Sysco 2008 Annual Report Download - page 29

Item 1A. Risk Factors
Increased Fuel Costs and Increased Inflation Have Increased our Costs and We May Not Be Able to Compensate for Such Increased Costs
Increased fuel costs have had a negative impact on our fiscal 2008 results of operations. The high cost of fuel has increased the price
paid by us for products as well as the costs incurred by us to deliver products to our customers. Although we have been able to pass along a
portion of our increased fuel costs to our customers, there is no guarantee that we can continue to do so. In addition, prolonged periods of
product cost inflation may have a negative impact on our profit margins and earnings to the extent that we are unable to pass on such
product cost increases. Our estimate for the inflation in SYSCO’s cost of goods was 6.0% in fiscal 2008, compared to 3.4% in fiscal 2007
and 0.6% in fiscal 2006. If fuel costs and product costs continue to increase, we may experience difficulties in passing all or a portion of
these costs along to our customers, which may have a negative impact on our business and our profitability.
Inflation, Rising Fuel Costs and Other Economic Conditions are Affecting Consumer Confidence, which is Currently Adversely Impacting our Busi-
ness and We Currently Expect These Conditions to Continue into Fiscal 2009
The foodservice distribution industry is characterized by relatively high inventory turnover with relatively low profit margins and the
foodservice industry is sensitive to national and regional economic conditions. Inflation, increases in fuel costs and other general economic
conditions have negatively affected consumer confidence and discretionary spending in fiscal 2008. This has led to reductions in the
frequency of dining out and the amount spent by consumers for food prepared away from home and can also result in reduction of sales
volumes, competitive price pressures, difficulties in collecting accounts receivable, increases in our product costs and increases in delivery
costs. These conditions have, in turn, negatively impacted our sales, as noted by declining rate of sales growth from 8.5% in the first quarter
of fiscal 2008 to 5.4% in the fourth quarter of fiscal 2008, and have also negatively impacted our operating results for fiscal 2008. These
conditions are expected to continue to negatively impact our results for the foreseeable future.
Conditions Beyond our Control can Interrupt our Supplies and Increase our Product Costs
We obtain substantially all of our foodservice and related products from third party suppliers. For the most part, we do not have long-
term contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide leverage when
dealing with suppliers, suppliers may not provide the foodservice products and supplies needed by us in the quantities and at the prices
requested. Because we do not control the actual production of the products we sell, we are also subject to delays caused by interruption in
production and increases in product costs based on conditions outside of our control. These conditions include work slowdowns, work
interruptions, strikes or other job actions by employees of suppliers, weather, crop conditions, transportation interruptions, unavailability of
fuel or increases in fuel costs, competitive demands and natural disasters or other catastrophic events (including, but not limited to food-
borne illnesses in the United States and Canada). Our inability to obtain adequate supplies of our foodservice and related products as a result
of any of the foregoing factors or otherwise could mean that we could not fulfill our obligations to customers, and customers may turn to
other distributors.
Taxing Authorities May Successfully Challenge our Baugh Supply Chain Cooperative Structure
The Baugh Supply Chain Cooperative (BSCC) administers a consolidated product procurement program to develop, obtain and ensure
consistent quality food and non-food products. BSCC is a cooperative taxed under subchapter T of the United States Internal Revenue Code.
We believe 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, we could be required to accelerate the payment of all or a portion of our income tax liabilities associated with BSCC
that we otherwise had deferred until future periods. In that event, we would be liable for interest on such amounts. As of June 28, 2008, we
have recorded deferred income tax liabilities of $1,054,190,000 related to the BSCC supply chain distributions. This amount represents the
income tax liabilities related to BSCC that were accrued, but the payment had been deferred as of June 28, 2008. In addition, if the IRS or any
other taxing authority determines that all amounts since the inception of BSCC were inappropriately deferred or that BSCC should have been
a taxable entity, we estimate that in addition to making a current payment for amounts previously deferred, as discussed above, we may have
additional liability, representing interest that would be payable on the cumulative deferred balances ranging from $290,000,000 to
$320,000,000, prior to federal and state income tax benefit, as of June 28, 2008. We calculated this amount based upon the amounts
deferred since the inception of BSCC applying the applicable jurisdictions’ interest rates in effect each period.The IRS, in connection with its
audit of our 2003 and 2004 federal income tax returns, proposed adjustments related to the taxability of the cooperative structure. We are
vigorously protesting these adjustments. We have reviewed the merits of the issues raised by the IRS and concluded the measurement
model of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”
required us to provide an accrual for a portion of the interest exposure. If a taxing authority requires us to accelerate the payment of these
deferred tax liabilities and to pay related interest, if any, we may be required to raise additional capital through debt financing or the issuance
of equity or we may have to forego share repurchases or defer planned capital expenditures or a combination of these items.
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