Item 1. Financial Statements
Item 1. Financial Statements
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
Dec. 26, 2020 Jun. 27, 2020
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 5,767,034 $ 6,059,427
Accounts receivable, less allowances of $254,347 and $334,810 2,855,424 2,893,551
Inventories 3,100,478 3,095,085
Prepaid expenses and other current assets 223,872 192,163
Income tax receivable 44,621 108,006
Total current assets 11,991,429 12,348,232
Plant and equipment at cost, less accumulated depreciation 4,382,737 4,458,567
Other long-term assets
Goodwill 3,929,636 3,732,469
Intangibles, less amortization 798,649 780,172
Deferred income taxes 280,511 194,115
Operating lease right-of-use assets, net 635,664 603,616
Other assets 471,225 511,095
Total other long-term assets 6,115,685 5,821,467
Total assets $ 22,489,851 $ 22,628,266
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable $ 8,754 $ 2,266
Accounts payable 3,554,624 3,447,065
Accrued expenses 1,679,429 1,616,289
Accrued income taxes — 2,938
Current operating lease liabilities 107,633 107,167
Current maturities of long-term debt 1,366,103 1,542,128
Total current liabilities 6,716,543 6,717,853
Long-term liabilities
Long-term debt 12,463,284 12,902,485
Deferred income taxes 47,780 86,601
Long-term operating lease liabilities 563,548 523,496
Other long-term liabilities 1,235,939 1,204,953
Total long-term liabilities 14,310,551 14,717,535
Noncontrolling interest 35,958 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 shares 765,175 765,175
Paid-in capital 1,565,255 1,506,901
Retained earnings 10,383,493 10,563,008
Accumulated other comprehensive loss ( 1,388,169 ) ( 1,710,881 )
Treasury stock at cost, 255,176,469 and 256,915,825 shares ( 9,898,955 ) ( 9,965,590 )
Total shareholders’ equity 1,426,799 1,158,613
Total liabilities and shareholders’ equity $ 22,489,851 $ 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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
Sales $ 11,558,982 $ 15,025,042 $ 23,336,361 $ 30,328,047
Cost of sales 9,460,524 12,196,643 19,018,058 24,556,278
Gross profit 2,098,458 2,828,399 4,318,303 5,771,769
Operating expenses 1,886,396 2,275,906 3,686,662 4,550,958
Operating income 212,062 552,493 631,641 1,220,811
Interest expense 146,498 76,762 293,215 160,097
Other (income) expense, net ( 15,556 ) ( 807 ) ( 1,432 ) 2,305
Earnings before income taxes 81,120 476,538 339,858 1,058,409
Income taxes 13,831 93,128 55,669 221,218
Net earnings $ 67,289 $ 383,410 $ 284,189 $ 837,191
Net earnings:
Basic earnings per share $ 0.13 $ 0.75 $ 0.56 $ 1.64
Diluted earnings per share 0.13 0.74 0.56 1.62
Average shares outstanding 510,006,754 509,984,743 509,567,080 511,721,290
Diluted shares outstanding 512,742,792 515,517,792 511,740,778 517,120,395
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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
Net earnings $ 67,289 $ 383,410 $ 284,189 $ 837,191
Other comprehensive income:
Foreign currency translation adjustment 222,507 154,955 335,647 28,796
Items presented net of tax:
Amortization of cash flow hedges 2,155 2,155 4,310 4,310
Change in net investment hedges ( 20,666 ) ( 41,479 ) ( 31,927 ) ( 11,479 )
Change in cash flow hedges 12,335 ( 14,797 ) ( 632 ) ( 5,538 )
Amortization of prior service cost 137 1,428 274 2,856
Amortization of actuarial loss 7,793 7,225 15,558 13,908
Change in marketable securities ( 44 ) ( 386 ) ( 518 ) 547
Total other comprehensive income 224,217 109,101 322,712 33,400
Comprehensive income $ 291,506 $ 492,511 $ 606,901 $ 870,591
See Notes to Consolidated Financial Statements
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Sysco Corporation and its Consolidated Subsidiaries
CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
(In thousands, except for share data)
Quarter to Date
Accumulated
Other Comprehensive
Loss
Common Stock Paid-in
Capital Retained
Earnings Treasury Stock
Shares Amount Shares Amounts Totals
Balance as of September 26, 2020 765,174,900 $ 765,175 $ 1,534,281 $ 10,546,598 $ ( 1,612,386 ) 256,075,772 $ ( 9,933,657 ) $ 1,300,011
Net earnings 67,289 67,289
Foreign currency translation adjustment 222,507 222,507
Amortization of cash flow hedges, net of tax 2,155 2,155
