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SYY Sysco

Filed: 3 Nov 20, 7:00pm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544
________________
syy-20200926_g1.jpg
Sysco Corporation
(Exact name of registrant as specified in its charter)
Delaware74-1648137
(State or other jurisdiction of incorporation or organization)(IRS employer identification number)

1390 Enclave Parkway, Houston, Texas 77077-2099
(Address of principal executive offices and zip code)

Registrant’s Telephone Number, Including Area Code:
(281) 584-1390

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock, $1.00 Par ValueSYYNew York Stock Exchange
1.25% Notes due June 2023SYY 23New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
(Do not check if a smaller reporting company)Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No þ

509,358,649 shares of common stock were outstanding as of October 16, 2020.




TABLE OF CONTENTS








PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 Sep. 26, 2020Jun. 27, 2020
 
ASSETS
Current assets
Cash and cash equivalents$5,985,532 $6,059,427 
Accounts receivable, less allowances of $265,597 and $334,8103,106,466 2,893,551 
Inventories3,134,732 3,095,085 
Prepaid expenses and other current assets197,074 192,163 
Income tax receivable9,294 108,006 
Total current assets12,433,098 12,348,232 
Plant and equipment at cost, less accumulated depreciation4,404,597 4,458,567 
Other long-term assets
Goodwill3,794,152 3,732,469 
Intangibles, less amortization776,598 780,172 
Deferred income taxes228,234 194,115 
Operating lease right-of-use assets, net621,307 603,616 
Other assets483,572 511,095 
Total other long-term assets5,903,863 5,821,467 
Total assets$22,741,558 $22,628,266 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable$5,408 $2,266 
Accounts payable4,035,332 3,447,065 
Accrued expenses1,697,995 1,616,289 
Accrued income taxes2,938 
Current operating lease liabilities108,704 107,167 
Current maturities of long-term debt1,320,628 1,542,128 
Total current liabilities7,168,067 6,717,853 
Long-term liabilities
Long-term debt12,422,780 12,902,485 
Deferred income taxes54,011 86,601 
Long-term operating lease liabilities545,485 523,496 
Other long-term liabilities1,217,227 1,204,953 
Total long-term liabilities14,239,503 14,717,535 
Noncontrolling interest33,977 34,265 
Shareholders’ equity
Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none
Common stock, par value $1 per share Authorized 2,000,000,000 shares, issued 765,174,900 shares765,175 765,175 
Paid-in capital1,534,281 1,506,901 
Retained earnings10,546,598 10,563,008 
Accumulated other comprehensive loss(1,612,386)(1,710,881)
Treasury stock at cost, 256,075,772 and 256,915,825 shares(9,933,657)(9,965,590)
Total shareholders’ equity1,300,011 1,158,613 
Total liabilities and shareholders’ equity$22,741,558 $22,628,266 
Note: The June 27, 2020 balance sheet has been derived from the audited financial statements at that date.
See Notes to Consolidated Financial Statements
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Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In thousands, except for share and per share data)
 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
Sales$11,777,379 $15,303,005 
Cost of sales9,557,534 12,359,635 
Gross profit2,219,845 2,943,370 
Operating expenses1,800,266 2,275,052 
Operating income419,579 668,318 
Interest expense146,717 83,335 
Other expense (income), net14,124 3,112 
Earnings before income taxes258,738 581,871 
Income taxes41,838 128,090 
Net earnings$216,900 $453,781 
  
Net earnings:  
Basic earnings per share$0.43 $0.88 
Diluted earnings per share0.42 0.87 
Average shares outstanding509,127,405 513,496,296 
Diluted shares outstanding510,738,760 518,761,456 

See Notes to Consolidated Financial Statements
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Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
Net earnings$216,900 $453,781 
Other comprehensive income (loss):
Foreign currency translation adjustment113,140 (126,159)
Items presented net of tax:
Amortization of cash flow hedges2,155 2,155 
Change in net investment hedges(11,261)30,000 
Change in cash flow hedges(12,967)9,259 
Amortization of prior service cost137 1,428 
Amortization of actuarial loss7,765 6,683 
Change in marketable securities(474)933 
Total other comprehensive income (loss)98,495 (75,701)
Comprehensive income$315,395 $378,080 

See Notes to Consolidated Financial Statements
3



Sysco Corporation and its Consolidated Subsidiaries
CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except for share data)


Accumulated
Other Comprehensive
Loss
 Common StockPaid-in
Capital
Retained
Earnings
Treasury Stock 
 SharesAmountSharesAmountsTotals
Balance as of June 27, 2020765,174,900 $765,175 $1,506,901 $10,563,008 $(1,710,881)256,915,825 $(9,965,590)$1,158,613 
Net earnings216,900 216,900 
Foreign currency translation adjustment113,140 113,140 
Amortization of cash flow hedges, net of tax2,155 2,155 
Change in cash flow hedges, net of tax(12,967)(12,967)
Change in net investment hedges, net of tax(11,261)(11,261)
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax7,902 7,902 
Change in marketable securities, net of tax(474)(474)
Adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), net of tax(2,068)(2,068)
Dividends declared ($0.45 per common share)(231,242)(231,242)
Share-based compensation awards27,380 (840,053)31,933 59,313 
Balance as of September 26, 2020765,174,900 $765,175 $1,534,281 $10,546,598 $(1,612,386)256,075,772 $(9,933,657)$1,300,011 
Accumulated
Other Comprehensive
Loss
 Common StockPaid-in
Capital
Retained
Earnings
Treasury Stock 
 SharesAmountSharesAmountsTotals
Balance as of June 29, 2019765,174,900 $765,175 $1,457,419 $11,229,679 $(1,599,729)252,297,926 $(9,349,941)$2,502,603 
Net earnings453,781 453,781 
Foreign currency translation adjustment(126,159)(126,159)
Amortization of cash flow hedges, net of tax2,155 2,155 
Change in cash flow hedges, net of tax9,259 9,259 
Change in net investment hedges, net of tax30,000 30,000 
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax8,111 8,111 
Change in marketable securities, net of tax933 933 
Adoption of ASU 2016-02, Leases (Topic 842), net of tax1,978 1,978 
Dividends declared ($0.39 per common share)(198,605)(198,605)
Treasury stock purchases4,587,397 (347,867)(347,867)
Share-based compensation awards33,242 (2,574,697)85,317 118,559 
Balance as of September 28, 2019765,174,900 $765,175 $1,490,661 $11,486,833 $(1,675,430)254,310,626 $(9,612,491)$2,454,748 

See Notes to Consolidated Financial Statements

4


Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
Cash flows from operating activities:
Net earnings$216,900 $453,781 
Adjustments to reconcile net earnings to cash provided by operating activities:
Share-based compensation expense25,834 21,386 
Depreciation and amortization180,520 187,405 
Operating lease asset amortization27,379 26,925 
Amortization of debt issuance and other debt-related costs6,554 4,920 
Deferred income taxes(53,579)(25,494)
Provision for losses on receivables(77,790)18,712 
Loss on sale of business12,043 
Other non-cash items(6,641)2,295 
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
Increase in receivables(111,261)(236,136)
Increase in inventories(23,320)(186,331)
Decrease (increase) in prepaid expenses and other current assets5,577 (30,133)
Increase (decrease) in accounts payable577,013 (38,894)
Increase (decrease) in accrued expenses56,042 (92,661)
Decrease in operating lease liabilities(31,167)(30,597)
Increase in accrued income taxes98,712 89,467 
Decrease in other assets7,187 3,141 
Increase in other long-term liabilities20,911 3,793 
Net cash provided by operating activities930,914 171,579 
Cash flows from investing activities:
Additions to plant and equipment(75,539)(175,728)
Proceeds from sales of plant and equipment7,064 4,902 
Acquisition of businesses, net of cash acquired(74,814)
Purchase of marketable securities(26,557)(4,002)
Proceeds from sales of marketable securities12,166 3,018 
Net cash used for investing activities(82,866)(246,624)
Cash flows from financing activities:
Bank and commercial paper borrowings, net3,110 533,400 
Other debt borrowings6,159 31,789 
Other debt repayments(762,858)(16,139)
Proceeds from stock option exercises31,933 85,317 
Treasury stock purchases(349,314)
Dividends paid(228,714)(200,037)
Other financing activities(457)(22,311)
Net cash (used for) provided by financing activities(950,827)62,705 
Effect of exchange rates on cash, cash equivalents and restricted cash17,095 (5,485)
Net decrease in cash, cash equivalents and restricted cash(85,684)(17,825)
Cash, cash equivalents and restricted cash at beginning of period6,095,570 532,245 
Cash, cash equivalents and restricted cash at end of period$6,009,886 $514,420 
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest$104,879 $84,407 
Income taxes6,851 70,013 
See Notes to Consolidated Financial Statements
5


Sysco Corporation and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.

1.  BASIS OF PRESENTATION

The consolidated financial statements have been prepared by the company, without audit. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income, changes in consolidated shareholders’ equity and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income, cash flows and changes in shareholders’ equity for all periods presented have been made.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020. Sysco’s fiscal year ends on the Saturday nearest to June 30th. This results in a 53-week year ending July 3, 2021 for fiscal 2021. Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements.

Supplemental Cash Flow Information

The following table sets forth the company’s reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statement of cash flows:
Sep. 26, 2020Sep. 28, 2019
(In thousands)
Cash and cash equivalents$5,985,532 $455,482 
Restricted cash (1)
24,354 58,938 
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows$6,009,886 $514,420 

(1)Restricted cash primarily represents cash and cash equivalents of Sysco’s wholly owned captive insurance subsidiary, restricted for use to secure the insurer’s obligations for workers’ compensation, general liability and auto liability programs. Restricted cash is located within other assets in each consolidated balance sheet.

2. CHANGES IN ACCOUNTING

Financial Instruments - Credit Losses

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. Sysco adopted this ASU as of June 28, 2020, the first day of fiscal 2021, with no significant impact to the company's financial statements.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The guidance amends Accounting Standards Codification (ASC) 350 to include in its scope implementation costs of a cloud computing arrangement that is a service contract and clarifies that a customer should apply ASC 350 to determine which implementation costs should be capitalized in such a cloud computing arrangement. Sysco adopted this ASU on June 28, 2020 on a prospective basis with no effect on the company’s financial statements.

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3. REVENUE

The company recognizes revenues when its performance obligations are satisfied in an amount that reflects the consideration Sysco expects to be entitled to receive in exchange for those goods and services. After completion of Sysco’s performance obligations, the company has an unconditional right to consideration as outlined in its contracts with customers. Sysco’s customer receivables will generally be collected in less than 30 days in accordance with the underlying payment terms. Customer receivables, which are included in accounts receivable, less allowances in the consolidated balance sheet, were $2.9 billion and $2.7 billion as of September 26, 2020 and June 27, 2020, respectively.

Sysco has certain customer contracts in which upfront monies are paid to its customers. These payments have become industry practice and are not related to financing of the customer’s business. They are not associated with any distinct good or service to be received from the customer and, therefore, are treated as a reduction of transaction prices. All upfront payments are capitalized in other assets and amortized over the life of the contract or the expected life of the relationship with the customer. As of September 26, 2020, Sysco’s contract assets were not significant. Sysco has no significant commissions paid that are directly attributable to obtaining a particular contract.

