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

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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 are impacted by restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges. Our results of operations for fiscal 2019 and 2018 are also impacted by the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. Fiscal 2019 results of operations were impacted by a gain on the sale of Iowa Premium, LLC (Iowa Premium) in the fourth quarter of fiscal 2019. In addition, fiscal 2018 results of operations were impacted

by multiemployer pension plan (MEPP) withdrawal charges and debt extinguishment charges. Sysco’s results of operations for fiscal 2019 and 2018 were also impacted by the changes to the United States (U.S.) tax code resulting from the Tax Cuts and Jobs Act of 2017 (Tax Act) enacted on December 22, 2017. The impact for fiscal 2019 and 2018 includes a transition tax on certain unrepatriated earnings of foreign subsidiaries, and the impact for fiscal 2019 also includes the recognition of a foreign tax credit applicable to repatriated earnings. Additionally, the impact for fiscal 2018 includes: (1) a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets due to the changes in tax rates; and (2) a benefit from contributions made to fund the U.S. Retirement Plan (Pension Plan). All acquisition-related costs in fiscal 2019 and 2018 that have been designated as Certain Items relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition).

The fiscal 2019 and fiscal 2018 items described above and excluded from our non-GAAP measures are collectively referred to as “Certain Items.” Management believes that adjusting its operating expenses, operating income, 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, (2) facilitates comparisons on a year-over-year basis, and (3) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.

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.

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.”

The following discussion includes a comparison of our Results of Operations and Liquidity and Capital Resources for fiscal 2019 and fiscal 2018. A discussion of changes in our results of operations from fiscal 2017 to fiscal 2018 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended June 30, 2018, filed with the Securities and Exchange Commission on August 24, 2018.

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 operating segments into three reportable segments. “Other” financial information is attributable to our 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 $300 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 52% of the total dollars spent on food purchases made at the consumer level in the U.S. as of the end of calendar year 2018. Industry sources estimate the total foodservice market in the U.S. experienced a real sales increase of approximately 1.2% in calendar year 2018 and 1.4% in calendar year 2017. Real sales changes do not include the impact of inflation or deflation.

Highlights and Trends

Our fiscal year 2019 financial performance improved year-over-year. We continue to focus on our customers and furthering the progress of our transformative initiatives that we believe will position us well for long-term growth and create value for our shareholders in fiscal 2020 and beyond.

Below is a comparison of results from fiscal 2019 to fiscal 2018:

•Sales:
◦increased 2.4%, or $1.4 billion, to $60.1 billion;
•Operating income:
◦increased 0.7%, or $16.1 million, to $2.3 billion;
◦adjusted operating income increased 7.9%, or $199.9 million, to $2.7 billion;
•Net earnings:
◦increased 17.0%, or $243.5 million, to $1.7 billion;
◦adjusted net earnings increased 11.9%, or $197.0 million, to $1.9 billion;
•Basic earnings per share:
◦increased 18.2%, or $0.50, to $3.24 from the comparable prior year amount of $2.74 per share;
•Diluted earnings per share:
◦increased 18.3%, or $0.50, to $3.20 from the comparable prior year amount of $2.70 per share; and
◦adjusted diluted earnings per share were $3.55 in fiscal 2019, a 13.1% increase from the comparable prior year amount of $3.14 per share.

The overall macroeconomic trends continue to be positive in the U.S., and the underlying economic picture remains relatively positive, including growth in gross domestic product of 2.1% for the second quarter of calendar year 2019 and continued low unemployment, which was 3.7% in July. Consumer confidence has decreased slightly, but remains solid. These factors are important macroeconomic indicators that describe the environment in which our customers are currently operating and speak to the relative health of the food-away-from-home market. Restaurant industry trends reflect same store sales that were relatively flat in June, while customer traffic continues to be negative. The economic outlook in the international geographies in which we operate is mostly positive; however, the U.K. is experiencing low consumer confidence due to the uncertain outcome of Brexit.

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 adversely affect our profitability. The majority of our sales are to locally managed customers and national customers. Our locally managed customers, including independent restaurant customers, represent 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. We are maintaining our focus on growing our digital platform to continue the growth with our local customers. 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. We are taking a disciplined approach to increasing our sales with national customers to profitably grow our business.

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, comprising 47% of U.S. Broadline sales to locally managed customers in fiscal 2019. Using customer insights, industry trends and innovative ideas, we launched new brands during fiscal 2019. We are introducing our brand to additional geographies outside the U.S. We have experienced continued success in category management and we are introducing this process in our European operations.

A portion of the cost to obtain products includes inbound freight. These costs have stabilized in fiscal 2019, but are still above pre-fiscal 2018 levels. 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 a modest level of inflation in fiscal 2019, with our U.S. Broadline operations experiencing a rate of inflation of 1.5% primarily in the frozen category, principally for frozen potatoes, and the canned and dry, paper and disposables and produce categories. Inflation has been higher in the fourth quarter of fiscal 2019, as compared to the beginning of the fiscal year. Inflation for our U.S. Broadline operations was 2.5% for the fourth quarter of fiscal 2019,

principally in the poultry, meat, and produce categories. 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.

Changes in exchange rates can impact our foreign sales as we convert them to U.S. dollars. In fiscal 2019, foreign exchange rates reduced our total sales by 0.8%.

