SYSCO CORPORATION This discussion should be read in conjunction with our consolidated financial statements as ofJune 27, 2020 , and for the fiscal year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year endedJune 27, 2020 (our fiscal 2020 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Sysco's fiscal year ends on the Saturday nearest toJune 30th . This results in a 53-week year endingJuly 3, 2021 for fiscal 2021. Highlights Our third quarter of fiscal 2021 results were strong despite the COVID-19 pandemic's impact on market conditions, due to improved sales and disciplined expense management. Our industry's business recovery is here and the pace of recovery is accelerating, especially in our domesticU.S. business. We are making excellent progress in our business transformation to better serve our customers and differentiate from our competition. We are growing market share at the national and local customer level, and we achieved a profitable quarter, despite a 14% reduction in sales, as compared to fiscal 2020. We continue to make strategic investments in preparation for the business recovery and have focused our investments on our customers, our people, our inventory, our technology, and our communities. These investments have helped position Sysco for the return of foodservice demand. See below for a comparison of our third quarter of fiscal 2021 results to our third quarter of fiscal 2020 results, both including and excluding Certain Items.
Comparisons of results from the third quarter of fiscal 2021 to the third quarter of fiscal 2020:
•Sales:
•decreased 13.7%, or$1.9 billion , to$11.8 billion ; •Operating income: •increased$175.6 million , to$235.9 million ; •adjusted operating income decreased$120.8 million , to$256.2 million ; •Net earnings: •increased$92.2 million , to$88.9 million ; •adjusted net earnings decreased$117.0 million , to$114.8 million ; •Basic earnings per share: •increased$0.18 , to$0.17 per share; •Diluted earnings per share: •increased$0.18 , to$0.17 per share; and •adjusted diluted earnings per share decreased$0.23 , to$0.22 per share. •EBITDA: •increased 76.5%, or$184.5 million , to$425.8 million ; and •adjusted EBITDA decreased 18.7%, or$100.7 million , to$437.4 million .
Comparisons of results from the first 39 weeks of fiscal 2021 to the first 39 weeks of fiscal 2020:
•Sales:
•decreased 20.1%, or$8.9 billion , to$35.2 billion ; •Operating income: •decreased 32.3%, or$413.5 million , to$867.6 million ; •adjusted operating income decreased 51.0%, or$890.9 million , to$855.0 million ; •Net earnings: •decreased 55.3%, or$460.8 million , to$373.1 million ; •adjusted net earnings decreased 68.3%, or$805.7 million , to$374.1 million ; •Basic earnings per share: •decreased 55.2%, or$0.90 , to$0.73 per share; •Diluted earnings per share: •decreased 54.9%, or$0.89 , to$0.73 per share; and •adjusted diluted earnings per share decreased 68.1%, or$1.56 , to$0.73 per share. •EBITDA: •decreased 22.3%, or$408.0 million , to$1.4 billion ; and 27 --------------------------------------------------------------------------------
•adjusted EBITDA decreased 38.3%, or
EBITDA and adjusted EBITDA are non-GAAP financial measures. More information on the rationale for the use of non-GAAP financial measures and reconciliations to the most directly comparable numbers calculated in accordance withU.S. generally accepted accounting principles (GAAP) can be found under "Non-GAAP Reconciliations." Sysco's results of operations for fiscal 2021 and fiscal 2020 were impacted by restructuring and transformational project costs consisting of: (1) restructuring charges; (2) expenses associated with our various transformation initiatives; and (3) facility closure and severance charges. Sysco's results for fiscal 2021 and fiscal 2020 were also impacted by intangible amortization expense related to the fiscal 2017 acquisition ofCucina Lux Investments Limited (the Brakes Acquisition). Additionally, our results for fiscal 2021 were impacted by loss on the sale of businesses. Fiscal 2021 results of operations were also positively impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the unexpected impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Fiscal 2020 results of operations were also negatively impacted by costs arising from the COVID-19 pandemic, the most significant of which were (1) excess bad debt expense, as we experienced an increase in past due receivables and recognized additional bad debt charges, and (2) goodwill impairment charges. While Sysco traditionally incurs bad debt expense, the magnitude of such expenses and benefits that we have experienced since the onset of the COVID-19 pandemic is not indicative of our normal operations. Our adjusted results have not been normalized in a manner that would exclude the full impact of the COVID-19 pandemic on our business. As such, Sysco has not adjusted its results for lost sales, inventory write-offs or other costs associated with the COVID-19 pandemic not previously stated. The fiscal 2021 and fiscal 2020 items discussed above are collectively referred to as "Certain Items." The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies toU.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis. Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from Certain Items, and certain metrics are stated on a constant currency basis. During the fourth quarter of fiscal 2020, Sysco revised the way performance is assessed for theU.S. Foodservice Operations segment. As a result of this change, charges incurred by the company's corporate office to provide direct support functions to theU.S. Foodservice Operations reportable segment have been reclassified from Corporate expenses into theU.S. Foodservice reportable segment. The segment information disclosed for fiscal 2021 reflects this change in reporting structure and prior year amounts have been reclassified to conform with the current year presentation.