The following tables present our sales disaggregated by reportable segment and sales mix for the company’s principal product categories for the periods presented:

13-Week Period Ended Sep. 26, 2020
US Foodservice OperationsInternational Foodservice OperationsSYGMAOtherTotal
(In thousands)
Principal Product Categories
Fresh and frozen meats$1,491,000 $314,172 $428,919 $$2,234,091 
Canned and dry products1,391,218 391,578 29,573 1,812,369 
Frozen fruits, vegetables, bakery and other1,048,833 426,565 256,787 1,732,185 
Poultry830,775 179,026 216,635 1,226,436 
Dairy products819,493 232,956 147,029 1,199,478 
Fresh produce767,097 170,538 64,982 1,002,617 
Paper and disposables677,321 90,709 179,174 11,638 958,842 
Seafood481,717 88,567 25,096 595,380 
Beverage products179,652 77,466 148,591 11,210 416,919 
Other (1)
234,427 192,116 27,362 145,157 599,062 
Total Sales$7,921,533 $2,163,693 $1,524,148 $168,005 $11,777,379 

(1)Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment, and other janitorial products, medical supplies and smallwares.

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13-Week Period Ended Sep. 28, 2019
US Foodservice OperationsInternational Foodservice OperationsSYGMAOtherTotal
(In thousands)
Principal Product Categories
Fresh and frozen meats$2,075,300 $412,155 $381,377 $$2,868,832 
Canned and dry products1,898,889 586,625 37,190 2,522,704 
Frozen fruits, vegetables, bakery and other1,449,218 552,014 254,455 2,255,687 
Dairy products1,148,381 312,178 145,921 1,606,480 
Poultry1,090,106 218,600 204,269 1,512,975 
Fresh produce998,164 257,758 60,933 1,316,855 
Paper and disposables719,540 98,342 168,436 17,373 1,003,691 
Seafood685,410 149,590 24,855 859,855 
Beverage products290,785 132,852 143,679 24,329 591,645 
Other (1)
302,840 192,274 25,879 243,288 764,281 
Total Sales$10,658,633 $2,912,388 $1,446,994 $284,990 $15,303,005 

(1)Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and other janitorial products, medical supplies and smallwares.

Credit Risk

Sysco is potentially subject to group concentrations of credit risk with respect to accounts receivable, as large amounts of the company’s trade receivables are concentrated on customers within the food away from home industry across North America and Europe. The prolonged disruption of Sysco’s customers’ businesses due to the COVID-19 pandemic has created additional bad debt risk for the company.

Sysco determines the past due status of trade receivables based on contractual terms with each customer, evaluates the collectability of accounts receivable and determines the appropriate reserve for doubtful accounts or the uncollectible receivables to be written off. Many of Sysco’s customers, including those in the restaurant, hospitality and education segments, are operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures and a portion of Sysco’s customers are closed. Some of these customers have ceased paying their outstanding receivables, creating uncertainty as to their collectability. To calculate the ending reserve needed, the company estimated uncollectible amounts based on the current collection experience and by applying write-off percentages based on historical loss experience, including loss experience during times of local and regional disasters. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ.

In the first quarter of fiscal 2021, Sysco recognized a net $77.8 million benefit on its provision for losses on receivables. In the third and fourth quarters of fiscal 2020, the company experienced an increase in past due receivables and recognized additional bad debt charges on its trade receivables that were outstanding at the time the pandemic caused closures among our customers in mid-March 2020. These receivables were all created in fiscal 2020 and are referred to as pre-pandemic receivables. In the first quarter of fiscal 2021, collections of the company’s pre-pandemic receivables have improved, and its reserve for doubtful accounts has been reduced accordingly, resulting in a $98.6 million benefit. Additional reserves of $20.8 million were recorded in the first quarter of fiscal 2021 for receivables relating to periods beginning after the onset of the COVID-19 pandemic.


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4.  FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and
Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include cash deposits, time deposits, certificates of deposit, commercial paper, high-quality money market funds and all highly liquid instruments with original maturities of three months or less.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:

Cash deposits included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 1 measurement in the tables below.
Time deposits and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value. These are included within cash equivalents as a Level 2 measurement in the tables below.
Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents as Level 1 measurements in the tables below.
Fixed income securities are valued using evaluated bid prices based on a compilation of observable market information or a broker quote in a non-active market. Inputs used vary by type of security, but include spreads, yields, rate benchmarks, rate of prepayment, cash flows, rating changes and collateral performance and type.
The interest rate swap agreements are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates.
The foreign currency swap agreements, including cross-currency swaps, are valued using a swap valuation model that utilizes an income approach applying observable market inputs including interest rates, LIBOR swap rates for U.S. dollars, Canadian dollars, pound sterling and euro currencies, and credit default swap rates.
Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments.
Fuel swap contracts are valued based on observable market transactions of forward commodity prices.

The fair value of the company’s marketable securities are all measured using inputs that are considered a Level 2 measurement, as they rely on quoted prices in markets that are not actively traded or observable inputs over the full term of the asset. The location and the fair value of the company’s marketable securities in the consolidated balance sheet are disclosed in Note 5, “Marketable Securities.” The fair value of the company’s derivative instruments are all measured using inputs that are considered a Level 2 measurement, as they are not actively traded and are valued using pricing models that use observable market quotations. The location and the fair value of derivative assets and liabilities designated as hedges in the consolidated balance sheet are disclosed in Note 6, “Derivative Financial Instruments.”

9


The following tables present the company’s assets measured at fair value on a recurring basis as of September 26, 2020 and June 27, 2020:
 Assets Measured at Fair Value as of Sep. 26, 2020
 Level 1Level 2Level 3Total
 (In thousands)
Assets:
Cash equivalents
Cash and cash equivalents$5,038,629 $469,034 $$5,507,663 
Other assets (1)
24,354 24,354 
Total assets at fair value$5,062,983 $469,034 $$5,532,017 

(1)Represents restricted cash balance recorded within other assets in the consolidated balance sheet.
 Assets Measured at Fair Value as of Jun. 27, 2020
 Level 1Level 2Level 3Total
 (In thousands)
Assets:
Cash equivalents
Cash and cash equivalents$5,245,487 $300,200 $$5,545,687 
Other assets (1)
36,143 36,143 
Total assets at fair value$5,281,630 $300,200 $$5,581,830 

(1)Represents restricted cash balance recorded within other assets in the consolidated balance sheet.

The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for new debt with the same maturities as existing debt, and is considered a Level 2 measurement. The fair value of total debt was approximately $15.8 billion and $16.3 billion as of September 26, 2020 and June 27, 2020, respectively. The carrying value of total debt was $13.7 billion and $14.4 billion as of September 26, 2020 and June 27, 2020, respectively.

5. MARKETABLE SECURITIES

Sysco invests a portion of the assets held by its wholly owned captive insurance subsidiary in a restricted investment portfolio of marketable fixed income securities, which have been classified and accounted for as available-for-sale. The company includes fixed income securities maturing in less than twelve months within prepaid expenses and other current assets and includes fixed income securities maturing in more than twelve months within other assets in the accompanying
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consolidated balance sheets. The company records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period.

ASC 326 requires Sysco to estimate lifetime expected credit losses for all available-for-sale debt securities in an unrealized loss position by assessing credit indicators, including credit ratings, for the applicable securities. If the assessment indicates that an expected credit loss exists, the company determines the portion of the unrealized loss attributable to credit deterioration and records an allowance for the expected credit loss through the consolidated results of operations. Unrealized gains and any portion of a security’s unrealized loss attributable to non-credit losses are recorded in accumulated other comprehensive loss. There were no significant credit losses recognized in the first 13 weeks of fiscal 2021. The following table presents the company’s available-for-sale marketable securities as of September 26, 2020 and June 27, 2020:

Sep. 26, 2020
Amortized Cost BasisGross Unrealized GainsGross Unrealized LossesFair ValueShort-Term Marketable SecuritiesLong-Term Marketable Securities
(In thousands)
Fixed income securities:
Corporate bonds$88,593 $3,524 $(174)$91,943 $17,762 $74,181 
Government bonds33,265 5,035 (1)38,299 38,299 
Total marketable securities$121,858 $8,559 $(175)$130,242 $17,762 $112,480 
Jun. 27, 2020
Amortized Cost BasisGross Unrealized GainsGross Unrealized LossesFair ValueShort-Term Marketable SecuritiesLong-Term Marketable Securities
(In thousands)
Fixed income securities:
Corporate bonds$78,651 $4,064 $$82,715 $18,233 $64,482 
Government bonds28,633 4,919 33,552 33,552 
Total marketable securities$107,284 $8,983 $$116,267 $18,233 $98,034 

The fixed income securities held at September 26, 2020 had effective maturities ranging from less than one year to approximately ten years. There were no significant realized gains or losses in marketable securities in the first quarter of fiscal 2021.

6.  DERIVATIVE FINANCIAL INSTRUMENTS

Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes. Hedging strategies are used to manage interest rate risk, foreign currency risk and fuel price risk.

Hedging of interest rate risk

Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. In the first quarter of fiscal 2021, Sysco settled some of its previously held interest rate swap contracts, which had a notional value of $750 million, due to the redemption of Sysco’s 2.60% senior notes.

Hedging of foreign currency risk

Sysco previously entered into cross-currency swap contracts to hedge the foreign currency transaction risk of certain intercompany loans. There were no credit-risk related contingent features associated with these swaps, which had been designated as cash flow hedges. In the first quarter of 2021, Sysco settled its cross-currency swaps, which had a notional value of £234 million. The company also previously used euro-bond denominated debt to hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in Europe have inventory purchases denominated in currencies other than their functional currency, such as the euro, U.S. dollar, Polish zloty and Danish krone. These inventory
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purchases give rise to foreign currency exposure between the functional currency of each entity and these currencies. The company enters into foreign currency forward swap contracts to sell the applicable entity’s functional currency and buy currencies matching the inventory purchase, which operate as cash flow hedges of the company’s foreign currency-denominated inventory purchases.

Hedging of fuel price risk

Sysco uses fuel commodity swap contracts to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have been designated as cash flow hedges.

