Sysco Corporation (10-Q) — Fiscal 2022 First Quarter
Reporting period: The 13-week quarter ended October 2, 2021; comparisons are with the 13 weeks ended September 26, 2020. Sysco distributes food and related products to foodservice customers. Management described the quarter as a recovery period, with sales improving sequentially despite the Delta variant.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Sales | $16.46 billion | $11.78 billion | +39.7% |
| Gross profit | $2.97 billion | $2.22 billion | +33.9% |
| Operating income | $631.7 million | $419.6 million | +50.6% |
| Net earnings | $378.0 million | $216.9 million | +74.3% |
| Diluted EPS | $0.73 | $0.42 | +73.8% |
| Adjusted diluted EPS (non-GAAP) | $0.83 | $0.34 | +144.1% |
| Operating cash flow | $110.8 million | $930.9 million | Down $820.1 million |
| Free cash flow (non-GAAP) | $31.4 million | $862.4 million | Down $831.0 million |
- Margins: Consolidated gross margin was 18.06%, down 79 basis points year over year; operating margin rose to 3.8% from 3.5%, and net margin to 2.3% from 1.8%.
- Liquidity and debt: Cash and cash equivalents were $2.07 billion at quarter-end. Debt carrying value was approximately $11.1 billion, including current maturities; estimated fair value was approximately $13.3 billion. Sysco had no borrowings under its $2.0 billion revolving facility and no commercial paper outstanding.
- Working capital: Operating cash flow reflected substantial working-capital investment, including increases in receivables and inventory. Management said inventory on hand and on order exceeded pre-pandemic levels.
- Shareholder returns: The company paid $0.47 per share in dividends. It made no share repurchases during the quarter and expected to begin repurchases of up to $500 million in fiscal 2022’s second quarter.
Material changes and drivers
- Sales growth reflected recovery in customer demand, higher product prices and acquisitions. U.S. Foodservice Operations sales rose 46.5%; International Foodservice Operations rose 33.8%; SYGMA rose 11.8%.
- U.S. Broadline case volume increased 28.1% year over year, including 23.8% growth in locally managed customer cases. U.S. and Canada inflation was 12.8% overall; U.S. Broadline product-cost inflation was 13.4%.
- Gross margin contracted primarily due to inflation and business mix, although Sysco said it passed inflation through to customers and increased gross profit dollars.
- Operating expenses increased 30.0%, driven by higher volume-related costs, labor and hiring expenses, business-recovery costs, and transformation investments. The quarter included $57.0 million of one-time and short-term recovery costs and more than $24.4 million of Recipe for Growth investments.
- Comparisons were affected by the prior-year $98.6 million benefit from reductions in reserves on pre-pandemic receivables. Sysco recorded a $7.1 million benefit from similar reserve reversals in the current quarter.
- Sysco paid $714.0 million, net of cash acquired, for acquisitions. The Greco and Sons acquisition closed in August; its results were not material to the quarter. Management expected Greco to contribute more than $1 billion of incremental sales in fiscal 2022.
- Effective tax rate was 25.40%, versus 16.17% a year earlier. The current-period rate included a $12.0 million increase in reserves for uncertain tax positions; the prior-year rate benefited from tax items including a U.K. tax-rate change.
Outlook, risks and contingencies
- Management reaffirmed its goal to grow at 1.2 times the foodservice industry rate in fiscal 2022 and target 1.5 times the industry rate by the end of fiscal 2024. These are growth goals, not specific revenue or EPS guidance.
- Management expected inflation to moderate by fiscal 2022’s fourth quarter, while noting that inflation is difficult to predict. It expected recovery-related costs to affect results similarly in the second quarter, with overtime and hiring-related investment expected to ease during the rest of the fiscal year; transformation spending was expected to remain elevated early in the program.
- Key risks include the continuing effects of COVID-19, inflation and supply disruption, labor availability and costs, margin and customer-mix pressure, and execution costs or delays related to Recipe for Growth and acquisitions. International recovery remained behind the U.S., particularly in travel, hospitality, business and industry, and foodservice management.
- Sysco said cash from operations, its revolving facility and access to capital markets should cover anticipated cash needs for more than 12 months. The company reported no material expected adverse impact from pending legal matters; it reported no material environmental proceedings for the period.
- The revolving credit facility was amended to remove restrictions on dividend increases and share repurchases and to adjust a financial covenant. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether volume growth and market-share gains persist as pandemic-related comparisons normalize, and whether recovery extends to lagging customer sectors.
- Whether inflation moderates as anticipated and Sysco sustains gross profit dollars without further gross-margin deterioration.
- Whether hiring, overtime and supply-chain costs ease while transformation spending and the Recipe for Growth program deliver expected returns.
- Whether operating cash flow recovers as working-capital investment normalizes, given the sharp year-over-year decline in quarterly cash flow.
- Greco’s contribution against management’s expected fiscal 2022 incremental sales, alongside acquisition integration, purchase accounting and contingent earnout obligations.
- Debt, liquidity and capital returns, including planned repurchases and the effect of the amended credit-facility covenant.
- The $12.0 million uncertain-tax-position adjustment and any subsequent change in tax reserves; the filing says a reasonably possible 12-month change cannot currently be estimated.