SYSCO CORP 10-Q

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. Highlights Our third quarter of fiscal 2021 results were strong despite the COVID-19 pandemic’s impact on market conditions, due to improved sales and disciplined expense management. Our industry’s business recovery is here and the pace of recovery is accelerating, especially in our domestic U.S. business. We are making excellent progress in our business transformation to better serve our customers and differentiate from our competition. We are growing market share at the national and local customer level, and we achieved a profitable quarter, despite a 14% reduction in sales, as compared to fiscal 2020. We continue to make strategic investments in preparation for the business recovery and have focused our investments on our customers, our people, our inventory, our technology, and our communities. These investments have helped position Sysco for the return of foodservice demand. See below for a comparison of our third quarter of fiscal 2021 results to our third quarter of fiscal 2020 results, both including and excluding Certain Items. Comparisons of results from the third quarter of fiscal 2021 to the third quarter of fiscal 2020: • Sales: ◦ decreased 13.7%, or $1.9 billion, to $11.8 billion; • Operating income: ◦ increased $175.6 million, to $235.9 million; ◦ adjusted operating income decreased $120.8 million, to $256.2 million; • Net earnings: ◦ increased $92.2 million, to $88.9 million; ◦ adjusted net earnings decreased $117.0 million, to $114.8 million; • Basic earnings per share: ◦ increased $0.18, to $0.17 per share; • Diluted earnings per share: ◦ increased $0.18, to $0.17 per share; and ◦ adjusted diluted earnings per share decreased $0.23, to $0.22 per share. • EBITDA: ◦ increased 76.5%, or $184.5 million, to $425.8 million; and ◦ adjusted EBITDA decreased 18.7%, or $100.7 million, to $437.4 million. Comparisons of results from the first 39 weeks of fiscal 2021 to the first 39 weeks of fiscal 2020: • Sales: ◦ decreased 20.1%, or $8.9 billion, to $35.2 billion; • Operating income: ◦ decreased 32.3%, or $413.5 million, to $867.6 million; ◦ adjusted operating income decreased 51.0%, or $890.9 million, to $855.0 million; • Net earnings: ◦ decreased 55.3%, or $460.8 million, to $373.1 million; ◦ adjusted net earnings decreased 68.3%, or $805.7 million, to $374.1 million; • Basic earnings per share: ◦ decreased 55.2%, or $0.90, to $0.73 per share; • Diluted earnings per share: ◦ decreased 54.9%, or $0.89, to $0.73 per share; and ◦ adjusted diluted earnings per share decreased 68.1%, or $1.56, to $0.73 per share. • EBITDA: ◦ decreased 22.3%, or $408.0 million, to $1.4 billion; and 27 ◦ adjusted EBITDA decreased 38.3%, or $854.6 million, to $1.4 billion. EBITDA and adjusted EBITDA are non-GAAP financial measures. 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.” 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. Sysco’s results for fiscal 2021 and fiscal 2020 were also impacted by intangible amortization expense related to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). Additionally, our results for fiscal 2021 were impacted by loss on the sale of businesses. 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. Fiscal 2020 results of operations were also negatively impacted by costs arising from the COVID-19 pandemic, the most significant of which were (1) excess bad debt expense, as we experienced an increase in past due receivables and recognized additional bad debt charges, and (2) goodwill impairment charges. While Sysco traditionally incurs bad debt expense, the magnitude of such expenses and benefits that we have experienced since the onset of the COVID-19 pandemic 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 total Sysco and 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. 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. The COVID-19 pandemic has significantly impacted the financial metrics used by management to evaluate the business, and certain metrics continue to be a near- and long-term focus, while other metrics do not provide meaningful comparable information in the near-term. We believe the following are our most significant performance metrics in our current business environment: • Adjusted operating income growth (non-GAAP); • Adjusted diluted earnings per share growth (non-GAAP); • Adjusted EBITDA (non-GAAP); • Case volume growth by customer type for U.S. Broadline operations; • Sysco brand penetration for U.S. Broadline operations; and • Free cash flow (non-GAAP). Adjusted EBITDA EBITDA represents net earnings (loss) plus (1) interest expense, (2) income tax expense and benefit, (3) depreciation and (4) amortization. The net earnings (loss) component of our EBITDA calculation is impacted by Certain Items that we do not consider representative of our underlying performance. As a result, in the non-GAAP reconciliations below for each period presented, adjusted EBITDA is computed as EBITDA plus the impact of Certain Items, excluding Certain Items related to interest expense, income taxes, depreciation and amortization. Sysco’s management considers growth in this metric to be a measure of overall financial performance that provides useful information to management and investors about the profitability of the business, as it facilitates comparison of performance on a consistent basis from period to period by providing a 28 measurement of recurring factors and trends affecting our business. Additionally, it is a commonly used component metric used to inform on capital structure decisions. 