Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

114K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with our consolidated financial statements as of July 3, 2021, and for the fiscal year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year ended July 3, 2021 (our fiscal 2021 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.

Highlights

Our first quarter of fiscal 2022 results were strong due to substantial sales momentum surpassing first quarter of fiscal 2019 levels. Our results increased sequentially each month of the quarter, despite the presence of the Delta variant of COVID-19. Customers are responding positively to Sysco’s relative supply chain strength, our new purpose platform and our improving capabilities driven by our Recipe for Growth strategy. Our financial results demonstrate our ability to gain market share in this business climate. See below for a comparison of our fiscal 2022 results to our fiscal 2021 results, both including and excluding Certain Items (as defined below).

Comparisons of results from the first quarter of fiscal 2022 to the first quarter of fiscal 2021 are presented below:

Sales:

◦increased 39.7%, or $4.7 billion, to $16.5 billion;

Operating income:

◦increased 50.6%, or $212.1 million, to $631.7 million;

◦adjusted operating income increased 87.9%, or $320.4 million, to $685.1 million;

Net earnings:

◦increased 74.3%, or $161.1 million, to $378.0 million;

◦adjusted net earnings increased 147.9%, or $256.5 million, to $429.9 million;

Basic earnings per share:

◦increased 72.1%, or $0.31, to $0.74 per share;

Diluted earnings per share:

◦increased 73.8%, or $0.31, to $0.73 per share;

◦adjusted diluted earnings per share increased 144.1%, or $0.49, to $0.83 in fiscal 2022;

EBITDA:

◦increased 40.2%, or $235.4 million, to $821.4 million; and

◦adjusted EBITDA increased 62.5%, or $328.1 million, to $852.8 million.

The discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove the impact of restructuring and transformational project costs consisting of: (1) restructuring charges, (2) expenses associated with our various transformation initiatives and (3) facility closure and severance charges; and acquisition-related costs consisting of: (1) intangible amortization expense and (2) acquisition costs and due diligence costs related to our significant acquisitions. Our results for fiscal 2022 are also impacted by the increase in reserves for uncertain tax positions. Our results for the first quarter of fiscal 2021 were also impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances, by a loss on the sale of a business and by a net benefit from remeasuring net deferred tax assets due to the changes in U.K. tax rates.

The fiscal 2022 and fiscal 2021 items discussed above are collectively referred to as “Certain Items.” The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies to U.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis.

Trends

Economic and Industry Trends

Despite the presence of the Delta variant of COVID-19, Sysco’s sales improved sequentially through the first quarter of fiscal 2022 and have continued to grow through October 2022, showing our ability to gain market-share in this environment. There was a high volume of cases shipped within the restaurant sector during the first quarter of fiscal 2022, and additional growth is still expected to come in certain segments such as hospitality, business and industry and foodservice management. International travel restrictions are beginning to ease, which we expect will benefit our hospitality sector in specific regions of our business. Our International Foodservice Operations segment improved sequentially throughout the first quarter of fiscal 2022, as restrictions continued to ease across our international regions. The relative performance in the international sector still lags the U.S. sector; however, we believe that the international foodservice markets will experience further recovery as the global effects of the COVID-19 pandemic subside.

Sales and Gross Profit Trends

Our sales and gross profit performance can be influenced by multiple factors, including price, volume, customer mix and product mix. The most significant factor affecting performance in the first quarter of fiscal 2022 was volume growth, as we are experiencing strong results from both independent and chain customers, driven by a 23.8% improvement in local case volume and a 28.1% improvement in total case volume within our U.S. Broadline operations, in each case as compared to the first quarter of fiscal 2021. Sysco continues to lead the industry in how we are supporting our customers during this challenging supply chain period. This has enabled us to gain market share during the first quarter of fiscal 2022. We expect additional recovery to occur, as our volume is yet to fully recover in certain segments, such as hospitality, business and industry, and foodservice management. We are on track to deliver our stated goal of achieving growth at a rate of 1.2 times the industry in fiscal 2022, and we believe that our Recipe for Growth strategy will enable us to accelerate over the next three years and grow at 1.5 times the pace of the industry by the end of fiscal 2024.

In terms of customer mix, the first quarter of fiscal 2022 represented another period of strong net new business wins for Sysco, as we continued our strong momentum and posted compelling wins at the national and local level in the U.S. In Europe, our business is skewed towards the business, industry and travel segments, which remain constrained due to the continuing effects of the COVID-19 pandemic. We expect that our Recipe for Growth strategy will enable our International Foodservice Operations segment to improve how we serve local customers over time and will create a better balance in our customer mix to the more profitable local sector over our current three-year plan.

Although our gross margin decreased 79 points in the first quarter of fiscal 2022, as compared to the prior year period, largely due to the impact of inflation on our sales, we believe we managed our profitability well in the inflationary environment. We passed along this inflation to our customers, and we are successfully growing gross profit dollars. In terms of the impact on pricing, we experienced inflation at a rate of 12.8% combined for the U.S. and Canada during the first quarter of fiscal 2022, primarily in the meat, poultry and canned and dry foods categories. While challenging to predict, we expect inflation to moderate by the fourth quarter of fiscal 2022. The gross margin dilution at the enterprise level was also driven by margin changes at our higher-margin businesses, with the larger U.S. Foodservice Operations segment business growing volume at lower-margin rates. Across our enterprise, each business segment experienced an increase in gross profit dollars per case, despite the decline in the gross margin rate.

Operating Expense Trends

Total operating expenses increased 30.0% during the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, driven by the variable costs associated with significantly increased volumes, one-time and short-term transitory expenses associated with the business recovery and transformation investments towards our Recipe for Growth strategy. The largest contributor to the increase was the higher associate-related expenses associated with elevated overtime rates and intentional expenditures to improve our staffing in preparation for additional growth and for increased throughput capacity. We have continued to improve our staffing levels in the second quarter of fiscal 2022, adding 1,000 new supply chain associates, consisting primarily of transportation and warehouse staff. Additionally, we had an unfavorable comparison of bad debt expense, as we recognized a $98.6 million benefit in the first quarter of fiscal 2021 from reducing our reserves on pre-pandemic receivables. In the first quarter of fiscal 2022, we recognized a benefit of $7.1 million from the reversal of pre-pandemic receivable allowances.

Our operating results in the first quarter of fiscal 2022 included $57.0 million of one-time and short-term transitory expenses related to the business recovery, including investments in incremental marketing to advertise open positions, sign-on bonuses for new associates, and referral and retention bonuses for existing staff, and more than $24.4 million of operating expense investments for our Recipe for Growth strategy. We are making these necessary investments to ensure that we can serve our customers to enable us to continue winning market share, profitably, at the national and local level; however, the higher operating expenses had a negative impact on our results for the quarter, and we expect these investments to have a similar impact on our results for the second quarter of fiscal 2022. We anticipate making progress on reducing overtime and on the incremental investments in hiring during the remainder of fiscal 2022; however, we expect investments in transformation to remain elevated early in the transformation process.

