SYSCO CORPORATION The following discussion and analysis of Sysco's financial condition, results of operations and liquidity and capital resources for the fiscal years endedJuly 3, 2021 andJune 27, 2020 should be read as a supplement to our Consolidated Financial Statements and the accompanying notes contained in Item 8 of this report, and in conjunction with the "Forward-looking Statements" section set forth in Part II and the "Risk Factors" section set forth in Item 1A of Part I. All discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Form 10-K, but may be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedJune 27, 2020 , filed with theSecurities and Exchange Commission onAugust 25, 2020 .
Overview
Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located inNorth America andEurope . Under the accounting provisions related to disclosures about segments of an enterprise, we have aggregated certain operating segments into three reportable segments. "Other" financial information is attributable to our other operating segments that do not meet the quantitative disclosure thresholds. 23 -------------------------------------------------------------------------------- •U.S. Foodservice Operations - primarily includesU.S. Broadline operations, which distribute a full line of food products, including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products; •International Foodservice Operations - includes operations in theAmericas (primarily outside ofthe United States (U.S. )) andEurope , which distribute a full line of food products and a wide variety of non-food products. TheAmericas primarily consists of operations inCanada ,Bahamas ,Mexico ,Costa Rica andPanama , as well as our operations that distribute to international customers. Our European operations primarily consist of operations in theUnited Kingdom (U.K. ), France,Ireland andSweden ; •SYGMA - ourU.S. customized distribution operations serving quick-service chain restaurant customer locations; and •Other - primarily our hotel supply operations, Guest Worldwide. Sysco sold its interests inCake Corporation in the first quarter of fiscal 2021. We estimate that we serve about 17% of an approximately$230 billion annual foodservice market in theU.S. based on industry data obtained fromTechnomic, Inc as of the end of calendar 2020.Technomic projects the market size to increase to approximately$285 billion by the end of calendar 2021. From time to time,Technomic may revise the methodology used to calculate the size of the foodservice market and, as a result, our percentage can change not only from our sales results, but also from such revisions. We also serve certain international geographies that vary in size and amount of market share. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 45% of the total dollars spent on food purchases made at the consumer level in theU.S. as of the end of calendar year 2020.
COVID-19 Response
We have closely monitored developments in the COVID-19 pandemic as the situation has evolved, and we are continuously revising our approach to create new processes and guidelines to keep associates and customers safe, with careful consideration to remaining aligned with guidance from relevant health authorities. •Supporting employees - We defined and implemented procedures to protect the health and safety of our employees while also ensuring business continuity and our ability to service our customers. Per our protocols, all employees at our offices or warehouses take part in daily temperature checks upon entry. Our policies for wearing face coverings at all Sysco and customer locations are aligned with the guidance provided by theCenters for Disease Control and Prevention (CDC ), unless local or state regulations differ. •Serving customers - We have procedures available to limit the contact between our drivers and customers' employees, including alternative delivery methods, not collecting signatures for customer invoices, and guidelines for safely accepting customer returns. These contact-less procedures are available to all customers by request. •Assisting our communities - We have donated over 27 million meals in fiscal 2021 across our global operations as part of our community response strategy to the pandemic. These donations were valued at over$55 million . Additionally, we continue to support community organizations in their efforts to address hunger and food insecurity by providing direct delivery to food banks and other hunger relief organizations by loaning refrigerated trucks and facility storage space to increase capacity for local food distribution and by providing volunteer and staffing support for mobile distribution efforts.
Highlights
Our fiscal 2021 results were strong due to improved sales and disciplined expense management. Our business recovery is stronger than anticipated in theU.S. , and the recovery is beginning to present itself in our international markets. Our increased profitability drove an improved cash flow performance and allowed us to pay down a large amount of debt. We are also making meaningful progress in advancing our Recipe for Growth strategy, which we expect will allow us to better serve our customers and differentiate Sysco from our competition. See below for a comparison of our fiscal 2021 results to our fiscal 2020 results, both including and excluding Certain Items (as defined below). 24 -------------------------------------------------------------------------------- Below is a comparison of results from fiscal 2021 to fiscal 2020: •Sales: •decreased 3.0%, or$1.6 billion , to$51.3 billion ; •Operating income: •increased 91.8%, or$687.7 million , to$1.4 billion ; •adjusted operating income decreased 14.7%, or$251.8 million , to$1.5 billion ; •Net earnings: •increased 143.3%, or$308.7 million , to$524.2 million ; •adjusted net earnings decreased 28.3%, or$291.6 million , to$740.4 million ; •Basic earnings per share: •increased 145.2%, or$0.61 , to$1.03 from the comparable prior year amount of$0.42 per share; •Diluted earnings per share: •increased 142.9%, or$0.60 , to$1.02 from the comparable prior year amount of$0.42 per share; •adjusted diluted earnings per share were$1.44 in fiscal 2021, a$0.57 decrease from the comparable prior year amount of$2.01 per share. •EBITDA: •increased 46.1%, or$695.4 million , to$2.2 billion ; and •adjusted EBITDA decreased 9.1%, or$216.2 million , to$2.2 billion . Our discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, 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 to remove the impact of 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; and by acquisition-related costs consisting of: (1) intangible amortization expense related to the fiscal 2017 acquisition ofCucina Lux Investments Limited (the Brakes Acquisition) and (2) due diligence and integration costs incurred in fiscal 2021 associated with the acquisition ofGreco and Sons , which closed inAugust 2021 . Our results for fiscal 2021 were also impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances, as well as non-operating gains and losses including (1) losses on the extinguishment of debt, (2) losses on the sale of businesses and (3) gains on the sale of property. Fiscal 2020 results of operations were also negatively impacted by costs arising from the COVID-19 pandemic and are also adjusted to remove the impact of (1) excess bad debt expense, as we experienced an increase in past due receivables and recognized additional bad debt charges, (2) goodwill and intangibles impairment charges and (3) fixed asset 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. Management believes that adjusting its operating expenses, operating income, interest expense, other (income) expense, net, net earnings and diluted earnings per share to remove these Certain Items, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company's underlying operations, (2) facilitates comparisons on a year-over-year basis and (3) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts' financial models and our investors' expectations with any degree of specificity. Sysco's fiscal year ends on the Saturday nearest toJune 30th . This resulted in a 53-week year endedJuly 3, 2021 for fiscal 2021, a 52-week year endedJune 27, 2020 for fiscal 2020 and a 52-week year endedJune 29, 2019 for fiscal 2019. We will have a 52-week year endingJuly 2, 2022 for fiscal 2022. Because fiscal 2021 contained an additional week as compared to fiscal 2020, our Consolidated Results of Operations for fiscal 2021 are not directly comparable to the prior year. Management 25 -------------------------------------------------------------------------------- believes that adjusting the fiscal 2021 Consolidated Results of Operations for the estimated impact of the additional week provides more comparable financial results on a year-over-year basis. This is calculated by taking one-fourteenth of the total metric for the fourth quarter of fiscal 2021. The company uses these non-GAAP measures when evaluating its financial results, as well as for internal planning and forecasting purposes. These financial measures should not be used as a substitute for GAAP measures in assessing the company's results of operations for periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. Any metric within this section referred to as "adjusted" will reflect the applicable impact of Certain Items. More information on the rationale for the use of these measures and reconciliations to GAAP numbers can be found under "Non-GAAP Reconciliations."
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). 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.
Key Financial Definitions
•Sales - Sales is equal to gross sales, minus (1) sales returns and (2) sales incentives that we offer to certain customers, such as upfront monies and discounts. Our sales are driven by changes in case volumes, product inflation that is reflected in the pricing of our products and mix of products sold. •Gross profit - Gross profit is equal to our net sales minus our cost of goods sold. Cost of goods sold primarily includes inventory costs (net of supplier consideration) and inbound freight. Cost of goods sold generally changes as we incur higher or lower costs from our suppliers and as our customer and product mix changes.
Adjusted Operating Income and Adjusted Diluted Earnings per Share Growth
Adjusted operating income represents our consolidated operating income, adjusted for the impact of Certain Items that we do not consider representative of our underlying performance. Adjusted diluted earnings per share represents our consolidated diluted earnings per share, adjusted for the impact of Certain Items that we do not consider representative of our underlying performance. Sysco's management considers growth in these metrics to be useful measures of operating efficiency and profitability, as they facilitate comparison of performance on a consistent basis from period to period by providing a measurement of recurring factors and trends affecting our business.
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
26
--------------------------------------------------------------------------------measurement of recurring factors and trends affecting our business. Additionally, it is a commonly used component metric used to inform on capital structure decisions.
Case Volume Growth by Customer Type for
Case volume represents the volume of product sold to customers during a period of time, and improvements in this metric are a primary driver of Sysco's top line performance. We define a case, specifically for ourU.S. Broadline operations, as the lowest level of packaged products that are sold from our warehouses, with one case potentially containing several pieces of a product packaged in bulk. Case size does not generally vary by location or from period to period, due to the design of our warehouses. Case volume growth is calculated by dividing the change in the volume of cases sold year-over-year by the volume of cases sold in the prior year. Sysco management considers case volume growth within itsU.S. Broadline operations to be a measure that provides useful information to management and investors in evaluating sales performance and as an indicator of gross margin performance. Management monitors case volume growth by customer type, with bifurcation between local customers and national customers, as this provides a measure of gross profit performance due to the pricing strategies attached to each customer type. Local customers are primarily street customers, such as independent restaurants that do not have long-term contracts, or locally managed customers, such as local chain restaurants, while national customers are the multi-unit customers requiring national coverage from a customer-centric view and are managed centrally from the Corporate office. Sysco management seeks to drive higher case volume growth to local customers, which allows more favorable pricing terms for ourU.S. Broadline operations and generates higher gross margins as a result. National customers benefit from purchasing power, as they are able to negotiate pricing agreements across multiple businesses, reducing our gross profit potential, but reducing our overall cost per case, as national customers have bigger drop sizes. While overall case volume growth reflects a key component of sales growth, local customer case growth provides additional context around gross profit performance.
Sysco Brand Penetration for
Sysco management considers Sysco brand penetration to be a measure that provides useful information to management and investors in evaluating the gross profit performance of the company'sU.S. Broadline operations. Sysco offers an assortment of Sysco-branded products that can be differentiated from privately branded products, which enables us to achieve higher gross margin by administering and leveraging a consolidated product procurement program for quality food and non-food products. Due to cost efficiencies, Sysco-branded products generate a higher gross margin than sales from other privately branded products. We define Sysco brand penetration as the percentage of Sysco-branded case volume sold toU.S. Broadline customers over all cases sold toU.S. Broadline customers. This performance indicator, also measured at the customer type level, including local and national customers, is driven by growth in the distribution of branded products to more customers and more geographies, as well as increasing branded offerings through innovation and the launch of new products.
Free Cash Flow
Free cash flow represents net cash provided from operating activities, less
purchases of plant and equipment, plus proceeds from sales of plant and
equipment. Sysco management considers free cash flow to be a non-GAAP liquidity
measure that provides useful information to management and investors about the
amount of cash generated by the business after the purchases and sales of
buildings, fleet, equipment and technology, which may potentially be used to pay
for, among other things, strategic uses of cash, including dividend payments,
share repurchases and acquisitions. However, free cash flow may not be available
for discretionary expenditures, as it may be necessary that we use it to make
mandatory debt service or other payments. Free cash flow should be considered in
addition to, rather than as a substitute for, consolidated net income as a
measure of our performance and net cash provided by operating activities as a
measure of our liquidity. See "Liquidity and Capital Resources" for discussions
of GAAP metrics, including net cash provided by operating activities and our
reconciliation of this non-GAAP financial measure.