Change in cash flow hedges, net of tax 12,335 12,335
Change in net investment hedges, net of tax ( 20,666 ) ( 20,666 )
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 7,930 7,930
Change in marketable securities, net of tax ( 44 ) ( 44 )
Dividends declared ($0.45 per common share) ( 230,394 ) ( 230,394 )
Share-based compensation awards 30,974 ( 899,303 ) 34,702 65,676
Balance as of December 26, 2020 765,174,900 $ 765,175 $ 1,565,255 $ 10,383,493 $ ( 1,388,169 ) 255,176,469 $ ( 9,898,955 ) $ 1,426,799
Accumulated
Other Comprehensive
Loss
Common Stock Paid-in
Capital Retained
Earnings Treasury Stock
Shares Amount Shares Amounts Totals
Balance as of September 28, 2019 765,174,900 $ 765,175 $ 1,490,661 $ 11,486,833 $ ( 1,675,430 ) 254,310,626 $ ( 9,612,491 ) $ 2,454,748
Net earnings 383,410 383,410
Foreign currency translation adjustment 154,955 154,955
Amortization of cash flow hedges, net of tax 2,155 2,155
Change in cash flow hedges, net of tax ( 14,797 ) ( 14,797 )
Change in net investment hedges, net of tax ( 41,479 ) ( 41,479 )
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 8,653 8,653
Change in marketable securities, net of tax ( 386 ) ( 386 )
Dividends declared ($0.45 per common share) ( 230,516 ) ( 230,516 )
Treasury stock purchases 3,501,930 ( 281,081 ) ( 281,081 )
Share-based compensation awards 35,471 ( 1,480,168 ) 56,393 91,864
Balance as of December 28, 2019 765,174,900 $ 765,175 $ 1,526,132 $ 11,639,727 $ ( 1,566,329 ) 256,332,388 $ ( 9,837,179 ) $ 2,527,526
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Year to Date
Accumulated
Other Comprehensive
Loss
Common Stock Paid-in
Capital Retained
Earnings Treasury Stock
Shares Amount Shares Amounts Totals
Balance as of June 27, 2020 765,174,900 $ 765,175 $ 1,506,901 $ 10,563,008 $ ( 1,710,881 ) 256,915,825 $ ( 9,965,590 ) $ 1,158,613
Net earnings 284,189 284,189
Foreign currency translation adjustment 335,647 335,647
Amortization of cash flow hedges, net of tax 4,310 4,310
Change in cash flow hedges, net of tax ( 632 ) ( 632 )
Change in net investment hedges, net of tax ( 31,927 ) ( 31,927 )
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 15,832 15,832
Change in marketable securities, net of tax ( 518 ) ( 518 )
Adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), net of tax ( 2,068 ) ( 2,068 )
Dividends declared ($0.90 per common share) ( 461,636 ) ( 461,636 )
Share-based compensation awards 58,354 ( 1,739,356 ) 66,635 124,989
Balance as of December 26, 2020 765,174,900 $ 765,175 $ 1,565,255 $ 10,383,493 $ ( 1,388,169 ) 255,176,469 $ ( 9,898,955 ) $ 1,426,799
Accumulated
Other Comprehensive
Loss
Common Stock Paid-in
Capital Retained
Earnings Treasury Stock
Shares Amount Shares Amounts Totals
Balance as of June 29, 2019 765,174,900 $ 765,175 $ 1,457,419 $ 11,229,679 $ ( 1,599,729 ) 252,297,926 $ ( 9,349,941 ) $ 2,502,603
Net earnings 837,191 837,191
Foreign currency translation adjustment 28,796 28,796
Amortization of cash flow hedges, net of tax 4,310 4,310
Change in cash flow hedges, net of tax ( 5,538 ) ( 5,538 )
Change in net investment hedge, net of tax ( 11,479 ) ( 11,479 )
Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 16,764 16,764
Change in marketable securities, net of tax 547 547
Adoption of ASU 2016-02, Leases (Topic 842), net of tax 1,978 1,978
Dividends declared ($0.84 per common share) ( 429,121 ) ( 429,121 )
Treasury stock purchases 8,089,327 ( 628,948 ) ( 628,948 )
Share-based compensation awards 68,713 ( 4,054,865 ) 141,710 210,423
Balance as of December 28, 2019 765,174,900 $ 765,175 $ 1,526,132 $ 11,639,727 $ ( 1,566,329 ) 256,332,388 $ ( 9,837,179 ) $ 2,527,526
See Notes to Consolidated Financial Statements
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Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019
Cash flows from operating activities:
Net earnings $ 284,189 $ 837,191
Adjustments to reconcile net earnings to cash provided by operating activities:
Share-based compensation expense 47,122 46,644
Depreciation and amortization 365,332 372,416
Operating lease asset amortization 55,231 53,444
Amortization of debt issuance and other debt-related costs 12,946 9,889
Deferred income taxes ( 107,821 ) ( 75,898 )
Provision for losses on receivables ( 94,242 ) 38,418