Income Tax Trends

Our provision for income taxes primarily reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Tax law changes, increases or decreases in book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

Our effective tax rate has been influenced by discrete events, such as tax law changes and excess tax benefits attributable to equity compensation exercises as discussed in Note 11, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 1 of Part I.

Comparisons to Fiscal 2019

In assessing our financial performance through the business recovery, Sysco’s management compared our results in the first quarter of fiscal 2022 against the first quarter of fiscal 2019. These results include:

Sales:

◦increased 8.2%, or $1.2 billion, as compared to fiscal 2019;

Operating income:

◦increased 0.6%, or $3.5 million, as compared to fiscal 2019;

◦adjusted operating income decreased 1.0%, or $6.6 million, as compared to fiscal 2019;

EBITDA:

◦increased 0.8%, or $6.8 million, as compared to fiscal 2019;

◦adjusted EBITDA decreased 0.6%, or $4.8 million, as compared to fiscal 2019;

Diluted earnings per share:

◦decreased 9.9%, or $0.08, as compared to fiscal 2019; and

◦adjusted diluted earnings per share decreased 8.8%, or $0.08, as compared to fiscal 2019.

Key items impacting the comparability of Sysco’s results in the first quarter of fiscal 2022 to the first quarter of fiscal 2019 included the one-time and short-term transitory expenses associated with the business recovery and the operating expense investments towards our Recipe for Growth strategy. Additionally, in the first quarter of fiscal 2022, Sysco incurred $50.9 million of on-going interest expense related to senior notes issued in April 2020 as a precautionary measure in response to the COVID-19 pandemic, as the company sought to preserve its available liquidity. Some of the senior notes issued in April 2020 remain outstanding as part of our capital structure.

Mergers and Acquisitions

We continue to focus on mergers and acquisitions as a part of our growth strategy, where we plan to cultivate new channels, new segments and new capabilities. We have completed the following acquisitions thus far in fiscal 2022.

In the first quarter of 2022, we acquired Greco and Sons, a leading independent specialty Italian distributor in the United States. We expect this acquisition to deliver over $1 billion in incremental sales to Sysco in fiscal 2022.
In the first quarter of fiscal 2022, we acquired a specialty food distributor in the United Kingdom.
In the second quarter of 2022, we acquired a regional broadline fresh produce distributor. The acquisition will operate as part of Sysco’s U.S. specialty produce business.

Strategy

Our purpose is “Connecting the World to Share Food and Care for One Another,” which we believe will allow us to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our “Recipe for Growth” transformation. This growth transformation is supported by strategic pillars that we believe will allow us to better serve our customers, including our digital, products and solutions, supply chain, customer teams, and future horizons strategies.

Our various business transformation initiatives remain on track, such as the centralized pricing tool project, which is substantially complete for local customers, and which enables Sysco to strategically manage the high levels of inflation that we are currently experiencing. Other initiatives, such as our personalization engine, continue to expand, while the sales transformation is helping our sales teams continue to win new business. Additionally, we are continuing to improve the efficiency of our organization, such as regionalizing the leadership structure of our specialty business, as we reduce our structural expenses to fund our capital investments. We are in the early stages of our Recipe for Growth, but we can already see the benefits of our developing capabilities in the new customers we are winning and in the progress we are making towards gaining market share. We expect that, as our Recipe for Growth matures, the impact on our top line growth will continue to accelerate. We are committed to profitably growing 1.2 times the market for fiscal 2022 and 1.5 times the market by the end of fiscal 2024, the third year of our three-year strategic plan.

Results of Operations

The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:


	13-Week Period Ended
	Oct. 2, 2021		Sep. 26, 2020
Sales	100.0	%	100.0	%
Cost of sales	81.9		81.2
Gross profit	18.1		18.8
Operating expenses	14.2		15.3
Operating income	3.8		3.5
Interest expense	0.8		1.2
Other (income) expense, net	—		0.1
Earnings before income taxes	3.1		2.2
Income taxes	0.8		0.4
Net earnings	2.3	%	1.8	%

The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:


	13-Week Period Ended
	Oct. 2, 2021
Sales	39.7	%
Cost of sales	41.1
Gross profit	33.9
Operating expenses	30.0
Operating income	50.6
Interest expense	12.6
Other (income) expense, net (1) (2)	123.0
Earnings before income taxes	(95.8)
Income taxes	207.6
Net earnings	74.3	%
Basic earnings per share	72.1	%
Diluted earnings per share	73.8
Average shares outstanding	0.7
Diluted shares outstanding	1.0

(1)Other (income) expense, net was income of $3.3 million and expense of $14.1 million in the first quarter of fiscal 2022 and fiscal 2021, respectively.

The following tables represent our results by reportable segments:


	13-Week Period Ended Oct. 2, 2021
	U.S. Foodservice Operations			International Foodservice Operations			SYGMA			Other			Global Support Center			Consolidated Totals
	(In thousands)
Sales	$	11,602,963		$	2,895,247		$	1,704,033		$	254,303					$	16,456,546
Sales increase (decrease)	46.5		%	33.8		%	11.8		%	51.4		%				39.7		%
Percentage of total	70.5		%	17.6		%	10.4		%	1.5		%				100.0		%

Operating income (loss)	$	797,523		$	36,676		$	(2,447)		$	6,456		$	(206,526)		$	631,682
Operating income (loss) increase (decrease)	35.5		%	NM			NM			NM			14.7		%	50.6		%
Percentage of total segments	95.1		%	4.4		%	(0.3)		%	0.8		%				100.0		%
Operating income (loss) as a percentage of sales	6.9		%	1.3		%	(0.1)		%	2.5		%				3.8		%


	13-Week Period Ended Sep. 26, 2020
	U.S. Foodservice Operations			International Foodservice Operations			SYGMA			Other			Global Support Center		Consolidated Totals
	(In thousands)
Sales	$	7,921,533		$	2,163,693		$	1,524,148		$	168,005				$	11,777,379

Percentage of total	67.3		%	18.4		%	12.9		%	1.4		%			100.0		%

Operating income	$	588,409		$	(537)		$	11,692		$	(5)		$	(179,980)	$	419,579

Percentage of total segments	98.1		%	(0.1)		%	2.0		%	—		%			100.0		%
Operating income as a percentage of sales	7.4		%	—		%	0.8		%	—		%			3.6		%

Based on information in Note 13, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 1 of Part I, in the first quarter of fiscal 2022, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 88.1% of Sysco’s overall sales and 99.5% of total segment operating income. This illustrates that these segments represent a substantial majority of our total segment results when compared to other reportable segments.

