Sysco Corporation (SYY) — Form 10-K Summary
Reporting period: Fiscal year ended July 3, 2021. Although the request metadata refers to 2020 Q4, this filing covers fiscal 2021; it included 53 weeks versus 52 weeks in fiscal 2020. The fourth quarter was 14 weeks. Sysco distributes food and related products to more than 650,000 foodservice customers through operations in North America and Europe.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Sales | $51.3 billion | $52.9 billion | Down 3.0% |
| Gross profit / gross margin | $9.36 billion / 18.24% | $9.90 billion / 18.72% | Gross profit down 5.5%; margin down 48 basis points |
| Operating income | $1.44 billion | $749.5 million | Up 91.8% |
| Adjusted operating income (non-GAAP) | $1.46 billion | $1.71 billion | Down 14.7% |
| Net earnings / diluted EPS | $524.2 million / $1.02 | $215.5 million / $0.42 | Net earnings up 143.3% |
| Adjusted net earnings / diluted EPS (non-GAAP) | $740.4 million / $1.44 | $1.03 billion / $2.01 | Down 28.3% / 28.4% |
| Cash from operations / free cash flow (non-GAAP) | $1.90 billion / $1.49 billion | $1.62 billion / $927.0 million | Free cash flow up 61.0% |
GAAP operating income and net earnings improved from the pandemic-affected prior year, but adjusted operating income, adjusted net earnings and adjusted EPS declined. Adjusted measures exclude specified items and do not remove all pandemic effects. Fiscal 2021 sales remained below fiscal 2019 sales of $60.1 billion.
- Segments: U.S. Foodservice sales were $35.7 billion, down 2.9%, with operating income of $2.46 billion. International sales were $8.35 billion, down 13.7%, and the segment recorded a $232 million operating loss. SYGMA sales rose 17.0% to $6.50 billion, with operating income of $52.7 million.
- Balance sheet and liquidity: Cash and equivalents were $3.01 billion, total debt was $11.08 billion, and shareholders’ equity was $1.55 billion at year-end. Debt declined from $14.45 billion a year earlier. No borrowings were outstanding under the $2.0 billion revolving facility at year-end. The company reported approximately $4.7 billion of cash and available liquidity as of August 10, 2021.
- Capital returns and spending: Dividends paid were $917.6 million ($1.80 per share); the quarterly dividend was raised to $0.47. There were no FY2021 share repurchases. Net capital expenditures were $411.5 million, down from $691.7 million.
Material changes and unusual items
- Sales and customer volumes were affected by COVID-19 closures and restrictions. Restaurant demand recovered substantially by the fourth quarter, while international, travel, hospitality and institutional markets lagged. The extra fiscal week contributed to reported FY2021 sales and earnings; therefore, year-over-year comparisons are not fully like-for-like.
- Fourth-quarter debt tenders and redemptions included a $293.9 million loss on extinguishment of debt, recorded in interest expense. Full-year interest expense rose to $880.1 million from $408.2 million.
- Improved customer collections reduced the allowance for pandemic-era receivables; the company reported a $152.7 million net credit to its provision for receivable losses in FY2021. The year-end allowance for doubtful accounts was $117.7 million, compared with $334.8 million a year earlier.
- Reported effective tax rate was 10.35%, versus 26.55% in FY2020, reflecting, among other factors, U.K. tax-rate changes and equity-compensation tax benefits.
- After year-end, Sysco acquired Greco and Sons on August 12, 2021; the distributor had approximately $800 million in annual revenue. Sysco also sold its interests in Cake Corporation and Davigel Spain during FY2021.
Outlook, management commentary and risks
- Management expected FY2022 sales to exceed FY2019 sales by mid-single digits and targeted growth at 1.2 times the industry in FY2022, rising to 1.5 times market growth by FY2024. It expected gross margins to improve over FY2021 and approach FY2019 levels. These are forward-looking expectations, not guarantees.
- Management targeted more than $750 million in cumulative cost savings through FY2024, including FY2021 savings, and expected to reinvest most FY2022 savings in recovery-related needs and its Recipe for Growth initiatives. FY2022 net capital expenditures were estimated at about 1.3% of sales; the expected effective tax rate was approximately 24%.
- U.S. and Canada product-cost inflation was 9.6% in the fourth quarter and accelerated late in the quarter. Management cited supplier capacity constraints, product shortages and a tight labor market, especially for warehouse and driver roles, with temporary wage incentives increasing costs.
- Key risks include further COVID-19 disruption or variants, inability to pass through inflation, supply-chain and labor constraints, intense competition and low industry margins, customer credit losses, and international-market uncertainty. The company also cited debt and refinancing risks, underfunded multiemployer pension plans, and goodwill impairment sensitivity. Two reporting units with $181.4 million of goodwill had relatively low valuation headroom of 18% and 27%.
- Debt covenants restrict increases to the regular dividend and share repurchases until specified conditions are met. Any FY2022 repurchases were conditional on a robust recovery, continued debt reduction, investment-grade ratings, funded business investment and excess liquidity.
- Management said it had no off-balance-sheet arrangements and did not believe pending legal proceedings would have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether sales, local-customer volumes and international markets sustain the recovery, while accounting for the extra week in FY2021 comparisons.
- Whether inflation, supply availability and wage pressures can be managed without further gross-margin erosion.
- How much of the GAAP improvement reflects sustainable operations versus debt-extinguishment costs, bad-debt reserve changes, pandemic effects and other excluded items.
- Progress on debt reduction, liquidity, covenant restrictions and the conditions for any share repurchases.
- Whether customer collections remain strong and whether low-headroom goodwill valuations or pension funding requirements change materially.