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. Trends Economic and Industry Trends In response to the COVID-19 pandemic, national and local governments have imposed substantial restrictions upon the customers we serve in the food-away-from-home sector. We see pent up demand in the sector, and we believe consumers are ready to eat at restaurants once restrictions are reduced. Strong sales results and long wait times are common in restaurants operating within geographies that have limited restrictions. Our customers faced meaningfully tight restrictions during the winter COVID-19 lockdown, while a substantial winter storm in February 2021 adversely affected performance in our strongest domestic markets. Nevertheless, there has been a notable improvement in the southern portion of the U.S., where reduced restrictions and warmer weather are generating strong performance results. These results in reopened markets present a positive sign of things to come as the northern regions begin to benefit from easing restrictions that currently remain largely in place. The International Foodservice Operations segment has been significantly adversely impacted due to tougher restrictions in the countries in which we operate, particularly in Europe, which are experiencing even stronger restrictions than those experienced in the United States and are making slower progress on vaccination. Demand in Europe, Canada and Latin America regressed in the third quarter of fiscal 2021 as a result of strict lockdowns that are expected to continue, and are expected to negatively affect our fourth quarter of fiscal 2021 results for our International Foodservice Operations segment. The impact of these lockdowns may carry into the early quarters of fiscal 2022, depending on vaccination progress by country. However, we see positive trends in the recent reopening taking place in the United Kingdom. In addition to softer European performance, our business in the travel, hospitality and Food Service Management sector remains down. Our business penetration in Europe and Foodservice Management pre-COVID is creating a lingering delay in the full recovery of our business results in comparison to other distributors. Although we expect these sectors to recover, their recovery will be at a slower pace than our core restaurant sector. Our sales teams are actively engaged with new customers and are helping existing customers maximize their business during this recovery period. In the third quarter of fiscal 2021, as a result of these efforts, Sysco gained overall market share versus the rest of the industry, reflecting the progress of our investments. Sales and Gross Profit Trends Our sales and gross profit performance can be influenced by multiple factors, including price, volume, customer mix, product mix and the impact of the COVID-19 pandemic. The biggest factor affecting performance in the first 39 weeks of fiscal 2021 was the COVID-19 pandemic due to reduced volume. Sales and gross profits were also adversely impacted by lower volumes in the beginning of the third quarter of fiscal 2021 due to restrictions on our customers resulting from the impact of the second wave of COVID-19 in different geographies. Since the beginning of March 2021, however, we have begun seeing volume improvements in our largest businesses in North America. In terms of customer mix, during the third quarter of fiscal 2021, we added more new local customers than we have added during any quarter in the last five years. We believe these efforts demonstrate our ability to accelerate future growth. We continue to win business at the national and contract sales level. We have added over $1.8 billion of net new national account business on an annualized basis since the beginning of the pandemic, with another strong quarter of new contracts signed. The contracts being written are at historical profit margins, as we are winning new business due to our supply chain and service capabilities. Sysco is currently serving more local customers than before the COVID-19 pandemic, and due to our increased customer count, we anticipate growing our market share as business returns to the food-away-from-home sector in fiscal 2022 and beyond. Given the strong growth in our SYGMA segment over the past year, but the lower margin profile of this business, we continue to be diligent in our contract review and approval process. As a result, during our fiscal fourth quarter, we plan to transition away from a large existing SYGMA customer. 29 Our gross margin decreased 77 and 62 basis points in the third quarter and first 39 weeks of fiscal 2021, respectively, compared to the respective prior year periods. The primary reason for the gross margin dilution at the enterprise level is business mix. Our sales in our generally higher margin European business were down, while our sales in our lower margin SYGMA business were up, resulting in lower margins for the enterprise. In terms of the impact on pricing, we experienced inflation at a rate of 3.5% and 2.0% during the third quarter and first 39 weeks of fiscal 2021, respectively, primarily in the paper and disposables, poultry and meat categories. Operating Expense Trends Total operating expenses decreased 24.6% and 21.0% during the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the same periods in fiscal 2020, and we saw a modest improvement in operating expense leverage. The largest contributor to the decrease was reduced costs from the achievement of cost-out initiatives (see “Cost-out Measures” below), as well as a benefit from a reduction in our allowance for doubtful accounts resulting from the COVID-19 pandemic. Many of Sysco’s customers have been operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures, and a portion of Sysco’s customers have been 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 partially from restaurant reopenings, volume improvements and Sysco’s improved credit processes. As a result, we have reduced our reserves on pre-pandemic receivables, recognizing a $33.5 million and $162.4 million benefit in the third quarter and first 39 weeks of fiscal 2021, respectively, included as a Certain Item. We recorded a reduction of $10.0 million on our reserves relating to periods beginning after the onset of the COVID-19 pandemic in the third quarter of fiscal 2021, which are not included as a Certain Item. Additional reserves of $24.7 million were recorded in the first 39 weeks 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. 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 third quarter and first 39 weeks of fiscal 2021. We have reduced pay-related expenses through headcount reductions across the organization, most of which occurred in fiscal 2020. With the improvement in sales volume, we anticipate that we will hire additional sales consultants, new business developers, culinary experts and operations associates in the fourth quarter of fiscal 2021. We are on track to surpass our fiscal 2021 goal of $350 million of cost savings, and we expect to drive continued cost savings opportunities to help fuel our future growth agenda. Status of Supply Chain Disruptions and Facility Closures We are experiencing pressure and constraints in the supply chain, as select suppliers struggle with meeting increased demand levels. We anticipated this constraint and have been partnering with our top suppliers to preposition inventory at our warehouses, which creates an opportunity for us to grow our business and take additional market share. Although our business continues to face challenges associated with 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. 