27
--------------------------------------------------------------------------------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; however, we saw demand in the restaurant industry increase throughout the fourth quarter of fiscal 2021 as restrictions continued to ease. TheU.S. foodservice industry is now within 5% of calendar year 2019 levels, as foot traffic has increased sinceMarch 2021 and continues to increase more than foot traffic in grocery stores. Consumer spending power is robust, signaling that the food-away-from-home sector is not permanently impaired, but rather is vibrant and healthy. Our performance in the non-restaurant sectors of our business trailed the success of restaurants in fiscal 2021; however, we are beginning to see improvements in the travel, hospitality and food service management sectors of our business as restrictions ease and as leisure travel has returned this summer. We expect these non-restaurant business sectors to improve further as travel restrictions continue to ease and businesses return to the office setting. Our International Foodservice Operations segment improved sequentially throughout the fourth quarter of fiscal 2021, as most international regions have begun meaningfully easing the restrictions affecting our customers. Sysco is best positioned to support the rapidly increasing demand due to our balance sheet, our large physical footprint, and our substantial human capital investment in salespeople and supply chain resources. The spread of the COVID-19 variants is creating uncertainty in our industry's business environment; however, the future impact to our customers and to Sysco's results is not yet known. The return of robust customer demand has created pressure on us and our industry for available product supply in select categories. Our supplier partners are struggling with meeting the demand of Sysco's orders, and certain product categories remain in short supply. We believe that Sysco is performing better than the industry at large in delivering what we refer to as customer fill rate, but we are performing below our historical performance standards. Our merchant teams are working closely with current suppliers and actively sourcing incremental supply from new suppliers, and we are working with our sales teams to offer product substitutions to our customers. In the current operating environment, we are experiencing a tight labor market, particularly with our warehouse and driver positions, which is more concentrated in certain geographic areas. This is resulting in cost pressures, as we adopt mostly temporary wage actions, such as hiring bonuses, referral bonuses, and even retention bonus programs. We are working aggressively to fill open positions and improve productivity to offset cost increases.
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 fiscal 2021 was the COVID-19 pandemic due to reduced volume. The restaurant sector of our business, however, had nearly achieved full recovery as of the fourth quarter of fiscal 2021, as local sales volumes have exceeded fiscal 2019 volume levels. We are experiencing especially strong results from independent customers. Sysco has increased market share in this rapidly expanding market. Sales growth has continued into the first quarter of fiscal 2022, with July results indicating a further acceleration of this increase. We expect our fiscal 2022 sales will exceed fiscal 2019 sales by mid-single digits, with all segments of our business expected to exceed fiscal 2019 sales, except for our lodging supply business and food service management component of our US Foodservice Operations. During fiscal 2022, we expect to achieve growth at a rate of 1.2 times the industry. That rate of growth is expected to accelerate across the three years of our long range plan, and we intend to deliver 1.5 times the market growth in fiscal 2024. In terms of customer mix, during fiscal 2021, we grew our local customer count by approximately 10%, as compared to fiscal 2019, which is a pace 2.5 times greater than the broadline industry. 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 commitments to over$2.0 billion of net new national account business on an annualized basis since the beginning of the pandemic, with the fourth quarter of fiscal 2021 representing another strong quarter of new contracts signed. The momentum shown in the fourth quarter of fiscal 2021 has accelerated into the first quarter of fiscal 2022 and, over the course of fiscal 2022, we expect to see an improving market, as additional sectors, including international markets, specialty foods, schools and colleges, and business office cafeterias, begin to reopen. 28 -------------------------------------------------------------------------------- Our gross margin decreased 48 points in fiscal 2021, compared to the prior year period, as we managed profitability in an inflationary environment. The primary reason for the gross margin dilution at the enterprise level was business mix; however, our higher marginU.S. Foodservice Operations segment business is currently growing alongside improvements in higher-margin business in our International Foodservice Operations segment, reducing the business mix impact on gross margin from the lower-margin SYGMA segment. Manufacturers passed inflation to us, and we have passed it on to customers across categories and customer types. In terms of the impact on pricing, we experienced inflation at a rate of 9.6% combined for theU.S. andCanada during the fourth quarter of fiscal 2021, primarily in the paper and disposables, poultry and meat categories. The rate accelerated towards the end of the quarter and continued into the first quarter of fiscal 2022. The majority of our customer contracts have provisions to pass through inflation, and we are working closely and carefully with customers not managed through a contract. We are educating restaurant operators that consumers currently appear willing to accept menu price increases. The increased inflation is expected to benefit sales, while slightly negatively impacting gross margin rates and positively impacting gross profit dollars. For fiscal 2022, we expect gross margins to improve over fiscal 2021 and approach our fiscal 2019 levels.
Operating Expense Trends
Total operating expenses decreased 13.5% during fiscal 2021, as compared to fiscal 2020. The largest contributors to the decrease were the reduction of variable costs early in the year, as sales declined due to COVID-19, achievement of cost-out initiatives across fiscal 2021 (see "Cost-out Measures" below), and the benefit from a reduction in our allowance for doubtful accounts resulting from improved collections. Many of Sysco's customers were operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures, and a portion of Sysco's customers closed. Some of these customers 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. In fiscal 2021, we recorded a net credit to the provision for losses on receivables totaling$152.7 million , which reflects a benefit on the reduction of our allowance for pre-pandemic receivable balances, as we have made excellent progress on obtaining timely payments from our customers. We continue to work with our customers to collect past due balances, including through the use of payment plans. We have also discontinued charging interest on past due balances. As ofJuly 3, 2021 , our pre-pandemic receivable balance outstanding is no longer significant and a majority of the amount outstanding is reserved within our allowance for doubtful accounts. The COVID-19 pandemic is more widespread and longer in duration than historical disasters that have impacted 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 critical projects and targeted investments and tightly managing receivables. These actions produced savings in fiscal 2021, and we have surpassed our fiscal 2021 goal of$350 million of cost savings. The majority of these savings came from selling, general and administrative costs, but some savings came from cost of goods sold as we continue to improve our capabilities to better optimize supplier relationships. From our selling, general and administrative costs, 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 due to the business recovery; however, we have hired over 6,000 additional associates in the second half of fiscal 2021. We continue to have hiring needs, as the business recovery is happening faster than anticipated. Other examples of the cost saving efforts are the regionalization of our Broadline and specialty produce operations and the achievements we have made in reducing healthcare contract costs, indirect sourcing and freight contract costs. We expect to drive continued cost savings opportunities to help fuel our future growth agenda, and we are now targeting over$750 million in savings through fiscal 2024, including the savings delivered in fiscal 2021. These savings are structural and permanent, and are expected to substantially benefit the company so that we can grow our profit and create growth for the future. We expect to invest most of the fiscal 2022 savings into both the recovery occurring within our industry, including the temporary wage actions noted in "Economic and Industry Trends" above, as well as our Recipe for Growth transformational initiatives.
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 29 -------------------------------------------------------------------------------- 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 would negatively impact our income tax expense, net earnings, and balance sheet. Our effective tax rate has been influenced by discrete events, such as tax law changes and excess tax benefits attributable to equity compensation exercises as discussed in Note 19, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 8. In fiscal 2022, we expect our effective tax rate to be approximately 24%. Mergers and Acquisitions We continue to focus on mergers and acquisitions as a part of our growth strategy. InAugust 2021 , we acquired, within ourU.S. Foodservice Operations,Greco and Sons , a leading independent Italian specialty distributor in theU.S. with approximately$800 million in annual revenue.
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
Our purpose is "Connecting the World to Share Food and Care for One Another,"
which we believe will allow us to grow substantially faster than the foodservice
distribution industry and deliver profitable growth through our "Recipe for
Growth" transformation. This growth transformation is supported by strategic
pillars that we believe will allow us to better serve our customers, including:
•Digital - We will enrich the customer experience through personalized digital
tools that reduce friction in the purchase experience and introduce innovation
to our customers. We continue to see excellent utilization of our Sysco SHOP
platform by customers, and the implementation of our pricing software is on
track to be complete by the end of this calendar year. We also have a new
personalization engine that is currently under construction and has proved to be
beneficial to our pilot customers.
•Products and Solutions - We will provide customer-focused marketing and
merchandising solutions that inspire increased sales of our broad assortment of
fair priced products and services. We are improving our merchandising and
marketing solutions by developing improved strategies for specific cuisine
segments.
•Supply Chain - We will efficiently and consistently serve customers with the
products they need, when and how they need them, through a flexible, agile
delivery framework. We are developing a more nimble, accessible and productive
supply chain that is better positioned to support customers in their business
recovery, we and have eliminated order minimums for our customers. Our strategic
initiatives to increase delivery frequency and enable omnichannel inventory
fulfillment remain on track.
•Customer Teams - Our greatest strength is our people, people who are passionate
about food and food service. Our diverse team delivers expertise and
differentiated services designed to help our customers grow their business. We
intend to improve the effectiveness of our sales organization by leveraging data
to increase the yield of the sales process.
•Future Horizons - We are committed to responsible growth. We will cultivate new
channels, new segments, and new capabilities while being stewards of our company
and our planet. We will fund our journey through cost-out and efficiency
improvements.
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--------------------------------------------------------------------------------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:
2021 2020
Sales 100.0 % 100.0 %
Cost of sales 81.8 81.3
Gross profit 18.2 18.7
Operating expenses 15.4 17.3
Operating income 2.8 1.4
Interest expense 1.7 0.8
Other (income) expense, net - 0.1
Earnings before income taxes 1.1 0.5
Income taxes 0.1 0.1
Net earnings 1.0 % 0.4 %
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:
2021
Sales (3.0) %
Cost of sales (2.4)
Gross profit (5.5)
Operating expenses (13.5)
Operating income 91.8
Interest expense 115.6
Other (income) expense, net (1) (157.7)
Earnings before income taxes 99.3
Income taxes (22.3)
Net earnings 143.3 %
Basic earnings per share 145.2 %
Diluted earnings per share 142.9
Average shares outstanding 0.1
Diluted shares outstanding (0.1)
(1)Other (income) expense, net was income of
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--------------------------------------------------------------------------------Segment Results
The following represents our results by reportable segments:
53-Week Period Ended Jul. 3, 2021
International
U.S. Foodservice Foodservice Consolidated
Operations Operations SYGMA Other Corporate Totals
(In thousands)
Sales $ 35,724,843 $ 8,350,638 $ 6,498,601 $ 723,761 $ - $ 51,297,843
Sales increase (decrease) (2.9) % (13.7) % 17.0 % (18.8) % (3.0) %
Percentage of total 69.6 % 16.3 % 12.7 % 1.4 % 100.0 %
Operating income (loss) $ 2,456,564 $ (232,403) $ 52,654 $ (396) $ (839,177) $ 1,437,242
Operating income (loss) increase
(decrease) 22.6 % (37.4) % 42.8 % (98.1) % 91.8 %
Percentage of total segments 107.9 % (10.2) % 2.3 % - % 100.0 %
Operating income as a percentage
of sales 6.9 % (2.8) % 0.8 % (0.1) % 2.8 %
52-Week Period Ended Jun. 27, 2020
International
U.S. Foodservice Foodservice Consolidated
Operations Operations SYGMA Other Corporate Totals
(In thousands)
Sales $ 36,774,146 $ 9,672,190 $ 5,555,926 $ 891,048 $ - $ 52,893,310
Percentage of total 69.5 % 18.3 % 10.5 % 1.7 % 100.0 %
Operating income $ 2,003,159 $ (371,407) $ 36,880 $ (21,361) $ (897,766) $ 749,505
Percentage of total segments 121.6 % (22.5) % 2.2 % (1.3) % 100.0 %
Operating income as a percentage
of sales 5.4 % (3.8) % 0.7 % (2.4) % 1.4 %
Based on information in Note 21, "Business Segment Information," in the Notes to
Consolidated Financial Statements in Item 8, in fiscal 2021, U.S. Foodservice
Operations and International Foodservice Operations represented approximately
69.6% and 16.3%, respectively, of Sysco's overall sales, compared to 69.5% and
18.3%, respectively, in fiscal 2020. In fiscal 2021 and fiscal 2020, U.S.