None of the company’s hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of September 26, 2020 are presented below:

Maturity Date of the Hedging InstrumentCurrency / Unit of MeasureNotional Value
(In millions)
Hedging of interest rate risk
July 2021U.S. Dollar500
June 2023Euro500
March 2025U.S. Dollar500
Hedging of foreign currency risk
Various (September 28, 2020 to October 2020)Swedish Krona57
Various (October 2020 to February 2021)British Pound Sterling7
June 2023Euro500
Hedging of fuel risk
Various (September 30, 2020 to December 2021)Gallons43

The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 26, 2020 and June 27, 2020 are as follows:
 Derivative Fair Value
 Balance Sheet locationSep. 26, 2020Jun. 27, 2020
(In thousands)
Fair Value Hedges:
Interest rate swapsOther current assets$4,013 $1,388 
Interest rate swapsOther assets62,594 69,782 
Cash Flow Hedges:
Fuel swapsOther current assets$455 $233 
Foreign currency forwardsOther current assets753 1,063 
Fuel swapsOther assets385 1,173 
Cross currency swapsOther assets19,614 
Fuel swapsOther current liabilities21,160 28,242 
Foreign currency forwardsOther current liabilities222 

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Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are not significant for each of the periods presented. The location and amount of gains or losses recognized in the consolidated results of operations for fair value hedging relationships for each of the periods, presented on a pretax basis, are as follows:
13-Week Period Ended
Sep. 26, 2020Sep. 28, 2019
(In thousands)
Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value hedges are recorded$146,717 $83,335 
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items$(9,998)$(24,736)
Derivatives designated as hedging instruments3,457 8,857 

    The losses on the fair value hedging relationships associated with the hedged items as disclosed in the table above are comprised of the following components for each of the periods presented:
13-Week Period Ended
Sep. 26, 2020Sep. 28, 2019
(In thousands)
Interest expense$(14,834)$(14,557)
Increase (decrease) in fair value of debt(4,836)10,179 
Hedged items$(9,998)$(24,736)



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The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 13-week periods ended September 26, 2020 and September 28, 2019, presented on a pretax basis, are as follows:
13-Week Period Ended Sep. 26, 2020
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on DerivativesLocation of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into IncomeAmount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands)(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps$2,891 Operating expense$(8,652)
Foreign currency contracts(19,732)Cost of sales / Other income(2,692)
Total$(16,841)$(11,344)
Derivatives in net investment hedging relationships:
Foreign denominated debt(36,550)N/A
Total$(36,550)$
13-Week Period Ended Sep. 28, 2019
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on DerivativesLocation of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into IncomeAmount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands)(In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps$344 Operating expense$(3,406)
Foreign currency contracts12,307 Cost of sales / Other income
Total$12,651 $(3,404)
Derivatives in net investment hedging relationships:
Foreign currency contracts$20,852 N/A$
Foreign denominated debt21,450 N/A
Total$42,302 $

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The location and carrying amount of hedged liabilities in the consolidated balance sheet as of September 26, 2020 are as follows:
Sep. 26, 2020
Carrying Amount of Hedged Assets (Liabilities)Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
(In thousands)
Balance sheet location:
Current maturities of long-term debt$(499,678)$(4,198)
Long-term debt(1,064,374)(62,594)

The location and carrying amount of hedged liabilities in the consolidated balance sheet as of June 27, 2020 are as follows:
Jun. 27, 2020
Carrying Amount of Hedged Assets (Liabilities)Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities)
(In thousands)
Balance sheet location:
Current maturities of long-term debt$(749,924)$(1,388)
Long-term debt(1,563,636)(70,239)

7. DEBT

The company has a $2.0 billion long-term revolving credit facility that expires on June 28, 2024, subject to extension. As of September 26, 2020, there were $700.0 million in borrowings outstanding under this facility. Sysco has a U.S. commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $2.0 billion. As of September 26, 2020, there were 0 commercial paper issuances outstanding under this program. Any outstanding amounts are classified within long-term debt, as the program is supported by the long-term revolving credit facility. Sysco’s United Kingdom-based subsidiary, Brake Bros Limited, has a separate U.K. commercial paper program for the purpose of issuing short-term, unsecured Sterling-denominated notes in an aggregate amount not to exceed £600.0 million. As of September 26, 2020, there were £600.0 million in aggregate principal amount of notes outstanding under this commercial paper program. The notes under this commercial paper program will mature on May 7, 2021 and are classified within current maturities of long-term debt. During the first 13 weeks of fiscal 2021, aggregate outstanding commercial paper issuances, borrowings under our long-term revolving credit facility and short-term bank borrowings ranged from approximately $1.4 billion to approximately $1.5 billion.

In September 2020, Sysco redeemed all $750 million of its outstanding 2.60% senior notes prior to the October 2020 maturity utilizing a combination of cash flow from operations and net proceeds from senior note issuances in fiscal 2020.

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8.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:
 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
 (In thousands, except for share
and per share data)
Numerator:  
Net earnings$216,900 $453,781 
Denominator:
Weighted-average basic shares outstanding509,127,405 513,496,296 
Dilutive effect of share-based awards1,611,355 5,265,160 
Weighted-average diluted shares outstanding510,738,760 518,761,456 
Basic earnings per share$0.43 $0.88 
Diluted earnings per share$0.42 $0.87 

The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 6,110,000 and 3,321,000 for the first quarter of fiscal 2021 and fiscal 2020, respectively.

9.  OTHER COMPREHENSIVE INCOME

Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, changes in marketable securities, amounts related to certain hedging arrangements and amounts related to pension and other postretirement plans. Comprehensive income was $315.4 million and $378.1 million for the first quarter of fiscal 2021 and fiscal 2020, respectively.

A summary of the components of other comprehensive income (loss) and the related tax effects for each of the periods presented is as follows:
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  13-Week Period Ended Sep. 26, 2020
 Location of
Expense (Income) Recognized in
Net Earnings
Before Tax
Amount
TaxNet of Tax
Amount
  (In thousands)
Pension and other postretirement benefit plans:    
Reclassification adjustments:
Amortization of prior service costOther expense, net$183 $46 $137 
Amortization of actuarial loss, netOther expense, net10,353 2,588 7,765 
Total reclassification adjustments10,536 2,634 7,902 
Foreign currency translation:
Foreign currency translation adjustmentN/A113,140 113,140 
Marketable securities:
   Change in marketable securities (1)
N/A(600)(126)(474)
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
   Change in cash flow hedge (3)
Operating expenses (2)
(16,841)(3,874)(12,967)
   Change in net investment hedgeN/A(20,399)(9,138)(11,261)
Total other comprehensive income before reclassification adjustments(37,240)(13,012)(24,228)
Reclassification adjustments:    
Amortization of cash flow hedgesInterest expense2,874 719 2,155 
Total other comprehensive income$88,710 $(9,785)$98,495 

(1)Realized gains or losses on marketable securities are presented within other (income) expense, net in the consolidated results of operations; however, there were no significant gains or losses realized in the first quarter of fiscal 2021.
(2)Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.
(3)Change in cash flow hedges includes the termination of some cash flow hedges, as described in Note 6, “Derivative Financial Instruments.”



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  13-Week Period Ended Sep. 28, 2019
 Location of
Expense (Income) Recognized in
Net Earnings
Before Tax
Amount
TaxNet of Tax
Amount
  (In thousands)
Pension and other postretirement benefit plans:    
Reclassification adjustments:    
Amortization of prior service costOther expense, net$1,905 $477 $1,428 
Amortization of actuarial loss, netOther expense, net8,942 2,259 6,683 
Total reclassification adjustments10,847 2,736 8,111 
Foreign currency translation:
Foreign currency translation adjustmentN/A(126,159)(126,159)
Marketable Securities:
Change in marketable securities (1)
N/A1,181 248 933 
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
Change in cash flow hedges
Operating expenses (2)
12,651 3,392 9,259 
Change in net investment hedgesN/A42,302 12,302 30,000 
Total other comprehensive income (loss) before reclassification adjustments54,953 15,694 39,259 
Reclassification adjustments:
Amortization of cash flow hedgesInterest expense2,874 719 2,155 
Total other comprehensive loss$(56,304)$19,397 $(75,701)

(1)Realized gains or losses on marketable securities are presented within other (income) expense, net in the consolidated results of operations; however, there were no significant gains or losses realized in the first quarter of fiscal 2020.
(2) Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.

The following tables provide a summary of the changes in accumulated other comprehensive (loss) income for the periods presented:
 13-Week Period Ended Sep. 26, 2020
 Pension and Other Postretirement Benefit Plans,
net of tax
Foreign Currency TranslationHedging,
net of tax
Marketable Securities,
net of tax
Total
 (In thousands)
Balance as of June 27, 2020$(1,265,714)$(402,384)$(49,878)$7,095 $(1,710,881)
Equity adjustment from foreign currency translation— 113,140 — — 113,140 
Amortization of cash flow hedges— — 2,155 — 2,155 
Change in net investment hedges— — (11,261)— (11,261)
Change in cash flow hedge— — (12,967)— (12,967)
Amortization of unrecognized prior service cost137 — — — 137 
Amortization of unrecognized net actuarial losses7,765 — — — 7,765 
Change in marketable securities— — — (474)(474)
Balance as of Sep. 26, 2020$(1,257,812)$(289,244)$(71,951)$6,621 $(1,612,386)

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 13-Week Period Ended Sep. 28, 2019
 Pension and Other Postretirement Benefit Plans,
net of tax
Foreign Currency TranslationHedging,
net of tax
Marketable Securities,
net of tax
Total
 (In thousands)
Balance as of Jun. 29, 2019$(1,217,617)$(290,169)$(94,770)2,827 $(1,599,729)
Equity adjustment from foreign currency translation— (126,159)— — (126,159)
Amortization of cash flow hedges— — 2,155 — 2,155 
Change in net investment hedges— — 30,000 — 30,000 
Change in cash flow hedge— — 9,259 — 9,259 
Amortization of unrecognized prior service cost1,428 — — — 1,428 
Amortization of unrecognized net actuarial losses6,683 — — — 6,683 
Change in marketable securities— — — 933 933 
Balance as of Sep. 28, 2019$(1,209,506)$(416,328)$(53,356)$3,760 $(1,675,430)

10.  SHARE-BASED COMPENSATION

Sysco provides compensation benefits to employees under several share-based payment arrangements, including various long-term employee stock incentive plans and the 2015 Employee Stock Purchase Plan (ESPP).

Stock Incentive Plans

In the first quarter of fiscal 2021, options to purchase 1,868,184 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first quarter of fiscal 2021 was $13.44.

In the first quarter of fiscal 2021, 749,505 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per PSU granted during the first quarter of fiscal 2021 was $57.92. The PSUs will convert into shares of Sysco common stock at the end of the two-year performance period based on actual performance targets achieved, as well as the market-based return of Sysco’s common stock relative to that of each company within the S&P 500 index.

In the first quarter of fiscal 2021, 395,803 restricted stock units were granted to employees. The weighted average grant-date fair value per restricted stock unit granted during the first quarter of fiscal 2021 was $57.01.

Employee Stock Purchase Plan

Plan participants purchased 273,323 shares of common stock under the Sysco ESPP during the first quarter of fiscal 2021. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $8.20 during the first quarter of fiscal 2021. The fair value of each stock purchase right is estimated as the difference between the stock price at the date of issuance and the employee purchase price.

All Share-Based Payment Arrangements

The total share-based compensation cost that has been recognized in results of operations was $25.8 million and $21.4 million for the first quarter of fiscal 2021 and fiscal 2020, respectively.

As of September 26, 2020, there was $143.7 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.01 years.