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 could negatively impact our income tax expense, net earnings, and balance sheet. 30 Divestitures Sysco sold its interests in Davigel Spain, part of the International Foodservice Operations segment, in the third quarter of fiscal 2021 and sold its interest in Cake Corporation in the first quarter of fiscal 2021. These operations were not significant to Sysco’s business, and these divestitures will facilitate our efforts to prioritize our focus and investments on our core business. Strategy In response to the current environment, we 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 took actions to strengthen our overall liquidity, and now we are reducing our debt levels in anticipation of the business recovery. Second, we focused on stabilizing the business by removing costs. Third, we created new sources of revenue by helping our restaurant customers succeed under pandemic conditions. Fourth, we provided, and continue to provide, 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 foodservice distribution industry. These include: • Improving service to our customers by enhancing our digital order entry platform, Sysco Shop, deploying a digital pricing tool and introducing our Restaurants Rising campaign; • 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 and FreshPoint businesses; and • Removing structural fixed costs from our business and becoming a more efficient company to return value to shareholders and to fund our continued growth plans. Throughout the third quarter of fiscal 2021, we have increased our strategic investments in preparation for the business recovery. Our investments in our customers include our Restaurants Rising campaign, which is intended to help restaurants to succeed and strengthen their business for the future by waiving delivery minimums and making it easier to do business with Sysco. We are making investments in our people, including increasing our efforts to proactively staff in advance of the business recovery. By the end of fiscal 2021, we believe we will have hired over 6,000 new associates, including warehouse selectors and drivers. While this hiring investment will increase our operating expenses in the short-term, over the long-term, it will help ensure that Sysco is able to maximize our market share gains during the business recovery. We are also making investments in inventory to properly position our warehouses to support customer demand. Our ability to ship product on time and in full during the upcoming period of anticipated volume recovery makes Sysco the strongest broadline distributor in the industry. Due to our strong balance sheet, we are uniquely positioned to make investments in inventory, allowing Sysco to accelerate growth and remain ahead of the pace of the overall business recovery. We are continuing our strategic investments in our technology to improve the customer experience and our technology platform is being meaningfully improved so that we can better service our customers. We are making it easier for our customers to order products through our Sysco Shop platform and we are implementing a new pricing software. See “Non-GAAP Reconciliations” below for an explanation of adjusted operating income, which is a non-GAAP financial measure. 31 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 39-Week Period Ended Mar. 27, 2021 Mar. 28, 2020 Mar. 27, 2021 Mar. 28, 2020 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 82.0 81.3 81.7 81.1 Gross profit 18.0 18.7 18.3 18.9 Operating expenses 16.0 18.3 15.8 16.0 Operating income 2.0 0.4 2.5 2.9 Interest expense 1.2 0.6 1.2 0.6 Other (income) expense, net (0.1) — — — Earnings before income taxes 0.9 (0.2) 1.3 2.3 Income taxes 0.1 (0.2) 0.2 0.4 Net earnings 0.8 % — % 1.1 % 1.9 % 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 39-Week Period Ended Mar. 27, 2021 Mar. 27, 2021 Sales (13.7) % (20.1) % Cost of sales (12.9) (19.5) Gross profit (17.2) (22.7) Operating expenses (24.6) (21.0) Operating income 291.4 (32.3) Interest expense 73.8 79.9 Other (income) expense, net (1) (2) (344.4) (288.4) Earnings before income taxes (457.4) (57.0) Income taxes (154.6) (64.4) Net earnings 2,797.2 % (55.3) % Basic earnings per share 1,800.0 % (55.2) % Diluted earnings per share 1,800.0 (54.9) Average shares outstanding 0.5 (0.1) Diluted shares outstanding 0.4 (0.6) (1) Other (income) expense, net was income of $12.7 million and expense of $5.2 million in the third quarter of fiscal 2021 and fiscal 2020, respectively. (2) Other (income) expense, net was income of $14.1 million and expense of $7.5 million in the first 39 weeks of fiscal 2021 and fiscal 2020, respectively. 32 The following tables represent our results by reportable segments: 13-Week Period Ended Mar. 27, 2021 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated Totals (In thousands) Sales $ 8,360,241 $ 1,723,126 $ 1,580,695 $ 160,527 $ — $ 11,824,589 Sales increase (decrease) (12.8) % (31.3) % 15.9 % (32.8) % (13.7) % Percentage of total 70.7 % 14.6 % 13.4 % 1.3 % 100.0 % Operating income (loss) $ 545,502 $ (121,487) $ 12,937 $ 5,884 $ (206,919) $ 235,917 Operating income (loss) increase (decrease) 17.5 % 45.0 % 25.6 % NM NM Percentage of total segments 123.2 % (27.4) % 2.9 % 1.3 % 100.0 % Operating income (loss) as a percentage of sales 6.5 % (7.1) % 0.8 % 3.7 % 2.0 % 13-Week Period Ended Mar. 28, 2020 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated Totals (In thousands) Sales $ 9,587,005 $ 2,508,642 $ 1,364,111 $ 238,941 $ — $ 13,698,699 Percentage of total 70.0 % 18.3 % 10.0 % 1.7 % 100.0 % Operating income $ 464,173 $ (83,786) $ 10,301 $ (19,051) $ (311,363) $ 60,274 Percentage of total segments 124.9 % (22.5) % 2.8 % (5.1) % 100.0 % Operating income as a percentage of sales 4.8 % (3.3) % 0.8 % (8.0) % 0.4 % 39-Week Period Ended Mar. 27, 2021 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated Totals (In thousands) Sales $ 24,205,917 $ 5,854,608 $ 4,625,244 $ 475,181 $ — $ 35,160,950 Sales increase (decrease) (21.0) % (29.6) % 8.4 % (39.8) % (20.1) % Percentage of total 68.8 % 16.7 % 13.2 % 1.3 % 100.0 % Operating income $ 1,619,162 $ (201,973) $ 35,957 $ 4,861 $ (590,449) $ 867,558 Operating income increase (decrease) (17.5) % NM 29.7 % NM (32.3) % Percentage of total segments 111.1 % (13.9) % 2.5 % 0.3 % 100.0 % Operating income as a percentage of sales 6.7 % (3.4) % 0.8 % 1.0 % 2.5 % 39-Week Period Ended Mar. 28, 2020 U.S. Foodservice Operations International Foodservice Operations SYGMA Other Corporate Consolidated Totals (In thousands) Sales $ 30,659,215 $ 8,311,081 $ 4,266,998 $ 789,452 $ — $ 44,026,746 Percentage of total 69.6 % 18.9 % 9.7 % 1.8 % 100.0 % Operating income $ 1,962,595 $ 5,895 $ 27,732 $ 486 $ (715,623) $ 1,281,085 Percentage of total segments 98.3 % 0.3 % 1.4 % — % 100.0 % Operating income as a percentage of sales 6.4 % 0.1 % 0.6 % 0.1 % 2.9 % 33 Based on information in Note 13, “Business Segment Information,” in the Notes to Consolidated Financial Statements in Item 1 of Part I, in the third quarter and first 39 weeks of fiscal 2021, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 85.3% and 85.5% of Sysco’s overall sales in each period. In the third quarter and first 39 weeks of fiscal 2021, U.S. Foodservice Operations and International Foodservice Operations collectively represented approximately 95.7% and 97.2% of the total segment operating income, respectively. This illustrates that these segments represent a substantial majority of our total segment results when compared to other reportable segments. Results of U.S. Foodservice Operations The following tables set forth a summary of the components of operating income expressed as a percentage increase or decrease over the comparable period in the prior year: 13-Week Period Ended Mar. 27, 2021 13-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands) Sales $ 8,360,241 $ 9,587,005 $ (1,226,764) (12.8) % Gross profit 1,634,837 1,895,378 (260,541) (13.7) Operating expenses 1,089,335 1,431,205 (341,870) (23.9) Operating income $ 545,502 $ 464,173 $ 81,329 17.5 % Gross profit $ 1,634,837 $ 1,895,378 $ (260,541) (13.7) % Adjusted operating expenses (Non-GAAP) 1,109,719 1,322,572 (212,853) (16.1) Adjusted operating income (Non-GAAP) $ 525,118 $ 572,806 $ (47,688) (8.3) % 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands) Sales $ 24,205,917 $ 30,659,215 $ (6,453,298) (21.0) % Gross profit 4,793,866 6,089,171 (1,295,305) (21.3) Operating expenses 3,174,704 4,126,576 (951,872) (23.1) Operating income $ 1,619,162 $ 1,962,595 $ (343,433) (17.5) % Gross profit $ 4,793,866 $ 6,089,171 $ (1,295,305) (21.3) % Adjusted operating expenses (Non-GAAP) 3,293,919 4,010,138 (716,219) (17.9) Adjusted operating income (Non-GAAP) $ 1,499,947 $ 2,079,033 $ (579,086) (27.9) % 34 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) Increase (Decrease) 13-Week Period 39-Week Period (Dollars in millions) (Dollars in millions) Cause of change Percentage Dollars Percentage Dollars Case volume (14.2) % $ (1,364.6) (21.3) % $ (6,540.5) Inflation 3.2 302.3 1.8 563.6 Acquisitions — — 0.2 50.5 Other (1) (1.8) (164.5) (1.7) (526.9) Total change in sales (12.8) % $ (1,226.8) (21.0) % $ (6,453.3) (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 third quarter of fiscal 2021 were 12.8% lower than the third 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 14.1% in the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, and included a 9.7% decline in locally managed customer case growth, along with a 19.2% decrease in national customer case volume. Sales from acquisitions within the last 12 months had no impact on locally managed customer sales for the third quarter of fiscal 2021; therefore, organic local case volume, which excludes acquisitions, declined 9.7%. We acquired a significant number of new customers and saw growth in our national accounts customer base during the third quarter of fiscal 2021. Sales for the first 39 weeks of fiscal 2021 were 21.0% lower than the first 39 weeks 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. Our sales have progressively improved throughout the first 39 weeks of fiscal 2021 due to volume improvements commensurate with an easing of restrictions on our customers. Case volumes from our U.S. Broadline operations, including acquisitions within the last 12 months, decreased 21.4% in the first 39 weeks of fiscal 2021, as compared to the first 39 weeks of fiscal 2020, and included a 17.2% decline in locally managed customer case growth along with a 26.4% 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 39 weeks of fiscal 2021; therefore, organic local case volume, which excludes acquisitions, declined 17.3%. Operating Income Operating income increased 17.5% for the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, and decreased 17.5% for the first 39 weeks of fiscal 2021, as compared to the first 39 weeks of fiscal 2020. Gross profit dollars decreased 13.7% and 21.3% in the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, driven primarily by the decline in local cases and a decline in Sysco-branded products. The decrease was partially offset by higher inflation. Our Sysco brand sales as a percentage of total U.S. cases decreased 116 basis points and 92 basis points, respectively, for the third quarter and first 39 weeks of fiscal 2021, which was driven by customer and product mix shift. Sysco brand sales as a percentage of local U.S. cases decreased by approximately 234 basis points and 274 basis points, respectively, for the third quarter and first 39 weeks of fiscal 2021, which was driven by product mix shifting into pre-packaged and takeaway ready products. The estimated change in product costs, an internal measure of inflation or deflation, for the third quarter and first 39 weeks of fiscal 2021 for our U.S. Broadline operations was inflation of 3.5% and 2.0%, respectively. For the third quarter and first 39 weeks of fiscal 2021, this change in product costs was primarily driven by inflation in the paper and disposables, poultry and meat categories. Gross margin, which is gross profit as a percentage of sales, was 19.55% and 19.80% in the third quarter and first 39 weeks of fiscal 2021, respectively, which was a decrease of 22 basis points and 6 basis points, respectively, compared to gross margin of 19.77% and 19.86% in the third quarter and first 39 weeks of fiscal 2020, respectively, primarily attributable to inflation. 