Foodservice Operations represented approximately 107.9% and 121.6%,
respectively, of the total segment operating income. This illustrates that these
segments represent a substantial majority of our total segment results when
compared to other reportable segments.
Cost of sales primarily includes our product costs, net of vendor consideration,
and includes in-bound freight. Operating expenses include the costs of
facilities, product handling, delivery, selling and general and administrative
activities. Fuel surcharges are reflected within sales and gross profit; fuel
costs are reflected within operating expenses. Along with sales, operating
income is the most relevant measure for evaluating segment performance and
allocating resources, as operating income includes cost of goods sold, as well
as the costs to warehouse and deliver goods, which are significant and relevant
costs when evaluating a distribution business.
Results of
In fiscal 2021, theU.S. Foodservice Operations operating results represented approximately 69.6% of Sysco's overall sales and 107.9% of the aggregated operating income of Sysco's reporting segments. Several factors contributed to these higher operating results as compared to the other operating segments. We have invested substantial amounts in assets, operating methods, technology and management expertise in this segment. The breadth of its sales force, geographic reach of its distribution area and its purchasing power enable this segment to generate its relatively stronger results of operations. 32 -------------------------------------------------------------------------------- The following tables set forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the prior year: 2021 2020 Change in Dollars % Change (In thousands) Sales$ 35,724,843 $ 36,774,146 $ (1,049,303) (2.9) % Gross profit 7,008,687 7,254,722 (246,035) (3.4) Operating expenses 4,552,123 5,251,563 (699,440) (13.3) Operating income$ 2,456,564 $ 2,003,159 $ 453,405 22.6 % Gross profit$ 7,008,687 $ 7,254,722 $ (246,035) (3.4) % Adjusted operating expenses (Non-GAAP) (1) 4,691,103 5,010,764 (319,661) (6.4)
Adjusted operating income (Non-GAAP) (1)
73,626 3.3 %
(1) See "Non-GAAP Reconciliations" below.
Sales
The following table sets forth the percentage and dollar value increase or
decrease in sales over the prior year in order to demonstrate the cause and
magnitude of change.
Increase (Decrease)
2021
(In millions)
Cause of change Percentage Dollars
Case volume (8.6) % $ (3,144.5)
Inflation (1) 4.1 1,522.8
Acquisitions 0.1 50.5
Extra week in fiscal 2021 2.2 822.8
Other (2) (0.7) (300.9)
Total change in sales (2.9) % $ (1,049.3)
(1) Includes product cost inflation of 4.3% for U.S. Broadline operations.
(2) Case volume excludes the volume impact from our custom-cut meat and seafood
subsidiaries that do not measure volume in cases. Any impact in volumes from
these operations are included within "Other."
Sales were 2.9% lower in fiscal 2021 than in fiscal 2020. The primary driver of
the decrease was the significant decline in case volume in our U.S. Broadline
operations as a result of some of our customers closing and many other customers
operating at a substantially reduced volume through portions of the fiscal year
in response to the COVID-19 pandemic. We estimate that the extra week in fiscal
2021 accounted for $822.8 million of sales during the fiscal year. Our sales
have progressively improved throughout fiscal 2021 due to volume improvements
commensurate with an easing of restrictions on our customers. Case volumes for
the company's U.S. Broadline operations, including acquisitions within the last
12 months, decreased 5.8% in fiscal 2021 compared to fiscal 2020 and included a
1.1% decline in locally managed customer case growth, along with a decrease of
11.5% in national customer case volume, including chain restaurants and
multi-locational restaurants. Sales from acquisitions within the last 12 months
favorably impacted locally managed customer sales by 0.1%; therefore, organic
local case volume, which excludes acquisitions, decreased 1.2%.
Operating Income
Operating income increased by 22.6% in fiscal 2021 over fiscal 2020, as our decline in gross profits was outpaced by the reduction of operating expenses. Operating income, on an adjusted basis (which is a non-GAAP financial measure for which a reconciliation is provided in "Non-GAAP Reconciliations" below), for fiscal 2021 increased 3.3%, or$73.6 million , compared to fiscal 2020. We estimate that the extra week in fiscal 2021 accounted for$58.4 million of adjusted operating income during the fiscal year. 33 -------------------------------------------------------------------------------- Gross profit dollars decreased 3.4% in fiscal 2021, as compared to fiscal 2020, driven primarily by the decline in local cases and a decline in Sysco-branded products. The decrease was partially offset by higher inflation. We estimate that the extra week in fiscal 2021 accounted for$158.2 million of gross profit during the fiscal year. Our Sysco brand sales as a percentage of totalU.S. cases decreased 87 basis points in fiscal 2021, which was driven by customer and product mix shift. Sysco brand sales as a percentage of localU.S. cases decreased by approximately 212 basis points in fiscal 2021, which was driven by product mix shifting into pre-packaged and takeaway ready products. The estimated change in product costs, an internal measure of inflation or deflation, in fiscal 2021 for ourU.S. Broadline operations was inflation of 4.3% and was primarily driven by inflation in the paper and disposables, poultry and meat categories. Gross margin, which is gross profit as a percentage of sales, was 19.62% in fiscal 2021, which was a decrease of 11 basis points compared to gross margin of 19.73% in fiscal 2020, respectively, primarily attributable to customer and product mix shift. Operating expenses in fiscal 2021 decreased 13.3%, or$699.4 million , compared to fiscal 2020. Our decline in operating expenses during fiscal 2021 was primarily driven by a favorable comparison of bad debt expense, including the reduction of reserves on pre-pandemic receivables, and a decrease in pay-related costs associated with permanent headcount reductions made in fiscal 2020 in response to the COVID-19 pandemic. Operating expenses, on an adjusted basis (which is a non-GAAP financial measure for which a reconciliation is provided in "Non-GAAP Reconciliations" below), for fiscal 2021 decreased 6.4%, or$319.7 million , compared to fiscal 2020. We estimate that the extra week in fiscal 2021 accounted for$99.8 million of adjusted operating expense during the fiscal year.
Results of International Foodservice Operations
In fiscal 2021, the International Foodservice Operations operating results represented approximately 16.3% of Sysco's overall sales.
34
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The following tables set forth a summary of the components of operating income
and adjusted operating income expressed as a percentage increase or decrease
over the prior year:
2021 2020 Change in Dollars % Change
(In thousands)
Sales $ 8,350,638 $ 9,672,190 $ (1,321,552) (13.7) %
Gross profit 1,645,448 1,955,190 (309,742) (15.8)
Operating expenses 1,877,851 2,326,597 (448,746) (19.3)
Operating (loss) income $ (232,403) $ (371,407) $ 139,004 (37.4) %
Gross profit $ 1,645,448 $ 1,955,190 $ (309,742) (15.8) %
Adjusted operating expenses (Non-GAAP) (1) 1,774,245 1,847,152 (72,907) (3.9)
Adjusted operating income (Non-GAAP) (1)
(219.2) %
Comparable sales using a constant currency
basis (Non-GAAP) (1) $ 7,906,258 $ 9,672,190 $ (1,765,932) (18.3) %
Comparable gross profit using a constant
currency basis (Non-GAAP) (1) 1,554,004 1,955,190 (401,186) (20.5)
Comparable operating expenses adjusted for
Certain Items using a constant currency basis
(Non-GAAP) (1) 1,673,300 1,847,152 (173,852) (9.4)
Comparable operating (loss) income adjusted
for Certain Items using a constant currency
basis (Non-GAAP) (1) $ (119,296) $ 108,038 $ (227,334) (210.4) %
(1) See "Non-GAAP Reconciliations" below.
Sales
The following table sets forth the percentage and dollar value increase or decrease in sales over the comparable prior year period in order to demonstrate the cause and magnitude of change.
Increase (Decrease)
2021
(In millions)
Cause of change Percentage Dollars
Inflation 3.6 % $ 351.7
Foreign currency 4.6 444.4
Extra week in fiscal 2021 1.8 178.3
Other (1) (23.7) (2,296.0)
Total change in sales (13.7) % $ (1,321.6) (1)The impact of volumes as a component of sales growth from international operations are included within "Other." Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent comparable basis.
Sales in fiscal 2021 were 13.7% lower, as compared to fiscal 2020, primarily due to the significant decline in volume, as our European, Canadian and Latin American businesses have been substantially impacted by lockdowns, although the restrictions in place are currently easing in many regions. We estimate that the extra week in fiscal 2021 accounted for$178.3 million of sales during the fiscal year. In fiscal 2021, changes in foreign exchange rates positively affected sales by 4.6%, resulting in an 18.3% decrease in sales on a constant currency basis. Operating Income
Operating income decreased by
35
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on an adjusted basis (which is a non-GAAP financial measure for which a
reconciliation is provided in "Non-GAAP Reconciliations" below), decreased by
$236.8 million , or 219.2%, in fiscal 2021, as compared to fiscal 2020. We
estimate that the extra week had a negligible impact on adjusted operating
income during the fiscal year. Foreign exchange rates positively affected
operating income by 8.8% in fiscal 2021; therefore, adjusted operating income
decreased 210.4% on a constant currency basis, as compared to fiscal 2020.
Gross profit dollars decreased by 15.8% in fiscal 2021, as compared to fiscal
2020, primarily attributable to decreased sales. We estimate that the extra week
in fiscal 2021 accounted for $35.4 million of gross profit during the fiscal
year. Changes in foreign exchange rates in fiscal 2021 positively affected gross
profit by 4.7%, resulting in a 20.5% decrease in adjusted gross profit on a
constant currency basis, as compared to fiscal 2020. Gross margin decreased by
51 basis points as a result of country mix, customer mix and product mix.
