Sysco Corporation (SYY) — Form 10-Q Summary
Business context and reporting period
This filing covers Sysco’s third quarter and first 39 weeks of fiscal 2021, ended March 27, 2021 (13 and 39 weeks, respectively). Although the request metadata says 2020 Q3, the filing is for 2021 Q3. Comparisons are with the corresponding periods ended March 28, 2020. Sysco distributes food and related products to foodservice customers; results remained significantly affected by COVID-19 restrictions and customer demand.
Key financial metrics
| Metric | Third quarter | First 39 weeks |
|---|---|---|
| Sales | $11.82B, down 13.7% | $35.16B, down 20.1% |
| Gross profit / margin | $2.12B / 18.0%; margin down 77 bps | $6.44B / 18.3%; margin down 62 bps |
| Operating income (GAAP) | $235.9M, versus $60.3M | $867.6M, down 32.3% |
| Adjusted operating income (non-GAAP) | $256.2M, down 32.0% | $855.0M, down 51.0% |
| Net earnings (GAAP) | $88.9M, versus a $3.3M loss | $373.1M, down 55.3% |
| Diluted EPS | $0.17 GAAP; $0.22 adjusted | $0.73 GAAP and adjusted |
| Adjusted EBITDA (non-GAAP) | $437.4M, down 18.7% | $1.37B, down 38.3% |
Operating cash flow for the first 39 weeks was $1.48B, compared with $1.08B. Free cash flow, a non-GAAP measure, was $1.25B versus $487.8M, helped by lower capital spending; net capital expenditures were $231.9M versus $590.6M. Cash and cash equivalents were $4.90B at quarter-end, down from $6.06B at June 27, 2020. Total debt carrying value was $12.7B, versus $14.4B at fiscal year-end; debt fair value was estimated at $14.7B. Sysco reported approximately $7.2B of cash and available liquidity as of April 24, 2021. The $2.0B revolving facility had no borrowings at quarter-end.
Material changes and operating performance
- Third-quarter GAAP operating income and earnings improved against a prior-year quarter that included pandemic-related bad-debt charges and goodwill impairment. On an adjusted basis, operating income, net earnings and EPS declined, reflecting lower sales volume.
- For the first 39 weeks, sales, adjusted operating income and adjusted EPS fell substantially year over year. Interest expense increased 79.9% to $439.0M, primarily due to higher fixed-rate debt volume.
- U.S. Foodservice sales fell 12.8% in the quarter, while SYGMA sales rose 15.9%, supported by quick-service restaurant demand. International sales fell 31.3%; the segment recorded a $121.5M operating loss as lockdowns weighed on Europe, Canada and Latin America.
- Enterprise gross margin was pressured by business mix, including lower European sales and higher SYGMA sales, and by inflation. Management reported third-quarter inflation of 3.5% in U.S. product costs and 3.5% enterprise-wide.
- Operating cash flow benefited from working-capital movements, including higher accounts payable. Sysco said it increased inventory to prepare for a recovery in demand. Financing cash outflows included $1.49B of other debt repayments and $689.3M of dividends; no stock repurchases were made.
Outlook, management commentary and risks
- Management said the recovery was accelerating, particularly in the U.S., and reported market-share gains and new customer wins. It added more new local customers in the quarter than in any quarter of the prior five years and cited over $1.8B of annualized net new national-account business since the pandemic began.
- Sysco expects fourth-quarter fiscal 2021 operating cash flow and free cash flow to be approximately flat, as it invests in working capital and inventory and pays amounts that supported accounts payable in the prior quarter.
- Management expected to exceed its $350M fiscal 2021 cost-savings goal and planned to hire more than 6,000 associates by fiscal year-end. It also planned to transition away from a large SYGMA customer during the fourth quarter.
- Management expected European, Canadian and Latin American lockdowns to weigh on international results in Q4 and potentially early fiscal 2022. Travel, hospitality and foodservice-management customers were recovering more slowly than core restaurants. Supplier capacity constraints were emerging, though Sysco reported no significant supply-chain disruption or facility closures to date.
- COVID-19 remains a key uncertainty, including customer demand, receivable collectability, supply and labor availability, and potential asset impairments or deferred-tax-asset valuation allowances. Sysco recorded a $162.4M benefit from reducing allowances on pre-pandemic receivables in the first 39 weeks, while recording $24.7M of additional reserves on newer receivables.
- At March 27, 87% of debt was at fixed rates, including swaps. Sysco had $300M of U.K. commercial paper outstanding at quarter-end; it repaid £200M in April, with £100M remaining and due May 7. The company expected to fund U.K. commercial paper and $500M of debt maturities within 12 months from operating cash flow and cash on hand. Share repurchases and dividend increases were restricted through fiscal 2021 under a credit-facility amendment.
- Management said pending legal proceedings were not expected to materially adversely affect financial position or results. Unrecognized tax benefits and related accrued interest were $20.4M and $2.7M; the possible change over the next 12 months could not be estimated. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether sales volumes and margins continue recovering, especially in U.S. Broadline, and whether international restrictions ease as expected.
- How much reported earnings and cash generation depend on non-GAAP adjustments, unusual prior-year comparisons and the receivables allowance release.
- Whether customer collections, supplier terms and inventory investment sustain liquidity without further working-capital pressure.
- Debt repayment timing, available liquidity, covenant restrictions and the resumption conditions for share repurchases or dividend increases.
- Delivery of cost savings and hiring plans, the effect of the planned SYGMA customer transition, and exposure to inflation, labor and supply constraints.