Key Performance Indicators
Sysco seeks to meet its strategic goals by continually measuring its success in its key performance metrics that drive stakeholder value through sales growth and capital allocation and deployment. The COVID-19 pandemic has significantly impacted the financial metrics used by management to evaluate the business, and certain metrics continue to be a near- and long-term focus, while other metrics do not provide meaningful comparable information in the near-term. We believe the following are our most significant performance metrics in our current business environment: •Adjusted operating income growth (non-GAAP); •Adjusted diluted earnings per share growth (non-GAAP); •Adjusted EBITDA (non-GAAP); •Case volume growth by customer type forU.S. Broadline operations; •Sysco brand penetration forU.S. Broadline operations; and •Free cash flow (non-GAAP).
Adjusted EBITDA
EBITDA represents net earnings (loss) plus (1) interest expense, (2) income tax
expense and benefit, (3) depreciation and (4) amortization. The net earnings
(loss) component of our EBITDA calculation is impacted by Certain Items that we
do not consider representative of our underlying performance. As a result, in
the non-GAAP reconciliations below for each period presented, adjusted EBITDA is
computed as EBITDA plus the impact of Certain Items, excluding Certain Items
related to interest expense, income taxes, depreciation and amortization.
Sysco's management considers growth in this metric to be a measure of overall
financial performance that provides useful information to management and
investors about the profitability of the business, as it facilitates comparison
of performance on a consistent basis from period to period by providing a
28
--------------------------------------------------------------------------------measurement of recurring factors and trends affecting our business. Additionally, it is a commonly used component metric used to inform on capital structure decisions.
We use these financial metrics and related computations, as well as sales and gross profit growth, to evaluate our business and to plan for near-and long-term operating and strategic decisions. We believe it is useful to provide investors with the same financial information that we use internally to make comparisons of our historical operating results, identify trends in our underlying operating results and evaluate our business.
Trends
Economic and Industry Trends
In response to the COVID-19 pandemic, national and local governments have imposed substantial restrictions upon the customers we serve in the food-away-from-home sector. We see pent up demand in the sector, and we believe consumers are ready to eat at restaurants once restrictions are reduced. Strong sales results and long wait times are common in restaurants operating within geographies that have limited restrictions. Our customers faced meaningfully tight restrictions during the winter COVID-19 lockdown, while a substantial winter storm inFebruary 2021 adversely affected performance in our strongest domestic markets. Nevertheless, there has been a notable improvement in the southern portion of theU.S. , where reduced restrictions and warmer weather are generating strong performance results. These results in reopened markets present a positive sign of things to come as the northern regions begin to benefit from easing restrictions that currently remain largely in place. The International Foodservice Operations segment has been significantly adversely impacted due to tougher restrictions in the countries in which we operate, particularly inEurope , which are experiencing even stronger restrictions than those experienced inthe United States and are making slower progress on vaccination. Demand inEurope ,Canada andLatin America regressed in the third quarter of fiscal 2021 as a result of strict lockdowns that are expected to continue, and are expected to negatively affect our fourth quarter of fiscal 2021 results for our International Foodservice Operations segment. The impact of these lockdowns may carry into the early quarters of fiscal 2022, depending on vaccination progress by country. However, we see positive trends in the recent reopening taking place in theUnited Kingdom . In addition to softer European performance, our business in the travel, hospitality and Food Service Management sector remains down. Our business penetration inEurope and Foodservice Management pre-COVID is creating a lingering delay in the full recovery of our business results in comparison to other distributors. Although we expect these sectors to recover, their recovery will be at a slower pace than our core restaurant sector. Our sales teams are actively engaged with new customers and are helping existing customers maximize their business during this recovery period. In the third quarter of fiscal 2021, as a result of these efforts, Sysco gained overall market share versus the rest of the industry, reflecting the progress of our investments.