Results of U.S. Foodservice Operations

The following tables set forth a summary of the components of operating income expressed as a percentage increase or decrease over the comparable period in the prior year:


	13-Week Period Ended Oct. 2, 2021		13-Week Period Ended Sep. 26, 2020		Change in Dollars		% Change
	(Dollars in thousands)
Sales	$	11,602,963	$	7,921,533	$	3,681,430	46.5	%
Gross profit	2,185,154		1,599,707		585,447		36.6
Operating expenses	1,387,631		1,011,298		376,333		37.2
Operating income	$	797,523	$	588,409	$	209,114	35.5	%

Gross profit	$	2,185,154	$	1,599,707	$	585,447	36.6	%
Adjusted operating expenses (Non-GAAP)	1,389,394		1,096,675		292,719		26.7
Adjusted operating income (Non-GAAP)	$	795,760	$	503,032	$	292,728	58.2	%

Sales

The following table sets forth the percentage and dollar value increase or decrease in the major factors impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change.


	Increase (Decrease)
	13-Week Period
	(Dollars in millions)
Cause of change	Percentage		Dollars
Case volume	28.7	%	$	2,273.8
Inflation (1)	13.5		1,069.6
Acquisitions (2)	2.1		167.0
Other (3)	2.2		171.0
Total change in sales	46.5	%	$	3,681.4

(1)Includes product cost inflation of 13.4% for U.S. Broadline operations.

(2)Includes the impact of the Greco and Sons acquisition.

(3)Case volume excludes the volume impact from our custom-cut meat companies that do not measure volume in cases. Any impact in volumes from these operations is included within “Other.”

The primary driver of the sales increase was the significant improvement in case volume in our U.S. Broadline operations as a result of the business recovery from the COVID-19 pandemic. Case volumes from our U.S. Broadline operations increased 28.1% in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, and included a 23.8% improvement in locally managed customer case growth, along with a 33.9% increase in national customer case volume. The increases in U.S. Broadline case volumes represent organic growth.

Operating Income

The increase in operating income for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was driven by gross profit dollar growth and partially offset by an increase in operating expenses.

Gross profit dollar growth in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was driven primarily by the improvement in local cases and the pass through of higher inflation to our customers, partially offset by a decline in penetration of Sysco-branded products. The estimated change in product costs, an internal measure of inflation or deflation, for the first quarter of fiscal 2022 for our U.S. Broadline operations was inflation of 13.4%. For the first quarter of fiscal 2022, this change in product costs was primarily driven by inflation in the meat, poultry, and canned and dry foods categories. Gross margin, which is gross profit as a percentage of sales, was 18.83% in the first quarter of fiscal 2022, which

was a decrease of 136 basis points compared to gross margin of 20.19% in the first quarter of fiscal 2021, primarily attributable to inflationary pressure.

The increase in operating expenses for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was primarily driven by variable costs associated with increased volumes and largely from short-term transitory expenses associated with the business recovery, including increases in associate-related costs associated with recruiting and hiring additional supply chain associates. Additionally, we experienced an unfavorable comparison of bad debt expense in the first quarter of fiscal 2022, as compared to fiscal 2021, which included a net bad debt benefit due to the significant reduction of reserves on pre-pandemic receivables.

Results of International Foodservice Operations

The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:


	13-Week Period Ended Oct. 2, 2021		13-Week Period Ended Sep. 26, 2020		Change in Dollars		% Change
	(Dollars in thousands)
Sales	$	2,895,247	$	2,163,693	$	731,554	33.8	%
Gross profit	589,134		450,398		138,736		30.8
Operating expenses	552,458		450,935		101,523		22.5
Operating income (loss)	$	36,676	$	(537)	$	37,213	NM

Gross profit	$	589,134	$	450,398	$	138,736	30.8	%
Adjusted operating expenses (Non-GAAP)	525,017		431,616		93,401		21.6
Adjusted operating income (Non-GAAP)	$	64,117	$	18,782	$	45,335	241.4	%

Sales on a constant currency basis (Non-GAAP)	$	2,773,852	$	2,163,693	$	610,159	28.2	%
Gross profit on a constant currency basis (Non-GAAP)	566,400		450,398		116,002		25.8
Adjusted operating expenses on a constant currency basis (Non-GAAP)	503,943		431,616		72,327		16.8
Adjusted operating income (Non-GAAP)	$	62,457	$	18,782	$	43,675	232.5	%

Sales

The following tables set forth the percentage and dollar value increase or decrease in the major components impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change.


	Increase (Decrease)
	13-Week Period
	(Dollars in millions)
Cause of change	Percentage		Dollars
Inflation	3.3	%	$	71.9

Foreign currency	5.7		122.9
Other (1)	24.8		536.8
Total change in sales	33.8	%	$	731.6

(1)The impact of volumes as a component of sales growth from international operations are included within “Other.” Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent, comparable basis.

Sales for the first quarter of fiscal 2022 were higher, as compared to the first quarter of fiscal 2021, primarily due to the significant improvement in volume, as restrictions continued to ease across our European, Canadian and Latin American businesses.

Operating Income

The increase in operating income for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was primarily due to the continuing recovery in business resulting from COVID-19 restrictions lifting in many international regions.

The increase in gross profit dollars in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was primarily attributable to the increase in sales volume and inflation.

The increase in operating expenses for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, was primarily due to an increase in associate-related costs associated with hiring associates to manage the business recovery. Additionally, we had an unfavorable comparison of bad debt expense, as fiscal 2021 included a reduction of reserves on pre-pandemic receivables.

Results of SYGMA and Other Segment

For SYGMA, sales were 11.8% higher in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, primarily from an increase in case volume driven by the success of national and regional quick service restaurants, partially offset by a decrease in volume due to the planned exit of a large regional customer. Operating income decreased by $14.1 million in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, as our increased investments in business recovery staffing drove an increase in operating expenses to exceed gross profit dollar growth from increased case volume.

For the operations that are grouped within Other, operating income increased $6.5 million in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, primarily due to the recovery of our hospitality business, Guest Worldwide, which had a gross profit increase of 75.2% in the first quarter of fiscal 2022. This business has improved as hospitality occupancy rates have grown from prior year levels.

Global Support Center Expenses

Our Global Support Center generally includes all expenses of the corporate office and Sysco’s shared service operations. These expenses in the first quarter of fiscal 2022 increased $29.0 million, or 16.3%, as compared to the first quarter of fiscal 2021, primarily due to higher charges for professional fees, including acquisition and due diligence costs associated certain acquisitions, as well as higher associate-related expenses.

Included in Global Support Center expenses are Certain Items that totaled $27.7 million in the first quarter of fiscal 2022, as compared to $12.0 million in the first quarter of fiscal 2021. Certain Items impacting the first quarter of fiscal 2022 were primarily expenses associated with our business technology transformation initiatives and expenses associated with acquisitions. Certain Items impacting the first quarter of fiscal 2021 were primarily expenses associated with our business technology transformation initiatives.

Interest Expense

Interest expense decreased $18.5 million for the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, primarily attributable to lower fixed debt volume, along with lower floating interest rates.