Loss on sale of business 12,043 —
Other non-cash items ( 9,312 ) 3,239
Additional changes in certain assets and liabilities, net of effect of businesses acquired:
Decrease (increase) in receivables 192,121 ( 161,158 )
Decrease (increase) in inventories 37,345 ( 279,403 )
Increase in prepaid expenses and other current assets ( 22,519 ) ( 38,503 )
Increase (decrease) in accounts payable 84,708 ( 191,280 )
Increase (decrease) in accrued expenses 20,108 ( 49,866 )
Decrease in operating lease liabilities ( 63,496 ) ( 62,101 )
Increase in accrued income taxes 63,385 182,557
Decrease in other assets 20,576 13,023
Increase in other long-term liabilities 38,962 55,857
Net cash provided by operating activities 936,678 754,469
Cash flows from investing activities:
Additions to plant and equipment ( 163,944 ) ( 393,379 )
Proceeds from sales of plant and equipment 15,510 10,293
Acquisition of businesses, net of cash acquired — ( 142,783 )
Purchase of marketable securities ( 36,121 ) ( 11,424 )
Proceeds from sales of marketable securities 20,797 9,038
Other investing activities — 565
Net cash used for investing activities ( 163,758 ) ( 527,690 )
Cash flows from financing activities:
Bank and commercial paper borrowings, net 6,463 721,415
Other debt borrowings 4,094 18,966
Other debt repayments ( 773,663 ) ( 23,234 )
Proceeds from stock option exercises 66,635 141,709
Stock repurchases — ( 630,395 )
Dividends paid ( 458,717 ) ( 399,093 )
Other financing activities ( 873 ) ( 22,461 )
Net cash used for financing activities ( 1,156,061 ) ( 193,093 )
Effect of exchange rates on cash, cash equivalents and restricted cash 77,056 5,565
Net (decrease) increase in cash, cash equivalents and restricted cash ( 306,085 ) 39,251
Cash, cash equivalents and restricted cash at beginning of period 6,095,570 532,245
Cash, cash equivalents and restricted cash at end of period $ 5,789,485 $ 571,496
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 290,926 $ 162,720
Income taxes 110,453 122,049
See Notes to Consolidated Financial Statements
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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:
Dec. 26, 2020 Dec. 28, 2019
(In thousands)
Cash and cash equivalents $ 5,767,034 $ 524,578
Restricted cash (1)
22,451 46,918
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows $ 5,789,485 $ 571,496
(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 $ 2.6 billion and $ 2.7 billion as of December 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 December 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 Dec. 26, 2020
US Foodservice Operations International Foodservice Operations SYGMA Other Total
(In thousands)
Principal Product Categories
Fresh and frozen meats $ 1,500,064 $ 267,817 $ 402,133 $ — $ 2,170,014
Canned and dry products 1,406,053 383,170 32,867 — 1,822,090
Frozen fruits, vegetables, bakery and other 1,070,227 394,706 275,422 — 1,740,355
Poultry 844,377 174,717 217,621 — 1,236,715
Dairy products 818,810 208,208 142,966 — 1,169,984
Paper and disposables 715,775 92,954 182,094 8,675 999,498
Fresh produce 696,879 145,565 66,528 — 908,972
Seafood 407,955 69,680 26,387 — 504,022
Beverage products 168,902 73,422 142,208 10,728 395,260
Other (1)
295,101 157,550 32,175 127,246 612,072
Total Sales $ 7,924,143 $ 1,967,789 $ 1,520,401 $ 146,649 $ 11,558,982
(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 Dec. 28, 2019
US Foodservice Operations International Foodservice Operations SYGMA Other Total
(In thousands)
Principal Product Categories
Fresh and frozen meats $ 2,071,447 $ 409,483 $ 392,584 $ — $ 2,873,514
Canned and dry products 1,861,743 578,998 38,652 — 2,479,393
Frozen fruits, vegetables, bakery and other 1,459,470 572,991 266,540 — 2,299,001
Dairy products 1,139,820 299,830 142,967 — 1,582,617
Poultry 1,064,679 214,781 200,481 — 1,479,941
Fresh produce 952,857 256,183 59,318 — 1,268,358
Paper and disposables 689,890 90,778 166,313 15,290 962,271
Seafood 601,709 129,065 23,383 — 754,157
Beverage products 276,626 130,766 139,106 20,912 567,410
Other (1)
295,334 207,178 26,549 229,319 758,380
Total Sales $ 10,413,575 $ 2,890,053 $ 1,455,893 $ 265,521 $ 15,025,042
(1) Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.