Sales and Gross Profit Trends
Our sales and gross profit performance can be influenced by multiple factors, including price, volume, customer mix, product mix and the impact of the COVID-19 pandemic. The biggest factor affecting performance in the first 39 weeks of fiscal 2021 was the COVID-19 pandemic due to reduced volume. Sales and gross profits were also adversely impacted by lower volumes in the beginning of the third quarter of fiscal 2021 due to restrictions on our customers resulting from the impact of the second wave of COVID-19 in different geographies. Since the beginning ofMarch 2021 , however, we have begun seeing volume improvements in our largest businesses inNorth America . In terms of customer mix, during the third quarter of fiscal 2021, we added more new local customers than we have added during any quarter in the last five years. We believe these efforts demonstrate our ability to accelerate future growth. We continue to win business at the national and contract sales level. We have added over$1.8 billion of net new national account business on an annualized basis since the beginning of the pandemic, with another strong quarter of new contracts signed. The contracts being written are at historical profit margins, as we are winning new business due to our supply chain and service capabilities. Sysco is currently serving more local customers than before the COVID-19 pandemic, and due to our increased customer count, we anticipate growing our market share as business returns to the food-away-from-home sector in fiscal 2022 and beyond. Given the strong growth in our SYGMA segment over the past year, but the lower margin profile of this business, we continue to be diligent in our contract review and approval process. As a result, during our fiscal fourth quarter, we plan to transition away from a large existing SYGMA customer. 29 -------------------------------------------------------------------------------- Our gross margin decreased 77 and 62 basis points in the third quarter and first 39 weeks of fiscal 2021, respectively, compared to the respective prior year periods. The primary reason for the gross margin dilution at the enterprise level is business mix. Our sales in our generally higher margin European business were down, while our sales in our lower margin SYGMA business were up, resulting in lower margins for the enterprise. In terms of the impact on pricing, we experienced inflation at a rate of 3.5% and 2.0% during the third quarter and first 39 weeks of fiscal 2021, respectively, primarily in the paper and disposables, poultry and meat categories.
Operating Expense Trends
Total operating expenses decreased 24.6% and 21.0% during the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the same periods in fiscal 2020, and we saw a modest improvement in operating expense leverage. The largest contributor to the decrease was reduced costs from the achievement of cost-out initiatives (see "Cost-out Measures" below), as well as a benefit from a reduction in our allowance for doubtful accounts resulting from the COVID-19 pandemic. Many of Sysco's customers have been operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures, and a portion of Sysco's customers have been closed. Some of these customers have ceased paying their outstanding receivables, creating uncertainty as to their collectability. We established reserves for bad debts in fiscal 2020 for these receivables; however, collections have improved in fiscal 2021 partially from restaurant reopenings, volume improvements and Sysco's improved credit processes. As a result, we have reduced our reserves on pre-pandemic receivables, recognizing a$33.5 million and$162.4 million benefit in the third quarter and first 39 weeks of fiscal 2021, respectively, included as a Certain Item. We recorded a reduction of$10.0 million on our reserves relating to periods beginning after the onset of the COVID-19 pandemic in the third quarter of fiscal 2021, which are not included as a Certain Item. Additional reserves of$24.7 million were recorded in the first 39 weeks of fiscal 2021 for receivables relating to periods beginning after the onset of the COVID-19 pandemic, which are not included as a Certain Item. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ and additional charges may be required; however, if collections continue to improve, it is also possible that additional reductions in our bad debt reserve could occur. Cost-out Measures The COVID-19 crisis has compelled us to take action to reduce costs by reducing variable expenses in response to reduced customer demand, aligning inventory to current sales trends, reducing capital expenditures to only urgent projects and targeted investments and tightly managing receivables. These actions produced savings in the third quarter and first 39 weeks of fiscal 2021. We have reduced pay-related expenses through headcount reductions across the organization, most of which occurred in fiscal 2020. With the improvement in sales volume, we anticipate that we will hire additional sales consultants, new business developers, culinary experts and operations associates in the fourth quarter of fiscal 2021. We are on track to surpass our fiscal 2021 goal of$350 million of cost savings, and we expect to drive continued cost savings opportunities to help fuel our future growth agenda.
Status of Supply Chain Disruptions and Facility Closures
We are experiencing pressure and constraints in the supply chain, as select suppliers struggle with meeting increased demand levels. We anticipated this constraint and have been partnering with our top suppliers to preposition inventory at our warehouses, which creates an opportunity for us to grow our business and take additional market share. Although our business continues to face challenges associated with the COVID-19 crisis, to date we have not experienced any significant disruptions to our supply chain, significant distribution facility closures or disposals of significant assets or lines of business. Income Tax Trends Our provision for income taxes primarily reflects a combination of income earned and taxed in the variousU.S. federal and state, as well as foreign, jurisdictions. Tax law changes, increases or decreases in book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. The impact of the COVID-19 pandemic may change our mix of earnings by jurisdiction and has increased the risk that operating losses may occur within certain of our jurisdictions that could lead to the recognition of valuation allowances against certain deferred tax assets in the future, if these losses are prolonged beyond our current expectations. These effects could negatively impact our income tax expense, net earnings, and balance sheet. 30 --------------------------------------------------------------------------------
Divestitures
Sysco sold its interests in Davigel Spain, part of the International Foodservice Operations segment, in the third quarter of fiscal 2021 and sold its interest inCake Corporation in the first quarter of fiscal 2021. These operations were not significant to Sysco's business, and these divestitures will facilitate our efforts to prioritize our focus and investments on our core business.
