Business context and reporting period
Sysco Corporation’s Form 10-Q covers the 13 weeks and 26 weeks ended December 26, 2020, the second quarter and first half of fiscal 2021. Sysco distributes food and related products through U.S. Foodservice Operations, International Foodservice Operations, SYGMA and other businesses. Results remained heavily affected by the COVID-19 pandemic and restrictions on restaurants, hospitality, education and other food-away-from-home customers.
Financial performance
Amounts below are in U.S. dollars. Fiscal second-quarter and first-half comparisons are against the corresponding prior-year periods.
| Metric | 13 weeks ended Dec. 26, 2020 | 26 weeks ended Dec. 26, 2020 |
|---|---|---|
| Sales | $11.56 billion, down 23.1% | $23.34 billion, down 23.1% |
| Gross profit / gross margin | $2.10 billion / 18.2%, versus 18.8% | $4.32 billion / 18.5%, versus 19.0% |
| Operating income / margin | $212 million / 1.8%, down 61.6% | $632 million / 2.7%, down 48.3% |
| Net earnings | $67 million, down 82.4% | $284 million, down 66.1% |
| Diluted EPS | $0.13, versus $0.74 | $0.56, versus $1.62 |
| Adjusted diluted EPS (non-GAAP) | $0.17, down 80.0% | $0.51, down 72.1% |
For the first half, operating cash flow was $937 million, compared with $754 million; free cash flow, a non-GAAP measure, was $788 million versus $371 million. Capital expenditures were $164 million, down from $393 million. Management attributed the cash-flow improvement substantially to favorable year-over-year working-capital comparisons, including collections and supplier payment terms.
At December 26, cash and cash equivalents were $5.77 billion, compared with $6.06 billion at fiscal year-end. Carrying-value total debt was $13.8 billion, versus $14.4 billion at June 27, 2020. Current maturities of long-term debt were $1.37 billion. Debt included $700 million drawn on the revolving credit facility and £600 million outstanding under the U.K. commercial paper program; no U.S. commercial paper was outstanding. As of January 23, 2021, Sysco reported approximately $7.8 billion of cash and available liquidity. Cash dividends paid in the first half were $459 million, or $0.90 per share.
Material changes and drivers
- COVID-related volume declines drove the sales contraction. U.S. Foodservice Operations sales fell 23.9% in the quarter; International Foodservice Operations fell 31.9%, while SYGMA sales rose 4.4%, supported by quick-service restaurant demand.
- International operations reported an operating loss of $80 million for the quarter, compared with $35 million of operating income a year earlier; European lockdowns and adverse customer and product mix contributed.
- Interest expense rose 90.8% in the quarter to $146 million and 83.1% in the first half to $293 million, primarily due to higher fixed debt volume, partly offset by lower floating rates.
- Sysco recorded a $128.9 million first-half benefit from reducing reserves on pre-pandemic receivables as collections improved, alongside $34.7 million of additional reserves for receivables arising after the pandemic began. These unusual bad-debt movements affected reported and adjusted comparisons.
- Sysco redeemed $750 million of 2.60% senior notes in September 2020. First-half capital spending was curtailed to preserve liquidity; no company stock repurchases were made, and the credit-facility amendment suspends repurchases and dividend increases through fiscal 2021.
Outlook, management commentary and risks
Management said the business gained market share in the quarter, added more new local customers than in any quarter in the prior five years, and added $200 million of net new national-account business. It reported improving volume in its largest North American businesses after the quarter began. Sysco continued investments in digital ordering, pricing tools, sales capabilities and U.S. Broadline regionalization, alongside cost-reduction initiatives. The company was pursuing $350 million of cost savings in fiscal 2021.
Management cautioned that the third quarter could be more challenging than originally anticipated, citing ongoing international restrictions, planned hiring of thousands of employees for an expected recovery, and continued transformation investments. The filing provides no clear numeric revenue or earnings guidance. Management expected to fund £600 million of U.K. commercial paper maturities and $500 million of long-term debt coming due over the next 12 months with operating cash flow and cash on hand. It stated that available liquidity and expected funding sources should meet cash needs for more than 12 months.
Key risks include the duration and severity of COVID-19 restrictions and recovery, customer failures to pay and potentially higher bad-debt charges, pressure on gross margins from customer and product mix, international and Brexit-related uncertainty, foreign-exchange, interest-rate and fuel-price exposure, and the possibility that cost and transformation initiatives may not deliver expected benefits. The company reported no significant supply-chain disruptions or facility closures to date. Management did not expect the resolution of pending legal proceedings, individually or in aggregate, to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether customer volumes and collections continue to recover, and whether additional receivable reserves or reserve releases are required.
- Whether international lockdowns and margin pressure persist, particularly in Europe, and how quickly SYGMA and U.S. operations recover.
- Whether cash generation remains strong after the favorable working-capital comparisons and reduced capital spending.
- Debt maturities, U.K. commercial paper refinancing, interest costs and continued access to credit markets.
- Progress and costs of the $350 million savings program, transformation investments and planned hiring; also confirm the restrictions on repurchases and dividend increases.