26-Week Period Ended Dec. 26, 2020
US Foodservice Operations International Foodservice Operations SYGMA Other Total
(In thousands)
Principal Product Categories
Fresh and frozen meats $ 2,997,869 $ 581,989 $ 831,053 $ — $ 4,410,911
Canned and dry products 2,812,198 774,747 62,440 — 3,649,385
Frozen fruits, vegetables, bakery and other 2,127,476 821,271 532,209 — 3,480,956
Poultry 1,679,256 353,743 434,255 — 2,467,254
Dairy products 1,655,075 441,164 289,995 — 2,386,234
Paper and disposables 1,396,600 183,663 361,268 20,313 1,961,844
Fresh produce 1,407,799 316,103 131,510 — 1,855,412
Seafood 890,652 158,247 51,483 — 1,100,382
Beverage products 348,919 150,888 290,799 21,938 812,544
Other (1)
529,832 349,667 59,537 272,403 1,211,439
Total Sales $ 15,845,676 $ 4,131,482 $ 3,044,549 $ 314,654 $ 23,336,361
(1) Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.
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26-Week Period Ended Dec. 28, 2019
US Foodservice Operations International Foodservice Operations SYGMA Other Total
(In thousands)
Principal Product Categories
Fresh and frozen meats $ 4,146,747 $ 821,638 $ 773,962 $ — $ 5,742,347
Canned and dry products 3,760,632 1,165,622 75,842 — 5,002,096
Frozen fruits, vegetables, bakery and other 2,908,688 1,125,005 520,995 — 4,554,688
Dairy products 2,288,201 612,008 288,888 — 3,189,097
Poultry 2,154,785 433,381 404,749 — 2,992,915
Fresh produce 1,951,020 513,941 120,252 — 2,585,213
Paper and disposables 1,409,431 189,120 334,748 32,663 1,965,962
Seafood 1,287,119 278,656 48,238 — 1,614,013
Beverage products 567,412 263,618 282,785 45,240 1,159,055
Other (1)
598,173 399,452 52,428 472,608 1,522,661
Total Sales $ 21,072,208 $ 5,802,441 $ 2,902,887 $ 550,511 $ 30,328,047
(1) Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our Sysco Labs business, and other janitorial products, medical supplies and smallwares.
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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. 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.
Sysco determines the past due status of trade receivables based on contractual terms with each customer, evaluates the collectability of accounts receivable to determine an appropriate allowance for doubtful accounts. To calculate an allowance for doubtful accounts, the company estimates uncollectible amounts based on historical loss experience, including those experienced during times of local and regional disasters, current conditions and collection rates, and expectations regarding future losses. The COVID-19 pandemic is more widespread and longer in duration than historical events impacting Sysco’s business, and it is possible that actual uncollectible amounts will differ from historical results.
In the first 26 weeks of fiscal 2021, Sysco recognized a net $ 94.2 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 26 weeks 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 $ 128.9 million benefit. Additional reserves of $ 34.7 million were recorded in the first 26 weeks of fiscal 2021 for receivables relating to periods beginning after the onset of the COVID-19 pandemic. Below is a summary of the activity in the allowance for credit losses for trade receivables for the first 26 weeks of fiscal 2021:
26-Week Period Ended
Dec. 26, 2020
(In thousands)
Balance at beginning of period $ 334,810
Charged to costs and expenses ( 94,242 )
Customer accounts written off, net of recoveries 22,675
Other adjustments ( 8,896 )
Balance at end of period $ 254,347
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.
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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.”