Net Earnings

Net earnings increased 74.3% in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021, due primarily to the items noted above for operating income and interest expense, as well as items impacting our income taxes that are discussed in Note 11, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 1 of Part I. Adjusted net earnings, excluding Certain Items, increased 147.9% in the first quarter of fiscal 2022, primarily due to a significant increase in sales volume, partially offset by an unfavorable tax expense compared to the prior year.

Earnings Per Share

Basic earnings per share in the first quarter of fiscal 2022 were $0.74, a 72.1% increase from the comparable prior year amount of $0.43 per share. Diluted earnings per share in the first quarter of fiscal 2022 were $0.73, a 73.8% increase from the comparable prior year period amount of $0.42 per share.

Adjusted diluted earnings per share, excluding Certain Items, in the first quarter of fiscal 2022 were $0.83, a 144.1% decrease from the comparable prior year amount of $0.34 per share.

Non-GAAP Reconciliations


Our discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove the impact of restructuring and transformational project costs consisting of: (1) restructuring charges, (2) expenses associated with our various transformation initiatives and (3) facility closure and severance charges; and by acquisition-related costs consisting of: (1) intangible amortization expense and (2) acquisition costs and due diligence costs related to our significant acquisitions. Our results for the first quarter of fiscal 2022 are also impacted by the increase in reserves for uncertain tax positions. Sysco’s results for the first quarter of fiscal 2022 and fiscal 2021 were also impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances, by a loss on the sale of a business and by a net benefit from remeasuring net deferred tax assets due to the changes in U.K. tax rates.

The results of our foreign operations can be impacted due to changes in exchange rates applicable in converting local currencies to U.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. The constant currency impact on our adjusted total Sysco and our adjusted International Foodservice Operations results are disclosed when the impact exceeds a defined threshold of greater than 1% on the growth metric. If the amount does not exceed this threshold, a disclosure will be made that the impact of the currency change was not significant.

Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items and presenting its International Foodservice Operations results on a constant currency basis, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations and (2) facilitates comparisons on a year-over-year basis.

Although Sysco has a history of growth through acquisitions, certain acquisitions were significantly larger than the companies historically acquired by Sysco, with a proportionately greater impact on Sysco’s consolidated financial statements. Accordingly, Sysco is excluding from its non-GAAP financial measures for the relevant periods the impact of acquisition-related intangible amortization, acquisition costs and due-diligence costs specific to our significant acquisitions. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2022 and fiscal 2021.

Set forth below is a reconciliation of sales, operating expenses, operating income, other (income) expense, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add up to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.


	13-Week Period Ended Oct. 2, 2021			13-Week Period Ended Sep. 26, 2020			Change in Dollars		% Change
Sales (GAAP)	$	16,456,546		$	11,777,379		$	4,679,167	39.7	%


Impact of currency fluctuations (1)	(124,726)			—			(124,726)		(1.1)
Comparable sales using a constant currency basis (Non-GAAP)	$	16,331,820		$	11,777,379		$	4,554,441	38.7	%

Gross profit (GAAP)	$	2,971,708		$	2,219,845		$	751,863	33.9	%


Impact of currency fluctuations (1)	(23,863)			—			(23,863)		(1.1)
Comparable gross profit using a constant currency basis (Non-GAAP)	$	2,947,845		$	2,219,845		$	728,000	32.8	%





Gross margin (GAAP)	18.06		%	18.85		%			-79 bps
Impact of currency fluctuations (1)	(0.01)			—					-1 bps
Comparable Gross margin using a constant currency basis (Non-GAAP)	18.05		%	18.85		%			-80 bps

Operating expenses (GAAP)	$	2,340,026		$	1,800,266		$	539,760	30.0	%
Impact of restructuring and transformational project costs (2)	(24,511)			(25,964)			1,453		5.6
Impact of acquisition-related costs (3)	(35,926)			(17,755)			(18,171)		(102.3)
Impact of bad debt reserve adjustments (4)	7,061			98,629			(91,568)		(92.8)

Operating expenses adjusted for Certain Items (Non-GAAP)	2,286,650			1,855,176			431,474		23.3


Impact of currency fluctuations (1)	(21,751)			—			(21,751)		(1.2)
Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)	$	2,264,899		$	1,855,176		$	409,723	22.1	%

Operating income (GAAP)	$	631,682		$	419,579		$	212,103	50.6	%
Impact of restructuring and transformational project costs (2)	24,511			25,964			(1,453)		(5.6)
Impact of acquisition-related costs (3)	35,926			17,755			18,171		102.3
Impact of bad debt reserve adjustments (4)	(7,061)			(98,629)			91,568		92.8

Operating income adjusted for Certain Items (Non-GAAP)	685,058			364,669			320,389		87.9	%


Impact of currency fluctuations (1)	(2,112)			—			(2,112)		(0.6)
Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP)	$	682,946		$	364,669		$	318,277	87.3	%










Other (income) expense (GAAP)	$	(3,252)		$	14,124		$	(17,376)	123.0	%
Impact of loss on sale of business	—			(12,043)			12,043		NM
Other (income) expense adjusted for Certain Items (Non-GAAP)	$	(3,252)		$	2,081		$	(5,333)	256.3	%



Net earnings (GAAP)	$	378,013		$	216,900		$	161,113	74.3	%
Impact of restructuring and transformational project costs (2)	24,511			25,964			(1,453)		(5.6)
Impact of acquisition-related costs (3)	35,926			17,755			18,171		102.3
Impact of bad debt reserve adjustments (4)	(7,061)			(98,629)			91,568		92.8


Impact of loss on sale of business	—			12,043			(12,043)		NM
Tax impact of restructuring and transformational project costs (5)	(6,186)			(5,920)			(266)		(4.5)
Tax impact of acquisition-related costs (5)	(9,066)			(4,048)			(5,018)		(124.0)
Tax impact of bad debt reserves adjustments (5)	1,782			22,488			(20,706)		(92.1)

Tax impact of loss on sale of business (5)	—			(7,553)			7,553		NM
Impact of adjustments to uncertain tax positions	12,000			—			12,000		NM
Impact of foreign tax rate change (6)	—			(5,548)			5,548		NM
Net earnings adjusted for Certain Items (Non-GAAP)	$	429,919		$	173,452		$	256,467	147.9	%



Diluted earnings per share (GAAP)	$	0.73	$	0.42	$	0.31	73.8	%
Impact of restructuring and transformational project costs (2)	0.05		0.05		—		—
Impact of acquisition-related costs (3)	0.07		0.03		0.04		133.3
Impact of bad debt reserve adjustments (4)	(0.01)		(0.19)		0.18		94.7


Impact of loss on sale of business	—		0.02		(0.02)		NM
Tax impact of restructuring and transformational project costs (5)	(0.01)		(0.01)		—		—
Tax impact of acquisition-related costs (5)	(0.02)		(0.01)		(0.01)		(100.0)
Tax impact of bad debt reserves adjustments (5)	—		0.04		(0.04)		NM