We experienced higher operating expenses in fiscal 2019, as compared to fiscal 2018, due to investments we made in our business, particularly in our International segment, such as our integration of Brake France and Davigel into Sysco France, from increased investments in technology for our business transformation initiatives and from increased supply chain costs in both transportation and warehouse, primarily in our U.S. operations. Strength in the labor markets is a positive factor contributing to sales growth in the U.S. and Canada; however, the tightening labor market in these geographies has an adverse effect on our operating expenses, including increased overtime expense and higher costs associated with hiring. We are addressing these challenges by continuing to drive productivity and focusing on retention initiatives for specialized recruiting, training and onboarding efforts to better retain talent in our supply chain operations, and we are experiencing positive results from these efforts. These expense increases were partially offset by benefits from our transformative initiatives and corporate expense management.

We have multiple transformational and operational initiatives underway, which include, among others:

•Improved customer-facing technology;
•Continued growth of our Sysco-branded products through new and innovative products, as well as expanding the reach of these products in additional geographies beyond the U.S. and Canada;
•A Finance Transformation Roadmap that modernizes our global financial platform. This initiative increases centralization and standardization of our end-to-end global processes and workflow and uses digital automation on a modern finance platform to improve efficiency;
•A Smart Spending initiative, which is focused on reducing our indirect spend in certain categories to drive productivity and savings;
•The integration of our businesses in France and Ireland;
•Supply chain transformation projects in the U.K., including converting warehouses to accommodate multiple temperature zones; and
•A Canadian Regionalization project, which is focused on streamlining our leadership and administrative support for our Canadian operations, while maintaining an acute focus on our customers.

We believe these initiatives will drive growth and profitability in the long-term.

Our effective tax rate has been influenced by discrete events, such as tax law changes and excess tax benefits attributable to equity compensation exercises as discussed in Note 20, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 8. In fiscal 2020, we expect our effective tax rate to be approximately 24%.

We continue to be focused on mergers and acquisitions as a part of our strategy. We have completed several acquisitions in fiscal 2019 within our U.S. Foodservice Operations and our International Foodservice Operations as follows:

U.S. Foodservice Operations

•In the fourth quarter of fiscal 2019, we acquired J & M Wholesale Meats and Imperio Foods, Inc., leading California distributors with approximately $44 million in combined annual sales. J & M Wholesale Meats and Imperio Foods, Inc., sister companies based out of Modesto, California, operate throughout northern California and Oregon.
•In the third quarter of fiscal 2019, we acquired Waugh Foods, Inc., a leading Illinois broadline distributor with approximately $40 million in annual sales; and

In addition to the acquisitions noted above, in the third quarter of fiscal 2019, we purchased the remaining interests in Iowa Premium, making the previously consolidated entity a wholly owned subsidiary. Sysco initially acquired an interest in the specialty meat company in fiscal 2014. We subsequently sold Iowa Premium in the fourth quarter of fiscal 2019 and realized a gain of $66.3 million.

International Foodservice Operations

•In the third quarter of fiscal 2019, we acquired Classic Drinks, an established specialist wine and spirits distributor in Ireland with approximately €42 million in annual sales.

In the first quarter of fiscal 2020, we acquired J. Kings Food Service Professionals, a New York broadline distributor with approximately $150 million in annual sales.

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.

Fiscal 2019 is the second year in our current three-year plan that was established in fiscal 2018 and includes our strategic and financial objectives through fiscal 2020, which will enable us to continue transforming our business, while improving the customer experience of doing business with Sysco. Our target financial objectives set at the beginning of our current three-year plan cycle, included:

•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.

While we continue to experience improved operating performance year-over-year, our volume growth is lower than originally anticipated, and we have incurred increased expenses. Due to these items, combined with the impact of our sale of Iowa Premium, we are lowering our fiscal 2018 to fiscal 2020 adjusted operating income growth target to approximately $600 million.

In accomplishing these goals, we believe that, by fiscal 2020, we could also achieve, as compared to fiscal 2017, (1) case growth of 2.5% to 3.0%, of which local case growth would contribute 3.0% to 3.3%; (2) sales and gross profit growth of 3.5% to 4.0%; (3) adjusted operating income growth of 8%; and (4) adjusted diluted earnings per share growth of approximately 15%. The objectives targeted in our three-year plan included the impact of the Tax Act. 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 2017, which primarily were due to restructuring and Brakes-related acquisitions costs. The business transformation initiatives we have in place will allow us to continue to grow our business and capitalize on our strong fundamentals. We are placing further emphasis on assessing our work in order to effectively centralize and standardize our business, including leveraging technology and strengthening Sysco overall. We will continue to focus on strong implementation and execution, while accelerating some of this work, all of which better position us to achieve our financial objectives.

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:

20192018
Sales100.0%100.0%
Cost of sales81.081.1
Gross profit19.018.9
Operating expenses15.115.0
Operating income3.93.9
Interest expense0.60.7
Other expense (income), net(0.1)(0.1)
Earnings before income taxes3.43.3
Income taxes0.60.9
Net earnings2.8%2.4%

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:

2019
Sales2.4%
Cost of sales2.2
Gross profit2.9
Operating expenses3.5
Operating income0.7
Interest expense(8.9)
Other expense (income), net (1)(4.1)
Earnings before income taxes2.5
Income taxes(36.9)
Net earnings17.0%
Basic earnings per share18.2%
Diluted earnings per share18.3
Average shares outstanding(1.2)
Diluted shares outstanding(1.1)
(1)Other expense (income), net was income of $36.1 million in fiscal 2019 and income of $37.7 million in fiscal 2018.