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11.  INCOME TAXES

Effective Tax Rate

The effective tax rates for the first quarters of fiscal 2021 and 2020 were 16.17% and 22.01%, respectively. As compared to the company’s statutory tax rate, the lower effective tax rate for the first quarter of fiscal 2021 was impacted by (1) the $7.6 million tax benefit attributable to the sale of the stock of Cake Corporation, (2) the impact of changes in tax law in the U.K. of $5.5 million and, (3) the favorable impact of excess tax benefits of equity-based compensation that totaled $2.3 million. The lower effective tax rate for the first quarter of fiscal 2020 was primarily due to the favorable impact of excess tax benefits of equity-based compensation that totaled $15.7 million.

Uncertain Tax Positions

As of September 26, 2020, the gross amount of unrecognized tax benefit and related accrued interest was $20.4 million and $2.1 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months. At this time, an estimate of the range of the reasonably possible change cannot be made.

Other

The determination of the company’s provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects income earned and taxed in the various U.S. federal and state, as well as foreign jurisdictions. Tax law changes, increases or decreases in permanent book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

12.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Sysco is engaged in various legal proceedings that have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable and reasonably estimable, the losses have been accrued. Although the final results of legal proceedings cannot be predicted with certainty, based on estimates of the range of potential losses associated with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company.

13.  BUSINESS SEGMENT INFORMATION

The company has aggregated certain of its operating segments into 3 reportable segments. “Other” financial information is attributable to the company’s other operating segments that do not meet the quantitative disclosure thresholds.

U.S. Foodservice Operations – primarily includes U.S. Broadline operations, which distribute a full line of food products including custom-cut meat, seafood, specialty produce, specialty imports and a wide variety of non-food products;
International Foodservice Operations – includes operations in the Americas and Europe, which distribute a full line of food products and a wide variety of non-food products. The Americas primarily consists of operations in Canada, Bahamas, Mexico, Costa Rica and Panama, as well as the company’s operations that distribute to international customers. The company’s European operations primarily consist of operations in the United Kingdom (U.K.), France, Ireland and Sweden;
SYGMA – the company’s U.S. customized distribution subsidiary; and
Other – primarily our hotel supply operations, Guest Worldwide. Sysco sold its interests in Cake Corporation in the first quarter of fiscal 2021.

The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Corporate expenses generally include all expenses of the corporate office and Sysco’s shared services center. These also include all share-based compensation costs. During the fourth quarter of fiscal 2020, Sysco revised the way performance is
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assessed for the U.S. Foodservice Operations segment. As a result of this change, charges incurred by the company’s corporate and shared services center, to provide direct support functions to the U.S. Foodservice Operations reportable segment, have been reclassified from Corporate expenses into the U.S. Foodservice reportable segment. The segment information disclosed for the first quarter of fiscal 2021 reflects this change in reporting structure and the first quarter of fiscal 2020 results reflect $67.8 million of corporate expense reclassifications to conform with the current year presentation.

The following tables set forth certain financial information for Sysco’s reportable business segments.

 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
Sales:(In thousands)
U.S. Foodservice Operations$7,921,533 $10,658,633 
International Foodservice Operations2,163,693 2,912,388 
SYGMA1,524,148 1,446,994 
Other168,005 284,990 
Total$11,777,379 $15,303,005 
 13-Week Period Ended
 Sep. 26, 2020Sep. 28, 2019
Operating income (loss):(In thousands)
U.S. Foodservice Operations$588,409 $793,618 
International Foodservice Operations(537)54,800 
SYGMA11,692 7,570 
Other(5)10,137 
Total segments599,559 866,125 
Corporate(179,980)(197,807)
Total operating income419,579 668,318 
Interest expense146,717 83,335 
Other expense (income), net14,124 3,112 
Earnings before income taxes$258,738 $581,871 

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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 June 27, 2020, 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 June 27, 2020 (our fiscal 2020 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Sysco’s fiscal year ends on the Saturday nearest to June 30th. This results in a 53-week year ending July 3, 2021 for fiscal 2021.

Sysco’s results of operations for fiscal 2021 and fiscal 2020 were impacted by restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges. All acquisition-related costs in fiscal 2021 and fiscal 2020 that have been designated as Certain Items relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). These include acquisition-related intangible amortization expense.

Fiscal 2021 results of operations were also positively impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the unexpected impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Many of Sysco’s customers, including those in the restaurant, hospitality and education segments, are operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures and a portion of Sysco’s customers are closed. Some of these customers ceased paying their outstanding receivables, creating uncertainty as to their collectability. We experienced an increase in past due receivables and recognized additional bad debt charges in the third and fourth quarters of fiscal 2020; however, collections have improved in fiscal 2021. We have estimated uncollectible amounts based on the current collection experience and by applying write-off percentages based on historical loss experience, including loss experience during times of local and regional disasters. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ and additional charges may be required; however, if collections continue to improve, it is also possible that additional reductions in our bad debt reserve could occur. While Sysco traditionally incurs bad debt expense, the magnitude of such expenses and benefits that we have experienced is not indicative of our normal operations. Our adjusted results have not been normalized in a manner that would exclude the full impact of the COVID-19 pandemic on our business. As such, Sysco has not adjusted its results for lost sales, inventory write-offs or other costs associated with the COVID-19 pandemic not previously stated.

The fiscal 2021 and fiscal 2020 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 International Foodservice Operations results on a constant currency basis. Our discussion below of our results includes certain non-GAAP financial measures 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 and exclude the impact from Certain Items, and certain metrics are stated on a constant currency basis.

More information on the rationale for the use of non-GAAP financial measures and reconciliations to the most directly comparable numbers calculated in accordance with U.S. generally accepted accounting principles (GAAP) can be found under “Non-GAAP Reconciliations.”

During the fourth quarter of fiscal 2020, Sysco revised the way performance is assessed for the U.S. Foodservice Operations segment. As a result of this change, charges incurred by the company’s corporate office to provide direct support functions to the U.S. Foodservice Operations reportable segment have been reclassified from Corporate expenses into the U.S. Foodservice reportable segment. The segment information disclosed for fiscal 2021 reflects this change in reporting structure and prior year amounts have been reclassified to conform with the current year presentation.

Key Performance Indicators

Sysco seeks to meet its strategic goals by continually measuring its success in its key performance metrics that drive stakeholder value through sales growth and capital allocation and deployment. We believe the following are our most significant performance metrics:

Adjusted operating income growth and adjusted operating income leverage (non-GAAP);
Adjusted diluted earnings per share growth (non-GAAP);
Case volume growth by customer type for U.S. Broadline operations;
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Sysco brand penetration for U.S. Broadline operations;
Free cash flow (non-GAAP); and
Adjusted return on invested capital.

We use these financial metrics and related computations, as well as sales and gross profit growth, to evaluate our business and to plan for near-and long-term operating and strategic decisions. We believe it is useful to provide investors with the same financial information that we use internally to make comparisons of our historical operating results, identify trends in our underlying operating results and evaluate our business.

Highlights and Trends

Highlights

Our first quarter of fiscal 2021 results continue to be impacted by the COVID-19 pandemic; however, we produced positive free cash flow and with our overall expense management, we experienced a profitable quarter despite a 23% reduction in sales. We saw improvement in the overall sales environment throughout the quarter and remain focused upon serving our customers. Our business transformation is on track as Sysco continues to manage through the COVID-19 pandemic, and we are using the crisis as an opportunity to accelerate our strategic transformation, which is expected to help improve how we serve our customers, differentiate ourselves from the competition and transform our industry. Our strategic transformation priorities include acceleration of our work across our customer-facing tools and technology, sales transformation to improve selling effectiveness and provide a more customer-centric structure, regionalization of our U.S. Broadline business to enable us to operate with greater agility and efficiency as a company, and the reduction of permanent costs from the business. All of these are expected to enable us to improve profitability and fund new sources of business growth. See below for a comparison of our first quarter of fiscal 2021 results to our first quarter of fiscal 2020 results, both including and excluding Certain Items.

Comparisons of results from the first quarter of fiscal 2021 to the first quarter of fiscal 2020:

Sales:
decreased 23.0%, or $3.5 billion, to $11.8 billion;
Operating income:
decreased 37.2%, or $248.7 million, to $419.6 million;
adjusted operating income decreased 50.8%, or $377.3 million, to $364.7 million;
Net earnings:
decreased 52.2%, or $236.9 million, to $216.9 million;
adjusted net earnings decreased 66.0%, or $336.8 million, to $173.5 million;
Basic earnings per share:
decreased 51.1%, or $0.45, to $0.43 per share;
Diluted earnings per share:
decreased 51.7%, or $0.45, to $0.42 per share; and
adjusted diluted earnings per share decreased 65.3%, or $0.64, to $0.34 per share.

See “Non-GAAP Reconciliations” below for an explanation of adjusted operating income, adjusted net earnings and adjusted diluted earnings per share, which are non-GAAP financial measures, and reconciliations to the most directly comparable GAAP financial measures.

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Trends

Economic and Industry Trends

The COVID-19 pandemic has significantly negatively affected economic and industry trends, primarily in the form of increased unemployment and significantly lower levels of activity in the food-away-from-home market. The level of government-imposed restrictions placed on our customers in response to the pandemic impacts our ability to achieve sales growth. In the first quarter of fiscal 2021, we experienced steady, week-over-week improvement in sales at the beginning of the quarter, followed by a leveling of the improvement as we exited the quarter. We believe our road to full recovery will be non-linear. We are focused on sales growth even as new restrictions that have been placed upon our customers in the second quarter are stalling the recovery, with sales volume approximately 20% below the comparable prior year period, with the potential for worsening results due to additional COVID restrictions. Where restrictions have eased, however, consumers are showing that they are ready to eat away from home. Southern U.S. states and more rural geographies continue to outperform national averages. We believe the tightening or loosening of restrictions on customers will be the primary driver of the pace of business recovery until vaccines are broadly available. In the second quarter of fiscal 2020, select geographies are experiencing increased restrictions on restaurant operations. We expect these restrictions to impact second quarter sales results particularly in Europe.
Sales and Gross Profit Trends

Our sales and gross profit performance can be influenced by multiple factors, including price, volume, product mix, customer mix and the impact of the COVID-19 pandemic. The biggest factor affecting performance in our first quarter was the COVID-19 pandemic due to reduced volume. In terms of customer mix, during the first quarter of fiscal 2021, we observed better than expected performance from local customers, specifically independent customers, as they are growing at an accelerated rate compared to total customer growth. Additionally, restaurants performed better than expected, including improved performance throughout the first quarter in SYGMA, as we are seeing continued resiliency in the industry. Healthcare performed well throughout the first quarter, which was offset by continued weakness in our food service management and hospitality segments.

Product mix was a factor that impacted our sales and gross margins. Our gross margin decreased 39 basis points in the first quarter of fiscal 2021 compared to the prior year; however, we ended the quarter with an exit rate that was relatively flat. This improved exit rate was primarily driven by favorable margins in the paper and disposables category, namely personal protection equipment. Margins within this category have normalized as demand has begun to stabilize.

In terms of the impact on pricing, we experienced inflation at a rate of 1.0% during the first quarter of fiscal 2021, primarily in the dairy products, paper and disposables and meat categories.