Tax impact of Impact of loss on sale of business (5)	—		(0.01)		0.01		NM
Impact of adjustments to uncertain tax positions	0.02		—		0.02		NM
Impact of foreign tax rate change (6)	—		(0.01)		0.01		NM
Diluted earnings per share adjusted for Certain Items (Non-GAAP) (7)	$	0.83	$	0.34	$	0.49	144.1	%


(1)			Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results.
(2)			Fiscal 2022 includes $16 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy and $8 million related to restructuring charges. Fiscal 2021 includes $13 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy and $13 million of primarily consisting of restructuring charges.
(3)			Fiscal 2022 includes $22 million of intangible amortization expense and $14 million in acquisition and due diligence costs, which are primarily included in Global Support Center expenses. Fiscal 2021 represents $18 million related to intangible amortization expense.
(4)			Fiscal 2022 and 2021 represent the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
(5)			The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(6)			Fiscal 2021 represents a net benefit from remeasuring Sysco’s accrued income taxes, deferred tax asset and deferred tax liabilities due to changes in tax rates in the United Kingdom.
(7)			Individual components of diluted earnings per share may not add up to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
			NM represents that the percentage change is not meaningful.


	13-Week Period Ended Oct. 2, 2021			13-Week Period Ended Sep. 29, 2018			Change in Dollars		% Change
Sales (GAAP)	$	16,456,546		$	15,215,279		$	1,241,267	8.2	%
Gross profit (GAAP)	2,971,708			2,903,785			67,923		2.3	%
Gross margin (GAAP)	18.06		%	19.08		%			-103

Operating expenses (GAAP)	$	2,340,026		$	2,275,645		$	64,381	2.8	%
Impact of restructuring and transformational project costs (1)	(24,511)			(40,903)			16,392		40.1	%
Impact of acquisition-related costs (2)	(35,926)			(22,636)			(13,290)		(58.7)	%
Impact of bad debt reserve adjustments (3)	7,061			—			7,061		NM
Comparable operating expenses adjusted for Certain Items (Non-GAAP)	$	2,286,650		$	2,212,106		$	74,544	3.4	%

Operating income (GAAP)	$	631,682		$	628,140		$	3,542	0.6	%
Impact of restructuring and transformational project costs (1)	24,511			40,903			(16,392)		(40.1)	%
Impact of acquisition-related costs (2)	35,926			22,636			13,290		58.7	%
Impact of bad debt reserve adjustments (3)	(7,061)			—			(7,061)		NM
Operating income adjusted for Certain Items (Non-GAAP)	$	685,058		$	691,679		$	(6,621)	(1.0)	%

Net earnings (GAAP)	$	378,013		$	431,042		$	(53,029)	(12.3)	%
Impact of restructuring and transformational project costs (1)	24,511			40,903			(16,392)		(40.1)	%
Impact of acquisition-related costs (2)	35,926			22,636			13,290		58.7	%
Impact of bad debt reserve adjustments (3)	(7,061)			—			(7,061)		NM
Tax impact of restructuring and transformational project costs (4)	(6,186)			(10,674)			4,488		42.0	%
Tax impact of acquisition-related costs (4)	(9,066)			(4,691)			(4,375)		(93.3)	%
Tax impact of bad debt reserves adjustments (4)	1,782			—			1,782		NM
Impact of adjustments to uncertain tax positions	12,000			—			12,000		NM
Net earnings adjusted for Certain Items (Non-GAAP)	$	429,919		$	479,216		$	(49,297)	(10.3)	%

Diluted earnings per share (GAAP)	$	0.73		$	0.81		$	(0.08)	(9.9)	%
Impact of restructuring and transformational project costs (1)	0.05			0.08			(0.03)		(37.5)	%
Impact of acquisition-related costs (2)	0.07			0.04			0.03		75.0	%
Impact of bad debt reserve adjustments (3)	(0.01)			—			(0.01)		NM
Tax impact of restructuring and transformational project costs (4)	(0.01)			(0.02)			0.01		50.0	%
Tax impact of acquisition-related costs (4)	(0.02)			(0.01)			(0.01)		(100.0)	%
Tax impact of bad debt reserves adjustments (4)	—			—			—		NM
Impact of adjustments to uncertain tax positions	0.02			—			0.02		NM
Diluted earnings per share adjusted for Certain Items (Non-GAAP) (5)	$	0.83		$	0.91		$	(0.08)	(8.8)	%


(1)			Fiscal 2022 includes $16 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy, and $8 million primarily consisting of restructuring charges. Fiscal 2019 includes $26 million related to various transformation initiative costs and $15 million related to severance, restructuring and facility closure charges.
(2)			Fiscal 2022 includes $22 million of intangible amortization expense and $14 million of acquisition and due diligence costs, which are primarily included in Global Support Center expenses. Fiscal 2019 includes $21 million of intangible amortization expense and $1 million of acquisition costs.
(3)			Fiscal 2022 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
(4)			The tax impact of adjustments for Certain Items is calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
(5)			Individual components of diluted earnings per share may not add up to the total presented due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding.
			NM represents that the percentage change is not meaningful.


	13-Week Period Ended Oct. 2, 2021			13-Week Period Ended Sep. 26, 2020			Change in Dollars		%/bps Change
U.S. FOODSERVICE OPERATIONS












Operating expenses (GAAP)	$	1,387,631		$	1,011,298		$	376,333	37.2	%
Impact of restructuring and transformational project costs	(3)			(940)			937		99.7
Impact of acquisition-related costs (1)	(4,654)			—			(4,654)		NM
Impact of bad debt reserve adjustments (2)	6,420			86,317			(79,897)		(92.6)

Operating expenses adjusted for Certain Items (Non-GAAP)	$	1,389,394		$	1,096,675		$	292,719	26.7	%



Operating income (GAAP)	$	797,523		$	588,409		$	209,114	35.5	%
Impact of restructuring and transformational project costs	3			940			(937)		(99.7)
Impact of acquisition-related costs (1)	4,654			—			4,654		NM
Impact of bad debt reserve adjustments (2)	(6,420)			(86,317)			79,897		92.6

Operating income adjusted for Certain Items (Non-GAAP)	$	795,760		$	503,032		$	292,728	58.2	%



INTERNATIONAL FOODSERVICE OPERATIONS
Sales (GAAP)	$	2,895,247		$	2,163,693		$	731,554	33.8	%


Impact of currency fluctuations (3)	(121,395)			—			(121,395)		(5.6)
Comparable sales using a constant currency basis (Non-GAAP)	$	2,773,852		$	2,163,693		$	610,159	28.2	%

Gross profit (GAAP)	$	589,134		$	450,398		$	138,736	30.8	%


Impact of currency fluctuations (3)	(22,734)			—			(22,734)		(5.0)
Comparable gross profit using a constant currency basis (Non-GAAP)	$	566,400		$	450,398		$	116,002	25.8	%





