting standards require the recognition of the funded status of our defined benefit plans in the statement

of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The amount reflected in accumulated other comprehensive loss related to the recognition of the funded status of our defined benefit plans as of June 30, 2018 was a charge, net of tax, of $1.1 billion. The amount reflected in accumulated other comprehensive loss related to the recognition of the funded status of our defined benefit plans as of July 1, 2017 was a charge, net of tax, of $1.0 billion.

Income Taxes

The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment in estimating the exposures associated with our various filing 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 financial 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.

As discussed in Note 18, “Income Taxes,” on December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act made broad and complex changes to the U.S. tax code that effected the company’s fiscal year ending June 30, 2018. The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. See Note 18, “Income Taxes” for a description of SAB 118.

Goodwill and Intangible Assets

We account for acquired businesses using the acquisition method of accounting, which requires that, once control of a business is obtained, 100% of the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. We use multiple valuation methods to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we generally use the income method, which uses a forecast of the expected future net cash flows associated with each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows and the discount rate selected to measure the risks inherent in the future cash flows. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. More information on our acquisitions can be found in Note 4, “Acquisitions” in the Notes to Consolidated Financial Statements in Item 8.

Annually in our fourth quarter, we assess the recoverability of goodwill and indefinite-lived intangibles by determining whether the fair values exceed the carrying values of these assets. Impairment reviews, outside our annual review time frame, are performed if events or circumstances occur that include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Our testing may be performed utilizing either a qualitative or quantitative assessment; however, if a qualitative assessment is performed and we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, a quantitative test is performed.

When using a quantitative test, we arrive at our estimates of fair value using a combination of discounted cash flow and earnings or revenue multiple models. The results from each of these models are then weighted and combined into a single estimate of fair value for each reporting unit. We generally use a higher weighting for our discounted cash flow valuation compared to the earnings multiple models 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. When reporting units represent recently acquired operations, we generally use a higher weighting for our earnings multiple models than our discounted cash flow valuation as we believe this aligns with how acquired operations are valued in the market place. The primary assumptions used in these various models include estimated earnings multiples of comparable acquisitions in the industry, including control premiums, earnings or revenue multiples on acquisitions completed by Sysco in the past, future cash flow 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.

Our estimates of fair value contain uncertainties requiring management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. Actual results could differ from these assumptions and projections, resulting in the company revising its assumptions and, if required, recognizing an impairment loss. There were no impairments of goodwill recorded as a result of assessment in fiscal 2018, 2017 and 2016. In fiscal 2018, a $14 million write-off for an intangible asset was recorded, as it was no longer being used due to restructuring in France. Our past estimates of fair value for fiscal 2017 and 2016 would not have 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 fiscal 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 fiscal 2018 assessment, the estimated fair values exceeded the carrying values for two international reporting units would have been applicable if our estimates of fair value were decreased by 15% and 18%, respectively, with goodwill of $341.0 million in the aggregate as of June 30, 2018, recorded for these reporting units.

Certain reporting units (such as those noted above) 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. As such, these reporting units have a greater risk of future impairment if their operations were to suffer a significant downturn.

Share-Based Compensation

Sysco provides compensation benefits 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 2015 Employee Stock Purchase Plan (ESPP).

As of June 30, 2018, there was $121.3 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 1.8 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 and performance share 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 and performance share units granted without dividend equivalents, the fair value is reduced by the present value of expected dividends during the vesting period. Expense recognized on performance share unit awards is subsequently adjusted based on forecasted performance compared to planned targets until the performance period concludes and the actual number of shares of Sysco common stock to be received upon the vesting of the performance share units is known.

The fair value of the stock issued under the ESPP 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 ESPP 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 first 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 benefit 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 benefit related to the tax deduction in an amount not to exceed the corresponding cumulative compensation cost recorded in the financial statements on the particular options multiplied by the statutory tax rate.

Forward-Looking Statements

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

Examples of forward-looking statements include, but are not limited to, statements about our liquidity and our possible or assumed future results of operations or economic performance, as well as descriptions of our plans, projections and strategies, including those described in the following paragraph, and our ability to meet those goals and expectations. Such statements in this document include, but are not limited to, statements regarding our four strategic priorities, including, but not limited to, enriching the customer experience, delivering operational excellence, optimizing the business and activating the power of our people; projections of future performance under our three-year strategic financial plan, including, for example, our expectation that we will reach $650 to $700 million of adjusted operating income growth, our goal of growing earnings per share faster than operating income, achieving 16% in adjusted return on invested capital improvement for existing businesses, and our goals of sales growth of 4% to 4.5%, adjusted operating growth of 9% and adjusted diluted earnings per share results in the range of $3.85 to $3.95 in fiscal 2020; our expectations regarding the calculation of adjusted return on invested capital; our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results; statements regarding the acceleration of locally managed customer case growth and driving leverage between gross profit and expense growth; statements regarding increased investments in capabilities across the International Foodservice business; statements regarding the positive impact of the merger of Brakes France and Davigel to Sysco France, specifically, our ability to provide new capabilities and a unique multi-temperature service; statements regarding local customer growth; our belief that overall macroeconomic trends continue to be positive in the U.S. and that the underlying economic picture remains encouraging, including a strong employment market; statements regarding our continued success in category management and our introduction of new categories to capture value; our expectation that inflation will continue for the balance of calendar 2018; our expectation that operating expenses will increase in fiscal 2019; our estimates of anticipated capital expenditures for fiscal 2019, including estimates provided net of estimated proceeds from sales of assets, and our ability to fund them; statements regarding our multi-regional presence in North America and Europe and its mitigating impact on regional economic declines; statements regarding our belief that our liquidity and access to capital provides us the ability to continuously invest in business improvements; our expectations regarding payments of future quarterly cash dividends and our ability to grow our dividend in fiscal 2019; statements regarding our focus on mergers and acquisitions as a part of our strategy; statements regarding our plans to continue purchasing shares under our current repurchase programs through open market purchases to align with our capital allocation strategy; our discussions of various types of market risks, including interest rate risks, floating rate debt projections and the effectiveness of our interest rate swaps; discussions about trends in transportation costs, including fuel pricing and the labor market; statements regarding the adequacy and anticipated amounts and uses of our cash flows, including our future ability to effectively access the commercial paper market and long-term capital market; our expectations regarding our effective tax rate and the positive impact of the Tax Act generally; our expectation that accounting for the income tax effects of the Tax Act is not expected to extend beyond one year of the Tax Act; our expectations that future tax payments will grow with our earnings; our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes or a combination thereof; our expectations and beliefs regarding our fair value estimates; our expectations regarding the recognition of compensation costs related to share-based compensation

arrangements; statements regarding our investments in Europe, including the supply chain transformation occurring in the U.K., technology and other integrations within Europe; and projections regarding the rate of return on retirement plan assets.

Forward-looking statements are not guarantees of future performance, and our actual results may differ materially from the results discussed in our forward-looking statements. Important 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.” Additional forward-looking statements and some important risks that could cause outcomes to vary materially from those expected include the following: The success of our three-year strategic financial objectives could be affected by conditions in the economy and the industry as well as internal factors, such as the ability to control expenses, including fuel costs. Our expectations regarding case growth may be impacted by factors beyond our control, including actions by our competitors and/or customers. Our expectations for deflation and inflation could be impacted by market events and supplier costs. Company-sponsored pension plan liabilities are impacted by a number of factors including the discount rate for determining the current value of plan benefits 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 our control. Expectations of cash tax payments can be impacted by our performance. 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 share 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 completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending. Our ability to finance capital expenditures as anticipated may be influenced 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 fiscal year that are subject to change based on our 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.