Segment Results

The following represents our results by reportable segments:

52-Week Period Ended Jun. 29, 2019
U.S. Foodservice OperationsInternational Foodservice OperationsSYGMAOtherCorporateConsolidated Totals
(In thousands)
Sales$41,288,188$11,493,040$6,244,328$1,088,366$—$60,113,922
Sales increase (decrease)4.2%(0.2)%(4.8)%7.8%2.4%
Percentage of total68.7%19.1%10.4%1.8%100.0%
Operating income$3,192,816$125,443$27,780$35,848$(1,051,737)$2,330,150
Operating income increase (decrease)4.4%(35.3)%14.2%(9.2)%0.7%
Percentage of total segments94.4%3.7%0.8%1.1%100.0%
Operating income as a percentage of sales7.7%1.1%0.4%3.3%3.9%
52-Week Period Ended Jun. 30, 2018
U.S. Foodservice OperationsInternational Foodservice OperationsSYGMAOtherCorporateConsolidated Totals
(In thousands)
Sales$39,642,263$11,518,565$6,557,033$1,009,463$—$58,727,324
Percentage of total67.5%19.6%11.2%1.7%100.0%
Operating income$3,056,817$193,864$24,318$39,485$(1,000,428)$2,314,056
Percentage of total segments92.2%5.8%0.7%1.3%100.0%
Operating income as a percentage of sales7.7%1.7%0.4%3.9%3.9%

Based on information in Note 22, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 8, in fiscal 2019, U.S. Foodservice Operations and International Foodservice Operations represented approximately 68.7% and 19.1%, respectively, of Sysco’s overall sales, compared to 67.5% and 19.6%, respectively, in fiscal 2018. In fiscal 2019, U.S. Foodservice Operations and International Foodservice Operations represented approximately 94.4% and 3.7%, respectively, of

the total segment operating income, compared to 92.2% and 5.8%, respectively in fiscal 2018. 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 2019, the U.S. Foodservice Operations operating results represented approximately 68.7% of Sysco’s overall sales and 94.4% of the aggregated operating income of Sysco’s reporting segments. Several factors contributed 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:

20192018Change in Dollars% Change
(In thousands)
Sales$41,288,188$39,642,263$1,645,9254.2%
Gross profit8,249,0277,900,276348,7514.4
Operating expenses5,056,2114,843,459212,7524.4
Operating income$3,192,816$3,056,817$135,9994.4%
Gross profit$8,249,027$7,900,276$348,7514.4%
Adjusted operating expenses (Non-GAAP)5,056,2114,841,759214,4524.4
Adjusted operating income (Non-GAAP)$3,192,816$3,058,517$134,2994.4%

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)
2019
(In millions)
Cause of changePercentageDollars
Case volume1.8%$727.2
Inflation1.6637.1
Acquisitions0.7283.5
Other (1)0.1(1.9)
Total sales increase4.2%$1,645.9
(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 4.2% higher in fiscal 2019 than in fiscal 2018. The largest drivers of the increase were case volume growth in our U.S. Broadline operations and the impact of product cost inflation. Case volumes for the company’s U.S. Broadline operations, including acquisitions within the last 12 months, increased 2.7% in fiscal 2019 compared to fiscal 2018 and included a 3.1%

improvement in locally managed customer case growth, along with an increase of 2.3% 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 0.9%; therefore, organic local case volume, which excludes acquisitions, grew 2.2%.

Operating Income

Operating income increased by 4.4% in fiscal 2019 over fiscal 2018, as our gross profits grew on pace with operating expenses.

Gross profit dollars increased in fiscal 2019, as compared to fiscal 2018, driven primarily by growth in sales of Sysco-branded products, year-over-year favorability of inbound freight and continued category management work. Our case growth for Sysco-branded sales to local customers increased 50 basis points in fiscal 2019. Additionally, our customer mix has continued to improve, as we grew local cases at a faster pace than total cases. The change in product costs, an internal measure of inflation or deflation, was estimated as inflation of 1.5% during fiscal 2019 for our U.S. Broadline operations. Inflation in fiscal 2019 occurred primarily in the frozen category, principally for frozen potatoes, and the canned and dry, paper and disposables and produce categories.

Operating expenses increased in fiscal 2019, as compared to fiscal 2018, primarily due to increased costs in both transportation and warehouse resulting from the tight labor market combined with seasonal hiring of driver and warehouse staff, which drove increased operational costs on a per unit basis as volume softened in the fourth quarter of fiscal 2019. An increase in our provisions for losses on receivables has also contributed to the increase in operating expenses primarily due to stronger performance in collections and recoveries of previously written off receivables in fiscal 2018 as compared to fiscal 2019.

Results of International Foodservice Operations

In fiscal 2019, the International Foodservice Operations operating results represented approximately 19.1% of Sysco’s overall sales and 3.7% 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:

20192018Change in Dollars% Change
(In thousands)
Sales$11,493,040$11,518,565$(25,525)(0.2)%
Gross profit2,392,1792,436,968(44,789)(1.8)
Operating expenses2,266,7362,243,10423,6321.1
Operating income$125,443$193,864$(68,421)(35.3)%
Gross profit$2,392,179$2,436,968$(44,789)(1.8)%
Adjusted operating expenses (Non-GAAP)2,037,3542,116,433(79,079)(3.7)
Adjusted operating income (Non-GAAP)$354,825$320,535$34,29010.7%

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)
2019
(In millions)
Cause of changePercentageDollars
Inflation3.2%$372.9
Acquisitions0.9103.5
Foreign currency(4.1)(475.1)
Other (1)(0.2)(26.8)
Total sales increase(0.2)%$(25.5)
(1)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 0.2% lower in fiscal 2019 than in fiscal 2018. The decrease for fiscal 2019 was primarily due to unfavorable changes in exchange rates used to translate our foreign sales into U.S. dollars. Additionally, we encountered operational challenges in France, as our efforts to integrate our businesses have negatively affected our ability to drive growth in sales. The decrease was partially offset by product cost inflation in Europe and Canada and a modest increase in volumes in Canada, Ireland and Sweden. Our businesses in Latin America, primarily in Costa Rica and Panama, have experienced continued growth in sales, partially offset by softness in our business in Mexico, which in the fourth quarter began to show recovery from weaker performance earlier in fiscal 2019.