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The following tables present the company’s assets measured at fair value on a recurring basis as of December 26, 2020 and June 27, 2020:
Assets Measured at Fair Value as of Dec. 26, 2020
Level 1 Level 2 Level 3 Total
(In thousands)
Assets:
Cash equivalents
Cash and cash equivalents $ 4,738,442 $ 489,977 $ — $ 5,228,419
Other assets (1)
22,451 — — 22,451
Total assets at fair value $ 4,760,893 $ 489,977 $ — $ 5,250,870
(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 1 Level 2 Level 3 Total
(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 $ 16.5 billion and $ 16.3 billion as of December 26, 2020 and June 27, 2020, respectively. The carrying value of total debt was $ 13.8 billion and $ 14.4 billion as of December 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 26 weeks of fiscal 2021. The following table presents the company’s available-for-sale marketable securities as of December 26, 2020 and June 27, 2020:
Dec. 26, 2020
Amortized Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-Term Marketable Securities Long-Term Marketable Securities
(In thousands)
Fixed income securities:
Corporate bonds $ 89,476 $ 3,664 $ ( 68 ) $ 93,072 $ 17,777 $ 75,295
Government bonds 33,194 4,733 — 37,927 — 37,927
Total marketable securities $ 122,670 $ 8,397 $ ( 68 ) $ 130,999 $ 17,777 $ 113,222
Jun. 27, 2020
Amortized Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-Term Marketable Securities Long-Term Marketable Securities
(In thousands)
Fixed income securities:
Corporate bonds $ 78,651 $ 4,064 $ — $ 82,715 $ 18,233 $ 64,482
Government bonds 28,633 4,919 — 33,552 — 33,552
Total marketable securities $ 107,284 $ 8,983 $ — $ 116,267 $ 18,233 $ 98,034
As of December 26, 2020, the balance of available-for-sale securities by contractual maturity is shown in the following table. Within the table, maturities of fixed income securities have been allocated based upon timing of estimated cash flows. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
Dec. 26, 2020
(In thousands)
Due in one year or less $ 17,777
Due after one year through five years 60,399
Due after five years through ten years 52,823
Total $ 130,999
There were no significant realized gains or losses in marketable securities in the second quarter or the first 26 weeks 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.
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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 uses 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 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 December 26, 2020 are presented below:
Maturity Date of the Hedging Instrument Currency / Unit of Measure Notional Value
(In millions)
Hedging of interest rate risk
July 2021 U.S. Dollar 500
June 2023 Euro 500
March 2025 U.S. Dollar 500
Hedging of foreign currency risk
Various (December 28, 2020 to January 2021) Swedish Krona 64
June 2023 Euro 500
Hedging of fuel risk
Various (December 31, 2020 to December 2021) Gallons 33
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The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of December 26, 2020 and June 27, 2020 are as follows:
Derivative Fair Value
Balance Sheet location Dec. 26, 2020 Jun. 27, 2020
(In thousands)
Fair Value Hedges:
Interest rate swaps Other current assets $ 2,678 $ 1,388
Interest rate swaps Other assets 58,053 69,782
Cash Flow Hedges:
Fuel swaps Other current assets $ 3,428 $ 233
Foreign currency forwards Other current assets 34 1,063
Fuel swaps Other assets — 1,173
Cross currency swaps Other assets — 19,614
Fuel swaps Other current liabilities 6,973 28,242
Foreign currency forwards Other current liabilities 163 222
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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 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 $ 146,498 $ 76,762 $ 293,215 $ 160,097
Gain or (loss) on fair value hedging relationships:
Interest rate swaps:
Hedged items $ ( 3,793 ) $ ( 5,350 ) $ ( 13,791 ) $ ( 30,086 )
Derivatives designated as hedging instruments ( 296 ) ( 9,248 ) 3,161 ( 391 )
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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
(In thousands)
Interest expense $ ( 9,735 ) $ ( 14,560 ) $ ( 24,568 ) $ ( 29,117 )
Increase (decrease) in fair value of debt ( 5,942 ) ( 9,210 ) ( 10,777 ) 969
Hedged items $ ( 3,793 ) $ ( 5,350 ) $ ( 13,791 ) $ ( 30,086 )
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 December 26, 2020 and December 28, 2019, presented on a pretax basis, are as follows:
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13-Week Period Ended Dec. 26, 2020
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands) (In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps $ 16,939 Operating expense $ ( 7,613 )
Foreign currency contracts ( 587 ) Cost of sales / Other income —