35 Operating expenses for the third quarter and first 39 weeks of fiscal 2021 decreased 23.9%, or $341.9 million, and 23.1%, or $951.9 million, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, primarily driven by a favorable comparison of bad debt expense, including the reduction of reserves on pre-pandemic receivables, and a decrease in pay-related costs associated with permanent headcount reductions made in fiscal 2020 in response to the COVID-19 pandemic. Operating expenses, on an adjusted basis (which is a non-GAAP financial measure for which a reconciliation is provided below), for the third quarter and first 39 weeks of fiscal 2021, decreased 16.1%, or $212.9 million, and 17.9%, or $716.2 million, respectively, compared to the third quarter and first 39 weeks 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 Mar. 27, 2021 13-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands) Sales $ 1,723,126 $ 2,508,642 $ (785,516) (31.3) % Gross profit 325,200 500,929 (175,729) (35.1) Operating expenses 446,687 584,715 (138,028) (23.6) Operating loss $ (121,487) $ (83,786) $ (37,701) 45.0 % Gross profit $ 325,200 $ 500,929 $ (175,729) (35.1) % Adjusted operating expenses (Non-GAAP) 417,575 495,945 (78,370) (15.8) Adjusted operating (loss) income (Non-GAAP) $ (92,375) $ 4,984 $ (97,359) (1,953.4) % Sales on a constant currency basis (Non-GAAP) $ 1,619,788 $ 2,508,642 $ (888,854) (35.4) % Gross profit on a constant currency basis (Non-GAAP) 304,540 500,929 (196,389) (39.2) Adjusted operating expenses on a constant currency basis (Non-GAAP) 388,764 495,945 (107,181) (21.6) Adjusted operating (loss) income on a constant currency basis (Non-GAAP) $ (84,224) $ 4,984 $ (89,208) (1,789.9) % 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands) Sales $ 5,854,608 $ 8,311,081 $ (2,456,473) (29.6) % Gross profit 1,149,438 1,692,153 (542,715) (32.1) Operating expenses 1,351,411 1,686,258 (334,847) (19.9) Operating (loss) income $ (201,973) $ 5,895 $ (207,868) (3,526.2) % Gross profit $ 1,149,438 $ 1,692,153 $ (542,715) (32.1) % Adjusted operating expenses (Non-GAAP) 1,278,247 1,514,144 (235,897) (15.6) Adjusted operating (loss) income (Non-GAAP) $ (128,809) $ 178,009 $ (306,818) (172.4) % Sales on a constant currency basis (Non-GAAP) $ 5,657,228 $ 8,311,081 $ (2,653,853) (31.9) % Gross profit on a constant currency basis (Non-GAAP) 1,105,807 1,692,153 (586,346) (34.7) Adjusted operating expenses on a constant currency basis (Non-GAAP) 1,221,984 1,514,144 (292,160) (19.3) Adjusted operating (loss) income on a constant currency basis (Non-GAAP) $ (116,177) $ 178,009 $ (294,186) (165.3) % 36 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) Increase (Decrease) 13-Week Period 39-Week Period (Dollars in millions) (Dollars in millions) Cause of change Percentage Dollars Percentage Dollars Inflation 0.9 % $ 23.4 2.3 % $ 188.6 Foreign currency 4.1 103.3 2.4 197.4 Other (1) (36.3) (912.2) (34.3) (2,842.5) Total change in sales (31.3) % $ (785.5) (29.6) % $ (2,456.5) (1) The impact of volumes as a component of sales growth from international operations are included within “Other.” Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent, comparable basis. Sales for the third quarter and first 39 weeks of fiscal 2021 were 31.3% and 29.6% lower, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, primarily due to the significant decline in volume, as our European, Canadian and Latin American businesses have been substantially impacted by recent lockdowns, which are more aggressive than the lockdowns in the United States. In the third quarter of fiscal 2021, changes in foreign exchange rates positively affected sales by 4.1%, resulting in a 35.4% decrease in sales on a constant currency basis. In the first 39 weeks of fiscal 2021, changes in foreign exchange rates positively affected sales by 2.4%, resulting in a 31.9% decrease in sales on a constant currency basis. Operating Income Operating income decreased by $37.7 million and $207.9 million for the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks 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. Operating income, on an adjusted basis, decreased by $97.4 million for the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020. In the third quarter of fiscal 2021, changes in foreign exchange rates negatively affected operating income by $8.2 million, resulting in an $89.2 million decrease in adjusted operating income on a constant currency basis. Operating income, on an adjusted basis, decreased by $306.8 million, or 172.4%, for the first 39 weeks of fiscal 2021, as compared to the first 39 weeks of fiscal 2020. In the first 39 weeks of fiscal 2021, changes in foreign exchange rates negatively affected operating income by 7.1%, resulting in a $294.2 million decrease in adjusted operating income on a constant currency basis. Gross profit dollars decreased by 35.1% in the third quarter of fiscal 2021, as compared to the third quarter of fiscal 2020, primarily attributable to the decline in sales. In the third quarter of fiscal 2021, changes in foreign exchange rates positively affected gross profit by 4.1%, resulting in a 39.2% decrease in gross profit on a constant currency basis. Gross profit dollars decreased by 32.1% in the first 39 weeks of fiscal 2021, as compared to the first 39 weeks of fiscal 2020, primarily attributable to the decline in sales. In the first 39 weeks of fiscal 2021, changes in foreign exchange rates positively affected gross profit by 2.6%, resulting in a 34.7% decrease in gross profit on a constant currency basis. Gross margin was 18.87% and 19.63% in the third quarter and first 39 weeks of fiscal 2021, respectively, which was a decrease of 110 and 73 basis points compared to the gross margin of 19.97% and 20.36% in the third quarter and first 39 weeks of fiscal 2020, respectively, primarily as a result of adverse country mix, customer mix and product mix. 37 Operating expenses for the third quarter and first 39 weeks of fiscal 2021 decreased 23.6%, or $138.0 million, and 19.9%, or $334.8 million, respectively, as compared to the third quarter and first 39 weeks 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, the reduction of reserves on pre-pandemic receivables and reduced restructuring and integration charges in Europe contributed to the decrease. Operating expenses, on an adjusted basis, for the third quarter of fiscal 2021 decreased 15.8%, or $78.4 million, compared to the third quarter of fiscal 2020. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars increased operating expenses during the period by 5.8%, resulting in a 21.6% decrease in adjusted operating expenses on a constant currency basis. Operating expenses, on an adjusted basis, for the first 39 weeks of fiscal 2021 decreased 15.6%, or $235.9 million, compared to the first 39 weeks of fiscal 2020. Changes in foreign exchange rates used to translate our foreign operating expenses into U.S. dollars increased operating expenses during the period by 3.7%, resulting in an 19.3% decrease in adjusted operating expenses on a constant currency basis. Results of SYGMA and Other Segment For SYGMA, sales were 15.9% and 8.4% higher in the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, primarily from an increase in case volume driven by the success of national and regional quick service restaurants servicing drive-through traffic. Operating income increased by 25.6% and 29.7% in the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, as our increase in gross profit from increased case volume exceeded the increase in operating expenses. For the operations that are grouped within Other, operating income increased $24.9 million and $4.4 million in the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020 primarily due to reduced operating expenses, as we sold a non-core asset, Cake Corporation, in the first quarter of fiscal 2021. Our hospitality business, Guest Worldwide, had a gross profit decrease of 27.6% and 41.2% in the third quarter and first 39 weeks of fiscal 2021, respectively. This business remains challenged, as hospitality occupancy rates remain low compared to prior year levels. Despite operating in a difficult hospitality environment, the business improved its underlying profitability during the third quarter. Additionally, our Guest Worldwide business signed a substantial new customer contract during the third quarter of fiscal 2021 that we expect to be beneficial to the segment as the travel and hospitality sector recovers. Corporate Expenses Corporate expenses in the third quarter of fiscal 2021 decreased $106.2 million, or 34.9%, as compared to the third quarter of fiscal 2020, primarily due to lower costs associated with the COVID-19 pandemic, as the third quarter of fiscal 2020 included $57.1 million of goodwill impairment charges for the Pacific Star and Cake reporting units and $18.6 million of severance charges related to permanent workforce reductions. Lower charges for professional fees and other business transformation initiatives also contributed to the decrease. Corporate expenses in the first 39 weeks of fiscal 2021 decreased $127.3 million, or 18.0%, as compared to the first 39 weeks 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, as well as $57.1 million of goodwill impairment charges for the Pacific Star and Cake reporting units and $18.6 million of severance charges recognized in the first 39 weeks of fiscal 2020. Lower charges for professional fees and other business transformation initiatives also contributed to the decrease. Corporate expenses, on an adjusted basis, decreased $13.7 million, or 7.0%, and $5.4 million, or 1.0%, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020. Lower investments in our business transformation contributed to the decrease in Corporate expenses, on an adjusted basis, in the third quarter and first 39 weeks of fiscal 2021. Included in Corporate expenses are Certain Items that totaled $15.0 million and $39.0 million in the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to $107.6 million and $160.9 million in the third quarter and first 39 weeks of fiscal 2020. Certain Items impacting the third quarter and first 39 weeks of fiscal 2021 were primarily expenses associated with our business technology transformation initiatives. Certain Items impacting the third quarter and first 39 weeks of fiscal 2020 were primarily goodwill impairment charges, severance charges arising from the COVID-19 pandemic and expenses associated with our various transformation initiatives. Interest Expense Interest expense increased $61.9 million and $195.0 million for the third quarter and first 39 weeks of fiscal 2021, respectively, as compared to the third quarter and first 39 weeks of fiscal 2020, primarily attributable to higher fixed debt volume, partially offset by lower floating interest rates. 38 Net Earnings Net earnings increased $92.2 million in the third quarter of fiscal 2021 and decreased $460.8 million, or 55.3%, in the first 39 weeks of fiscal 2021, as compared to the third quarter and first 39 weeks of fiscal 2020, respectively, 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 50.5% and 68.3% in the third quarter and first 39 weeks of fiscal 2021, respectively, 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 third quarter of fiscal 2021 were $0.17, an $0.18 increase from the comparable prior year period loss of $0.01 per share. Diluted earnings per share in the third quarter of fiscal 2021 were $0.17, an $0.18 increase from the comparable prior year period loss of $0.01 per share. Adjusted diluted earnings per share, excluding Certain Items, in the third quarter of fiscal 2021 were $0.22, a 51.1% decrease from the comparable prior year period amount of $0.45 per share. These results were primarily attributable to the factors discussed above related to net earnings in the third quarter of fiscal 2021. Basic earnings per share in the first 39 weeks of fiscal 2021 were $0.73, a 55.2% decrease from the comparable prior year period amount of $1.63 per share. Diluted earnings per share in the first 39 weeks of fiscal 2021 were $0.73, a 54.9% decrease from the comparable prior year period amount of $1.62 per share. Adjusted diluted earnings per share, excluding Certain Items, in the first 39 weeks of fiscal 2021 were $0.73, a 68.1% decrease from the comparable prior year period amount of $2.29 per share. These results were primarily attributable to the factors discussed above related to net earnings in the first 39 weeks of fiscal 2021. 39 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. Sysco’s results for fiscal 2021 and fiscal 2020 were also impacted by intangible amortization expense related to the fiscal 2017 acquisition of Cucina Lux Investments Limited (the Brakes Acquisition). Additionally, our results for fiscal 2021 were impacted by loss on the sale of businesses. 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. Fiscal 2020 results of operations were also negatively impacted by costs arising from the COVID-19 pandemic, the most significant of which were (1) excess bad debt expense, as we experienced an increase in past due receivables and recognized additional bad debt charges, and (2) goodwill impairment charges. 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 have been 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, partially from restaurant reopenings, volumes improvements and Sysco’s improved credit processes. 