Operating Income

Operating income decreased by 35.3% in fiscal 2019 from fiscal 2018, primarily as a result of the continued strategic investments we are making across Europe to drive continued future business performance. Operating income, on an adjusted basis, increased by $34.3 million, or 10.7%, as compared to fiscal 2018.

Gross profit dollars decreased $44.8 million in fiscal 2019, as compared to fiscal 2018, primarily due to currency translation in Europe and Canada, partially offset by increasing product costs and local case growth in our Canadian operations.

Operating expenses increased $23.6 million in fiscal 2019, as compared to fiscal 2018, primarily due to restructuring charges, largely in France, and supply chain transformation costs in the U.K. These activities resulted in restructuring charges that were combined with our Brakes Acquisition-related costs that are included within Certain Items. We incurred restructuring charges of $61.1 million relating to our France integration during fiscal 2019. Operating expense, on an adjusted basis, decreased 3.7%, or $79.1 million, compared to fiscal 2018. We have also begun to leverage broader Sysco capabilities and processes to deliver improved synergies across Europe. Additionally, our regionalization efforts in Canada continue to deliver benefits and have helped to drive improved cost performance. Changes in exchange rates used to translate our foreign operating expenses into U.S. dollars further contributed to a decrease in operating expenses.

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 4.8% lower in fiscal 2019 than in fiscal 2018. The decrease for fiscal 2019 was primarily attributable to a modest decline in case volumes, as we continue to focus on improving overall profitability.

Operating Income

Operating income increased by 14.2% in fiscal 2019, as compared to fiscal 2018, due to improved gross margins and solid expense management. Gross margin increased 30 basis points driven by higher product margins, while operating expenses decreased 1.9% in fiscal 2019, as compared to fiscal 2018. Operating expenses decreased in fiscal 2019 largely due to decreases in transportation costs, primarily resulting from our focus on removing unproductive miles and streamlining operations at under-performing locations.

“Other” segment information is attributable to our 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 decreased 9.2%, or $3.6 million, in fiscal 2019, as compared to fiscal 2018. The decrease was primarily attributable to unfavorable results from our hotel supply operations, partially offset by improved results from Sysco Labs. Guest Supply gross profit grew 2.3%, while operating expenses grew 7.1% during fiscal 2019.

Corporate Expenses

Corporate expenses in fiscal 2019 increased $67.2 million, or 6.9%, as compared to fiscal 2018, due primarily to an increase in expenses related to our business technology initiatives, including accelerated depreciation on certain enterprise resource planning (ERP) systems and software platforms that we are no longer using, along with higher pay-related expenses, partly driven by higher severance and relocation charges. Corporate expenses, on an adjusted basis, decreased $12.9 million, or 1.5%, as compared to fiscal 2018. Certain Items impacting fiscal 2019 totaled $171.1 million and were primarily expenses associated with our business transformation initiatives, as well as severance charges associated with our organizational changes, as compared to $91.0 million in fiscal 2018.

Interest Expense

Interest expense decreased $35.1 million in fiscal 2019, as compared to fiscal 2018, primarily due to a favorable comparison to the prior year as a result of the redemption of certain series of senior notes and debentures 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 $18.0 million in fiscal 2019 from fiscal 2018, due to higher floating interest rates and a higher average balance of fixed rate debt.

Net Earnings

Net earnings increased 17.0% in fiscal 2019, as compared to the prior year, due primarily to the items noted above for operating income and interest expense, as well as items impacting our income taxes that are discussed in Note 20, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 8. These included the favorable impact of foreign tax credits generated as a result of distributions to Sysco from our foreign operations at the end of fiscal 2018, lower U.S. tax rates resulting from the enactment of the Tax Act and the favorable impact of excess tax benefits of equity-based compensation. Adjusted net earnings increased 11.9% in fiscal 2019, primarily due to gross profit growth and favorable expense growth, including reduced administrative expense, partially offset by increased interest expense, which resulted in earnings growth that exceeded our operating income growth.

Earnings Per Share

Basic earnings per share in fiscal 2019 were $3.24, an 18.2% increase from the fiscal 2018 amount of $2.74 per share. Diluted earnings per share in fiscal 2019 were $3.20, an 18.3% increase from the fiscal 2018 amount of $2.70 per share. Adjusted diluted earnings per share in fiscal 2019 were $3.55, a 13.1% increase from the fiscal 2018 amount of $3.14 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 2019 and fiscal 2018.

