Sysco Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended April 2, 2022 (13 weeks), with year-to-date results for the 39 weeks ended April 2, 2022. The filing covers fiscal 2022, notwithstanding the request metadata’s “2021 Q3” label. Unless stated otherwise, dollar figures below are in billions.
Business context and key financial results
Sysco distributes food and related products to foodservice customers in North America and Europe. Management reported continued recovery in food-away-from-home demand, stronger sales volumes and market-share gains, while navigating inflation, supply constraints and labor costs.
| Metric | Fiscal Q3 2022 | Fiscal Q3 2021 | Fiscal 2022 YTD | Fiscal 2021 YTD |
|---|---|---|---|---|
| Sales | $16.90 | $11.82 | $49.68 | $35.16 |
| Gross profit | $3.01 | $2.12 | $8.88 | $6.44 |
| Operating income | $0.50 | $0.24 | $1.57 | $0.87 |
| Net earnings | $0.30 | $0.09 | $0.85 | $0.37 |
| Diluted EPS | $0.59 | $0.17 | $1.65 | $0.73 |
| Gross margin | 17.83% | 17.95% | 17.87% | 18.32% |
| Operating margin | 2.9% | 2.0% | 3.2% | 2.5% |
| Net margin | 1.8% | 0.8% | 1.7% | 1.1% |
Management’s adjusted, non-GAAP Q3 figures included adjusted diluted EPS of $0.71 and adjusted EBITDA of $0.76 billion, compared with $0.22 and $0.44 billion, respectively, a year earlier. These measures exclude specified items and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $0.75 billion, down from $1.48 billion. Capital expenditures were $0.33 billion; company-defined free cash flow was $0.43 billion, versus $1.25 billion a year earlier.
- Working-capital changes reduced operating cash flow year over year by about $1.4 billion, particularly from higher receivables and inventory as customer demand recovered and Sysco stocked product to support service levels.
- Cash and cash equivalents were $0.88 billion at April 2, 2022, versus $3.01 billion at July 3, 2021. Current assets were $10.41 billion and current liabilities $8.37 billion.
- Total debt carrying value was approximately $11.1 billion, including $0.50 billion of current maturities; the filing estimated debt fair value at approximately $11.9 billion. No borrowings were outstanding under the $2.0 billion revolving facility or commercial paper program at quarter-end.
- Sysco issued $1.25 billion of long-dated notes and redeemed $1.25 billion of 2025 notes in December 2021. The refinancing generated a $115.6 million debt-extinguishment loss included in interest expense.
- On April 29, 2022, after quarter-end, Sysco replaced its $2.0 billion revolving facility with a $3.0 billion facility, expandable to $4.0 billion, expiring in 2027.
Material changes and management commentary
- Q3 sales increased 42.9% year over year; year-to-date sales increased 41.3%. Comparisons were against periods affected by the pandemic. Versus fiscal 2019, Q3 sales were 15.3% higher, but GAAP operating income was 6.4% lower and diluted EPS 30.6% lower.
- U.S. Foodservice sales rose 43.6% in Q3, with reported U.S. Broadline case volume up 18.8%. U.S. Broadline product-cost inflation was 15.8% for the quarter and 14.4% year to date. Management said inflation supported sales and gross profit dollars but pressured gross margin.
- Consolidated gross margin declined 12 basis points in Q3 and 45 basis points year to date versus the prior-year periods. Management cited product-cost inflation as a principal factor.
- Management said demand rebounded strongly from late February as Omicron-related effects and restrictions eased. It described accelerating market-share gains and progress in its “Recipe for Growth” strategy, including a six-day U.S. Broadline delivery model.
- Management targeted growth at 1.2 times the industry in fiscal 2022 and 1.5 times the industry by fiscal 2024. It expected business-recovery expenses to continue declining in fiscal Q4; these are targets and expectations, not guarantees.
- Recipe for Growth operating-expense investments were $48 million in Q3 and $116 million year to date. Business-recovery investments were $35 million and $165 million, respectively. Labor turnover, recruiting, overtime and transportation costs remained relevant operating pressures.
- Year-to-date acquisitions used $1.28 billion of cash. Acquisitions included Greco and Sons, a U.K. specialty distributor, Paragon Foodservice and The Coastal Companies. Greco’s reported contribution was not material to consolidated results for the year-to-date period.
- Sysco repurchased 5.7 million shares for $415.8 million year to date and paid $719.9 million in dividends. The April 2022 quarterly dividend was raised to $0.49 per share; management said it intended to maintain that payout through fiscal Q4 2023, when it would be reassessed.
Risks, contingencies and unusual items
- Management identified elevated inflation, supplier shortages, labor availability and costs, transportation and fuel costs, and the possibility that costs cannot be fully passed through to customers. Certain categories faced demand exceeding available supply.
- The filing said the Russia-Ukraine conflict had not materially affected Sysco to date, but its effects on suppliers, customers, markets and operations were uncertain. COVID-19 recovery and possible future disruptions also remained risks.
- Sysco uses derivatives to hedge interest-rate, currency and fuel exposures; remaining fuel needs are exposed to market prices. It reported no significant changes in market risk since July 2021 other than those discussed in the filing.
- Management did not expect pending legal proceedings, individually or together, to materially adversely affect financial position or results. No material environmental proceedings meeting the filing’s stated threshold were reported.
- Year-to-date results included the debt-extinguishment loss, a $29.6 million COVID-related protective-equipment inventory write-down, acquisition and transformation costs, and a $12 million increase in uncertain-tax-position reserves. The filing states that the possible change in certain unrecognized tax benefits over the next 12 months cannot currently be estimated.
- Management concluded disclosure controls and procedures were effective as of April 2, 2022; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How much reported sales growth reflects sustained volume and market-share gains versus inflation, acquisitions, foreign exchange and pandemic-recovery comparisons.
- Whether Sysco can protect gross margins if elevated inflation persists, and whether price changes, sourcing actions and customer mix offset cost pressure.
- Whether working-capital investment moderates and operating cash flow and free cash flow recover, given lower year-to-date cash generation and substantial acquisition, dividend and repurchase outlays.
- Debt, interest costs and covenant headroom following the refinancing and the April 29 revolving-credit-facility amendment.
- Execution and returns from acquisitions and Recipe for Growth investments, including management’s fiscal 2022 and fiscal 2024 relative-growth targets.
- The effects of labor constraints, supplier availability, fuel prices, geopolitical disruption and customer recovery on service levels, costs and demand.