Total $ 16,352 $ ( 7,613 )
Derivatives in net investment hedging relationships:
Foreign denominated debt ( 27,554 ) N/A —
Total $ ( 27,554 ) $ —
13-Week Period Ended Dec. 28, 2019
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands) (In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps $ 10,345 Operating expense $ ( 3,213 )
Foreign currency contracts ( 29,658 ) Cost of sales / Other income 3,624
Total $ ( 19,313 ) $ 411
Derivatives in net investment hedging relationships:
Foreign currency contracts $ ( 34,639 ) N/A $ —
Foreign denominated debt ( 11,650 ) N/A —
Total $ ( 46,289 ) $ —
The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 26-week periods ended December 26, 2020 and December 28, 2019, presented on a pretax basis, are as follows:
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26-Week Period Ended Dec. 26, 2020
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands) (In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps $ 19,830 Operating expense $ ( 16,265 )
Foreign currency contracts ( 20,319 ) Cost of sales / Other income ( 2,692 )
Total $ ( 489 ) $ ( 18,957 )
Derivatives in net investment hedging relationships:
Foreign currency contracts $ — N/A $ —
Foreign denominated debt ( 47,953 ) N/A —
Total $ ( 47,953 ) $ —
26-Week Period Ended Dec. 28, 2019
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
(In thousands) (In thousands)
Derivatives in cash flow hedging relationships:
Fuel swaps $ 10,689 Operating expense $ ( 6,619 )
Foreign currency contracts ( 17,351 ) Cost of sales / Other income 3,626
Total $ ( 6,662 ) $ ( 2,993 )
Derivatives in net investment hedging relationships:
Foreign currency contracts $ ( 13,787 ) N/A $ —
Foreign denominated debt 9,800 N/A —
Total $ ( 3,987 ) $ —
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The location and carrying amount of hedged liabilities in the consolidated balance sheet as of December 26, 2020 are as follows:
Dec. 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 $ ( 499,778 ) $ ( 2,797 )
Long-term debt ( 1,064,694 ) ( 58,053 )
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 December 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 December 26, 2020, there were no 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 December 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 through May 7, 2021 and are classified within current maturities of long-term debt. During the first 26 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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
(In thousands, except for share
and per share data) (In thousands, except for share
and per share data)
Numerator:
Net earnings $ 67,289 $ 383,410 $ 284,189 $ 837,191
Denominator:
Weighted-average basic shares outstanding 510,006,754 509,984,743 509,567,080 511,721,290
Dilutive effect of share-based awards 2,736,038 5,533,049 2,173,698 5,399,105
Weighted-average diluted shares outstanding 512,742,792 515,517,792 511,740,778 517,120,395
Basic earnings per share $ 0.13 $ 0.75 $ 0.56 $ 1.64
Diluted earnings per share $ 0.13 $ 0.74 $ 0.56 $ 1.62
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 6,287,000 and 2,947,000 for the second quarter of fiscal 2021 and fiscal 2020, respectively. 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 6,199,000 and 3,134,000 for the first 26 weeks 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 $ 291.5 million and $ 492.5 million for the second quarter of fiscal 2021 and fiscal 2020, respectively. Comprehensive income was $ 606.9 million and $ 870.6 million for the first 26 weeks 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 Dec. 26, 2020
Location of
Expense (Income) Recognized in
Net Earnings Before Tax
Amount Tax Net of Tax
Amount
(In thousands)
Pension and other postretirement benefit plans:
Reclassification adjustments:
Amortization of prior service cost Other expense, net $ 183 $ 46 $ 137
Amortization of actuarial loss, net Other expense, net 10,387 2,594 7,793
Total reclassification adjustments 10,570 2,640 7,930
Foreign currency translation:
Foreign currency translation adjustment N/A 222,507 — 222,507
Marketable securities:
Change in marketable securities (1)
N/A ( 55 ) ( 11 ) ( 44 )
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
Change in cash flow hedge
Operating expenses (2)
16,352 4,017 12,335
Change in net investment hedge N/A ( 27,554 ) ( 6,888 ) ( 20,666 )
Total other comprehensive income before reclassification adjustments ( 11,202 ) ( 2,871 ) ( 8,331 )
Reclassification adjustments:
Amortization of cash flow hedges Interest expense 2,874 719 2,155
Total other comprehensive income $ 224,694 $ 477 $ 224,217
(1) Realized gains or losses on marketa ble 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 second quarter of fiscal 2021.
(2) Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.