With our focus on growing sales, in the first quarter of fiscal 2021 we added approximately $300 million of net new business. Since the beginning of the pandemic, we have added $1.3 billion of new national customer business on an annualized basis. We are also adding new customers at the local level at an accelerated rate compared to prior year, due to an increased rate of new customer prospecting. We believe these customer additions will enable Sysco to recover faster than the market as economic conditions improve.

Operating Expense Trends

Total operating expenses decreased 20.9% during the first quarter of fiscal 2021, as compared to the same period in fiscal 2020. The largest contributor to the decrease was a benefit from a reduction in our allowance for doubtful accounts as a result of the COVID-19 pandemic, as well as reduced costs from cost-out initiatives. Many of Sysco’s customers, including those in the restaurant, hospitality and education segments, are operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures and portion of Sysco’s customers are closed. Some of these customers have ceased paying their outstanding receivables, creating uncertainty as to their collectability. We established reserves for bad debts in fiscal 2020 for these receivables; however, collections have improved in fiscal 2021 and, as a result, we have reduced our reserves on pre-pandemic receivables, recognizing a $98.6 million benefit, included as a Certain Item. Additional reserves of $20.8 million were recorded in the first quarter of fiscal 2021 for receivables relating to periods beginning after the onset of the COVID-19 pandemic, which are not included as a Certain Item. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ and additional charges may be required; however, if collections continue to improve, it is also possible that additional reductions in our bad debt reserve could occur.

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Cost-out Measures

The COVID-19 crisis has compelled us to take action to reduce costs by reducing variable expenses in response to reduced customer demand, aligning inventory to current sales trends, reducing capital expenditures to only urgent projects and targeted investments and tightly managing receivables. These actions produced savings in the first quarter of fiscal 2021. We have reduced pay-related expenses through headcount reductions across the organization, most of which occurred in fiscal 2020. Our U.S. broadline regionalization also contributed to reduced costs. We believe that our cost reduction initiatives are on track to remove approximately $350 million in structural costs from the business in fiscal 2021. We expect the majority of these savings will flow through to the bottom line, while a portion of the cost savings will be reinvested in our growth agenda. We are also reviewing for additional savings that would begin in fiscal 2022 and beyond.

Status of Supply Chain Disruptions and Facility Closures

Although our business continues to face challenges associated with decreased customer demand and increased costs directly related to the COVID-19 crisis, to date we have not experienced any significant disruptions to our supply chain, significant distribution facility closures or disposals of significant assets or lines of business. The foodservice distribution industry is considered to be an essential industry and, as such, we expect our supply chain and facilities to remain in place and operational in the current environment and in the event of worsening macroeconomic conditions in connection with a prolonged downturn.

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. The impact of the COVID-19 pandemic may change our mix of earnings by jurisdiction and has increased the risk that operating losses may occur within certain of our jurisdictions that could lead to the recognition of valuation allowances against certain deferred tax assets in the future, if these losses are prolonged beyond our current expectations. These effects would negatively impact our income tax expense, net earnings, and balance sheet.

Divestitures

Sysco sold its interests in Cake Corporation in the first quarter of fiscal 2021.

Strategy

In response to the current environment, we have identified four key areas of focus as we manage the business in the near-term and prepare the company for recovery once the COVID-19 crisis subsides. First, we have taken actions to strengthen our overall liquidity. Second, we are focused on stabilizing the business by removing costs. Third, we are creating new sources of revenue by helping our restaurant customers succeed under pandemic conditions. Fourth, we are providing products for cleaning, sanitation, and personal protection, without disruptions, so that our customers may continue their business operations.

While our response to the COVID-19 pandemic has been a primary focus, we have also accelerated our transformation initiatives that improve how we serve our customers, differentiate Sysco from our competitors and transform the industry. These include:

Improving service to our customers by enhancing our digital order entry platform, Sysco Shop, and deploying a digital pricing tool;
Transforming our sales model to make it easier for customers to do business with Sysco and to increase the effectiveness of our sales teams;
Regionalizing our operations in the U.S. within our U.S. Broadline business; and
Removing structural fixed costs from our business and becoming a more efficient company. return value to shareholders and to fund our continued growth plans.

By the end of the first quarter, the percentage of orders placed through Sysco Shop increased to approximately 60%. We believe this increase is a direct result of the improvements we are making to the Sysco Shop platform, combined with the consultation that our sales force has been providing customers on how best to utilize the tools we have built, while soliciting feedback on what our customers most want to see in the Sysco Shop platform. Additionally, we are on track to begin piloting
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our new pricing software in November 2020. We finalized the regionalization of our U.S. Broadline business in September 2020, and we are making good progress on implementing our strategic initiatives.

See “Non-GAAP Reconciliations” below for an explanation of adjusted operating income and adjusted return on invested capital, which are non-GAAP financial measures.

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
 Sep. 26, 2020Sep. 28, 2019
Sales100.0 %100.0 %
Cost of sales81.2 80.8 
Gross profit18.8 19.2 
Operating expenses15.3 14.9 
Operating income3.5 4.3 
Interest expense1.2 0.5 
Other expense (income), net0.1 — 
Earnings before income taxes2.2 3.8 
Income taxes0.4 0.8 
Net earnings1.8 %3.0 %

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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
Sep. 26, 2020
Sales(23.0)%
Cost of sales(22.7)
Gross profit(24.6)
Operating expenses(20.9)
Operating income(37.2)
Interest expense76.1 
Other expense (income), net (1)
353.9 
Earnings before income taxes(55.5)
Income taxes(67.3)
Net earnings(52.2)%
Basic earnings per share(51.1)%
Diluted earnings per share(51.7)
Average shares outstanding(0.9)
Diluted shares outstanding(1.5)

(1)Other expense (income), net was expense of $14.1 million and $3.1 million in the first quarter of fiscal 2021 and fiscal 2020, respectively.

The following tables represent our results by reportable segments:

 13-Week Period Ended Sep. 26, 2020
 U.S. Foodservice OperationsInternational Foodservice OperationsSYGMAOtherCorporateConsolidated
Totals
 (In thousands)
Sales$7,921,533 $2,163,693 $1,524,148 $168,005 $— $11,777,379 
Sales increase (decrease)(25.7)%(25.7)%5.3 %(41.0)%(23.0)%
Percentage of total67.3 %18.4 %12.9 %1.4 %100.0 %
Operating income (loss)$588,409 $(537)$11,692 $(5)$(179,980)$419,579 
Operating income (loss) increase (decrease)(25.9)%NM54.5 %NM(37.2)%
Percentage of total segments98.1 %(0.1)%2.0 %— %100.0 %
Operating income (loss) as a percentage of sales7.4 %— %0.8 %— %3.6 %

 13-Week Period Ended Sep. 28, 2019
 U.S. Foodservice OperationsInternational Foodservice OperationsSYGMAOtherCorporateConsolidated
Totals
 (In thousands)
Sales$10,658,633 $2,912,388 $1,446,994 $284,990 $— $15,303,005 
Percentage of total69.7 %19.0 %9.5 %1.8 %100.0 %
Operating income$793,618 $54,800 $7,570 $10,137 $(197,807)$668,318 
Percentage of total segments91.6 %6.3 %0.9 %1.2 %100.0 %
Operating income as a percentage of sales7.4 %1.9 %0.5 %3.6 %4.3 %

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 2021, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 85.7% of Sysco’s overall sales. In the first quarter of fiscal 2021, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 98.0% of the total segment
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operating income. This illustrates that these segments represent the majority of our total segment results when compared to the other reportable segment.

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 Sep. 26, 202013-Week Period Ended Sep. 28, 2019Change in Dollars% Change
 (Dollars in thousands)
Sales$7,921,533 $10,658,633 $(2,737,100)(25.7)%
Gross profit1,599,707 2,144,886 (545,179)(25.4)
Operating expenses1,011,298 1,351,268 (339,970)(25.2)
Operating income$588,409 $793,618 $(205,209)(25.9)%
Gross profit$1,599,707 $2,144,886 $(545,179)(25.4)%
Adjusted operating expenses (Non-GAAP)1,096,675 1,347,142 (250,467)(18.6)
Adjusted operating income (Non-GAAP)$503,032 $797,744 $(294,712)(36.9)%

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 changePercentageDollars
Case volume(25.6)%$(2,728.2)
Inflation0.9 92.2 
Acquisitions0.3 33.8 
Other (1)
(1.3)(134.9)
Total change in sales(25.7)%$(2,737.1)

(1)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.”

Sales for the first quarter of fiscal 2021 were 25.7% lower than the first quarter of fiscal 2020. The primary driver of the decrease was the significant decline in case volume in our U.S. Broadline operations as a result of some of our customers closing and many other customers operating at a substantially reduced volume in response to the COVID-19 pandemic. Case volumes from our U.S. Broadline operations, including acquisitions within the last 12 months, decreased 25.8% in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, and included a 21.6% decline in locally managed customer case growth along with a 30.9% decrease in national customer case volume. Sales from acquisitions within the last 12 months favorably impacted locally managed customer sales by 0.1% for the first quarter of fiscal 2021; therefore, organic local case volume, which excludes acquisitions, declined 21.7%.

Operating Income

Operating income decreased 25.9% for the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020.

Gross profit dollars decreased 25.4% in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, driven primarily by the decline in local cases. The decrease was partially offset by higher inflation and growth in Sysco-branded products. The estimated change in product costs, an internal measure of inflation or deflation, for the first quarter of fiscal 2021 for our U.S. Broadline operations was inflation of 1.0%. For the first quarter of fiscal 2021, this change in product costs was
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primarily driven by inflation in the dairy products, paper and disposables and meat categories. Our Sysco brand sales as a percentage of total U.S. cases increased 15 basis points, which was driven by customer mix shift and brand penetration in certain categories. Sysco brand sales as a percentage of local U.S. cases decreased by approximately 106 basis points for the first quarter of fiscal 2021. Gross margin, which is gross profit as a percentage of sales, was 20.19% in the first quarter of fiscal 2021, which was an increase of 7 basis points from the gross margin of 20.12% in the first quarter of fiscal 2020, primarily attributable to inflation and favorable margins in the paper and disposables category, primarily from personal protection equipment.

Operating expenses for the first quarter of fiscal 2021 decreased 25.2%, or $340.0 million, compared to the first quarter of fiscal 2020, primarily driven by a decrease in pay-related costs associated with permanent headcount reductions made in fiscal 2020 in response to the COVID-19 pandemic and the reduction of reserves on pre-pandemic receivables. Operating expenses, on an adjusted basis (which is a non-GAAP financial measure for which a reconciliation is provided below), for the first quarter of fiscal 2021, decreased 18.6%, or $250.5 million, compared to the first quarter of fiscal 2020.