Gross margin (GAAP)	20.35		%	20.82		%			-48 bps
Impact of currency fluctuations (3)	(0.07)			—					-7 bps
Comparable gross margin using a constant currency basis (Non-GAAP)	20.42		%	20.82		%			-40 bps

Operating expenses (GAAP)	$	552,458		$	450,935		$	101,523	22.5	%
Impact of restructuring and transformational project costs (4)	(9,426)			(12,993)			3,567		27.5
Impact of acquisition-related costs (5)	(18,656)			(17,755)			(901)		(5.1)
Impact of bad debt reserve adjustments (2)	641			11,429			(10,788)		(94.4)

Operating expenses adjusted for Certain Items (Non-GAAP)	525,017			431,616			93,401		21.6


Impact of currency fluctuations (3)	(21,074)			—			(21,074)		(4.9)
Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)	$	503,943		$	431,616		$	72,327	16.8	%

Operating income (loss) (GAAP)	$	36,676		$	(537)		$	37,213	NM
Impact of restructuring and transformational project costs (4)	9,426			12,993			(3,567)		(27.5)
Impact of acquisition-related costs (5)	18,656			17,755			901		5.1
Impact of bad debt reserve adjustments (2)	(641)			(11,429)			10,788		94.4

Operating income adjusted for Certain Items (Non-GAAP)	64,117			18,782			45,335		241.4


Impact of currency fluctuations (3)	(1,660)			—			(1,660)		(8.8)
Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP)	$	62,457		$	18,782		$	43,675	232.5	%

SYGMA












Operating expenses (GAAP)	$	140,604		$	119,849		$	20,755	17.3	%
Impact of restructuring and transformational project costs	—			(13)			13		NM



Operating expenses adjusted for Certain Items (Non-GAAP)	$	140,604		$	119,836		$	20,768	17.3	%



Operating (loss) income (GAAP)	$	(2,447)		$	11,692		$	(14,139)	(120.9)	%
Impact of restructuring and transformational project costs	—			13			(13)		NM



Operating (loss) income adjusted for Certain Items (Non-GAAP)	$	(2,447)		$	11,705		$	(14,152)	(120.9)	%



OTHER












Operating expenses (GAAP)	$	52,565	$	40,435	$	12,130	30.0	%


Impact of bad debt reserve adjustments (2)	—		883		(883)		NM

Operating expenses adjusted for Certain Items (Non-GAAP)	$	52,565	$	41,318	$	11,247	27.2	%



Operating income (loss) (GAAP)	$	6,456	$	(5)	$	6,461	NM


Impact of bad debt reserve adjustments (2)	—		(883)		883		NM

Operating income (loss) adjusted for Certain Items (Non-GAAP)	$	6,456	$	(888)	$	7,344	NM



GLOBAL SUPPORT CENTER




Operating expenses (GAAP)	$	206,768	$	177,749	$	29,019	16.3	%
Impact of restructuring and transformational project costs (6)	(15,082)		(12,018)		(3,064)		(25.5)
Impact of acquisition-related costs (7)	(12,616)		—		(12,616)		NM


Operating expenses adjusted for Certain Items (Non-GAAP)	$	179,070	$	165,731	$	13,339	8.0	%



Operating loss (GAAP)	$	(206,526)	$	(179,980)	$	(26,546)	14.7	%
Impact of restructuring and transformational project costs (6)	15,082		12,018		3,064		25.5
Impact of acquisition-related costs (7)	12,616		—		12,616		NM


Operating loss adjusted for Certain Items (Non-GAAP)	$	(178,828)	$	(167,962)	$	(10,866)	6.5	%


(1)			Fiscal 2022 includes $3 million intangible amortization expense and acquisition costs.
(2)			Fiscal 2022 and 2021 represent the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
(3)			Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results.
(4)			Includes restructuring and facility closure costs primarily in Europe.
(5)			Represents intangible amortization expense.
(6)			Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy.
(7)			Represents due diligence costs.

			NM represents that the percentage change is not meaningful.

EBITDA and Adjusted EBITDA

EBITDA and adjusted EBITDA should not be used as a substitute for the most comparable GAAP measure in assessing Sysco’s overall financial performance for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Performance Indicators” contained in our fiscal 2021 Form 10-K for discussions around this non-GAAP performance metric. Set forth below is a reconciliation of actual net earnings to EBITDA and to adjusted EBITDA results for the periods presented (dollars in thousands):


	13-Week Period Ended Oct. 2, 2021		13-Week Period Ended Sep. 26, 2020		Change in Dollars		% Change
Net earnings (GAAP)	$	378,013	$	216,900	$	161,113	74.3	%
Interest (GAAP)	128,214		146,717		(18,503)		(12.6)	%
Income taxes (GAAP)	128,707		41,838		86,869		207.6
Depreciation and amortization (GAAP)	186,466		180,520		5,946		3.3
EBITDA (Non-GAAP)	$	821,400	$	585,975	$	235,425	40.2	%
Certain Item adjustments:
Impact of restructuring and transformational project costs (1)	24,247		25,278		(1,031)		(4.1)
Impact of acquisition-related costs (2)	14,221		—		14,221		NM
Impact of bad debt reserve adjustments (3)	(7,061)		(98,629)		91,568		(92.8)

Impact of impact of loss on sale of business	—		12,043		(12,043)		NM
EBITDA adjusted for Certain Items (Non-GAAP) (4)	$	852,807	$	524,667	$	328,140	62.5	%


(1)			Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation.
(2)			Fiscal 2022 includes acquisition and due diligence costs.
(3)			Fiscal 2022 and 2021 represent the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
(4)			In arriving at adjusted EBITDA, Sysco does not adjust out interest income of $2 million and $4 million for fiscal 2022 and fiscal 2021, respectively, or non-cash stock compensation expense of $29 million and $25 million for fiscal 2022 and fiscal 2021, respectively.


	13-Week Period Ended Oct. 2, 2021		13-Week Period Ended Sep. 29, 2018		Change in Dollars		% Change
Net earnings (GAAP)	$	378,013	$	431,042	$	(53,029)	(12.3)	%
Interest (GAAP)	128,214		89,016		39,198		44.0	%
Income taxes (GAAP)	128,707		106,950		21,757		20.3	%
Depreciation and amortization (GAAP)	186,466		187,627		(1,161)		(0.6)	%
EBITDA (Non-GAAP)	$	821,400	$	814,635	$	6,765	0.8	%
Certain Item adjustments:
Impact of restructuring and transformational project costs (1)	24,247		40,903		(16,656)		(40.7)	%
Impact of acquisition-related costs (2)	14,221		2,056		12,165		NM
Impact of bad debt reserve adjustments (3)	(7,061)		—		(7,061)		NM
EBITDA adjusted for Certain Items (Non-GAAP) (4)	$	852,807	$	857,594	$	(4,787)	(0.6)	%


(1)			Fiscal 2022 includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation. Fiscal 2019 includes $26 million related to various transformation initiative costs and $15 million related to severance, restructuring and facility closure charges, excluding charges related to accelerated depreciation.
(2)			Fiscal 2022 includes acquisition and due diligence costs. Fiscal 2019 represents acquisition costs.
(3)			Fiscal 2022 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
(4)			In arriving at adjusted EBITDA, Sysco does not adjust out interest income of $2 million and $1 million for fiscal 2022 and fiscal 2019, respectively, or non-cash stock compensation expense of $29 million in both fiscal 2022 and fiscal 2019.
			NM represents that the percentage change is not meaningful.

