Sysco 2007 Annual Report Download - page 89

Certain acquisitions involve contingent consideration typically payable only in the event that certain operating results are
attained or certain outstanding contingencies are resolved. Aggregate contingent consideration amounts outstanding as
of June 30, 2007 included $113,303,000 in cash, which, if distributed, could result in the recording of additional goodwill.
Such amounts are to be paid out over periods of up to four years from the date of acquisition if the contingent criteria
are met.
16. COMMITMENTS AND CONTINGENCIES
SYSCO is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings,
in the opinion of management, will not have a material adverse effect upon the consolidated financial position or results
of operations of the company when ultimately concluded.
Product Liability Claim
In July, 2007, SYSCO was found contractually liable in arbitration proceedings related to a product liability claim from
one of its former customers. As of June 30, 2007, the company has recorded $50,296,000 on its consolidated balance
sheet within accrued expenses related to the accrual of this loss. Also as of June 30, 2007, a corresponding receivable
of $48,296,000 is included in the consolidated balance sheet within prepaid expenses and other current assets, which
represents the estimate of the loss less the $2,000,000 deductible on SYSCO’s insurance policy. The company has hold
harmless agreements with the product suppliers and is named as an additional insured party under the suppliers’ policies
with their insurers. Further, SYSCO maintains its own product liability insurance with coverage related to this claim.
The company believes it is probable that it will be able to recover the recorded loss from one or more of these sources.
Multi-Employer Pension Plans
SYSCO contributes to several multi-employer defined benefit pension plans based on obligations arising under collective
bargaining agreements covering union-represented employees. Approximately 11% of SYSCO’s current employees are
participants in such multi-employer plans. In fiscal 2007, total contributions to these plans were approximately
$37,296,000.
SYSCO does not directly manage these multi-employer plans, which are generally managed by boards of trustees, half
of whom are appointed by the unions and the other half by other contributing employers to the plan. Based upon the
information available from plan administrators, management believes that some of these multi-employer plans are
under-funded due partially to a decline in the value of the assets supporting these plans, a reduction in the number of
actively participating members for whom employer contributions are required, and the level of benefits provided by the
plans. In addition, the Pension Protection Act, enacted in August 2006, will require under-funded pension plans to improve
their funding ratios within prescribed intervals based on the level of their under-funding, perhaps beginning as soon as
calendar 2008. As a result, SYSCO’s required contributions to these plans may increase in the future.
Under current law regarding multi-employer defined benefit plans, a plan’s termination, SYSCO’s voluntary withdrawal,
or the mass withdrawal of all contributing employers from any under-funded multi-employer defined benefit plan would
require SYSCO to make payments to the plan for SYSCO’s proportionate share of the multi-employer plan’s unfunded
vested liabilities. SYSCO does not believe that it is probable that there will be a mass withdrawal of employers from the
plans or that any of the plans will terminate in the near future. In addition, if a multi-employer defined benefit plan fails
to satisfy certain minimum funding requirements, the IRS may impose a nondeductible excise tax of 5% on the amount
of the accumulated funding deficiency for those employers contributing to the fund.
Based on the information available from plan administrators, SYSCO estimates that its share of withdrawal liability on all
the multi-employer plans it participates in could be as much as $120,000,000.
BSCC Cooperative Structure
SYSCO’s affiliate, BSCC, is a cooperative taxed under subchapter T of the United States Internal Revenue Code. SYSCO
believes that the deferred tax liabilities resulting from the business operations and legal ownership of BSCC are
appropriate under the tax laws. However, if the application of the tax laws to the cooperative structure of BSCC were to
be successfully challenged by any federal, state or local tax authority, SYSCO could be required to accelerate the payment
of all or a portion of its income tax liabilities associated with BSCC that it otherwise has deferred until future periods in
that event, would be liable for interest on such amounts. As of June 30, 2007, SYSCO has recorded deferred income tax
SYSCO Corporation ][ page 63