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13-Week Period Ended Dec. 28, 2019
Location of
Expense (Income) Recognized in
Net Earnings Before Tax
Amount Tax Net of Tax
Amount
(In thousands)
Pension and other postretirement benefit plans:
Reclassification adjustments:
Amortization of prior service cost Other expense, net $ 1,905 $ 477 $ 1,428
Amortization of actuarial loss, net Other expense, net 9,630 2,405 7,225
Total reclassification adjustments 11,535 2,882 8,653
Foreign currency translation:
Foreign currency translation adjustment N/A 154,955 — 154,955
Marketable Securities:
Change in marketable securities (1)
N/A ( 489 ) ( 103 ) ( 386 )
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
Change in cash flow hedges Operating expenses (2)
( 19,313 ) ( 4,516 ) ( 14,797 )
Change in net investment hedges N/A ( 46,289 ) ( 4,810 ) ( 41,479 )
Total other comprehensive income (loss) before reclassification adjustments ( 65,602 ) ( 9,326 ) ( 56,276 )
Reclassification adjustments:
Amortization of cash flow hedges Interest expense 2,874 719 2,155
Total other comprehensive income (loss) $ 103,273 $ ( 5,828 ) $ 109,101
(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 second quarter of fiscal 2020.
(2) Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.
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26-Week Period Ended Dec. 26, 2020
Location of
Expense (Income) Recognized in
Net Earnings Before Tax
Amount Tax Net of Tax
Amount
(In thousands)
Pension and other postretirement benefit plans:
Reclassification adjustments:
Amortization of prior service cost Other expense, net $ 366 $ 92 $ 274
Amortization of actuarial loss, net Other expense, net 20,740 5,182 15,558
Total reclassification adjustments 21,106 5,274 15,832
Foreign currency translation:
Other comprehensive income (loss) before reclassification adjustments:
Foreign currency translation adjustment N/A 335,647 — 335,647
Marketable securities:
Change in marketable securities (1)
N/A ( 655 ) ( 137 ) ( 518 )
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
Change in cash flow hedges (3)
Operating expenses (2)
( 489 ) 143 ( 632 )
Change in net investment hedges (3)
N/A ( 47,953 ) ( 16,026 ) ( 31,927 )
Total other comprehensive income before reclassification adjustments ( 48,442 ) ( 15,883 ) ( 32,559 )
Reclassification adjustments:
Amortization of cash flow hedges Interest expense 5,748 1,438 4,310
Total other comprehensive income (loss) $ 313,404 $ ( 9,308 ) $ 322,712
(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 26 weeks 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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26-Week Period Ended Dec. 28, 2019
Location of
Expense (Income) Recognized in
Net Earnings Before Tax
Amount Tax Net of Tax
Amount
(In thousands)
Pension and other postretirement benefit plans:
Reclassification adjustments:
Amortization of prior service cost Other expense, net $ 3,810 $ 954 $ 2,856
Amortization of actuarial loss, net Other expense, net 18,572 4,664 13,908
Total reclassification adjustments 22,382 5,618 16,764
Foreign currency translation:
Foreign currency translation adjustment N/A 28,796 — 28,796
Marketable Securities:
Change in marketable securities (1)
N/A 692 145 547
Hedging instruments:
Other comprehensive income (loss) before reclassification adjustments:
Change in cash flow hedges Operating expenses (2)
( 6,662 ) ( 1,124 ) ( 5,538 )
Change in net investment hedges N/A ( 3,987 ) 7,492 ( 11,479 )
Total other comprehensive income (loss) before reclassification adjustments ( 10,649 ) 6,368 ( 17,017 )
Reclassification adjustments:
Amortization of cash flow hedges Interest expense 5,748 1,438 4,310
Total other comprehensive income $ 46,969 $ 13,569 $ 33,400
(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 26 weeks 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:
26-Week Period Ended Dec. 26, 2020
Pension and Other Postretirement Benefit Plans,
net of tax Foreign Currency Translation Hedging,
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 — 335,647 — — 335,647
Amortization of cash flow hedges — — 4,310 — 4,310
Change in net investment hedges — — ( 31,927 ) — ( 31,927 )
Change in cash flow hedge — — ( 632 ) — ( 632 )
Amortization of unrecognized prior service cost 274 — — — 274
Amortization of unrecognized net actuarial losses 15,558 — — — 15,558
Change in marketable securities — — — ( 518 ) ( 518 )
Balance as of Dec. 26, 2020 $ ( 1,249,882 ) $ ( 66,737 ) $ ( 78,127 ) $ 6,577 $ ( 1,388,169 )
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26-Week Period Ended Dec. 28, 2019
Pension and Other Postretirement Benefit Plans,
net of tax Foreign Currency Translation Hedging,
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 — 28,796 — — 28,796
Amortization of cash flow hedges — — 4,310 — 4,310
Change in net investment hedges — — ( 11,479 ) — ( 11,479 )
Change in cash flow hedge — — ( 5,538 ) — ( 5,538 )
Amortization of unrecognized prior service cost 2,856 — — — 2,856
Amortization of unrecognized net actuarial losses 13,908 — — — 13,908
Change in marketable securities — — — 547 547
Balance as of Dec. 28, 2019 $ ( 1,200,853 ) $ ( 261,373 ) $ ( 107,477 ) $ 3,374 $ ( 1,566,329 )
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 26 weeks of fiscal 2021, options to purchase 1,943,368 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 26 weeks of fiscal 2021 was $ 13.63 .