Operating expenses in fiscal 2021 decreased 19.3%, or $448.7 million , as
compared to fiscal 2020, primarily due to a decrease in pay-related costs
associated with permanent workforce reductions made in fiscal 2020 as a result
of the COVID-19 pandemic. Additionally, the reduction of reserves on
pre-pandemic receivables and reduced restructuring and integration charges in
Europe contributed to the decrease. Operating expenses, on an adjusted basis
(which is a non-GAAP financial measure for which a reconciliation is provided in
"Non-GAAP Reconciliations" below), in fiscal 2021, decreased 3.9%, or $72.9
million , compared to fiscal 2020. We estimate that the extra week accounted for
$35.4 million of adjusted operating expense during the fiscal year. Changes in
foreign exchange rates used to translate our foreign operating expenses into
U.S. dollars in fiscal 2021 negatively affected operating expenses during the
period by 5.5%, resulting in a 9.4% decrease in adjusted operating expenses on a
constant currency basis, as compared to fiscal 2020.
Results of SYGMA and Other Segment
For SYGMA, sales were 17.0% higher in fiscal 2021 as compared to fiscal 2020, primarily from an increase in case volume driven by the success of national and regional quick service restaurants servicing drive-through traffic through the COVID-19 pandemic. We estimate that the extra week in fiscal 2021 accounted for$133.8 million of sales during the fiscal year. Operating income increased by 42.8% in fiscal 2021, as compared to fiscal 2020, as our increase in gross profit from increased case volume exceeded the increase in operating expenses. Adjusted operating income (which is a non-GAAP financial measure for which a reconciliation is provided in "Non-GAAP Reconciliations" below) increased by 23.4% in fiscal 2021, as compared to fiscal 2020. We estimate that the extra week in fiscal 2021 accounted for$1.2 million of adjusted operating income during the fiscal year. For the operations that are grouped within Other, operating loss decreased$21.0 million in fiscal 2021, as compared to fiscal 2020, primarily due to reduced operating expenses, as we sold a non-core asset,Cake Corporation , in the first quarter of fiscal 2021. Our hospitality business, Guest Worldwide, had a gross profit decrease of 24.5% in fiscal 2021, as compared to fiscal 2020. This business remains challenged, as hospitality occupancy rates remain low compared to prior year levels. Despite operating in a difficult hospitality environment, the business improved its underlying profitability during the second half of fiscal 2021 as leisure travel increased and as the travel and hospitality sector continued its recovery. Corporate Expenses Corporate expenses in fiscal 2021 decreased$59.8 million , or 6.7%, as compared to fiscal 2020, primarily due to a reduction in costs associated with the business impacts of the COVID-19 pandemic, including severance charges related to permanent headcount reductions made in the third and fourth quarters of fiscal 2020 and goodwill impairment charges recognized in fiscal 2020. Lower charges for professional fees and other business transformation initiatives also contributed to the decrease. Corporate expenses, on an adjusted basis, increased$97.7 million , or 14.6%, as compared to fiscal 2020, primarily due to an increase in incentives and stock-based compensation expense as compared to fiscal 2020, when these expenses were lower due to reduced performance against targets. Expenses for our transformational investments also contributed to the increase. We estimate that the extra week in fiscal 2021 accounted for$16.0 million of adjusted corporate expenses during the fiscal year. Included in corporate expenses are Certain Items that totaled$62.9 million in fiscal 2021, as compared to$220.3 million in fiscal 2020. Certain Items impacting fiscal 2021 were primarily expenses associated with our business technology transformation initiatives. Certain Items impacting fiscal 2020 were primarily expenses associated with our various transformation initiatives, severance charges arising from the COVID-19 pandemic and goodwill impairment charges. 36 --------------------------------------------------------------------------------
Interest Expense
Interest expense increased$471.9 million in fiscal 2021, as compared to fiscal 2020, primarily attributable the purchase of senior notes and debentures due 2027, 2028, 2030, 2039, 2040 and 2050 pursuant to a tender offer in the fourth quarter of fiscal 2021. Interest charges included a loss of$293.9 million related to the purchase costs noted above, and are considered Certain Items. Excluding Certain Items, our adjusted interest expense (which is a non-GAAP financial measure for which a reconciliation is provided in "Non-GAAP Reconciliations" below) increased$178.0 million due to higher fixed debt volume, partially offset by lower floating interest rates.
Net Earnings
Net earnings increased 143.3% in fiscal 2021 as compared to the prior year, due primarily to the items noted above for operating income and interest expense, as well as items impacting our income taxes that are discussed in Note 11, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 8. Adjusted net earnings, excluding Certain Items, decreased$291.6 million in fiscal 2021, primarily due to a significant decrease in sales volume and a large increase in interest expense. Earnings Per Share Basic earnings per share in fiscal 2021 were$1.03 , a 145.2% increase from the comparable prior year period amount of$0.42 per share. Diluted earnings per share in fiscal 2021 were$1.02 , a 142.9% increase from the comparable prior year period amount of$0.42 per share. Adjusted diluted earnings per share, excluding Certain Items (which is a non-GAAP financial measure for which a reconciliation is provided in "Non-GAAP Reconciliations" below), in fiscal 2021 were$1.44 , a 28.4% decrease from the comparable prior year period amount of$2.01 per share. These results were primarily attributable to the factors discussed above related to net earnings in fiscal 2021. 37 --------------------------------------------------------------------------------
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, and by acquisition-related costs consisting of: (1) intangible amortization expense related to the fiscal 2017 acquisition ofCucina Lux Investments Limited (the Brakes Acquisition); and (2) due diligence and integration costs incurred in fiscal 2021 associated with the acquisition ofGreco and Sons , which closed inAugust 2021 . Our results for fiscal 2021 were also impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances, as well as non-operating gains and losses including (1) losses on the extinguishment of debt; (2) losses on the sale of businesses; and (3) gains on the sale of property. Fiscal 2020 results of operations were also negatively impacted by costs arising from the COVID-19 pandemic and are also adjusted to remove the impact of (1) excess bad debt expense, as we experienced an increase in past due receivables and recognized additional bad debt charges; (2) goodwill and intangibles impairment charges; and (3) fixed asset 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 results of our foreign operations can be impacted due to changes in exchange rates applicable in converting local currencies toU.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-periodU.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. The constant currency impact on our adjusted total Sysco and our adjusted International Foodservice Operations results are disclosed when the impact exceeds a defined threshold of greater than 1% on the growth metric. If the amount does not exceed this threshold, a disclosure will be made that the impact of the currency change was not significant. Management believes that adjusting its operating expenses, operating income, interest expense, other (income) expense, net, net earnings and diluted earnings per share to remove these Certain Items and presenting its International Foodservice Operations results on a constant currency basis, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company's underlying operations and (2) facilitates comparisons on a year-over-year basis. Although Sysco has a history of growth through acquisitions, theBrakes Group was significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco's consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant period the impact of acquisition-related intangible amortization specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco's results for fiscal 2021 and fiscal 2020. Set forth below is a reconciliation of sales, operating expenses, operating income, interest expense, other (income) expense net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add up to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. 38
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2021 2020 Change in Dollars % Change
(In thousands, except for share and per share data) Sales (GAAP)
$ 51,297,843 $ 52,893,310 $ (1,595,467) (3.0) % Impact of currency fluctuations (1) (454,004) - (454,004) (0.9) Comparable sales using a constant currency basis (Non-GAAP)$ 50,843,839 $ 52,893,310 $ (2,049,471) (3.9) % Gross profit (GAAP)$ 9,356,749 $ 9,901,664 $ (544,915) (5.5) % Impact of currency fluctuations (1) (94,664) - (94,664) (1.0) Comparable gross profit using a constant currency basis (Non-GAAP)$ 9,262,085 $ 9,901,664 $ (639,579) (6.5) % Gross margin (GAAP) 18.24 % 18.72 % -48 bps Impact of currency fluctuations (1) (0.03) - -3 bps Comparable Gross margin using a constant currency basis (Non-GAAP) 18.22 % 18.72 % -50 bps Operating expenses (GAAP)$ 7,919,507 $ 9,152,159 $ (1,232,652) (13.5) %
Impact of restructuring and transformational project costs (2)
(128,187) (371,088) 242,901 65.5
Impact of acquisition-related costs (3) (79,540) (64,793) (14,747) (22.8)
Impact of bad debt reserve adjustments (4) 184,813 (323,403) 508,216 157.1
Impact of goodwill impairment - (203,206) 203,206 NM
Operating expenses adjusted for Certain Items
(Non-GAAP) 7,896,593 8,189,669 (293,076) (3.6)
Impact of currency fluctuations (1) (104,438) - (104,438) (1.3)
Comparable operating expenses adjusted for Certain
Items using a constant currency basis (Non-GAAP)
$ 8,189,669 $ (397,514) (4.9) % Operating income (GAAP)$ 1,437,242 $ 749,505 $ 687,737 91.8 %
Impact of restructuring and transformational project costs (2)
128,187 371,088 (242,901) (65.5)
Impact of acquisition-related costs (3) 79,540 64,793 14,747 22.8
Impact of bad debt reserve adjustments (4) (184,813) 323,403 (508,216) (157.1)
Impact of goodwill impairment - 203,206 (203,206) NM
Operating income adjusted for Certain Items (Non-GAAP)
$ 1,711,995 $ (251,839) (14.7) % Interest expense (GAAP)$ 880,137 $ 408,220 $ 471,917 115.6 % Impact of loss on extinguishment of debt (293,897) - (293,897) NM
Interest expense adjusted for Certain Items (Non-GAAP)
$ 408,220 $ 178,020 43.6 % Other (income) expense (GAAP)$ (27,623) $ 47,901 $ (75,524) 157.7 % Impact of other non-routine gains and losses (5) (10,460) (46,968) 36,508 (77.7) Other (income) expense adjusted for Certain Items (Non-GAAP)$ (38,083) $ 933 $ (39,016) NM Net earnings (GAAP)$ 524,209 $ 215,475 $ 308,734 143.3 %
Impact of restructuring and transformational project costs (2)
128,187 371,088 (242,901) (65.5)
Impact of acquisition-related costs (3) 79,540 64,793 14,747 22.8
Impact of bad debt reserve adjustments (4) (184,813) 323,403 (508,216) (157.1)
Impact of goodwill impairment - 203,206 (203,206) NM
Impact of loss on extinguishment of debt 293,897 - 293,897 NM
39
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Change in
2021 2020 Dollars % Change
(In thousands, except for share and per share data)
Impact of other non-routine gains and losses (5) 10,460 46,968 (36,508) (77.7)
Tax impact of restructuring and transformational
project costs (6) (32,416) (90,683) 58,267 64.3
Tax impact of acquisition-related costs (6) (19,675) (13,641) (6,034) (44.2)
Tax impact of bad debt reserves adjustments (6) 46,260 (76,864) 123,124 160.2
Tax impact of loss on extinguishment of debt (6) (79,323) - (79,323) NM
Tax impact of other non-routine gains and losses (6) (2,692)
(12,644) 9,952 78.7
Impact of foreign tax rate change (7) (23,197) 924 (24,121) NM
Net earnings adjusted for Certain Items (Non-GAAP)
$ 1,032,025 $ (291,588) (28.3) % Diluted earnings per share (GAAP)$ 1.02 $ 0.42 $ 0.60 142.9 %
Impact of restructuring and transformational project costs (2)
0.25 0.72 (0.47) (65.3)
Impact of acquisition-related costs (3) 0.15 0.13 0.02 15.4
Impact of bad debt reserve adjustments (4) (0.36) 0.63 (0.99) (157.1)
Impact of goodwill impairment - 0.40 (0.40) NM
Impact of loss on extinguishment of debt 0.57 - 0.57 NM
Impact of other non-routine gains and losses (5) 0.02 0.09 (0.07) (77.8)
Tax impact of restructuring and transformational
project costs (6) (0.06) (0.18) 0.12 66.7
Tax impact of acquisition-related costs (6) (0.04) (0.03) (0.01) (33.3)
Tax impact of bad debt reserves adjustments (6) 0.09 (0.15) 0.24 160.0
Tax impact of loss on extinguishment of debt (6) (0.15) - (0.15) NM
Tax impact of non-routine gains and losses (6) (0.01) (0.02) 0.01 50.0
Impact of foreign tax rate change (7) (0.05) - (0.05) NM
Diluted earnings per share adjusted for Certain Items (Non-GAAP) (8)
$ 1.44 $ 2.01 $ (0.57) (28.4) %
(1) Represents a constant currency adjustment, which eliminates the impact of foreign
currency fluctuations on current year results.