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 and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and

(3) restructuring charges. Our results of operations for fiscal 2019 and 2018 were also impacted by the following acquisition-related items: (1) intangible amortization expense and (2) integration costs. Fiscal 2019 results of operations were impacted by a gain on the sale of Iowa Premium. In addition, fiscal 2018 results of operations were impacted by MEPP withdrawal charges and debt extinguishment charges. Sysco’s results of operations for fiscal 2019 and 2018 were also impacted by reform measures from the Tax Act enacted on December 22, 2017. The impact for fiscal 2019 and 2018 includes a transition tax on certain unrepatriated earnings of foreign subsidiaries, and the impact for fiscal 2019 also includes the recognition of a foreign tax credit applicable to repatriated earnings. The impact for fiscal 2018 includes: (1) a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax liabilities and deferred tax assets due to the changes in tax rates; and (2) a benefit from contributions made to fund the U.S. Retirement Plan (Pension Plan). The fiscal 2019 and 2018 items described above and excluded from our non-GAAP measures are collectively referred to as “Certain Items.” All acquisition-related costs in fiscal 2019 and 2018 that have been designated as Certain Items relate to the fiscal 2017 Brakes Acquisition, discussed in Note 5, “Acquisitions,” in the Notes to Consolidated Financial Statements in Item 8. 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, 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, (2) facilitates comparisons on a year-over-year basis and (3) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.

Although Sysco has a history of growth through acquisitions, the Brakes Group was significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2019 and 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.

20192018Change in Dollars% Change
(In thousands, except for share and per share data)
Operating expenses (GAAP)$9,078,837$8,771,335$307,5023.5%
Impact of restructuring and transformational project costs (1)(325,300)(109,524)(215,776)NM
Impact of acquisition-related costs (2)(77,832)(108,136)30,304(28.0)
Impact of MEPP charge—(1,700)1,700NM
Operating expenses adjusted for Certain Items (Non-GAAP)$8,675,705$8,551,975$123,7301.4%
Operating income (GAAP)$2,330,150$2,314,056$16,0940.7%
Impact of restructuring and transformational project costs (1)325,300109,524215,776NM
Impact of acquisition-related costs (2)77,832108,136(30,304)(28.0)
Impact of MEPP charge—1,700(1,700)NM
Operating income adjusted for Certain Items (Non-GAAP)$2,733,282$2,533,416$199,8667.9%
Interest expense (GAAP)$360,423$395,483$(35,060)(8.9)%
Impact of loss on extinguishment of debt—(53,104)53,104NM
Interest expense adjusted for Certain Items (Non-GAAP)$360,423$342,379$18,0445.3%
Other (income) expense (GAAP)$(36,109)$(37,651)$1,542(4.1)%
20192018Change in Dollars% Change
(In thousands, except for share and per share data)
Impact of gain on sale of Iowa Premium66,309—66,309NM
Other (income) expense (Non-GAAP)$30,200$(37,651)$67,851NM
Net earnings (GAAP)$1,674,271$1,430,766$243,50517.0%
Impact of restructuring and transformational project costs (1)325,300109,524215,776NM
Impact of acquisition-related costs (2)77,832108,136(30,304)(28.0)
Impact of gain on sale of Iowa Premium(66,309)—(66,309)NM
Impact of MEPP charge—1,700(1,700)NM
Impact of loss on extinguishment of debt—53,104(53,104)NM
Tax impact of restructuring and special projects (3)(81,722)(34,024)(47,698)NM
Tax impact of acquisition-related costs (3)(19,553)(26,172)6,619(25.3)
Tax impact of gain on sale of Iowa Premium18,119—18,119NM
Tax impact of MEPP charge—(573)573NM
Tax impact of loss on extinguishment of debt (3)—(18,225)18,225NM
Tax impact of Pension Plan contribution—(44,424)44,424NM
Impact of foreign tax credit benefit(95,067)—(95,067)NM
Impact of US transition tax17,51680,000(62,484)(78.1)
Impact of France, U.K. and Sweden tax law changes6,464(9,706)16,170NM
Impact of US balance sheet remeasurement from tax law change—(14,477)14,477NM
Impact of repatriation of certain international earnings (4)—24,208(24,208)NM
Net earnings adjusted for Certain Items (Non-GAAP)$1,856,851$1,659,837$197,01411.9%
Diluted earnings per share (GAAP)$3.20$2.70$0.5018.3%
Impact of restructuring and special projects (1)0.620.210.41NM
Impact of acquisition-related costs (2)0.150.20(0.05)(25.0)
Impact of gain on sale of Iowa Premium(0.13)—(0.13)NM
Impact of loss on extinguishment of debt—0.10(0.10)NM
Tax impact of restructuring and transformational project costs (3)(0.16)(0.06)(0.10)NM
Tax impact of acquisition-related costs (3)(0.04)(0.05)0.01(20.0)
Tax impact of gain on sale of Iowa Premium0.03—0.03NM
Tax impact of loss on extinguishment of debt (3)—(0.03)0.03NM
Tax impact of Pension Plan contribution—(0.08)0.08NM
Impact of foreign tax credit benefit(0.18)—(0.18)NM
Impact of U.S. transition tax0.030.15(0.12)(80.0)
Impact of France, U.K. and Sweden tax law changes0.01(0.02)0.03NM
Impact of US balance sheet remeasurement from tax law change—(0.03)0.03NM
Impact of repatriation of certain international earnings (4)—0.05(0.05)NM
Diluted EPS adjusted for Certain Items (Non-GAAP) (5)$3.55$3.14$0.4113.1%
(1)Fiscal 2019 includes $151 million in costs related to various transformation initiatives, primarily consisting of changes to our business technology strategy, of which $18 million relates to accelerated depreciation related to software that is being replaced, and $174 million related to severance, restructuring and facility closure charges in Europe, Canada and at Corporate, of which $61 million relates to our France restructuring as part of our integration of Brake France and Davigel into Sysco France. Fiscal 2018 includes $70 million related to business technology costs and professional fees on three-year financial objectives and $33 million related to restructuring charges.
(2)Fiscal 2019 and fiscal 2018 include $77 million and $81 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of Brakes, and $1 million and $18 million, respectively, related to integration costs.
(3)The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(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.

