Sysco 2008 Annual Report Download - page 82

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 28, 2008 included
$55,469,000 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.
18. 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 October 2007, an arbitration judgment against the company was issued related to a product liability claim from one of SYSCO’s
former customers, which formalized a preliminary award by the arbitrator in July 2007. As of the year ended June 30, 2007, the company
had recorded $50,296,000 on its consolidated balance sheet within accrued expenses related to the accrual of this loss and a corresponding
receivable of $48,296,000 within prepaid expenses and other current assets, which represented the estimate of the loss less the
$2,000,000 deductible on SYSCO’s insurance policy, as the company anticipated recovery from various parties. In December 2007, the
company paid its deductible on its insurance policy and made arrangements with its insurance carrier and other parties who paid the
remaining amount of the judgment in excess of the company’s deductible. The company no longer has any remaining contingent liabilities
related to this claim.
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 12% of SYSCO’s current employees are participants in such multi-
employer plans. In fiscal 2008, total contributions to these plans were approximately $35,040,000.
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 employers contributing to the plan. Based upon the information available from plan
administrators, management believes that several of these multi-employer plans are underfunded. In addition, the Pension Protection Act,
enacted in August 2006, requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of
their underfunding. As a result, SYSCO expects its contributions to these plans to increase in the future.
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 underfunded 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. Based on the information
available from plan administrators, SYSCO estimates that its share of withdrawal liability on most of the multi-employer plans it participates
in could be as much as $140,000,000 based on a voluntary withdrawal. 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. Of the plans in which SYSCO participates, one plan is more critically underfunded
than the others. During fiscal 2008, the company obtained information that this plan failed to satisfy minimum funding requirements for
certain periods and believes it is probable that additional funding will be required as well as the payment of excise tax. As a result, SYSCO
recorded a liability of approximately $16,500,000 related to our share of the minimum funding requirements and related excise tax for these
periods. Currently, the company believes that a majority of this amount will be paid in fiscal 2009 and SYSCO is continuing to explore its
alternatives as it relates to this plan. As of June 28, 2008, SYSCO has approximately $22,000,000 in liabilities recorded in total related to
certain underfunded multi-employer defined benefit plans.
BSCC Cooperative Structure
SYSCO’s affiliate, Baugh Supply Chain Cooperative (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, SYSCO would be liable for interest on such
amounts. As of June 28, 2008, SYSCO has recorded deferred income tax liabilities of $1,054,190,000, net of federal benefit, related to the
BSCC supply chain distributions. If the IRS and any other relevant taxing authorities determine that all amounts since the inception of BSCC
were inappropriately deferred, and the determination is upheld, SYSCO estimates that in addition to making a current payment for amounts
previously deferred, as discussed above, the company may be required to pay interest on the cumulative deferred balances. These interest
amounts could range from $290,000,000 to $320,000,000, prior to federal and state income tax benefit, as of June 28, 2008. SYSCO
calculated this amount based upon the amounts deferred since the inception of BSCC applying the applicable jurisdictions’ interest rates in
effect in each period. The IRS, in connection with its audit of the company’s 2003 and 2004 federal income tax returns, proposed
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