(2) Fiscal 2021 includes
and severance charges and
costs, primarily consisting of changes to our business technology strategy. Fiscal
2020 includes
charges and
primarily consisting of changes to our business technology strategy.
(3) Fiscal 2021 represents
Acquisition, which is included in the results of International Foodservice, as well
as
are included within Corporate expenses. Fiscal 2020 represents intangible
amortization expense from the Brakes Acquisition. (4) Fiscal 2021 represents the reduction of bad debt charges previously taken on
pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess
bad debt charges recognized on the increase in past due receivables arising from the
COVID-19 pandemic.
(5) Fiscal 2021 includes
gains on sale of property and other non-recurring gains and losses. Fiscal 2020
represents the impairment of assets held for sale. (6) The tax impact of adjustments for Certain Items is calculated by multiplying the
pretax impact of each Certain Item by the statutory rates in effect for each
jurisdiction where the Certain Item was incurred. (7) Fiscal 2021 represents a net benefit from remeasuring Sysco's accrued income taxes,
deferred tax asset and deferred tax liabilities due to changes in tax rates in the
presented due to rounding. Total diluted earnings per share is calculated using
adjusted net earnings divided by diluted shares outstanding.
NM represents that the percentage change is not meaningful.
40-------------------------------------------------------------------------------- Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for the periods presented (dollars in thousands): U.S. FOODSERVICE OPERATIONS 2021 2020 Change in Dollars % Change Operating expenses (GAAP)$ 4,552,123 $ 5,251,563 $ (699,440) (13.3) % Impact of restructuring and transformational project costs (4,056) (10,145) 6,089 60.0 Impact of bad debt reserve adjustments (1) 143,036 (230,654) 373,690 162.0 Operating expenses adjusted for Certain Items (Non-GAAP)$ 4,691,103 $ 5,010,764 $ (319,661) (6.4) % Operating income (GAAP)$ 2,456,564 $ 2,003,159 $ 453,405 22.6 % Impact of restructuring and transformational project costs 4,056 10,145 (6,089) (60.0) Impact of bad debt reserve adjustments (1) (143,036) 230,654 (373,690) (162.0) Operating income adjusted for Certain Items (Non-GAAP)$ 2,317,584 $ 2,243,958 $ 73,626 3.3 % INTERNATIONAL FOODSERVICE OPERATIONS Sales (GAAP)$ 8,350,638 $ 9,672,190 $ (1,321,552) (13.7) % Impact of currency fluctuations (2) (444,380) - (444,380) (4.6) Comparable sales using a constant currency basis (Non-GAAP)$ 7,906,258 $ 9,672,190 $ (1,765,932) (18.3) % Gross Profit (GAAP)$ 1,645,448 $ 1,955,190 $ (309,742) (15.8) % Impact of currency fluctuations (2) (91,444) - (91,444) (4.7) Comparable gross profit using a constant currency basis (Non-GAAP)$ 1,554,004 $ 1,955,190 $ (401,186) (20.5) % Gross Margin (GAAP) 19.70 % 20.21 % -51 bps Impact of currency fluctuations (2) 0.05 % - % -5 bps Comparable gross margin using a constant currency basis (Non-GAAP) 19.66 % 20.21 % -56 bps Operating expenses (GAAP)$ 1,877,851 $ 2,326,597 $ (448,746) (19.3) % Impact of restructuring and transformational project costs (3) (66,147) (191,900) 125,753 65.5 Impact of acquisition-related costs (4) (73,673) (64,793) (8,880) (13.7) Impact of bad debt reserve adjustments (1) 36,214 (88,271) 124,485 141.0 Impact of goodwill impairment - (134,481) 134,481 NM Operating expenses adjusted for Certain Items (Non-GAAP) 1,774,245 1,847,152 (72,907) (3.9) Impact of currency fluctuations (2) (100,945) - (100,945) (5.5) Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)$ 1,673,300 $ 1,847,152 $ (173,852) (9.4) % Operating loss (GAAP)$ (232,403) $ (371,407) $ 139,004 37.4 % Impact of restructuring and transformational project costs (3) 66,147 191,900 (125,753) (65.5) Impact of acquisition-related costs (4) 73,673 64,793 8,880 13.7 Impact of bad debt reserve adjustments (1) (36,214) 88,271 (124,485) (141.0) Impact of goodwill impairment - 134,481 (134,481) NM Operating (loss) income adjusted for Certain Items (Non-GAAP) (128,797) 108,038 (236,835) (219.2) Impact of currency fluctuations (2) 9,501 - 9,501 (8.8) Comparable operating (loss) income adjusted for Certain Items using a constant currency basis (Non-GAAP)$ (119,296) $ 108,038 $ (227,334) (210.4) % 41
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SYGMA
Operating expenses (GAAP)$ 501,360 $ 446,614 $ 54,746 12.3 % Impact of restructuring and transformational project costs (7) (5,793) 5,786 99.9 Operating expenses adjusted for Certain Items (Non-GAAP)$ 501,353 $ 440,821 $ 60,532 13.7 % Operating income (GAAP)$ 52,654 $ 36,880 $ 15,774 42.8 % Impact of restructuring and transformational project costs 7 5,793 (5,786) (99.9) Operating income adjusted for Certain Items (Non-GAAP)$ 52,661 $ 42,673 $ 9,988 23.4 % OTHER Operating expenses (GAAP)$ 160,790 $ 240,245 $ (79,455) (33.1) % Impact of restructuring and transformational project costs (956) - (956) NM Impact of bad debt reserve adjustments (1) 5,563 (4,478) 10,041 224.2 Impact of goodwill impairment - (11,660) 11,660 NM Operating expenses adjusted for Certain Items (Non-GAAP)$ 165,397 $ 224,107 $ (58,710) (26.2) % Operating loss (GAAP)$ (396) $ (21,361) $ 20,965 98.1 % Impact of restructuring and transformational project costs 956 - 956 NM Impact of bad debt reserve adjustments (1) (5,563) 4,478 (10,041) (224.2) Impact of goodwill impairment - 11,660 (11,660) NM Operating loss adjusted for Certain Items (Non-GAAP)$ (5,003) $ (5,223) $ 220 4.2 % CORPORATE Operating expenses (GAAP)$ 827,383 $ 887,140 $ (59,757) (6.7) % Impact of restructuring and transformational project costs (5) (57,021) (163,249) 106,228 65.1 Impact of acquisition-related costs (6) (5,867) - (5,867) NM Impact of goodwill impairment - (57,066) 57,066 NM Operating expenses adjusted for Certain Items (Non-GAAP)$ 764,495 $ 666,825 $ 97,670 14.6 % Operating loss (GAAP)$ (839,177) $ (897,766) $ 58,589 6.5 % Impact of restructuring and transformational project costs (5) 57,021 163,249 (106,228) (65.1) Impact of acquisition-related costs (6) 5,867 - 5,867 NM Impact of goodwill impairment - 57,066 (57,066) NM Operating loss adjusted for Certain Items (Non-GAAP)$ (776,289) $ (677,451) $ (98,838) (14.6) %
(1) Fiscal 2021 represents the reduction of bad debt charges previously taken on
pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess
bad debt charges recognized on the increase in past due receivables arising from the
COVID-19 pandemic. (2) Represents a constant currency adjustment, which eliminates the impact of foreign
currency fluctuations on current year results.
(3) Includes restructuring, severance and facility closure costs primarily in Europe .
(4) Represents intangible amortization expense from the Brakes Acquisition.
(5) Includes various transformation initiative costs, primarily consisting of changes to
our business technology strategy. (6) Fiscal 2021 represents due diligence and integration costs related to the acquisition
of Greco and Sons in the first quarter of fiscal 2022.
NM represents that the percentage change is not meaningful.
42--------------------------------------------------------------------------------
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA should not be used as a substitute for the most
comparable GAAP measure in assessing Sysco's overall financial performance for
the periods presented. An analysis of any non-GAAP financial measure should be
used in conjunction with results presented in accordance with GAAP. See "Key
Performance Indicators" for further discussion regarding this non-GAAP financial
measure. Set forth below is a reconciliation of actual net earnings (loss) to
EBITDA and to adjusted EBITDA results for the periods presented (dollars in
thousands):
Change in
2021 2020 Dollars % Change
Net earnings (GAAP) $ 524,209 $ 215,475 $ 308,734 143.3 %
Interest (GAAP) 880,137 408,220 471,917 115.6
Income taxes (GAAP) 60,519 77,909 (17,390) (22.3)
Depreciation and amortization (GAAP) 737,916 805,765 (67,849) (8.4)
EBITDA (Non-GAAP) $ 2,202,781 $ 1,507,369 $ 695,412 46.1 %
Certain Item adjustments:
Impact of restructuring and
transformational project costs (1) 120,693 290,284 (169,591) (58.4)
Impact of acquisition-related costs 5,867 - 5,867 NM
Impact of bad debt reserve adjustments
(2) (184,813) 323,403 (508,216) (157.1)
Impact of goodwill impairment - 203,206 (203,206) NM
Impact of other non-routine gains and
losses (3) 10,460 46,968 (36,508) (77.7)
EBITDA adjusted for Certain Items
(Non-GAAP)(4) $ 2,154,988 $ 2,371,230 $ (216,242) (9.1) %
(1) Includes various transformation initiative costs, primarily consisting of changes to
our business technology strategy, excluding charges related to accelerated
depreciation.
(2) Fiscal 2021 represents the reduction of bad debt charges previously taken on
pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess
bad debt charges recognized on the increase in past due receivables arising from the
COVID-19 pandemic.
