Sysco 2015 Annual Report Download - page 44
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Please find page 44 of the 2015 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.SYSCO CORPORATION-Form10-K36
PARTII
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
Income Taxes
The determination of our provision for income taxes requires signi cant judgment, the use of estimates and the interpretation and application of complex
tax laws. Our provision for income taxes primarily re ects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign
jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of
accruals for unrecognized tax bene ts or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall
effective tax rate.
Our liability for unrecognized tax bene ts contains uncertainties because management is required to make assumptions and to apply judgment to estimate
the exposures associated with our various ling positions. We believe that the judgments and estimates discussed herein are reasonable; however, actual
results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which a liability has been
established, or pay amounts in excess of recorded liabilities, our effective income tax rate in a given nancial statement period could be materially affected.
An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution.
A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution.
Vendor Consideration
We recognize consideration received from vendors when the services performed in connection with the monies received are completed and when the
related product has been sold by Sysco. There are several types of cash consideration received from vendors. In many instances, the vendor consideration
is in the form of a speci ed amount per case or per pound. In these instances, we will recognize the vendor consideration as a reduction of cost of sales
when the product is sold. In some instances, vendor consideration is received upon receipt of inventory in our distribution facilities. We calculate the
amount needed to reduce our inventory based on inventory turns until the product is sold. Our inventory turnover is usually less than one month; therefore,
amounts deferred against inventory do not require long-term estimation. In the situations where the vendor consideration is not related directly to speci c
product purchases, we will recognize these as a reduction of cost of sales when the earnings process is complete, the related service is performed and
the amounts realized. Historically, adjustments to our estimates related to vendor consideration have not been signi cant.
Goodwill and Intangible Assets
Goodwill and intangible assets represent the excess of consideration paid over the fair value of tangible net assets acquired. Certain assumptions and
estimates are employed in determining the fair value of assets acquired, including goodwill and other intangible assets, as well as determining the allocation
of goodwill to the appropriate reporting unit.
In addition, annually in our fourth quarter or more frequently as needed, we assess the recoverability of goodwill and inde nite-lived intangibles by
determining whether the fair values of the applicable reporting units exceed the carrying values of these assets. The reporting units used in assessing
goodwill impairment are our 13 operating segments as described in Note 21, “Business Segment Information,” to the Consolidated Financial Statements
in Item 8. The components within each of our 13 operating segments have similar economic characteristics and therefore are aggregated into 13
reporting units.
We arrive at our estimates of fair value using a combination of discounted cash ow and earnings multiple models. The results from each of these
models are then weighted and combined into a single estimate of fair value for each of our 13 operating segments. We primarily use a 60% weighting
for our discounted cash ow valuation and 40% for the earnings multiple models giving greater emphasis to our discounted cash ow model because
the forecasted operating results that serve as a basis for the analysis incorporate management’s outlook and anticipated changes for the businesses
consistent with a market participant. The primary assumptions used in these various models include estimated earnings multiples of comparable
acquisitions in the industry including control premiums, earnings multiples on acquisitions completed by Sysco in the past, future cash ow estimates
of the reporting units, which are dependent on internal forecasts and projected growth rates, and weighted average cost of capital, along with working
capital and capital expenditure requirements. When possible, we use observable market inputs in our models to arrive at the fair values of our reporting
units. We update our projections used in our discounted cash ow model based on historical performance and changing business conditions for each
of our reporting units.
Our estimates of fair value contain uncertainties requiring management to make assumptions and to apply judgment to estimate industry economic
factors and the pro tability of future business strategies. Actual results could differ from these assumptions and projections, resulting in the company
revising its assumptions and, if required, recognizing an impairment loss. There were no impairments of goodwill or inde nite-lived intangibles recorded
as a result of assessment in scal 2015, 2014 or 2013. Our past estimates of fair value for scal 2014 and 2013 have not been materially different when
revised to include subsequent years’ actual results. Sysco has not made any material changes in its impairment assessment methodology during the
past three scal years. We do not believe the estimates used in the analysis are reasonably likely to change materially in the future but we will continue
to assess the estimates in the future based on the expectations of the reporting units. In the scal 2015 assessment, our estimates of fair value did not
require additional analysis. However, we would have performed additional analysis to determine if an impairment existed for our Costa Rican Broadline