Sysco 2010 Annual Report Download - page 31
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Please find page 31 of the 2010 Sysco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Technology Dependence Could have a Material Negative Impact on our Business
Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the reliability of our
technology network. We use software and other technology systems, among other things, to generate and select orders, to load and route trucks and
to monitor and manage our business on a day-to-day basis. Any disruption to these computer systems could adversely impact our customer service,
decrease the volume of our business and result in increased costs. Furthermore, process changes may be required as we continue to use our existing
warehousing, delivery, and payroll systems to support operations as we implement the ERP system. While Sysco has invested and continues to
invest in technology security initiatives and disaster recovery plans, these measures cannot fully insulate us from technology disruption that could
result in adverse effects on operations and profits.
We may be Required to Pay Material Amounts Under Multi-Employer Defined Benefit Pension Plans
We contribute to several multi-employer defined benefit pension plans based on obligations arising under collective bargaining agreements
covering union-represented employees. Approximately 11% of our current employees are participants in such multi-employer plans. In fiscal 2010,
our total contributions to these plans, which include payments for voluntary withdrawals, were approximately $51.5 million.
We do 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 to us from plan administrators, we
believe 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, we expect
our required contributions to these plans to increase in the future.
Under current law regarding multi-employer defined benefit plans, a plan’s termination, our voluntary withdrawal, or the mass withdrawal of all
contributing employers from any underfunded multi-employer defined benefit plan would require us to make payments to the plan for our
proportionate share of the multi-employer plan’s unfunded vested liabilities. Based on the information currently available from plan administrators,
which has valuation dates ranging from January 31, 2008 to June 30, 2009, Sysco estimates its share of the aggregate withdrawal liability on most of
the multi-employer plans in which it participates could have been as much as $183.0 million as of July 3, 2010 based on a voluntary withdrawal. The
majority of the plans we participate in have a valuation date of calendar year-end. As such, the majority of our estimated withdrawal liability results
from plans for which the valuation date was December 31, 2008; therefore, our estimated liability reflects the asset losses incurred by the financial
markets as of that date. In general, the financial markets improved during calendar year 2009; therefore, we believe our current share of the
withdrawal liability could differ from this estimate. In addition, if a multi-employer defined benefit plan fails to satisfy certain minimum funding
requirements, the Internal Revenue Service (IRS) may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency
for those employers contributing to the fund. As of July 3, 2010, Sysco had approximately $0.9 million in liabilities recorded in total related to certain
multi-employer defined benefit plans for which our voluntary withdrawal has already occurred. Requirements to pay such increased contributions,
withdrawal liability, and excise taxes could negatively impact our liquidity and results of operations.
Our Funding of our Company-Sponsored Pension Plans may Increase and our Earnings May Decrease Should Financial Markets and the Value of our
Company Owned Life Insurance Experience Future Declines
Our company-sponsored qualified pension plan (Retirement Plan) holds investments in both equity and fixed income securities. The amount of
our annual contribution to the plan is dependent upon, among other things, the returns on the plan’s assets and discount rates used to calculate the
plan’s liability. Our expense is also impacted by these items. Fluctuations in asset values can cause the amount of our anticipated future contributions
to the plan to increase and pension expense to increase and can result in a reduction to shareholders’ equity on our balance sheet at fiscal year-end,
which is when this plan’s funded status is measured. Also, the projected liability of the plan will be impacted by the fluctuations of interest rates on
high quality bonds in the public markets as these are inputs in determining our discount rate at fiscal year-end. Specifically, decreases in these
interest rates may have an adverse impact on our results of operations. To the extent financial markets experience future declines similar to those
experienced in fiscal 2008 through the beginning of fiscal 2010, and/or interest rates on high quality bonds in the public markets decline, our
contributions and pension expense may increase for future years as our funded status decreases, which could have an adverse impact on our liquidity
and results of operations.
Sysco invests in corporate-owned life insurance policies in order to fund certain retirement programs which are subject to market risk.The value of
our investments in corporate-owned life insurance (COLI) policies is largely based on the values of underlying investments, which include publicly
traded securities. Therefore, the value of these policies will be adjusted each period based on the performance of the underlying securities which hasin
the past resulted, and could in the future further result, in volatility in our earnings. As of July 3, 2010, our investments in COLI policies were valuedat
$203.2 million. During periods of significant declines in the financial markets, we experienced significant losses in adjusting the carrying value of these
policies to their cash surrender values. Should the financial markets suffer significant declines again in the future, we would take additional charges to
adjust the carrying value of our COLI policies, which would increase our operating expenses, and adversely impact our net earnings and earnings per
share.
Failure to Successfully Renegotiate Union Contracts Could Result in Work Stoppages
As of July 3, 2010, approximately 8,400 employees at 51 operating companies were members of 55 different local unions associated with the
International Brotherhood of Teamsters and other labor organizations. In fiscal 2011, 12 agreements covering approximately 2,400 employees have
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