(3) Fiscal 2021 includes
gains on sale of property and other non-recurring items. Fiscal 2020 represents the
impairment of assets held for sale. (4) In arriving at adjusted EBITDA, Sysco does not adjust out interest income of
Liquidity and Capital Resources
Highlights
Below are comparisons of the cash flows from fiscal 2021 to fiscal 2020: •Cash flows from operations were$1.9 billion in fiscal 2021, compared to$1.6 billion in fiscal 2020; •Net capital expenditures totaled$411.5 million in fiscal 2021, compared to$691.7 million in fiscal 2020; •Free cash flow was$1.5 billion in fiscal 2021, compared to$927.0 million in fiscal 2020 (see "Cash Flows - Free Cash Flow - Non-GAAP Reconciliation" below for an explanation of this non-GAAP financial measure); •There were no acquisitions in fiscal 2021; cash used for acquisition of businesses was$142.8 million in fiscal 2020; •There were$826.2 million of bank and commercial paper repayments, net, in fiscal 2021, compared to$616.7 million of bank and commercial paper borrowings, net in fiscal 2020; •Dividends paid were$917.6 million in fiscal 2021, compared to$856.3 million in fiscal 2020; and •There were no stock repurchases in fiscal 2021; cash paid for treasury stock repurchases was$844.7 million in fiscal 2020. 43 -------------------------------------------------------------------------------- We repaid senior notes in the amount of$1.3 billion , purchased senior notes and debentures in the amount of$712.4 million pursuant to a tender offer in fiscal 2021 and repaid$700 million of borrowings under our long-term revolving credit facility, utilizing cash flow from operations. In response to the COVID-19 pandemic and its impact on our working capital, as well as the uncertainty regarding our ability to generate cash flow in the near term, we took steps to increase our liquidity in the second half of fiscal 2020, including the issuance of senior notes, borrowings under our long-term revolving credit facility and borrowings under aU.K. commercial paper program. In the fourth quarter of fiscal 2020, we entered into an amendment to our long-term revolving credit facility, which required us to suspend share repurchases and dividend increases. In the fourth quarter of fiscal 2021, we further amended our long-term revolving credit facility to increase the authorized dividend per share amount, which allowed us to declare a dividend increase of$0.02 per share, resulting in a quarterly cash dividend of$0.47 per share payable in the first quarter of fiscal 2022. In fiscal 2021, we continued to reduce our debt levels, and have paid down$3.4 billion of debt. As ofJuly 3, 2021 , there were no borrowings outstanding under our long-term revolving credit facility. As ofAugust 10, 2021 , the company has approximately$4.7 billion in cash and available liquidity.
Sources and Uses of Cash
Sysco's strategic objectives include continuous investment in our business; these investments are funded by a combination of cash from operations and access to capital from financial markets. Our operations historically have produced significant cash flow. Cash generated from operations is generally allocated to: •working capital requirements; •capital investments in facilities, systems, fleet, other equipment and technology; •cash dividends; •acquisitions consistent with our growth strategy; •debt repayments; •share repurchases; and •contributions to our various retirement plans. Any remaining cash generated from operations may be invested in high-quality, short-term instruments. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses, and our overall capital structure. Any transactions resulting from these evaluations may materially impact our liquidity, borrowing capacity, leverage ratios and capital availability. We continue to be in a strong financial position based on our balance sheet and operating cash flows; however, our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations. We believe our mechanisms to manage working capital, such as actively working with customers to receive payments on receivables, optimizing inventory levels and maximizing payment terms with vendors, have been sufficient to limit a significant unfavorable impact on our cash flows from operations. We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations. We extend credit terms to some of our customers based on our assessment of each customer's creditworthiness. We monitor each customer's account and will suspend shipments if necessary. In the ordinary course of business, customers periodically negotiate extended payment terms on trade accounts receivable. The company may utilize purchase arrangements with third-party financial institutions to transfer portions of our trade accounts receivable balance on a non-recourse basis in order to extend terms for the customer without negatively impacting our cash flow. The arrangements meet the requirements for the receivables transferred to be accounted for as sales. See Note 1, "Summary of Accounting Policies," in the Notes to Consolidated Financial Statements in Item 8 for additional information. As ofJuly 3, 2021 , we had$3.0 billion in cash and cash equivalents, approximately 19% of which was held by our international subsidiaries generated from our earnings of international operations. If these earnings were transferred among countries or repatriated to theU.S. , such amounts may be subject to withholding and additional foreign tax obligations. Additionally,Sysco Corporation has provided intercompany loans to certain of its international subsidiaries, and when interest and principal payments are made, some of this cash will move to theU.S. 44 -------------------------------------------------------------------------------- Our wholly owned captive insurance subsidiary (the Captive) must maintain a sufficient level of liquidity to fund future reserve payments. As ofJuly 3, 2021 , the Captive held$129.7 million of fixed income marketable securities and$30.0 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased$53.1 million in marketable securities in fiscal 2021 and received$36.0 million in proceeds from the sale of marketable securities in that period.
Cash Requirements
The Company's cash requirements within the next twelve months include accounts payable and accrued liabilities, current maturities of long-term debt, other current liabilities, and purchase commitments and other obligations. We expect the cash required to meet these obligations to be primarily generated through a combination of cash from operations and access to capital from financial markets.
Our long-term cash requirements under our various contractual obligations and commitments include:
•Debt Obligations and Interest Payments - See Note 12, "Debt and Other Financing Arrangements," in the Notes to Consolidated Financial Statements in Item 8 for further detail of our debt and the timing of expected future principal and interest payments.
•Operating and Finance leases - See Note 13, "Leases," in the Notes to Consolidated Financial Statements in Item 8 for further detail of our obligations and the timing of expected future payments.
•Deferred Compensation - The estimate of the timing of future payments under the Executive Deferred Compensation Plan and Management Savings Plan involves the use of certain assumptions, including retirement ages and payout periods. See Note 14, "Company-Sponsored Employee Benefit Plans," in the Notes to Consolidated Financial Statements in Item 8 for further detail of our obligations and the timing of expected future payments. •Purchase and Other Obligations - Purchase obligations include agreements for purchases of product in the normal course of business for which all significant terms have been confirmed, including minimum quantities resulting from our category management process. Such amounts are based on estimates. Purchase obligations also include amounts committed with various third-party service providers to provide information technology services for periods up to fiscal 2026. See discussion under Note 20, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements in Item 8. Purchase obligations exclude full requirements electricity contracts where no stated minimum purchase volume is required. •Other Liabilities - These include other long-term liabilities reflected in our Consolidated Balance Sheets as ofJuly 3, 2021 , including obligations associated with certain employee benefit programs, unrecognized tax benefits and various long-term liabilities, which have some inherent uncertainty in the timing of these payments. •Contingent Consideration - Certain acquisitions involve contingent consideration, typically payable only if certain operating results are attained or certain outstanding contingencies are resolved. See Note 4, "Acquisitions," in the Notes to Consolidated Financial Statements in Item 8 for aggregate contingent consideration amounts outstanding as ofJuly 3, 2021 . We believe the following sources will be sufficient to meet our anticipated cash requirements for at least the next twelve months, while maintaining sufficient liquidity for normal operating purposes: •our cash flows from operations; •the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility; and •our ability to access capital from financial markets, including issuances of debt securities, either privately or under our shelf registration statement filed with theSEC . Due to our strong financial position, we believe that we will continue to be able to effectively access the commercial paper market and long-term capital markets, if necessary. 45 --------------------------------------------------------------------------------
Cash Flows
Operating Activities
We generated$1.9 billion and$1.6 billion in cash flows from operations in fiscal 2021 and fiscal 2020, respectively. Fiscal 2021 reflects higher operating results, as well as year-over-year favorable comparisons on accrued expenses, income taxes and working capital. The positive impact from accrued expenses was primarily due to a favorable comparison of customer rebate payments resulting from an increase in volume purchase incentives earned by our customers, as sales volumes increased throughout fiscal 2021, and a favorable comparison of incentive payments resulting from prior year incentive payments exceeding current payments, coupled with an increase in incentive accruals in fiscal 2021 due to improved business performance. Income tax cash payments decreased$273.1 million year-over-year. This was a result of higher accrual of earnings in fiscal 2019 and the beginning of fiscal 2020 used to calculate estimated tax payments in fiscal 2020. Lower earnings at the end of fiscal 2020 and in fiscal 2021, including the impact of the debt tender in the fourth quarter of fiscal 2021, resulted in lower estimated tax payments for fiscal 2021. Additionally in fiscal 2021, we received a$50 million refund related to a payment made in fiscal 2020. Changes in working capital had a positive impact of$49.3 million on cash flow from operations period-over-period. There was a favorable comparison on accounts payable, partially offset by unfavorable comparisons on accounts receivable and inventories. Accounts payable and inventories have increased, as we continue our business recovery efforts and investments in inventory. In the second half of fiscal 2021, we invested heavily in inventory, and we ended the fiscal year with inventory on-hand and inventory on-order in a combined amount that exceeds our pre-COVID-19 levels, which should enable us to ship product on time and in full during the upcoming period of expected volume recovery. The unfavorable comparison in cash flows from accounts receivables is primarily due to our customers beginning to purchase more in the second half of fiscal 2021, coupled with significantly lower sales in the latter half of fiscal 2020 due to the COVID-19 pandemic. In fiscal 2021, we recorded a net credit to the provision for losses on receivables totaling$152.7 million , which reflects a benefit on the reduction of our allowance for pre-pandemic receivable balances, as we have made excellent progress on obtaining timely payments from our customers. We continue to work with our customers to collect past due balances, including through the use of payment plans. We have also discontinued charging interest on past due balances. The positive impacts to cash flows from operating activities noted above were partially offset by an unfavorable comparison year-over-year with regard to the provision for losses on trade receivables. During fiscal 2021, we recognized a net benefit on our allowance for credit losses on receivables due to improved collections on Sysco's pre-pandemic receivables, as compared to the excess bad debt charges recognized in fiscal 2020, due to the impact of the COVID-19 pandemic on our customers.
Investing Activities
Fiscal 2021 capital expenditures included:
•buildings and building improvements; •investments in technology; •warehouse equipment; and •fleet replacements.
Fiscal 2020 capital expenditures included:
•buildings and building improvements; •fleet replacements; •investments in technology; and •warehouse equipment. The level of gross capital expenditures in fiscal 2021 decreased$249.7 million , as compared to fiscal 2020. We reduced our capital expenditures in fiscal 2021 by eliminating capital projects that were not critical for our business in order to preserve our liquidity in response to the COVID-19 crisis. We estimate our capital expenditures, net of proceeds from sales of assets, in fiscal 2022 will be approximately 1.3% of fiscal 2022 sales as we continue to invest in our business for the long-term. 46 --------------------------------------------------------------------------------
Fiscal 2022 expenditures are expected to include facility expansions and new facility construction; fleet and other equipment purchases, including replacements; and investments in technology.
During fiscal 2020, the company paid cash of
Free Cash Flow
Our free cash flow for fiscal 2021 increased by$565.3 million , to$1.5 billion , as compared to fiscal 2020, principally as a result of an increase in cash flows from operations and year-over-year decreased capital expenditures.
Non-GAAP Reconciliation
Free cash flow should not be used as a substitute for the most comparable GAAP
measure in assessing the company's liquidity for the periods presented. An
analysis of any non-GAAP financial measure should be used in conjunction with
results presented in accordance with GAAP. See "Key Performance Indicators" for
further discussion regarding this non-GAAP financial measure. In the table that
follows, free cash flow for each period presented is reconciled to net cash
provided by operating activities.
Change in
2021 2020 Dollars % Change
(In thousands)
Net cash provided by operating activities
(GAAP) $ 1,903,842 $ 1,618,680 $ 285,162 17.6 %
Additions to plant and equipment (470,676) (720,423) 249,747 (34.7)
Proceeds from sales of plant and equipment 59,147 28,717 30,430 106.0
Free Cash Flow (Non-GAAP) $ 1,492,313 $ 926,974 $ 565,339 61.0 %
Financing Activities
Equity Transactions
Proceeds from exercises of share-based compensation awards were $130.4 million
and $227.6 million in fiscal 2021 and fiscal 2020, respectively. The level of
option exercises, and thus proceeds, will vary from period to period and is
largely dependent on movements in our stock price and the time remaining before
option grants expire.