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 Sep. 26, 202013-Week Period Ended Sep. 28, 2019Change in Dollars% Change
 (Dollars in thousands)
Sales$2,163,693 $2,912,388 $(748,695)(25.7)%
Gross profit450,398 605,185 (154,787)(25.6)
Operating expenses450,935 550,385 (99,450)(18.1)
Operating (loss) income$(537)$54,800 $(55,337)NM
Gross profit$450,398 $605,185 $(154,787)(25.6)%
Adjusted operating expenses (Non-GAAP)431,616 506,204 (74,588)(14.7)
Adjusted operating income (Non-GAAP)$18,782 $98,981 $(80,199)(81.0)%
Sales on a constant currency basis (Non-GAAP)$2,123,053 $2,912,388 $(789,335)(27.1)%
Gross profit on a constant currency basis (Non-GAAP)438,886 605,185 (166,299)(27.5)
Adjusted operating expenses on a constant currency basis (Non-GAAP)419,287 506,204 (86,917)(17.2)
Adjusted operating income on a constant currency basis (Non-GAAP)$19,599 $98,981 $(79,382)(80.2)%

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 changePercentageDollars
Inflation2.8 %$81.8 
Foreign currency1.4 40.6 
Other (1)
(29.9)(871.1)
Total change in sales(25.7)%$(748.7)

(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.
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Sales for the first quarter of fiscal 2021 were 25.7% lower, as compared to the first quarter of fiscal 2020, primarily due to the significant decline in volume in our Europe and Canada operations as a result of some of our customers closing and many other customers operating at a substantially reduced volume in response to the COVID-19 pandemic. Our business in Europe has decreased significantly year-over-year, as governments have issued additional “stay-at-home” restrictions and restaurant traffic has decreased as a result. Restaurant sales in Canada have decreased as consumers are practicing isolation measures to protect health and safety. For our Latin American businesses, the impact of COVID-19 has been most prominent in Mexico, where sales decreased more rapidly.

Operating Income

Operating income decreased by $55.3 million for the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, primarily due to the decline in business resulting from the reductions in our customers’ business in response to the COVID-19 pandemic and from ongoing restructuring and transformation projects in our European operations. Operating income, on an adjusted basis, decreased by $80.2 million, or 81.0%, for the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020. Foreign exchange rates did not have a meaningful impact on operating income during the current year.

Gross profit dollars decreased by 25.6% in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, primarily attributable to the decline in sales. Changes in foreign exchange rates positively affected gross profit by 1.9%, resulting in a 27.5% decrease in adjusted gross profit on a constant currency basis.

Operating expenses for the first quarter of fiscal 2021 decreased 18.1%, or $99.5 million, as compared to the first quarter of fiscal 2020, primarily due to a decrease in pay-related costs associated with permanent workforce reductions made in fiscal 2020 as a result of the COVID-19 pandemic. Additionally, reduced restructuring and integration charges in Europe and the reduction of reserves on pre-pandemic receivables contributed to the decrease. Operating expenses, on an adjusted basis, for the first quarter of fiscal 2021 decreased 14.7%, or $74.6 million, compared to the first quarter of fiscal 2020. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars negatively affected operating expenses during the period by 2.4%, resulting in a 17.2% decrease in adjusted operating expenses on a constant currency basis.

Results of SYGMA and Other Segment

For SYGMA, sales were 5.3% higher in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, primarily from an increase in case volume due to newly acquired business and an increase in customer demand as quick service restaurants have been less impacted by the effects of the COVID-19 pandemic. Operating income increased by $4.1 million in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, as our increase in case volume exceeded the increase in expenses, resulting from our focus on business and routing optimization and improved gross margin performance.

For the operations that are grouped within Other, operating income decreased $10.1 million in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020. Our hospitality business, Guest Worldwide, had a gross profit decrease of 50.3% in the first quarter of fiscal 2021. This business remains challenged, as the customers in the hospitality segment continue to see lower occupancy rates compared to historical levels. During the first quarter of fiscal 2021, we sold a non-core asset, Cake Corporation, as we chose to narrow our business focus.

Corporate Expenses

Corporate expenses in the first quarter of fiscal 2021 decreased $15.7 million, or 8.1%, as compared to the first quarter of fiscal 2020, primarily due to a reduction in pay-related costs associated with permanent headcount reductions made in the third and fourth quarters of fiscal 2020 in response to the COVID-19 pandemic. Lower charges for professional fees and other business transformation initiatives also contributed to the decrease. Corporate expenses, on an adjusted basis, increased $5.0 million, or 2.9% as compared to the first quarter of fiscal 2020.

Included in corporate expenses are Certain Items that totaled $12.0 million in the first quarter of fiscal 2021, as compared to $22.7 million in the first quarter of fiscal 2020. Certain Items impacting the first quarters of fiscal 2021 and fiscal 2020 were primarily expenses associated with our business technology transformation initiatives.

Interest Expense

Interest expense increased $63.4 million for the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, primarily attributable to higher fixed debt volume, partially offset by lower floating interest rates.
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Net Earnings

Net earnings decreased 52.2% in the first quarter of fiscal 2021, as compared to the first quarter of fiscal 2020, 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, decreased 66.0% in the first quarter of fiscal 2021, primarily due to a significant decrease in sales volume, partially offset by a favorable tax expense compared to the prior year.

Earnings Per Share

Basic earnings per share in the first quarter of fiscal 2021 were $0.43, a 51.1% decrease from the comparable prior year period amount of $0.88 per share. Diluted earnings per share in the first quarter of fiscal 2021 were $0.42, a 51.7% decrease from the comparable prior year period amount of $0.87 per share. Adjusted diluted earnings per share, excluding Certain Items, in the first quarter of fiscal 2021 were $0.34, a 65.3% decrease from the comparable prior year period amount of $0.98 per share. These results were primarily attributable to the factors discussed above related to net earnings in the first quarter of fiscal 2021.



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Non-GAAP Reconciliations

Sysco’s results of operations for fiscal 2021 and fiscal 2020 were impacted by 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. All acquisition-related costs in fiscal 2021 and fiscal 2020 that have been designated as Certain Items relate to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). These include acquisition-related intangible amortization expense.
Fiscal 2021 results of operations were also positively impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the unexpected impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Many of Sysco’s customers, including those in the restaurant, hospitality and education segments, are operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures and a portion of Sysco’s customers are closed. Some of these customers ceased paying their outstanding receivables, creating uncertainty as to their collectability. We experienced an increase in past due receivables and recognized additional bad debt charges in the third and fourth quarters of fiscal 2020; however, collections have improved in fiscal 2021. We have estimated uncollectible amounts based on the current collection experience and by applying write-off percentages based on historical loss experience, including loss experience during times of local and regional disasters. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ and additional charges may be required; however, if collections continue to improve, it is also possible that additional reductions in our bad debt reserve could occur. While Sysco traditionally incurs bad debt expense, the magnitude of such expenses and benefits, that we have experienced is not indicative of our normal operations. Our adjusted results have not been normalized in a manner that would exclude the full impact of the COVID-19 pandemic on our business. As such, Sysco has not adjusted its results for lost sales, inventory write-offs or other costs associated with the COVID-19 pandemic not previously stated.
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 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 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, facilitating comparisons on a year-over-year basis and (2) removes those items that are difficult to predict and are often unanticipated and that, as a result, are difficult to include in analysts’ financial models and our investors’ expectations with any degree of specificity.
Although Sysco has a history of growth through acquisitions, the Brakes Group was 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 period solely those acquisition costs specific to the Brakes Acquisition. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal 2021 and fiscal 2020.
Set forth below is a reconciliation of sales, operating expenses, operating income, interest 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.


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 13-Week Period Ended Sep. 26, 202013-Week Period Ended Sep. 28, 2019Change in Dollars% Change
 (Dollars in thousands, except for per share data)
Operating expenses (GAAP)$1,800,266 $2,275,052 $(474,786)(20.9)%
Impact of restructuring and transformational project costs (1)
(25,964)(56,722)30,758 (54.2)
Impact of acquisition-related costs (2)
(17,755)(16,909)(846)5.0 
Impact of bad debt reserve adjustments (3)
98,629 — 98,629 NM
Operating expenses adjusted for Certain Items (Non-GAAP)$1,855,176 $2,201,421 $(346,245)(15.7)%
Operating income (GAAP)$419,579 $668,318 $(248,739)(37.2)%
Impact of restructuring and transformational project costs (1)
25,964 56,722 (30,758)(54.2)
Impact of acquisition-related costs (2)
17,755 16,909 846 5.0 
Impact of bad debt reserve adjustments (3)
(98,629)— (98,629)NM
Operating income adjusted for Certain Items (Non-GAAP)$364,669 $741,949 $(377,280)(50.8)%
Other (income) expense (GAAP)$14,124 $3,112 $11,012 NM
Impact of loss on sale of a business(12,043)— (12,043)NM
Other (income) expense (Non-GAAP)$2,081 $3,112 $(1,031)(33.1)%
Net earnings (GAAP)$216,900 $453,781 $(236,881)(52.2)%
Impact of restructuring and transformational project costs (1)
25,964 56,722 (30,758)(54.2)
Impact of acquisition-related costs (2)
17,755 16,909 846 5.0 
Impact of bad debt reserve adjustments (3)
(98,629)— (98,629)NM
Impact of loss on sale of a business12,043 — 12,043 NM
Tax impact of restructuring and transformational project costs (4)
(5,920)(13,921)8,001 (57.5)
Tax impact of acquisition-related costs (4)
(4,048)(4,149)101 (2.4)
Tax impact of bad debt reserve adjustments (4)
22,488 — 22,488 NM
Tax impact of loss on sale of a business
(7,553)— (7,553)NM
Impact of foreign tax rate change(5,548)924 (6,472)NM
Net earnings adjusted for Certain Items (Non-GAAP)$173,452 $510,266 $(336,814)(66.0)%
Diluted earnings per share (GAAP)$0.42 $0.87 $(0.45)(51.7)%
Impact of restructuring and transformational project costs (1)
0.05 0.11 (0.06)(54.5)
Impact of acquisition-related costs (2)
0.03 0.03 — NM
Impact of bad debt reserve adjustments (3)
(0.19)— (0.19)NM
Impact of loss on sale of a business0.02 — 0.02 NM
Tax impact of restructuring and transformational project costs (4)
(0.01)(0.03)0.02 (66.7)
Tax impact of acquisition-related costs (4)
(0.01)(0.01)— NM
Tax impact of bad debt reserve adjustments (4)
0.04 — 0.04 NM
Tax impact loss on sale of a business(0.01)— (0.01)NM
Tax impact of foreign tax rate change(0.01)— (0.01)NM
Diluted EPS adjusted for Certain Items (Non-GAAP) (5)
$0.34 $0.98 $(0.64)(65.3)%

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(1)Fiscal 2021 includes $13 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy, and $13 million primarily consisting of restructuring charges. Fiscal 2020 includes $30 million related to restructuring, facility closure and severance charges and $27 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy.
(2)Fiscal 2021 and fiscal 2020 include $18 million and $17 million, respectively, related to intangible amortization expense from the Brakes Acquisition, which is included in the results of International Foodservice.
(3)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 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.
(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.