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 (dollars in thousands):

U.S. FOODSERVICE OPERATIONS20192018Change in Dollars% Change
Operating expenses (GAAP)$5,056,211$4,843,459$212,7524.4%
Impact of MEPP charge—(1,700)1,700NM
Operating expenses adjusted for Certain Items (Non-GAAP)$5,056,211$4,841,759$214,4524.4%
Operating income (GAAP)$3,192,816$3,056,817$135,9994.4%
Impact of MEPP charge—1,700(1,700)NM
Operating income adjusted for Certain Items (Non-GAAP)$3,192,816$3,058,517$134,2994.4%
INTERNATIONAL FOODSERVICE OPERATIONS
Operating expenses (GAAP)$2,266,736$2,243,104$23,6321.1%
Impact of restructuring and transformational project costs (1)(152,852)(36,667)(116,185)NM
Impact of acquisition-related costs (2)(76,530)(90,004)13,474(15.0)
Operating expenses adjusted for Certain Items (Non-GAAP)$2,037,354$2,116,433$(79,079)(3.7)%
Operating income (GAAP)$125,443$193,864$(68,421)(35.3)%
Impact of restructuring and transformational project costs (1)152,85236,667116,185NM
Impact of acquisition related costs (2)76,53090,004(13,474)(15.0)
Operating income adjusted for Certain Items (Non-GAAP)$354,825$320,535$34,29010.7%
SYGMA
Operating expenses (GAAP)$477,858$486,960$(9,102)(1.9)%
Impact of restructuring and transformational project costs (3)(2,609)—(2,609)NM
Operating expenses adjusted for Certain Items (Non-GAAP)$475,249$486,960$(11,711)(2.4)%
Operating income (GAAP)$27,780$24,318$3,46214.2%
Impact of restructuring and transformational project costs (3)2,609—2,609NM
Operating income adjusted for Certain Items (Non-GAAP)$30,389$24,318$6,07125.0%
CORPORATE
Operating expenses (GAAP)$1,041,183$973,934$67,2496.9%
Impact of restructuring and transformational project costs (4)(169,838)(72,857)(96,981)NM
Impact of acquisition-related costs (5)(1,302)(18,132)16,830(92.8)
Operating expenses adjusted for Certain Items (Non-GAAP)$870,043$882,945$(12,902)(1.5)%
Operating income (GAAP)$(1,051,737)$(1,000,428)$(51,309)5.1%
Impact of restructuring and transformational project costs (4)169,83872,85796,981NM
Impact of acquisition-related costs (5)1,30218,132(16,830)(92.8)
Operating income adjusted for Certain Items (Non-GAAP)$(880,597)$(909,439)$28,842(3.2)%
(1)Includes $61 million of restructuring charges in France and other restructuring, severance and facility closure costs in Europe and Canada.
(2)Fiscal 2019 and fiscal 2018 include $77 million and $81 million, respectively, related to intangible amortization expense from the Brakes Acquisition.
(3)Includes charges related to facility closures and other restructuring charges.
(4)Fiscal 2019 and fiscal 2018 include various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2019 includes $18 million of accelerated depreciation on software that is being replaced, and severance charges related to restructuring.
(5)Fiscal 2019 and fiscal 2018 include $1 million and $18 million, respectively, related to integration costs from the Brakes Acquisition.

NM represents that the percentage change is not meaningful.

Three-Year Financial Targets

Sysco management considers adjusted return on invested capital (ROIC) to be a measure that provides useful information to management and investors in evaluating the efficiency and effectiveness of the company’s long-term capital investments. In addition, we have targets and expectations that are based on adjusted results, including an adjusted ROIC target of 16% under our three-year plan. We cannot predict with certainty whether or when we will achieve these results or whether the calculation of our ROIC in such future periods 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 historically calculated this measure. All components of our adjusted ROIC calculation would be impacted by Certain Items. We calculate adjusted ROIC as adjusted net earnings divided by (i) stockholders’ equity, computed as the average of adjusted stockholders’ equity at the beginning of the year and at the end of each fiscal quarter during the year; and (ii) long-term debt, computed as the average of the long-term debt at the beginning of the year and at the end of each fiscal quarter during the year.

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

Additional targets and expectations for our three-year plan include target amounts for adjusted operating income, adjusted net earnings and adjusted diluted earnings per share. We cannot predict with certainty when we will achieve these results or whether the calculation of these measures 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 uncertainties in projecting Certain Items during the period covered under our three-year strategic plan, we cannot provide a quantitative reconciliation of any of our non-GAAP operating income, earnings per share or ROIC measures to the respective, 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

Below are comparisons of the cash flows from fiscal 2019 to fiscal 2018:

•Cash flows from operations were $2.4 billion in fiscal 2019, compared to $2.2 billion in fiscal 2018;
•Net capital expenditures totaled $671.5 million in fiscal 2019, compared to $665.6 million in fiscal 2018;
•Free cash flow was $1.7 billion in fiscal 2019, compared to $1.5 billion in fiscal 2018 (see “Non-GAAP Reconciliation” below under the heading “Free Cash Flow”);
•Cash used for acquisition of businesses was $106.6 million in fiscal 2019, compared to $248.1 million in fiscal 2018;
•Cash proceeds from the sale of a business were $149.9 million in fiscal 2019;
•Dividends paid were $775.4 million in fiscal 2019, compared to $722.2 million in fiscal 2018; and
•We repurchased approximately $1.0 billion of shares in fiscal 2019, compared to $978.9 million in fiscal 2018.