We have traditionally engaged in share repurchase programs to allow Sysco to
continue offsetting dilution resulting from shares issued under the company's
benefit plans and to make opportunistic repurchases. In August 2019 , our Board
of Directors approved a repurchase program to authorize the repurchase of up to
$2.5 billion of the company's common stock through the end of fiscal 2021.
During March 2020 , we discontinued share repurchases under the program, and
pursuant to the amendment to our long-term revolving credit facility as
described below under "Debt Activity and Borrowing Availability," we repurchased
no shares during fiscal 2021, compared to 11.1 million shares repurchased in
fiscal 2020 for $844.7 million . The remaining authorization of approximately
$2.1 billion expired at the end of fiscal 2021. In May 2021 , our Board of
Directors approved a separate repurchase program to authorize the repurchase of
up to $5.0 billion of the company's common stock, which will remain available
until fully utilized.
Certain conditions would need to be present for us to resume share repurchases
in fiscal 2022, including but not limited to the following: the market recovery
must be robust; our investments in our business must be fully funded, including
acquisitions; our debt reduction must continue and our investment grade credit
rating must be preserved; and excess liquidity must exist to fund the repurchase
program. If current trends continue with respect to each of these conditions and
our balanced capital allocation strategy is employed, we may return more capital
to shareholders through share repurchases in fiscal 2022.
We have made dividend payments to our shareholders in each fiscal year since our
company's inception. Dividends paid were $917.6 million , or $1.80 per share, in
fiscal 2021 and $856.3 million , or $1.68 per share, in fiscal 2020. In May 2021 ,
we declared our regular quarterly dividend for the fourth quarter of fiscal 2021
of $0.47 per share, a $0.02 per share increase from the prior quarter, which was
paid in July 2021 .
In August 2018 , we filed a universal shelf registration statement with the SEC
under which we, as a well-known seasoned issuer, have the ability to issue and
sell an indeterminate amount of various types of debt and equity securities. The
47
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specific terms of any securities we issue under this registration statement,
which we expect to replace with a new universal shelf registration statement to
be filed shortly after this Form 10-K, will be provided in the applicable
prospectus supplements.
In November 2000 , we filed with the SEC a shelf registration statement covering
30,000,000 shares of common stock to be offered from time to time in connection
with acquisitions. As of August 10, 2021 , 29,477,835 shares remained available
for issuance under this registration statement.
Debt Activity and Borrowing Availability
Our debt activity, including issuances and repayments, and our borrowing availability is described in Note 12, "Debt and Other Financing Arrangements," in the Notes to Consolidated Financial Statements in Item 8. Our outstanding borrowings atJuly 3, 2021 , and repayment activity since the end of fiscal 2021 are disclosed within those notes. Updated amounts atAugust 10, 2021 , include:
•No outstanding borrowings from the credit facility supporting our
Our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 0.97% for fiscal 2021 and 1.99% for fiscal 2020.
In the next 12 months,$450 million of long-term debt will mature. We expect to repay these senior notes in the fourth quarter of fiscal 2022 and to fund this repayment with internally generated funds. The availability of financing in the form of debt is influenced by many factors, including our profitability, free cash flows, debt levels, credit ratings, debt covenants and economic and market conditions. For example, a significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital. To date, we have not experienced difficulty accessing the credit markets. As ofAugust 10, 2021 , the company had approximately$4.7 billion in cash and available liquidity. During the fourth quarter of fiscal 2020 due to worsening business conditions, Sysco entered into an amendment to its$2 billion long-term revolving credit facility that expires onJune 28, 2024 . During the fourth quarter of fiscal 2021 due to improving business conditions, we further amended our long-term revolving credit facility to (1) adjust the covenant restricting increases to Sysco's regular quarterly dividend to enable future increases; (2) remove access to a 364-day credit facility that the company believes it no longer needs; and (3) adjust the covenant requiring Sysco to maintain a certain ratio of EBITDA to consolidated interest expense. As ofJuly 3, 2021 , Sysco was in compliance with all of its debt covenants, and the company expects to remain in compliance through the next twelve months.
Guarantor Summarized Financial Information
OnJanuary 19, 2011 , the wholly ownedU.S. Broadline subsidiaries ofSysco Corporation , which distribute a full line of food products and a wide variety of non-food products, entered into full and unconditional guarantees of all outstanding senior notes and debentures ofSysco Corporation . A list of the current guarantors is included in Exhibit 22 to this Form 10-K. All subsequent issuances of senior notes and debentures in theU.S. and borrowings under the company's$2.0 billion long-term revolving credit facility have also been guaranteed by these subsidiaries, as discussed in Note 12, "Debt and Other Financing Arrangements," in the Notes to Consolidated Financial Statements in Item 8. As ofJuly 3, 2021 , Sysco had a total of$10.6 billion in senior notes, debentures and borrowings under the long-term revolving credit facility that were guaranteed by these subsidiary guarantors. Our remaining consolidated subsidiaries (non-guarantor subsidiaries) are not obligated under the senior notes indenture, debentures indenture or our long-term revolving credit facility. All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional, and all guarantees are joint and several. The guarantees rank equally and ratably in right of payment with all other existing and future unsecured and unsubordinated indebtedness of the respective guarantors. The assets ofSysco Corporation consist principally of the stock of its subsidiaries. Therefore, the rights ofSysco Corporation and the rights of its creditors to participate in the assets of any subsidiary upon liquidation, recapitalization or otherwise will be subject to the prior claims of that subsidiary's creditors, except to the extent that claims ofSysco Corporation itself and/or the claims of those creditors themselves may be recognized as creditor claims of the subsidiary. Furthermore, the ability ofSysco Corporation to service its indebtedness and other obligations is dependent upon the earnings and cash flow of its subsidiaries and the distribution or other payment to it of such earnings or cash flow. If any ofSysco Corporation's 48 -------------------------------------------------------------------------------- subsidiaries becomes insolvent, the direct creditors of that subsidiary will have a prior claim on its assets.Sysco Corporation's rights and the rights of its creditors, including the rights of a holder of senior notes as an owner of debt securities, will be subject to that prior claim, unlessSysco Corporation or such noteholder, if such noteholder's debt securities are guaranteed by such subsidiary, also is a direct creditor of that subsidiary. The guarantee of any subsidiary guarantor with respect to a series of senior notes or debentures may be released under certain customary circumstances. If we exercise our defeasance option with respect to the senior notes or debentures of any series, then any subsidiary guarantor effectively will be released with respect to that series. Further, each subsidiary guarantee will remain in full force and effect until the earliest to occur of the date, if any, on which (1) the applicable subsidiary guarantor shall consolidate with or merge intoSysco Corporation or any successor ofSysco Corporation or (2)Sysco Corporation or any successor ofSysco Corporation consolidates with or merges into the applicable subsidiary guarantor.
Basis of Preparation of the Summarized Financial Information
The following tables include summarized financial information ofSysco Corporation (issuer), and certain wholly ownedU.S. Broadline subsidiaries (guarantors) (together, the obligor group). The summarized financial information of the obligor group is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. Investments in and equity in the earnings of our non-guarantor subsidiaries, which are not members of the obligor group, have been excluded from the summarized financial information. The obligor group's amounts due to, amounts due from and transactions with non-guarantor subsidiaries have been presented in separate line items, if they are material to the obligor financials. Combined Parent and Guarantor Subsidiaries Summarized Balance Sheet
(In thousands)
ASSETS
Receivables due from non-obligor subsidiaries $ 171,718
Current assets 6,661,284
Total current assets $ 6,833,002
Notes receivable from non-obligor subsidiaries $ 83,457
Other noncurrent assets 3,933,833
Total noncurrent assets $ 4,017,290
LIABILITIES
Payables due to non-obligor subsidiaries $ 203,365
Other current liabilities 2,299,674
Total current liabilities $ 2,503,039
Notes payable to non-obligor subsidiaries $ 269,709
Long-term debt 10,139,596
Other noncurrent liabilities
1,209,598
Total noncurrent liabilities
Combined Parent and Guarantor Subsidiaries Summarized Results of
Operations 2021
(In thousands)
Sales $ 32,944,700
Gross profit 6,206,924
Operating income 1,773,215
Interest expense from non-obligor subsidiaries 59,745
Net earnings 816,957
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
49
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses in the accompanying financial statements. Significant accounting policies employed by Sysco are presented in the notes to the financial statements. Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to the goodwill and intangible assets, allowance for doubtful accounts, income taxes, share-based compensation and company-sponsored pension plans.
We account for acquired businesses using the acquisition method of accounting, which requires that, once control of a business is obtained, 100% of the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. We use multiple valuation methods to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we generally use the income method, which uses a forecast of the expected future net cash flows associated with each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows and the discount rate selected to measure the risks inherent in the future cash flows. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. More information on our acquisitions can be found in Note 4, "Acquisitions," in the Notes to Consolidated Financial Statements in Item 8. Annually in our fiscal fourth quarter, we assess the recoverability of goodwill and indefinite-lived intangibles by determining whether the fair values exceed the carrying values of these assets. Impairment reviews, outside our annual review time frame, are performed if events or circumstances occur that include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price. Our testing may be performed utilizing either a qualitative or quantitative assessment; however, if a qualitative assessment is performed and we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, a quantitative test is performed. When using a quantitative test, we arrive at our estimates of fair value using a combination of discounted cash flow and earnings or revenue multiple models. The results from each of these models are then weighted and combined into a single estimate of fair value for each reporting unit. We use a higher weighting for our discounted cash flow valuation compared to the earnings multiple models 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 or revenue multiples on acquisitions completed by Sysco in the past, future cash flow 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. Certain reporting units have a greater proportion of goodwill recorded to estimated fair value as compared to theU.S. Broadline, Canada Broadline or SYGMA reporting units. This is primarily due to these businesses having been more recently acquired, and as a result there has been less history of organic growth than in theU.S. Broadline, Canadian Broadline and SYGMA reporting units. As such, these reporting units have a greater risk of future impairment if their operations were to suffer a significant downturn. In the annual fiscal 2021 assessment, certain reporting units did not have a fair value substantially in excess of their book value. For two reporting units with goodwill of$181.4 million in the aggregate as ofJuly 3, 2021 , headroom was considered low at 18% and 27%. All other reporting units were concluded to have a fair value that exceeded book value by at least 30%. 50 -------------------------------------------------------------------------------- The company estimated the fair value of these reporting units using a combination of discounted cash flow and earnings or revenue multiple models. For the purposes of the discounted cash flow models, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk adjusted rate. The fair value conclusions as ofJuly 3, 2021 for the reporting units are highly sensitive to changes in the assumptions used in the income approach, which include forecasted revenues, perpetual growth rates, and long-term discount rates, among others, all of which require significant judgments by management. Fair value of the reporting unit is therefore determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the discounted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future changes, industry and global economic and geo-political conditions, and the timing and success of the implementation of current strategic initiatives. The ongoing impact of the COVID-19 pandemic on estimated future cash flows is uncertain and will largely depend on the outcome of future events, which could result in goodwill impairments going forward.