Liquidity and Capital Resources

Highlights

As of October 2, 2021, we had $2.1 billion in cash and cash equivalents, approximately 28% of which was held by our international subsidiaries. We produced positive free cash flow in a period of higher working capital investments, one-time and short-term transitory costs related to the business recovery and investments towards our Recipe for Growth strategy. In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities and comparisons of the significant cash flows from the first quarter of fiscal 2022 to the first quarter of fiscal 2021 are provided.


	13-Week Period Ended Oct. 2, 2021		13-Week Period Ended Sep. 26, 2020
	(In thousands)
Net cash provided by operating activities (GAAP)	$	110,812	$	930,914
Additions to plant and equipment	(85,019)		(75,539)
Proceeds from sales of plant and equipment	5,627		7,064
Free Cash Flow (Non-GAAP) (1)	$	31,420	$	862,439

Acquisition of businesses, net of cash acquired	$	(714,010)	$	—

Debt (repayments) borrowings, net	(10,048)		(753,589)
Dividends paid	(240,561)		(228,714)


(1)			Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Performance Indicators” contained in our fiscal 2021 Form 10-K for discussions around this non-GAAP performance metric.

Sources and Uses of Cash

Sysco’s strategic objectives are funded primarily by cash from operations and, to a lesser extent, external borrowings. Traditionally, our operations have produced significant cash flow and, due to our strong financial position, we believe that we will continue to be able to effectively access capital markets, as needed. Cash is generally allocated to working capital requirements, investments compatible with our overall growth strategy (organic and inorganic), debt management, and shareholder return. Remaining cash balances are invested in high-quality, short-term instruments.

We believe our cash flow from operations, the availability of liquidity under our revolving credit facility, and our ability to access capital from financial markets will be sufficient to meet our anticipated cash requirements for more than the next twelve months, while maintaining sufficient liquidity for normal operating purposes.

Cash Flows

Operating Activities

We generated $110.8 million in cash flows from operations in the first quarter of fiscal 2022, compared to cash flows from operative activities of $930.9 million in the first quarter of fiscal 2021. These amounts include year-over-year unfavorable comparisons on working capital and accrued expenses, partially offset by higher operating results.

Changes in working capital had a negative impact of $886.1 million on cash flow from operations period-over-period. There were unfavorable comparisons on receivables, inventories and accounts payable. The unfavorable comparison in cash flows from accounts receivables is primarily due to our customers beginning to purchase more in the first quarter of fiscal 2022, coupled with significantly lower sales in the first quarter of fiscal 2021 resulting from the COVID-19 pandemic. In the first quarter of fiscal 2021, we recorded a net credit to the provision for losses on receivables totaling $77.8 million, which reflects a benefit on the reduction of our allowance for pre-pandemic receivable balances, as collection rates exceeded our expectations. In the first quarter of fiscal 2022, we invested heavily in inventory, and we ended the quarter with inventory on-hand and inventory on-order in a combined amount that exceeds our pre-COVID-19 levels. This positions us to be able to ship product on time and in full during the recovery from COVID-19. Accounts payable has increased, as we continue our business recovery

efforts and investments in inventory. In the first quarter of fiscal 2021, we experienced a greater benefit within our accounts payable due to extended payment terms implemented at that time.

Included in the change in accrued expenses was a negative comparison, primarily from accrued interest expenses due to the timing of interest payments in the first quarter of fiscal 2022, as compared to the first quarter of fiscal 2021. In fiscal 2022, these interest payments were included in our first quarter, whereas payments on these same notes occurred in the second quarter of fiscal 2021.

Investing Activities

Our capital expenditures in the first quarter of fiscal 2022 primarily consisted of investments in technology equipment, buildings and building improvements, warehouse equipment, and fleet. Our capital expenditures in the first quarter of fiscal 2022 were $9.5 million higher than in the first quarter of fiscal 2021, as investments are made towards advancing our Recipe for Growth strategy.

During the first quarter of fiscal 2022, we paid $714.0 million, net of cash acquired, for acquisitions. There were no such acquisitions made in the first quarter of fiscal 2021.

Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $17.9 million in the first quarter of fiscal 2022, as compared to $31.9 million in the first quarter of fiscal 2021. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.

We made no share repurchases during the first quarter of fiscal 2022; however, given the strength of our results of operations and financial position, we expect to commence share repurchases of up to $500 million for fiscal 2022 under our $5.0 billion share repurchase program beginning in the second quarter of fiscal 2022.

Dividends paid in the first quarter of fiscal 2022 were $240.6 million, or $0.47 per share, as compared to $228.7 million, or $0.45 per share, in the first quarter of fiscal 2021. In August 2021, we declared our regular quarterly dividend for the first quarter of fiscal 2022 of $0.47 per share, which was paid in October 2021.

Debt Activity and Borrowing Availability

Our debt activity, including issuances and repayments, if any, and our borrowing availability is described in Note 7, “Debt,” in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. Our outstanding borrowings at October 2, 2021 are disclosed within that note.

During the first 13 weeks of fiscal 2022, we amended our revolving credit facility to (a) eliminate the covenant that had restricted (i) increases to Sysco’s regular quarterly dividend and (ii) share repurchases, in each case, until the earlier of September 2022 or the date on which Sysco has achieved a certain ratio of consolidated EBITDA to consolidated interest expense, and (b) adjust the covenant requiring Sysco to maintain a certain ratio of consolidated EBITDA to consolidated interest expense.

Guarantor Summarized Financial Information

On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation, which distribute a full line of food products and a wide variety of non-food products, at that time entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. All subsequent issuances of senior notes and debentures in the U.S. and borrowings under the company’s $2.0 billion long-term revolving credit facility have also been guaranteed by these subsidiaries. As of October 2, 2021, Sysco had a total of $10.6 billion in senior notes, debentures and borrowings under the long-term revolving credit facility that were guaranteed by these subsidiary guarantors. Our remaining consolidated subsidiaries (non-guarantor subsidiaries) are not obligated under the senior notes indenture, debentures indenture or our long-term revolving credit facility. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” contained in our fiscal 2021 Form 10-K for additional information regarding the terms of the guarantees.