In addition, with regard to our senior notes:

•Our wholly owned Canadian subsidiary issued an aggregate of CDN $500.0 million in new senior notes in fiscal 2019, and we issued an aggregate of $1.0 billion in new senior notes in fiscal 2018; and
•We repaid senior notes in the amount of $750.0 million in fiscal 2019, utilizing a combination of cash flow from operations and commercial paper issuances. 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; 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.

We extend credit terms to our customers that can vary from cash on delivery to 30 days or more based on our assessment of each customer’s credit worthiness. In the ordinary course of business, customers periodically negotiate extended payment terms on trade accounts receivable. The company may utilize purchase arrangements with third-party financial institutions to transfer portions of our trade accounts receivable balance on a non-recourse basis in order to extend terms for the customer without negatively impacting our cash flow. The arrangements meet the requirements for the receivables transferred to be accounted for as sales. See Note 1, “Summary of Accounting Policies” for additional information.

As of June 29, 2019, we had $513.5 million in cash and cash equivalents, approximately 58% 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.

Our wholly owned captive insurance subsidiary (the Captive) must maintain a sufficient level of liquidity to fund future reserve payments. As of June 29, 2019, the Captive held $120.0 million of fixed income marketable securities and $18.8 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased $116.4 million in marketable securities in fiscal 2019, of which none were sold during the year.

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

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

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

Cash Flows

Operating Activities

We generated $2.4 billion and $2.2 billion in cash flows from operations in fiscal 2019 and in fiscal 2018, respectively. These amounts include year-over-year favorable comparisons on other long-term liabilities and accrued expenses, as well as higher operating results, partially offset by unfavorable comparisons on accrued income taxes. The cash impact of our Certain Items increased $51.1 million year-over-year. The cash impact of Certain Items can 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.

The change in other long-term liabilities was impacted primarily by the positive comparison of pension contributions made in fiscal 2019 as compared to fiscal 2018. Pension contributions were $37.2 million in fiscal 2019 and $415.0 million in fiscal 2018, including a $380 million contribution to the U.S. Retirement Plan in fiscal 2018.

The positive comparison on accrued expenses was primarily due to a $70.1 million increase in accrued severance primarily related to restructuring in our European operations, and a $34.2 million decrease in MEPP liability payments.

Our tax payments in fiscal 2019 were higher than in fiscal 2018 as a result of the Tax Act, primarily due to the impact on fiscal 2018 of certain capital allocation initiatives in the U.S., such as funding our Pension Plan and fleet spend acceleration, as well as payment in fiscal 2019 of Canadian withholding taxes attributable to the repatriation of Canadian earnings at the end of fiscal 2018. We made tax payments of approximately $531.1 million in fiscal 2019. We expect future tax payments to grow with our earnings.

Investing Activities

Fiscal 2019 capital expenditures included:

•buildings and building improvements;
•investments in technology;
•fleet replacements; and
•warehouse equipment.

Fiscal 2018 capital expenditures included:

•fleet replacements;
•buildings and building improvements;
•investments in technology; and
•warehouse equipment.

The level of gross capital expenditures in fiscal 2019 increased $4.6 million as compared to fiscal 2018.

We estimate our capital expenditures, net of proceeds from sales of assets, in fiscal 2020 to be approximately 1.3% of fiscal sales. Fiscal 2020 expenditures are expected to include facility expansions and new facility construction; fleet and other equipment purchases, including replacements; and investments in technology.

During fiscal 2019, the company paid cash of $106.6 million for acquisitions, net of cash acquired, including Waugh Foods, Inc., J & M Wholesale Meats and Imperio Foods, Inc. within U.S. Foodservice operations, Classic Drinks and the remaining interest in Iowa Premium, making the previously consolidated entity a wholly owned subsidiary, which was subsequently sold in the fourth quarter of fiscal 2019.

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 2019, the company received $149.9 million in proceeds from the sale of a business. These dispositions resulted in a recognized gain of $66.3 million, which is included within Other income in the consolidated results of operations.

Free Cash Flow

Free cash flow represents net cash provided from operating activities, less purchases of plant and equipment, plus proceeds from sales of plant and equipment. Sysco considers free cash flow to be a non-GAAP liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases and sales of buildings, fleet, equipment and technology, which may potentially be used to pay for, among other things, strategic uses of cash, including dividend payments, share repurchases and acquisitions. However, free cash flow may not be available for discretionary expenditures, as it may be necessary that we use it to make mandatory debt service or other payments. Our free cash flow for fiscal 2019 increased 16.8%, or $249.9 million, to $1.7 billion, as compared to fiscal 2018, principally as a result of a year-over-year increase in cash flows from operations.

Non-GAAP Reconciliation

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.