Allowance for Doubtful Accounts
Sysco determines the past due status of trade receivables based on contractual terms with each customer and evaluates the collectability of accounts receivable to determine an appropriate allowance for credit losses on trade receivables. To calculate an allowance for credit losses, the company estimates uncollectible amounts based on historical loss experience, including those experienced during times of local and regional disasters, current conditions and collection rates, and expectations regarding future losses. In the third and fourth quarters of fiscal 2020, the company experienced an increase in past due receivables and recognized additional bad debt charges on its trade receivables that were outstanding at the time the pandemic caused closures among our customers inmid-March 2020 . These receivables were all created in fiscal 2020 and are referred to as pre-pandemic receivables. In fiscal 2021, we recorded a net credit to the provision for losses on receivables totaling$152.7 million , which reflects a benefit on the reduction of our allowance for pre-pandemic receivable balances, as we have made excellent progress on obtaining timely payments from our customers. We continue to work with our customers to collect past due balances, including through the use of payment plans. We have also discontinued charging interest on past due balances. Our balance for the allowance of doubtful accounts as ofJuly 3, 2021 was$117.7 million . The COVID-19 pandemic is more widespread and longer in duration than historical disasters that have impacted 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. Our judgment is required as to the impact of certain of these items and other factors as to ultimate realization of our accounts receivable.
Income Taxes
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. 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. This would negatively impact our income tax expense, net earnings, and balance sheet. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment in estimating the exposures associated with our various filing 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 financial 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. 51 --------------------------------------------------------------------------------
Share-Based Compensation
Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, a non-employee director plan and the 2015 Employee Stock Purchase Plan (ESPP). As ofJuly 3, 2021 , there was$124.4 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.7 years. The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatility is based on historical volatility of Sysco's stock, implied volatilities from traded options on Sysco's stock and other factors. We utilize historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected dividend yield is estimated based on the historical pattern of dividends and the average stock price for the year preceding the option grant. The risk-free rate for the expected term of the option is based on theU.S. Treasury yield curve in effect at the time of grant. The fair value of each restricted stock unit award and performance share unit award granted with a dividend equivalent is based on the company's stock price as of the date of grant. For restricted stock units and performance share units granted without dividend equivalents, the fair value is reduced by the present value of expected dividends during the vesting period. Expense recognized on performance share unit awards is subsequently adjusted based on forecasted performance compared to planned targets until the performance period concludes and the actual number of shares of Sysco common stock to be received upon the vesting of the performance share units is known.
The fair value of the stock issued under the ESPP is calculated as the difference between the stock price and the employee purchase price.
The fair value of restricted stock granted to employees or non-employee directors is based on the stock price on grant date. The application of a discount to the fair value of a restricted stock grant is dependent upon whether or not each individual grant contains a post-vesting restriction.
The compensation cost related to these share-based awards is recognized over the requisite service period. The requisite service period is generally the period during which an employee is required to provide service in exchange for the award. The compensation cost related to stock issuances resulting from employee purchases of stock under the ESPP is recognized during the quarter in which the employee payroll withholdings are made. Our share-based awards are generally subject to graded vesting over a service period. We will recognize compensation cost on a straight-line basis over the requisite service period for the entire award. In addition, certain of our share-based awards provide that the awards continue to vest as if the award holder continued to be an employee or director if the award holder meets certain age and years of service thresholds upon retirement. In these cases, we will recognize compensation cost for such awards over the period from the grant date to the date the employee or director first becomes eligible to retire with the options continuing to vest after retirement. Our option grants include options that qualify as incentive stock options for income tax purposes. In the period the compensation cost related to incentive stock options is recorded, a corresponding tax benefit is not recorded as it is assumed that we will not receive a tax deduction related to such incentive stock options. We may be eligible for tax deductions in subsequent periods to the extent that there is a disqualifying disposition of the incentive stock option. In such cases, we would record a tax benefit related to the tax deduction in an amount not to exceed the corresponding cumulative compensation cost recorded in the financial statements on the particular options multiplied by the statutory tax rate.
Company-Sponsored Pension Plans
Amounts related to defined benefit plans recognized in the financial statements are determined on an actuarial basis. Two of the more critical assumptions in the actuarial calculations are the discount rate for determining the current value of plan benefits and the expected rate of return on plan assets. OurU.S. Retirement Plan is largely frozen and is only open to a small number of employees. Our SERP is frozen and is not open to any employees. None of these plans have a significant sensitivity to changes in discount rates specific to our results of operations, but such changes could impact our balance sheet due to a 52 -------------------------------------------------------------------------------- change in our funded status. Due to the low level of active employees in our retirement plans, our assumption for the rate of increase in future compensation is not a critical assumption. The expected long-term rate of return on plan assets of theU.S. Retirement Plan is 4.75% for fiscal 2021, consistent with fiscal 2020. The expectations of future returns are derived from a mathematical asset model that incorporates assumptions as to the various asset class returns, reflecting a combination of historical performance analysis and the forward-looking views of the financial markets regarding the yield on bonds, historical returns of the major stock markets and returns on alternative investments. 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 theU.S. Retirement Plan decreased by 25 basis points to 4.50% for fiscal 2022, due to expected lower long-term rate of return. A 25 basis point increase (decrease) in the assumed rate of return in the Plan for fiscal 2022 would decrease (increase) Sysco's net company-sponsored pension costs for fiscal 2022 by approximately$11 million . Pension accounting standards require the recognition of the funded status of our defined benefit plans in the statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The amount reflected in accumulated other comprehensive loss related to the recognition of the funded status of our defined benefit plans as ofJuly 3, 2021 was a charge, net of tax, of$1.1 billion , driven by an increase in the discount rates and a decline in expected return on assets. The amount reflected in accumulated other comprehensive loss related to the recognition of the funded status of our defined benefit plans as ofJune 27, 2020 was a charge, net of tax, of$1.3 billion . Forward-Looking Statements Certain statements made herein that look forward in time or express management's expectations or beliefs with respect to the occurrence of future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," "projected," "continues," "continuously," variations of such terms, and similar terms and phrases denoting anticipated or expected occurrences or results. Examples of forward-looking statements include, but are not limited to, statements about: •the effect, impact, potential duration or other implications of the COVID-19 pandemic and any expectations we may have with respect thereto, including our ability to withstand the crisis; •expectations regarding our business and the economic recovery generally as the COVID-19 pandemic subsides, including beliefs regarding future customer activity; •our expectations regarding the improvement in the performance of non-restaurant business sectors; •our expectations of an improving market over the course of fiscal 2022; •our expectations regarding the ability of our supply chain and facilities to remain in place and operational; •our plans regarding our transformation initiatives and the expected effects from such initiatives; •statements regarding uncollectible accounts, including that if collections continue to improve, additional reductions in bad debt expense could occur; •our expectations that our Recipe for Growth strategy will allow us to better serve our customers and differentiate Sysco from our competition; •our expectations regarding theSysco Driver Academy ; •our expectations regarding our fiscal 2022 sales and our rate of sales growth in fiscal 2022 and the three years of our long-range plan; 53 -------------------------------------------------------------------------------- •our expectations regarding the impact of inflation on sales, gross margin rates and gross profit dollars; •our expectations regarding gross margins in fiscal 2022; •our plans regarding cost savings, including our target for cost savings through fiscal 2024 and the impact of costs savings on the company; •our expectations that divestitures in fiscal 2021 will facilitate our efforts to prioritize our focus and investments on our core business; •our belief that our purpose will allow us to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our Recipe for Growth transformation, and statements regarding our plans with respect to our strategic pillars that support this growth transformation; •our expectations regarding the investment of remaining cash generated from operations; •the expected long-term rate of return on plan assets of theU.S. Retirement Plan; •the sufficiency of our available liquidity to sustain our operations for multiple years; •estimates regarding the outcome of legal proceedings; •the impact of seasonal trends on our free cash flow; •our expectations regarding the use of remaining cash generated from operations; •estimates regarding our capital expenditures and the sources of financing for our capital expenditures; •our expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability; •our expectations regarding real sales growth in theU.S. foodservice market; •our expectations regarding trends in produce markets; •our expectations regarding the calculation of adjusted return on invested capital, adjusted operating income, adjusted net earnings and adjusted diluted earnings per share; •our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results; •our expectations regarding our effective tax rate in fiscal 2022; •the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms; •our ability to meet future cash requirements, including the ability to access financial markets effectively, including issuances of debt securities, and maintain sufficient liquidity; •our expectations regarding the payment of dividends, and the growth of our dividend, in the future; •our expectations regarding future activity under our share repurchase program; •future compliance with the covenants under our revolving credit facility; •our ability to effectively access the commercial paper market and long-term capital markets; •the expected redemption of$450 million of debt maturing in the next 12 months; 54 --------------------------------------------------------------------------------
•our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes, or a combination thereof.
These statements are based on management's current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below and those within Part I, Item 1A of this document: •the impact and effects of public health crises, pandemics and epidemics, such as the recent outbreak of COVID-19, and the adverse impact thereof on our business, financial condition and results of operations, including, but not limited to, our growth, product costs, supply chain, labor availability, logistical capabilities, customer demand for our products and industry demand generally, consumer spending, our liquidity, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally; •the risk that if sales from our locally managed customers do not grow at the same rate as sales from multi-unit customers, our gross margins may decline; •the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit; •periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability generally; •the risk that our efforts to modify truck routing, including our small truck initiative, in order to reduce outbound transportation costs may be unsuccessful; •the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges; •risks related to unfavorable conditions inNorth America andEurope and the impact on our results of operations and financial condition; •the risks related to our efforts to implement our transformation initiatives and meet our other long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated; •the impact of unexpected future changes to our business initiatives based on management's subjective evaluation of our overall business needs; •the risk that the actual costs of any business initiatives may be greater or less than currently expected; •the risk that competition in our industry and the impact of GPOs may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability; 55 -------------------------------------------------------------------------------- •the risk that our relationships with long-term customers may be materially diminished or terminated; •the risk that changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations; •the risk that changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results; •the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs; •the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control; •the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products; •risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers; •the risk that we may not realize anticipated benefits from our operating cost reduction efforts; •difficulties in successfully expanding into international markets and complimentary lines of business; •the potential impact of product liability claims; •the risk that we fail to comply with requirements imposed by applicable law or government regulations; •risks related to our ability to effectively finance and integrate acquired businesses; •risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity; •our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position; •the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; •the risk that divestiture of one or more of our businesses may not provide the anticipated effects on our operations; •the risk that Brexit may adversely impact our operations in theU.K. , including those of theBrakes Group ; •the risk that future labor disruptions or disputes could disrupt the integration ofBrake France andDavigel intoSysco France and our operations inFrance and the EU generally; •the risk that factors beyond management's control, including fluctuations in the stock market, as well as management's future subjective evaluation of the company's needs, would impact the timing of share repurchases; •due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business; •the risk that a cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers; 56
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•the risk that changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt; •the potential requirement to pay material amounts under our multiemployer defined benefit pension plans; •our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines; •labor issues, including the renegotiation of union contracts and shortage of qualified labor; •capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; •the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders; and •the risk that the exclusive forum provisions in our amended and restated bylaws could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
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