Strategy
In response to the current environment, we identified four key areas of focus as we manage the business in the near-term and prepare the company for recovery once the COVID-19 crisis subsides. First, we took actions to strengthen our overall liquidity, and now we are reducing our debt levels in anticipation of the business recovery. Second, we focused on stabilizing the business by removing costs. Third, we created new sources of revenue by helping our restaurant customers succeed under pandemic conditions. Fourth, we provided, and continue to provide, products for cleaning, sanitation, and personal protection, without disruptions, so that our customers may continue their business operations. While our response to the COVID-19 pandemic has been a primary focus, we have also accelerated our transformation initiatives that improve how we serve our customers, differentiate Sysco from our competitors and transform the foodservice distribution industry. These include: •Improving service to our customers by enhancing our digital order entry platform, Sysco Shop, deploying a digital pricing tool and introducing our Restaurants Rising campaign; •Transforming our sales model to make it easier for customers to do business with Sysco and to increase the effectiveness of our sales teams; •Regionalizing our operations in theU.S. within ourU.S. Broadline and FreshPoint businesses; and •Removing structural fixed costs from our business and becoming a more efficient company to return value to shareholders and to fund our continued growth plans. Throughout the third quarter of fiscal 2021, we have increased our strategic investments in preparation for the business recovery. Our investments in our customers include our Restaurants Rising campaign, which is intended to help restaurants to succeed and strengthen their business for the future by waiving delivery minimums and making it easier to do business with Sysco. We are making investments in our people, including increasing our efforts to proactively staff in advance of the business recovery. By the end of fiscal 2021, we believe we will have hired over 6,000 new associates, including warehouse selectors and drivers. While this hiring investment will increase our operating expenses in the short-term, over the long-term, it will help ensure that Sysco is able to maximize our market share gains during the business recovery. We are also making investments in inventory to properly position our warehouses to support customer demand. Our ability to ship product on time and in full during the upcoming period of anticipated volume recovery makes Sysco the strongest broadline distributor in the industry. Due to our strong balance sheet, we are uniquely positioned to make investments in inventory, allowing Sysco to accelerate growth and remain ahead of the pace of the overall business recovery. We are continuing our strategic investments in our technology to improve the customer experience and our technology platform is being meaningfully improved so that we can better service our customers. We are making it easier for our customers to order products through our Sysco Shop platform and we are implementing a new pricing software.
See "Non-GAAP Reconciliations" below for an explanation of adjusted operating income, which is a non-GAAP financial measure.
31
--------------------------------------------------------------------------------Results of Operations
The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
13-Week Period Ended 39-Week Period Ended
Mar. 27, 2021 Mar. 28, 2020 Mar. 27, 2021 Mar. 28, 2020
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 82.0 81.3 81.7 81.1
Gross profit 18.0 18.7 18.3 18.9
Operating expenses 16.0 18.3 15.8 16.0
Operating income 2.0 0.4 2.5 2.9
Interest expense 1.2 0.6 1.2 0.6
Other (income) expense, net (0.1) - - -
Earnings before income taxes 0.9 (0.2) 1.3 2.3
Income taxes 0.1 (0.2) 0.2 0.4
Net earnings 0.8 % - % 1.1 % 1.9 %
The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:
13-Week Period Ended 39-Week Period Ended
Mar. 27, 2021 Mar. 27, 2021
Sales (13.7) % (20.1) %
Cost of sales (12.9) (19.5)
Gross profit (17.2) (22.7)
Operating expenses (24.6) (21.0)
Operating income 291.4 (32.3)
Interest expense 73.8 79.9
Other (income) expense, net (1) (2) (344.4) (288.4)
Earnings before income taxes (457.4) (57.0)
Income taxes (154.6) (64.4)
Net earnings 2,797.2 % (55.3) %
Basic earnings per share 1,800.0 % (55.2) %
Diluted earnings per share 1,800.0 (54.9)
Average shares outstanding 0.5 (0.1)
Diluted shares outstanding 0.4 (0.6)
(1)Other (income) expense, net was income of $12.7 million and expense of $5.2
million in the third quarter of fiscal 2021 and fiscal 2020, respectively.
(2)Other (income) expense, net was income of $14.1 million and expense of $7.5
million in the first 39 weeks of fiscal 2021 and fiscal 2020, respectively.
32
--------------------------------------------------------------------------------The following tables represent our results by reportable segments:
© Edgar Online, source