20192018Change in Dollars% Change
(In thousands)
Net cash provided by operating activities (GAAP)$2,411,207$2,155,380$255,82711.9%
Additions to plant and equipment(692,391)(687,815)(4,576)0.7
Proceeds from sales of plant and equipment20,94122,255(1,314)(5.9)
Free Cash Flow (Non-GAAP)$1,739,757$1,489,820$249,93716.8%

Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $253.1 million in fiscal 2019 and $268.8 million in fiscal 2018. 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. We repurchased a total of 14,963,189 shares in fiscal 2019 for $1.0 billion and 17,930,114 shares in fiscal 2018 for $978.9 million. 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, all of which were executed through August 2018. 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. We have repurchased approximately 20,500 additional shares for $1.4 million in fiscal 2020 through August 9, 2019. The current repurchase program is intended to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans and to make opportunistic repurchases. In fiscal 2020, we intend to increase the share repurchase amount to over $1 billion, which repurchases will involve opportunistic purchases and purchases to offset dilution resulting from shares issued under the company’s benefit plans. In August 2019, our Board of Directors approved a separate repurchase program to authorize the repurchase of the company’s common stock not to exceed $2.5 billion through the end of fiscal 2021.

We have made dividend payments to our shareholders in each fiscal year since our company’s inception. Dividends paid were $775.4 million, or $1.50 per share, in fiscal 2019 and $722.2 million, or $1.38 per share, in fiscal 2018. In May 2019, we declared our regular quarterly dividend for the fourth quarter of fiscal 2019 of $0.39 per share, which was paid in July 2019. We expect to continue to grow our dividend in fiscal 2020.

In August 2018, 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. 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 9, 2019, 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 13, “Debt and Other Financing Arrangements,” in the Notes to Consolidated Financial Statements in Item 8. Our outstanding borrowings at June 29, 2019, and repayment activity since the end of fiscal 2019 are disclosed within those notes. Updated amounts at August 9, 2019, include:

•$466.2 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 2.47% for fiscal 2019 and 1.71% for fiscal 2018.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

The following table sets forth, as of June 29, 2019, certain information concerning our obligations and commitments to make contractual future payments:

Payments Due by Period
More Than
Total< 1 Year1-3 Years3-5 Years5 Years
(In thousands)
Recorded Contractual Obligations:
Principal payments of long-term debt$8,077,666$132,081$1,700,000$568,500$5,677,085
Capital leases111,15335,19743,44921,07711,430
Deferred compensation (1)115,9129,09512,7498,62385,445
International pension plans145,7449,93822,72026,98786,099
SERP and other postretirement plans (2)317,62832,05464,39164,632156,551
Unrecognized tax benefits and interest (3)10,933————
Unrecorded Contractual Obligations:
Interest payments related to debt (4)2,958,307284,172519,055468,1201,686,960
Operating lease obligations643,864107,492172,48297,445266,445
Purchase obligations (5)4,382,0643,131,746752,492491,9715,855
Total contractual cash obligations$16,763,271$3,741,775$3,287,338$1,747,355$7,975,870
(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 2029, 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 29, 2019, we had a liability of $26.1 million for unrecognized tax benefits for all tax jurisdictions and $4.6 million for related interest that could result in cash payment, of which $10.9 million could settle in cash. 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)Includes payments on floating rate debt based on rates as of June 29, 2019, assuming amount remains unchanged until maturity, and payments on fixed rate debt based on maturity dates. The impact of our outstanding fixed-to-floating interest rate swap on the fixed rate debt interest payments is included as well based on the floating rates in effect as of June 29, 2019.
(5)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 2024 (see discussion under Note 21, “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 if certain operating results are attained or certain outstanding contingencies are resolved. Aggregate contingent consideration amounts outstanding as of June 29, 2019 were $18.9 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 goodwill and intangible assets, income taxes, share-based compensation and company-sponsored pension plans.

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 5, “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 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. 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 2019. Sysco has not made any material changes in its impairment assessment methodology during fiscal 2019. 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 2019 assessment, impairment charges would have been applicable for two reporting units if our estimates of fair value were decreased by 13% and 15%, respectively, with goodwill of $226.0 million in the aggregate as of June 29, 2019, recorded for these reporting units.

Certain reporting units 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.

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.

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 29, 2019, there was $116.4 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 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.

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. None of these plans have a significant sensitivity to changes in discount rates specific to our results of operations, but such changes could impact our balance sheet due to a change in our funded status. 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 is 5.00% for fiscal 2019, consistent with 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. 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 2020, consistent with fiscal 2019. 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 2020 would decrease (increase) Sysco’s net company-sponsored pension costs for fiscal 2019 by approximately $39 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 29, 2019 was a charge, net of tax, of $1.2 billion. 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.

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; our belief that our transformative initiatives will position us well for long-term growth and create value for our shareholders; projections of future performance under our three-year strategic financial plan, including, for example, our expectation that we will reach approximately $600 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 3.5% to 4.0%, adjusted operating growth of 8% and adjusted diluted earnings per share growth of approximately 15% in fiscal 2020; statements regarding our ability to achieve our strategic and financial objectives; the impact on our business of achieving

our strategic and financial objectives; 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; our belief that the economic outlook in the international geographies in which we operate is mostly positive; expectations regarding near-term demand growth in the foodservice industry; statements regarding our continued success in category management and our introduction of new categories to capture value; statements regarding future operating expenses; our estimates of anticipated capital expenditures for fiscal 2020, 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 2020; 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; statements regarding the amount of our expected share repurchases during fiscal 2020; 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; our expectations regarding increases in our future contributions to our multiemployer pension plans; our expectations regarding the remaining cost of information technology services to be received from third-party service providers up to fiscal 2024; 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.

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