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Set forth below is a reconciliation by segment of actual operating expenses and operating income to adjusted results for these measures for applicable segments and corporate for the periods presented (dollars in thousands):
13-Week Period Ended Sep. 26, 202013-Week Period Ended Sep. 28, 2019Change in Dollars% Change
U.S. FOODSERVICE OPERATIONS
Operating expenses (GAAP)$1,011,298 $1,351,268 $(339,970)(25.2)%
Impact of restructuring and transformational project costs (1)
(940)(4,126)3,186 (77.2)
Impact of bad debt reserve adjustments (2)
86,317 — 86,317 NM
Operating expenses adjusted for Certain Items (Non-GAAP)$1,096,675 $1,347,142 $(250,467)(18.6)%
Operating income (GAAP)$588,409 $793,618 $(205,209)(25.9)%
Impact of restructuring and transformational project costs (1)
940 4,126 (3,186)(77.2)
Impact of bad debt reserve adjustments (2)
(86,317)— (86,317)NM
Operating income adjusted for Certain Items (Non-GAAP)$503,032 $797,744 $(294,712)(36.9)%
INTERNATIONAL FOODSERVICE OPERATIONS
Sales (GAAP)$2,163,693 $2,912,388 $(748,695)(25.7)%
Impact of currency fluctuations (3)
(40,640)— (40,640)1.4 
Comparable sales using a constant currency basis (Non-GAAP)$2,123,053 $2,912,388 $(789,335)(27.1)%
Gross Profit (GAAP)$450,398 $605,185 $(154,787)(25.6)%
Impact of currency fluctuations (3)
(11,512)— (11,512)1.9 
Comparable gross profit using a constant currency basis (Non-GAAP)$438,886 $605,185 $(166,299)(27.5)%
Gross Margin (GAAP)20.82 %20.78 %4 bps
Impact of currency fluctuations (3)
0.15 %— 15 bps
Comparable gross margin using a constant currency basis (Non-GAAP)20.67 %20.78 %-11 bps
Operating expenses (GAAP)$450,935 $550,385 $(99,450)(18.1)%
Impact of restructuring and transformational project costs (4)
(12,993)(27,272)14,279 (52.4)
Impact of acquisition-related costs (5)
(17,755)(16,909)(846)5.0 
Impact of bad debt reserve adjustments (2)
11,429 — 11,429 NM
Operating expenses adjusted for Certain Items (Non-GAAP)431,616 506,204 (74,588)(14.7)
Impact of currency fluctuations (3)
(12,329)— (12,329)2.4 
Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP)$419,287 $506,204 $(86,917)(17.2)%
Operating income (loss) (GAAP)$(537)$54,800 $(55,337)(101.0)
Impact of restructuring and transformational project costs (4)
12,993 27,272 (14,279)(52.4)
Impact of acquisition-related costs (5)
17,755 16,909 846 5.0 
Impact of bad debt reserve adjustments (2)
(11,429)— (11,429)NM
Operating income adjusted for Certain Items (Non-GAAP) *18,782 98,981 (80,199)(81.0)
SYGMA
Operating expenses (GAAP)$119,849 $118,348 $1,501 1.3 %
Impact of restructuring and transformational project costs (1)
(13)(2,585)2,572 (99.5)
Operating expenses adjusted for Certain Items (Non-GAAP)$119,836 $115,763 $4,073 3.5 %
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Operating income (GAAP)$11,692 $7,570 $4,122 54.5 %
Impact of restructuring and transformational project costs (1)
13 2,585 (2,572)(99.5)
Operating income adjusted for Certain Items (Non-GAAP)$11,705 $10,155 $1,550 15.3 %
OTHER
Operating expenses (GAAP)$40,435 $61,607 (21,172)(34.4)%
Impact of bad debt reserve adjustments (2)
883 — 883 NM
Operating expenses adjusted for Certain Items (Non-GAAP)$41,318 $61,607 $(20,289)(32.9)%
Operating (loss) income (GAAP)$(5)$10,137 (10,142)(100.0)%
Impact of bad debt reserve adjustments (2)
(883)— (883)NM
Operating income adjusted for Certain Items (Non-GAAP)$(888)$10,137 $(11,025)(108.8)%
CORPORATE
Operating expenses (GAAP)$177,749 $193,444 $(15,695)(8.1)%
Impact of restructuring and transformational project costs (6)
(12,018)(22,739)10,721 (47.1)
Operating expenses adjusted for Certain Items (Non-GAAP)$165,731 $170,705 $(4,974)(2.9)%
Operating income (GAAP)$(179,980)$(197,807)$17,827 (9.0)%
Impact of restructuring and transformational project costs (6)
12,018 22,739 (10,721)(47.1)
Operating income adjusted for Certain Items (Non-GAAP)$(167,962)$(175,068)$7,106 (4.1)%

(1)Includes charges related to restructuring and business transformation projects.
(2)Represents 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, severance and facility closure costs primarily in Europe.
(5)Fiscal 2021 and fiscal 2020 include $18 million and $17 million, respectively, related to intangible amortization expense from the Brakes Acquisition.
(6)Fiscal 2021 and fiscal 2020 include various transformation initiative costs, primarily consisting of changes to our business technology strategy.
*Foreign exchange rates did not have a meaningful impact during the period; therefore, the constant currency adjustment is not disclosed.
NM represents that the percentage change is not meaningful.


Liquidity and Capital Resources

Highlights

Below are comparisons of the cash flows from the first quarter of fiscal 2021 to the first quarter of fiscal 2020:

Cash flows from operations were $930.9 million in fiscal 2021, compared to $171.6 million in fiscal 2020;
Net capital expenditures totaled $68.5 million in fiscal 2021, compared to $170.8 million in fiscal 2020;
Free cash flow was $862.4 million in fiscal 2021, compared to free cash flow of $0.8 million in fiscal 2020 (see below under the heading “Free Cash Flow” for an explanation of this non-GAAP financial measure);
There were $3.1 million of net bank borrowings in fiscal 2021, compared to $533.4 million of commercial paper issuances and net bank borrowings in fiscal 2020;
Dividends paid were $228.7 million in fiscal 2021, compared to $200.0 million in fiscal 2020; and
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There were no treasury stock repurchases in fiscal 2021. Cash paid for treasury stock repurchases was $349.3 million in fiscal 2020.

We redeemed senior notes in the amount of $750.0 million in fiscal 2021 using cash flow from operations.

In response to the COVID-19 pandemic and its impact on our working capital, as well as the uncertainty regarding our ability to generate cash flow in the near term, we took steps to increase our liquidity in the second half of fiscal 2020 including the issuance of senior notes, borrowings under our long-term revolving credit facility and borrowings under our U.K. commercial paper program. As of September 26, 2020, there were $700.0 million and £600.0 million in borrowings outstanding under our long-term revolving credit facility and the U.K. commercial paper program, respectively. In the fourth quarter of fiscal 2020, we entered into an amendment to our long-term revolving credit facility, which requires us to suspend share repurchases and dividend increases through fiscal 2021. As of November 3, 2020, the company has approximately $7.5 billion in cash and available liquidity.

Sources and Uses of Cash

Sysco’s strategic objectives include continuous investment in our business; these investments are funded by a combination of cash from operations and access to capital from financial markets. Our operations historically have produced significant cash flow. Cash generated from operations is generally allocated to:

working capital requirements;
investments in facilities, systems, fleet, other equipment and technology;
cash dividends;
acquisitions compatible with our overall growth strategy;
contributions to our various retirement plans;
debt repayments; and
share repurchases, which are currently suspended.

Any remaining cash generated from operations or excess borrowings are invested in high-quality, short-term instruments. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses, and our overall capital structure. Any transactions resulting from these evaluations may materially impact our liquidity, borrowing capacity, leverage ratios and capital availability.

We continue to be in a strong financial position based on our balance sheet and operating cash flows; however, our liquidity and capital resources can be influenced by economic trends and conditions that impact our results of operations. We believe our mechanisms to manage working capital, such as actively working with customers to receive payments on receivables, optimizing inventory levels and maximizing payment terms with vendors, have been sufficient to limit a significant unfavorable impact on our cash flows from operations. We believe these mechanisms will continue to prevent a significant unfavorable impact on our cash flows from operations.

As of September 26, 2020, we had $6.0 billion in cash and cash equivalents, approximately 20% of which was held by our international subsidiaries and generated from our earnings of international operations. If the cash and cash equivalents attributable to our earnings were to be transferred among countries or repatriated to the U.S., such amounts may become subject to withholding and additional foreign tax obligations. Additionally, Sysco Corporation has provided intercompany loans to certain of its international subsidiaries, and when interest and principal payments are made, some of this cash will be transferred to the U.S.

Our wholly-owned captive insurance subsidiary (the Captive), must maintain a sufficient level of liquidity to fund future reserve payments. As of September 26, 2020, the Captive held $130.2 million of fixed income marketable securities and $24.4 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased $26.6 million in marketable securities in the first quarter of fiscal 2021 and received $12.2 million in proceeds from the sale of marketable securities in that period.

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We believe the following sources will be sufficient to meet our anticipated cash requirements for more than the next twelve months, while maintaining sufficient liquidity for normal operating purposes:

our cash flows from operations;
the availability of additional capital under our existing commercial paper programs, supported by our revolving credit facility and bank line of credit; and
our ability to access capital from financial markets, including issuances of debt securities, either privately or under our shelf registration statement filed with the Securities and Exchange Commission.

Due to our strong financial position, we believe that we will continue to be able to effectively access the commercial paper market and long-term capital markets, if necessary.

Cash Flows

Operating Activities

We generated $930.9 million in cash flows from operations in the first quarter of fiscal 2021, compared to cash flows of $171.6 million in the first quarter of fiscal 2020. These amounts include year-over-year favorable comparisons on working capital and accrued expenses, partially offset by lower operating results.

    Changes in working capital had a positive impact of $903.8 million on cash flow from operations period-over-period. There were favorable comparisons on accounts payable, inventories, and accounts receivable. Accounts payable has increased, primarily due to supplier term extensions. Both accounts receivable and inventory balances have increased during the first 13 weeks of fiscal 2021 as our business recovery continues. The favorable comparison in cash flows from accounts receivables is primarily due to faster than anticipated collections on our pre-pandemic accounts receivables and adhering to tighter terms on new sales to customers. In the first 13 weeks 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 have exceeded the company’s expectations. We continue to work with our customers to collect past due balances, including through the use of payment plans. We have also discontinued charging interest on past due balances.

The positive comparison on accrued expenses was primarily due to favorable comparisons of incentive payments related to each previous fiscal year, customer rebate accruals resulting from the increase in volume purchase incentives earned by our customers, and interest accruals that have increased due to our higher debt volume.

We continue to recognize the benefits provided in the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in the first quarter of fiscal 2021, as we have deferred U.S. social security tax to future fiscal years, which has favorably impacted our cash flows from operations.

We expect our cash flows from operations for the remainder of the fiscal year, will initially decline for the next two quarters, due to the building of inventory and ongoing investments in the business. Our cash flows from operations are expected to end flat to slightly positive compared to the end of the first quarter of fiscal 2021.

Investing Activities

Our capital expenditures in the first quarter of fiscal 2021 primarily consisted of technology equipment, fleet, and warehouse equipment. Our capital expenditures in the first quarter of fiscal 2021 were lower by $100.2 million, as compared to the first quarter of fiscal 2020, primarily due to eliminating capital projects not urgently needed for our business and targeted investments in order to preserve our liquidity in response to the COVID-19 crisis.
During the first quarter of fiscal 2020, we paid $74.8 million, net of cash acquired, for acquisitions.