In the first 26 weeks of fiscal 2021, 794,659 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 26 weeks of fiscal 2021 was $ 58.71 . 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 26 weeks of fiscal 2021, 415,910 r estricted stock units were granted to employees. The weighted average grant-date fair value per restricted stock unit granted during the first 26 weeks of fiscal 2021 was $ 57.90 .
Employee Stock Purchase Plan
Plan participants purchased 452,013 shares of common stock under the Sysco ESPP during the first 26 weeks of fiscal 2021. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $ 3.41 during the first 26 weeks 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 $ 47.1 million and $ 46.6 million for the first 26 weeks of fiscal 2021 and fiscal 2020, respectively.
As of December 26, 2020, there was $ 123.8 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 1.91 years.
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11. INCOME TAXES
Effective Tax Rate
The effective tax rates for the second quarter and first 26 weeks of fiscal 2021 were 17.05 % and 16.38 %, respectively. As compared to the company’s statutory tax rate, the lower effective tax rate for the second quarter and first 26 weeks of fiscal 2021 was impacted by (1) the favorable impact of excess tax benefits of equity-based compensation that totaled $ 4.3 million and $ 6.6 million, respectively, (2) the $ 7.6 million tax benefit attributable to the sale of the stock of Cake Corporation in the first quarter, and (3) the impact of changes in tax law in the U.K. of $ 5.5 million in the first quarter. The effective tax rates for the second quarter and first 26 weeks of fiscal 2020 were 19.54 % and 20.90 %, respectively. The lower effective tax rate for the second quarter and first 26 weeks of fiscal 2020 was primarily due to the favorable impact of excess tax benefits of equity-based compensation that totaled $ 11.8 million and $ 27.5 million, respectively.
Uncertain Tax Positions
As of December 26, 2020, the gross amount of unrecognized tax benefit and related accrued interest was $ 20.4 million and $ 2.4 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 three 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.
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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 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 26 weeks of fiscal 2021 reflects this change in reporting structure. The second quarter and first 26 weeks of fiscal 2020 results reflect $ 64.0 million and $ 131.8 million, respectively, 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 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
Sales: (In thousands) (In thousands)
U.S. Foodservice Operations $ 7,924,143 $ 10,413,575 $ 15,845,676 $ 21,072,208
International Foodservice Operations 1,967,789 2,890,053 4,131,482 5,802,441
SYGMA 1,520,401 1,455,893 3,044,549 2,902,887
Other 146,649 265,521 314,654 550,511
Total $ 11,558,982 $ 15,025,042 $ 23,336,361 $ 30,328,047
13-Week Period Ended 26-Week Period Ended
Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019
Operating income (loss): (In thousands) (In thousands)
U.S. Foodservice Operations $ 485,251 $ 704,801 $ 1,073,660 $ 1,498,420
International Foodservice Operations ( 79,949 ) 34,881 ( 80,486 ) 89,681
SYGMA 11,328 9,861 23,020 17,431
Other ( 1,018 ) 9,403 ( 1,023 ) 19,540
Total segments 415,612 758,946 1,015,171 1,625,072
Corporate ( 203,550 ) ( 206,453 ) ( 383,530 ) ( 404,261 )
Total operating income 212,062 552,493 631,641 1,220,811
Interest expense 146,498 76,762 293,215 160,097
Other (income) expense, net ( 15,556 ) ( 807 ) ( 1,432 ) 2,305
Earnings before income taxes $ 81,120 $ 476,538 $ 339,858 $ 1,058,409
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