Sysco 2012 Annual Report Download - page 57

SYSCO CORPORATION-Form10-K34
PARTII
ITEM7Management’s Discussion and Analysis of Financial Condition and Results of Operations
inability to meet its fi nancial obligation, a specifi c allowance for doubtful accounts is recorded to reduce the receivable to the net amount reasonably
expected to be collected. Our judgment is required as to the impact of certain of these items and other factors as to ultimate realization of our accounts
receivable. If the fi nancial condition of our customers were to deteriorate, additional allowances may be required.
Self-Insurance Program
We maintain a self-insurance program covering portions of workers’ compensation, general liability and vehicle liability costs. The amounts in excess of
the self-insured levels are fully insured by third party insurers. We also maintain a fully self-insured group medical program. Liabilities associated with these
risks are estimated in part by considering historical claims experience, medical cost trends, demographic factors, severity factors and other actuarial
assumptions. Projections of future loss expenses are inherently uncertain because of the random nature of insurance claims occurrences and could be
signifi cantly affected if future occurrences and claims differ from these assumptions and historical trends. In an attempt to mitigate the risks of workers’
compensation, vehicle and general liability claims, safety procedures and awareness programs have been implemented.
Company-Sponsored Pension Plans
Amounts related to defi ned benefi t plans recognized in the fi nancial statements are determined on an actuarial basis. Three of the more critical assumptions
in the actuarial calculations are the discount rate for determining the current value of plan benefi ts, the assumption for the rate of increase in future
compensation levels and the expected rate of return on plan assets.
For guidance in determining the discount rates, we calculate the implied rate of return on a hypothetical portfolio of high-quality fi xed-income investments
for which the timing and amount of cash outfl ows approximates the estimated payouts of the pension plan. The discount rate assumption is reviewed
annually and revised as deemed appropriate. The discount rate for determining fi scal 2012 net pension costs for the Retirement Plan, which was determined
as of the July2,2011 measurement date, decreased 21 basis points to 5.94%. The discount rate for determining fi scal 2012 net pension costs for the
SERP, which was determined as of the July2,2011 measurement date, decreased 42 basis points to 5.93%. The combined effect of these discount rate
changes increased our net company-sponsored pension costs for all plans for fi scal 2012 by an estimated $14.3million. The discount rate for determining
fi scal 2013 net pension costs for the Retirement Plan, which was determined as of the June30,2012 measurement date, decreased 113 basis points to
4.81%. The discount rate for determining fi scal 2013 net pension costs for the SERP, which was determined as of the June30,2012 measurement date,
decreased 104 basis points to 4.89%. The combined effect of these discount rate changes will increase our net company-sponsored pension costs for all
plans for fi scal 2013 by an estimated $84.1million. A 100basis point increase in the discount rates for fi scal 2013 would decrease Sysco’s net company-
sponsored pension cost by $41.9million, while a 100basis point decrease in the discount rates would increase pension cost by $50.6million. The impact
of a 100basis point increase in the discount rates differs from the impact of a 100basis point decrease in discount rates because the liabilities are less
sensitive to change at higher discount rates. Therefore, a 100basis point increase in the discount rate will not generate the same magnitude of change as
a 100basis point decrease in the discount rate.
We look to actual plan experience in determining the rates of increase in compensation levels. We used a plan specifi c age-related set of rates for the
Retirement Plan, which are equivalent to a single rate of 5.30% as of June30,2012 and July2,2011. For determining the benefi t obligations as of
June30,2012 and July2,2011, the SERP calculations use an age-graded salary growth assumption.
The expected long-term rate of return on plan assets of the Retirement Plan was 7.75% for fi scal 2012 and 8.00% for fi scal 2011. The expectations of
future returns are derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, refl ecting a combination
of historical performance analysis and the forward-looking views of the fi nancial markets regarding the yield on bonds, historical returns of the major stock
markets and returns on alternative investments. Although not determinative of future returns, the effective annual rate of return on plan assets, developed
using geometric/compound averaging, was approximately 7.0%, 4.2%, 1.6%, and -0.2%, over the 20-year, 10-year, 5-year and 1-year periods ended
December31,2011, respectively. In addition, in eight of the last 15 years, the actual return on plan assets has exceeded 10%. 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
Retirement Plan is 7.75% for fi scal 2013. A 100basis point increase (decrease) in the assumed rate of return for fi scal 2013 would decrease (increase)
Sysco’s net company-sponsored pension costs for fi scal 2013 by approximately $22.1million.
Pension accounting standards require the recognition of the funded status of our defi ned benefi t plans in the statement of fi nancial position, with a
corresponding adjustment to accumulated other comprehensive income, net of tax. The amount refl ected in accumulated other comprehensive loss
related to the recognition of the funded status of our defi ned benefi t plans as of June30,2012 was a charge, net of tax, of $823.9million. The amount
refl ected in accumulated other comprehensive loss related to the recognition of the funded status of our defi ned benefi t plans as of July2,2011 was a
charge, net of tax, of $501.1million.