Basis of Preparation of the Summarized Financial Information

The summarized financial information of Sysco Corporation (issuer), and certain wholly owned U.S. Broadline subsidiaries (guarantors) (together, the obligor group) is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. Investments in and equity in the earnings of our non-guarantor subsidiaries, which are not members of the obligor group, have been excluded from the summarized financial information. The obligor group’s amounts due to, amounts due from and transactions with non-guarantor subsidiaries have been presented in separate line items, if they are material to the obligor financials. The following tables include summarized financial information of the obligor group for the periods presented.


Combined Parent and Guarantor Subsidiaries Summarized Balance Sheet	Oct. 2, 2021		Jul. 3, 2021
	(In thousands)
ASSETS
Receivables due from non-obligor subsidiaries	$	148,565	$	171,718
Current assets	6,251,167		6,661,284
Total current assets	$	6,399,732	$	6,833,002
Notes receivable from non-obligor subsidiaries	$	83,550	$	83,457
Other noncurrent assets	3,981,818		3,933,833
Total noncurrent assets	$	4,065,368	$	4,017,290

LIABILITIES
Payables due to non-obligor subsidiaries	$	76,547	$	203,365
Other current liabilities	2,403,275		2,299,674
Total current liabilities	$	2,479,822	$	2,503,039
Notes payable to non-obligor subsidiaries	$	230,956	$	269,709
Long-term debt	10,127,201		10,139,596
Other noncurrent liabilities	1,306,495		1,209,598
Total noncurrent liabilities	$	11,664,652	$	11,618,903


Combined Parent and Guarantor Subsidiaries Summarized Results of Operations		13-Week Period Ended Oct. 2, 2021
	(In thousands)
Sales		$	10,665,199
Gross profit		1,924,123
Operating income		602,325
Interest expense from non-obligor subsidiaries		11,069
Net earnings		349,251

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to goodwill and intangible assets, allowance for doubtful accounts, income taxes, share-based compensation and the company-sponsored pension plans, which are described in Item 7 of our fiscal 2021 Form 10-K.

Forward-Looking Statements

Certain statements made herein that look forward in time or express management’s expectations or beliefs with respect to the occurrence of future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” “projected,” “continues,” “continuously,” variations of such terms, and similar terms and phrases denoting anticipated or expected occurrences or results. Examples of forward-looking statements include, but are not limited to, statements about:

the effect, impact, potential duration or other implications of the COVID-19 pandemic and any expectations we may have with respect thereto, including our ability to withstand the crisis;
our expectations regarding our business and the economic recovery generally as the COVID-19 pandemic subsides, including beliefs regarding future customer activity and the timing of the recovery;
our expectations regarding the impact of the COVID-19 pandemic on our mix of earnings by jurisdiction;
our expectations regarding the recovery of our travel, hospitality and Food Service Management sectors of our business, and the impact that recovery in such sectors will have on our business;
our expectations regarding our ability to meet our stated growth rate goals for fiscal 2022;
our belief that our Recipe for Growth strategy will enable us to accelerate over the next three years to meet our growth target by the end of fiscal 2024;
our expectations that our Recipe for Growth strategy will enable our International Foodservice Operations segment to improve how we serve local customers and will create a better balance in our customer mix;
our expectations regarding inflation;
our expectations regarding the impact of certain investments on our ability to serve customers and continue to gain market share, and our expectations regarding the impact of such investments on our results for the second quarter of 2022;
our expectations regarding the impact of the acquisition of Greco and Sons on incremental sales;
our expectations regarding our efforts to reduce overtime rates and the incremental investments in hiring, and our expectations regarding the effects thereof on profits throughout fiscal 2022 and the size of such investments;
our ability to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our Recipe for Growth strategy;
our belief that our growth transformation will allow us to better serve our customers;
the continuing expansion of other business transformation initiatives, such as our personalization engine;
our expectations regarding growth in customers and gains in market share;
estimates regarding the outcome of legal proceedings;
our expectations regarding the use of remaining cash generated from operations;
our expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability;
our belief in our strong financial position;
our expectations regarding the calculation of adjusted return on invested capital, adjusted operating income, adjusted net earnings and adjusted diluted earnings per share;
our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results;
our expectations regarding our effective tax rate for the remainder of fiscal 2022;
our expectations regarding the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions;
our expectations regarding the recognition of compensation costs related to share-based compensation arrangements;
our ability to meet future cash requirements, including the ability to access financial markets effectively, including issuances of debt securities, and maintain sufficient liquidity;
our expectations regarding the payment of dividends, and the growth of our dividend, in the future;
our expectations regarding future activity under our share repurchase program; and
our ability to effectively access the commercial paper market and long-term capital markets.

These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below, those within Part II, Item 1A of this document and those discussed in Item 1A of our fiscal 2021 Form 10-K:

the impact and effects of public health crises, pandemics and epidemics, such as the recent outbreak of COVID-19, and the adverse impact thereof on our business, financial condition and results of operations, including, but not limited to, our growth, product costs, supply chain, labor availability, logistical capabilities, customer demand for our products and industry demand generally, consumer spending, our liquidity, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally;
the risk that if sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, or if we are unable to continue to accelerate local case growth, our gross margins may decline;
the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit;
periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability generally;
the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges;
risks related to unfavorable conditions in North America and Europe and the impact on our results of operations and financial condition;
the risks related to our efforts to meet our long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated;
the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs;
the risk that the actual costs of any business initiatives may be greater or less than currently expected;
the risk that competition in our industry and the impact of GPOs may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability;
the risk that our relationships with long-term customers may be materially diminished or terminated;
the risk that changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations;
the risk that changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results;
the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs;
the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control;
the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products;
risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers;
the risk that we may not realize anticipated benefits from our operating cost reduction efforts;
difficulties in successfully expanding into international markets and complimentary lines of business;
the potential impact of product liability claims;
the risk that we fail to comply with requirements imposed by applicable law or government regulations;
risks related to our ability to effectively finance and integrate acquired businesses;
risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity;
our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position;
the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending;
the risk that divestiture of one or more of our businesses may not provide the anticipated effects on our operations;
the risk that the U.K.’s exit from the European Union (EU) on January 31, 2020, commonly referred to as Brexit, may adversely impact our operations in the U.K., including those of the Brakes Group;
the risk that future labor disruptions or disputes could disrupt the integration of Brake France into Sysco France and our operations in France and the EU generally;
the risk that factors beyond management’s control, including fluctuations in the stock market, as well as management’s future subjective evaluation of the company’s needs, would impact the timing of share repurchases;
due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business;
the risk that a cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with customers;
the potential requirement to pay material amounts under our multiemployer defined benefit pension plans;
our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines;
labor issues, including the renegotiation of union contracts and shortage of qualified labor;
capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; and
the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders.

For a more detailed discussion of factors that could cause actual results to differ from those contained in the forward-looking statements, see the risk factors discussion contained in Item 1A of our fiscal 2021 Form 10-K.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures about Market Risk