Free Cash Flow

Our free cash flow for the first 13 weeks of fiscal 2021 increased by $861.7 million, to $862.4 million, as compared to the first 13 weeks of fiscal 2020, principally as a result of an increase in cash flows from operations and year-over-year decreased capital expenditures. We expect our free cash flow for the remainder of the fiscal year, will initially decline for the next two quarters, due to normalized seasonality, the building of inventory and our ongoing investments in the business. Our free cash flow is expected to end flat to slightly positive compared to the prior year.
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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 2020 Form 10-K for discussions around this non-GAAP performance metric. In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities.
 13-Week Period Ended Sep. 26, 202013-Week Period Ended Sep. 28, 2019
 (In thousands)
Net cash provided by operating activities (GAAP)$930,914 $171,579 
Additions to plant and equipment(75,539)(175,728)
Proceeds from sales of plant and equipment7,064 4,902 
Free Cash Flow (Non-GAAP)$862,439 $753 

Financing Activities

Equity Transactions

Proceeds from exercises of share-based compensation awards were $31.9 million in the first quarter of fiscal 2021, as compared to $85.3 million in the first quarter of fiscal 2020. 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 have routinely engaged in share repurchase programs to allow Sysco to continue offsetting dilution resulting from shares issued under the company’s benefit plans and to make opportunistic repurchases. In August 2019, our Board of Directors approved a repurchase program to authorize the repurchase of the company’s common stock not to exceed $2.5 billion through the end of fiscal 2021. During March 2020, however, we discontinued share repurchases under this program, and pursuant to the amendment to our long-term revolving credit facility, we do not anticipate making any repurchases for the remainder of fiscal 2021. As of September 26, 2020, we had a remaining authorization of approximately $2.1 billion.

Dividends paid in the first quarter of fiscal 2021 were $228.7 million, or $0.45 per share, as compared to $200.0 million, or $0.39 per share, in the first quarter of fiscal 2020. In July 2020, we declared our regular quarterly dividend for the first quarter of fiscal 2021 of $0.45 per share, which was paid in October 2020. Although we expect to continue making quarterly dividend payments, we do not expect to continue to grow our dividend in fiscal 2021.

Debt Activity and Borrowing Availability

Our debt activity, including issuances and repayments, 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 September 26, 2020, and repayment activity since the close of the first quarter of fiscal 2021, are disclosed within that note. Updated amounts through October 16, 2020, include:

$700.0 million outstanding from the credit facility supporting our commercial paper program;
No outstanding borrowings from our U.S. commercial paper program; and
£600.0 million outstanding from our U.K. commercial paper programs.

During the first quarters of fiscal 2021 and fiscal 2020, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 0.52% and 2.31%, respectively.

In the next 12 months, our £600.0 million U.K. commercial paper program and $500.0 million of long-term debt will mature. We expect to fund these repayments with a combination of cash flow from operations and cash on hand.

The availability of financing in the form of debt is influenced by many factors, including our profitability, free cash flows, debt levels, credit ratings, debt covenants and economic and market conditions. For example, a significant downgrade in our credit ratings or adverse conditions in the capital markets may increase the cost of borrowing for us or limit our access to capital. To date, we have not experienced difficulty accessing the credit markets. As of November 3, 2020, the company had
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approximately $7.5 billion in cash and available liquidity; and we believe this amount would be sufficient to sustain our operations for an extended period, including through an impact much worse than we are currently experiencing or expecting.

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 September 26, 2020, Sysco had a total of $12.5 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.

All subsidiary guarantors are 100% owned by the parent company, all guarantees are full and unconditional, and all guarantees are joint and several. The guarantees rank equally and ratably in right of payment with all other existing and future unsecured and unsubordinated indebtedness of the respective guarantors. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in our fiscal 2020 Form 10-K for additional information regarding the terms of the guarantees.

Basis of Preparation of the Summarized Financial Information

The following tables include summarized financial information of Sysco Corporation (issuer), and certain wholly owned U.S. Broadline subsidiaries (guarantors) (together, the obligor group). The summarized financial information of 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.

Combined Parent and Guarantor Subsidiaries Summarized Balance SheetSep. 26, 2020Jun. 27, 2020
(In thousands)
ASSETS
Receivables due from non-obligor subsidiaries$123,883 $133,195 
Current assets8,241,522 8,644,084 
Total current assets$8,365,405 $8,777,279 
Notes receivable from non-obligor subsidiaries$83,275 $671,500 
Other noncurrent assets3,938,444 4,036,312 
Total noncurrent assets$4,021,719 $4,707,812 
LIABILITIES
Payables due to non-obligor subsidiaries$46,973 $48,923 
Other current liabilities2,013,761 2,200,422 
Total current liabilities$2,060,734 $2,249,345 
Notes payable to non-obligor subsidiaries$212,695 $233,158 
Long-term debt11,994,280 12,478,453 
Other noncurrent liabilities1,292,880 1,356,781 
Total noncurrent liabilities$13,499,855 $14,068,392 


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Combined Parent and Guarantor Subsidiaries Summarized Results of Operations13-Week Period Ended Sep. 26, 2020
(In thousands)
Sales$7,330,291 
Gross profit1,421,395 
Operating income442,389 
Interest expense from non-obligor subsidiaries11,307 
Net earnings262,680 

Contractual Obligations

Our fiscal 2020 Form 10-K contains a table that summarizes our obligations and commitments to make specified contractual future cash payments as of June 27, 2020. Other than as described in this Form 10-Q, there have been no material changes to our specified contractual obligations through September 26, 2020.
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 2020 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;
expectations regarding the impact of cost-saving measures undertaken in response to the COVID-19 pandemic;
expectations regarding our business and the economic recovery generally as the COVID-19 pandemic subsides, including beliefs regarding future customer activity;
our expectations regarding the impact of the COVID-19 pandemic on our mix of earnings by jurisdiction;
our belief that the tightening or loosening of restrictions on customers will continue to be the primary driver of the pace of business recovery until vaccines are available;
our expectations regarding exit rate trends;
our belief that our new customer additions will enable Sysco to recover faster than the market as economic conditions improve;
our expectations regarding the ability of our supply chain and facilities to remain in place and operational;
our plans regarding our transformation initiatives, including acceleration of our work across our customer-facing tools and technology, sales transformation and the regionalization of our operations in the U.S., and the expected effects from such initiatives;
our belief that we will continue to experience risk in fiscal 2021 relating to uncollectible accounts, our expectations regarding the level of uncollectible accounts, and our expectations regarding the timing of our collection of the unreserved balance of accounts receivable held prior to the onset of the COVID-19 crisis;
our belief that our actions undertaken to receive payments on receivables will help to partially affect the unfavorable impact of the COVID-19 pandemic;
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our belief that our available liquidity would be sufficient to sustain our operations for an extended period, including through an impact much worse than we are currently experiencing or expecting;
our expectations regarding the benefits to us of the CARES Act;
our intention not to seek assistance from the U.S. government outside of the CARES Act;
estimates regarding the outcome of legal proceedings;
the impact of seasonal trends on our free cash flow;
our expectations regarding the use of remaining cash generated from operations;
our intention to continue to manage our working capital aggressively, and our expectation that our improvements in working capital will normalize in the second quarter of fiscal 2021;
estimates regarding our capital expenditures and the sources of financing for our capital expenditures;
our expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability;
our expectations regarding real sales growth in the U.S. foodservice market;
our expectations regarding trends in produce markets;
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 2021;
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;
the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms;
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;
future compliance with the covenants under our revolving credit facility;
our ability to effectively access the commercial paper market and long-term capital markets; and
our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes, or a combination thereof.

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 2020 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
42


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 and Davigel 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 2020 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risks consist of interest rate risk, foreign currency exchange rate risk, fuel price risk and investment risk. For a discussion on our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market
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Risks” in our fiscal 2020 Form 10-K. There have been no significant changes to our market risks since June 27, 2020, except as noted below.

Interest Rate Risk

At September 26, 2020, there were no commercial paper issuances outstanding under our U.S. commercial paper program, and we had £600.0 million outstanding under our U.K. commercial paper program. Total debt as of September 26, 2020 was $13.7 billion, of which approximately 83% was at fixed rates of interest, including the impact of our interest rate swap agreements.

Fuel Price Risk

Due to the nature of our distribution business, we are exposed to potential volatility in fuel prices. The price and availability of diesel fuel fluctuates due to changes in production, seasonality and other market factors generally outside of our control. Increased fuel costs may have a negative impact on our results of operations in three areas. First, the high cost of fuel can negatively impact consumer confidence and discretionary spending and thus reduce the frequency and amount spent by consumers for food-away-from-home purchases. Second, the high cost of fuel can increase the price we pay for product purchases and we may not be able to pass these costs fully to our customers. Third, increased fuel costs impact the costs we incur to deliver product to our customers. Fuel costs related to outbound deliveries represented approximately 0.5% of sales during the first quarter of fiscal 2021 and fiscal 2020.

Our activities to mitigate fuel costs include routing optimization with the goal of reducing miles driven, improving fleet utilization by adjusting idling time and maximum speeds and using fuel surcharges that primarily track with the change in market prices of fuel. We use diesel fuel swap contracts to fix the price of a portion of our projected monthly diesel fuel requirements. As of September 26, 2020, we had diesel fuel swaps with a total notional amount of approximately 43 million gallons through December 2021. These swaps are expected to lock in the price of approximately 60% of our projected fuel purchase needs for fiscal 2021. Additional swaps have been entered into for hedging activity in fiscal 2022. As of September 26, 2020, we had diesel fuel swaps with a total notional amount of approximately 8 million gallons specific to fiscal 2022. Our remaining fuel purchase needs will occur at market rates unless contracted for a fixed price or hedged at a later date.

Item 4.  Controls and Procedures

Sysco’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 26, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Sysco’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of September 26, 2020, our chief executive officer and chief financial officer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended September 26, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44


PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1A.  Risk Factors

There were no material changes from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 27, 2020.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

Issuer Purchases of Equity Securities

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None

Item 6.  Exhibits

The exhibits listed on the Exhibit Index below are filed as a part of this Quarterly Report on Form 10-Q.
45


EXHIBIT INDEX
3.1
   
3.2
   
3.3
   
3.4
10.1#
10.2#
10.3†#
10.4†#
10.5†
10.6†#
10.7†#
10.8
10.9
22.1
31.1#
   
31.2#
   
32.1#
   
32.2#
   
46


101.SCH#Inline XBRL Taxonomy Extension Schema Document
101.CAL#Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF#Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB#Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE#Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
___________
† Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K
# Filed herewith
47


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Sysco Corporation
(Registrant)
Date: November 3, 2020By:/s/ KEVIN P. HOURICAN
 Kevin P. Hourican
  President and Chief Executive Officer
Date: November 3, 2020By:/s/ JOEL T. GRADE
 Joel T. Grade
  Executive Vice President and
Chief Financial Officer
Date: November 3, 2020By:/s/ ANITA A. ZIELINSKI
 Anita A. Zielinski
 Senior Vice President and
 Chief Accounting Officer

48