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, current conditions and collection rates, and expectations regarding future losses. 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 total Sysco and our International Foodservice Operations results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. The constant currency impact on our adjusted total Sysco and our adjusted International Foodservice Operations results are disclosed when the impact exceeds a defined threshold of greater than 1% on the growth metric. If the amount does not exceed this threshold, a disclosure will be made that the impact of the currency change was not significant. Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items and presenting its International Foodservice Operations results on a constant currency basis, provides an important perspective with respect to our underlying business trends and results and provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations and (2) facilitates comparisons on a year-over-year basis. Although Sysco has a history of growth through acquisitions, 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 the impact of acquisition-related intangible amortization 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, other (income) expense, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not add up to the total presented due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. 40 13-Week Period Ended Mar. 27, 2021 13-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands, except for per share data) Operating expenses (GAAP) $ 1,886,751 $ 2,503,966 $ (617,215) (24.6) % Impact of restructuring and transformational project costs (1) (34,953) (77,195) 42,242 (54.7) Impact of acquisition-related intangible amortization (2) (18,834) (17,321) (1,513) 8.7 Impact of bad debt reserve adjustments (3) 33,473 (153,499) 186,972 (121.8) Impact of goodwill impairment — (68,725) 68,725 NM Operating expenses adjusted for Certain Items (Non-GAAP) 1,866,437 2,187,226 (320,789) (14.7) Impact of currency fluctuations (4) (29,659) — (29,659) (1.3) Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP) $ 1,836,778 $ 2,187,226 $ (350,448) (16.0) % Operating income (GAAP) $ 235,917 $ 60,274 $ 175,643 291.4 % Impact of restructuring and transformational project costs (1) 34,953 77,195 (42,242) (54.7) Impact of acquisition-related intangible amortization (2) 18,834 17,321 1,513 8.7 Impact of bad debt reserve adjustments (3) (33,473) 153,499 (186,972) (121.8) Impact of goodwill impairment — 68,725 (68,725) NM Operating income adjusted for Certain Items (Non-GAAP) 256,231 377,014 (120,783) (32.0) Impact of currency fluctuations (4) 8,029 — 8,029 (2.1) Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP) $ 264,260 $ 377,014 $ (112,754) (29.9) % Other (income) expense (GAAP) $ (12,708) $ 5,200 $ (17,908) NM Impact of loss on sale of businesses (10,790) — (10,790) NM Other (income) expense (Non-GAAP) $ (23,498) $ 5,200 $ (28,698) NM Net earnings (loss) (GAAP) $ 88,927 $ (3,297) $ 92,224 NM Impact of restructuring and transformational project costs (1) 34,953 77,195 (42,242) (54.7) % Impact of acquisition-related intangible amortization (2) 18,834 17,321 1,513 8.7 Impact of bad debt reserve adjustments (3) (33,473) 153,499 (186,972) (121.8) Impact of goodwill impairment — 68,725 (68,725) NM Impact of loss on sale of businesses 10,790 — 10,790 NM Tax impact of restructuring and transformational project costs (5) (10,300) (28,461) 18,161 (63.8) Tax impact of acquisition-related intangible amortization (5) (5,573) (6,777) 1,204 (17.8) Tax impact of bad debt reserve adjustments (5) 10,354 (46,410) 56,764 (122.3) Tax impact of loss on sale of businesses 301 — 301 NM Net earnings adjusted for Certain Items (Non-GAAP) $ 114,813 $ 231,795 $ (116,982) (50.5) % Diluted earnings (loss) per share (GAAP) $ 0.17 $ (0.01) $ 0.18 NM Impact of restructuring and transformational project costs (1) 0.07 0.15 (0.08) (53.3) % Impact of acquisition-related intangible amortization (2) 0.04 0.03 0.01 33.3 Impact of bad debt reserve adjustments (3) (0.07) 0.30 (0.37) (123.3) Impact of goodwill impairment — 0.13 (0.13) NM Impact of loss on sale of businesses 0.02 — 0.02 NM Tax impact of restructuring and transformational project costs (5) (0.02) (0.06) 0.04 (66.7) Tax impact of acquisition-related intangible amortization (5) (0.01) (0.01) — 0.0 Tax impact of bad debt reserve adjustments (5) 0.02 (0.09) 0.11 (122.2) Diluted EPS adjusted for Certain Items (Non-GAAP) (6) $ 0.22 $ 0.45 $ (0.23) (51.1) % 41 (1) Fiscal 2021 includes $21 million related to restructuring charges and $14 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2020 includes $48 million related to restructuring, facility closure and severance charges and $30 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. (2) Represents intangible amortization expense from the Brakes Acquisition, which is included in the results of International Foodservice. (3) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. (4) Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results. (5) The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred. (6) 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. 42 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 Change in Dollars % Change (Dollars in thousands, except for share and per share data) Operating expenses (GAAP) $ 5,573,413 $ 7,054,924 $ (1,481,511) (21.0) % Impact of restructuring and transformational project costs (1) (95,078) (191,022) 95,944 (50.2) Impact of acquisition-related intangible amortization (2) (54,714) (51,543) (3,171) 6.2 Impact of bad debt reserve adjustments (3) 162,372 (153,499) 315,871 (205.8) Impact of goodwill impairment — (68,725) 68,725 NM Operating expenses adjusted for Certain Items (Non-GAAP)* $ 5,585,993 $ 6,590,135 $ (1,004,142) (15.2) % Operating income (GAAP) $ 867,558 $ 1,281,085 $ (413,527) (32.3) % Impact of restructuring and transformational project costs (1) 95,078 191,022 (95,944) (50.2) Impact of acquisition-related intangible amortization (2) 54,714 51,543 3,171 6.2 Impact of bad debt reserve adjustments (3) (162,372) 153,499 (315,871) (205.8) Impact of goodwill impairment — 68,725 (68,725) NM Operating income adjusted for Certain Items (Non-GAAP)* $ 854,978 $ 1,745,874 $ (890,896) (51.0) % Other (income) expense (GAAP) $ (14,140) $ 7,505 $ (21,645) (288.4) % Impact of loss on sale of businesses (22,834) — (22,834) NM Other (income) expense (Non-GAAP) $ (36,974) $ 7,505 $ (44,479) NM Net earnings (GAAP) $ 373,116 $ 833,894 $ (460,778) (55.3) % Impact of restructuring and transformational project costs (1) 95,078 191,022 (95,944) (50.2) Impact of acquisition-related intangible amortization (2) 54,714 51,543 3,171 6.2 Impact of bad debt reserve adjustments (3) (162,372) 153,499 (315,871) (205.8) Impact of goodwill impairment — 68,725 (68,725) NM Impact of loss on sale of businesses 22,834 — 22,834 NM Tax impact of restructuring and transformational project costs (4) (26,886) (57,756) 30,870 (53.4) Tax impact of acquisition-related intangible amortization (4) (15,471) (15,584) 113 (0.7) Tax impact of bad debt reserve adjustments (4) 45,913 (46,410) 92,323 (198.9) Tax impact of loss on sale of businesses (7,251) — (7,251) NM Impact of foreign tax rate change (5,548) 924 (6,472) NM Net earnings adjusted for Certain Items (Non-GAAP) $ 374,127 $ 1,179,857 $ (805,730) (68.3) % Diluted earnings per share (GAAP) $ 0.73 $ 1.62 $ (0.89) (54.9) % Impact of restructuring and transformational project costs (1) 0.19 0.37 (0.18) (48.6) Impact of acquisition-related intangible amortization (2) 0.11 0.10 0.01 10.0 Impact of bad debt reserve adjustments (3) (0.32) 0.30 (0.62) (206.7) Impact of goodwill impairment — 0.13 (0.13) NM Impact of loss on sale of businesses 0.04 — 0.04 NM Tax impact of restructuring and transformational project costs (4) (0.05) (0.11) 0.06 (54.5) Tax impact of acquisition-related intangible amortization (4) (0.03) (0.03) — 0.0 Tax impact of bad debt reserve adjustments (4) 0.09 (0.09) 0.18 (200.0) Tax impact of loss on sale of businesses (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) $ 0.73 $ 2.29 $ (1.56) (68.1) % 43 (1) Fiscal 2021 includes $56 million related to restructuring, severance and facility closure charges, and $39 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2020 includes $100 million related to restructuring, severance, and facility closure charges and $91 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. (2) Represents intangible amortization expense from the Brakes Acquisition, which is included in the results of International Foodservice. (3) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. (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. * 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. 44 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 Mar. 27, 2021 13-Week Period Ended Mar. 28, 2020 Change in Dollars % Change U.S. FOODSERVICE OPERATIONS Operating expenses (GAAP) $ 1,089,335 $ 1,431,205 $ (341,870) (23.9) % Impact of restructuring and transformational project costs (1) (1,285) (1,403) 118 (8.4) Impact of bad debt reserve adjustments (2) 21,669 (107,230) 128,899 (120.2) Operating expenses adjusted for Certain Items (Non-GAAP) $ 1,109,719 $ 1,322,572 $ (212,853) (16.1) % Operating income (GAAP) $ 545,502 $ 464,173 $ 81,329 17.5 % Impact of restructuring and transformational project costs (1) 1,285 1,403 (118) (8.4) Impact of bad debt reserve adjustments (2) (21,669) 107,230 (128,899) (120.2) Operating income adjusted for Certain Items (Non-GAAP) $ 525,118 $ 572,806 $ (47,688) (8.3) % INTERNATIONAL FOODSERVICE OPERATIONS Sales (GAAP) $ 1,723,126 $ 2,508,642 $ (785,516) (31.3) % Impact of currency fluctuations (3) (103,338) — (103,338) 4.1 Comparable sales using a constant currency basis (Non-GAAP) $ 1,619,788 $ 2,508,642 $ (888,854) (35.4) % Gross Profit (GAAP) $ 325,200 $ 500,929 $ (175,729) (35.1) % Impact of currency fluctuations (3) (20,660) — (20,660) 4.1 Comparable gross profit using a constant currency basis (Non-GAAP) $ 304,540 $ 500,929 $ (196,389) (39.2) % Gross Margin (GAAP) 18.87 % 19.97 % -110 bps Impact of currency fluctuations (3) 0.07 — 7 bps Comparable gross margin using a constant currency basis (Non-GAAP) 18.80 % 19.97 % -117 bps Operating expenses (GAAP) $ 446,687 $ 584,715 $ (138,028) (23.6) % Impact of restructuring and transformational project costs (4) (18,635) (25,180) 6,545 (26.0) Impact of acquisition-related intangible amortization (5) (18,834) (17,321) (1,513) 8.7 Impact of bad debt reserve adjustments (2) 8,357 (46,269) 54,626 (118.1) Operating expenses adjusted for Certain Items (Non-GAAP) 417,575 495,945 (78,370) (15.8) Impact of currency fluctuations (3) (28,811) — (28,811) 5.8 Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP) $ 388,764 $ 495,945 $ (107,181) (21.6) % Operating loss (GAAP) $ (121,487) $ (83,786) $ (37,701) (45.0) % Impact of restructuring and transformational project costs (4) 18,635 25,180 (6,545) (26.0) Impact of acquisition-related intangible amortization (5) 18,834 17,321 1,513 8.7 Impact of bad debt reserve adjustments (2) (8,357) 46,269 (54,626) (118.1) Operating (loss) income adjusted for Certain Items (Non-GAAP) (92,375) 4,984 (97,359) NM Impact of currency fluctuations (3) 8,151 — 8,151 NM Comparable operating (loss) income adjusted for Certain Items using a constant currency basis (Non-GAAP) $ (84,224) $ 4,984 $ (89,208) NM 45 SYGMA Operating expenses (GAAP) $ 120,541 $ 108,590 $ 11,951 11.0 % Impact of restructuring and transformational project costs (1) — (122) 122 NM Operating expenses adjusted for Certain Items (Non-GAAP) $ 120,541 $ 108,468 $ 12,073 11.1 % Operating income (GAAP) $ 12,937 $ 10,301 $ 2,636 25.6 % Impact of restructuring and transformational project costs (1) — 122 (122) NM Operating income adjusted for Certain Items (Non-GAAP) $ 12,937 $ 10,423 $ 2,514 24.1 % OTHER Operating expenses (GAAP) $ 32,027 $ 75,051 $ (43,024) (57.3) % Impact of bad debt reserve adjustments (2) 3,447 — 3,447 NM Impact of goodwill impairment — (11,660) 11,660 NM Operating expenses adjusted for Certain Items (Non-GAAP) $ 35,474 $ 63,391 $ (27,917) (44.0) % Operating (loss) income (GAAP) $ 5,884 $ (19,051) $ 24,935 130.9 % Impact of bad debt reserve adjustments (2) (3,447) — (3,447) NM Impact of goodwill impairment — 11,660 (11,660) NM Operating (loss) income adjusted for Certain Items (Non-GAAP) $ 2,437 $ (7,391) $ 9,828 133.0 % CORPORATE Operating expenses (GAAP) $ 198,161 $ 304,405 $ (106,244) (34.9) % Impact of restructuring and transformational project costs (6) (15,033) (50,490) 35,457 (70.2) Impact of goodwill impairment — (57,065) 57,065 NM Operating expenses adjusted for Certain Items (Non-GAAP) $ 183,128 $ 196,850 $ (13,722) (7.0) % Operating loss (GAAP) $ (206,919) $ (311,363) $ 104,444 33.5 % Impact of restructuring and transformational project costs (6) 15,033 50,490 (35,457) (70.2) Impact of goodwill impairment — 57,065 (57,065) NM Operating loss adjusted for Certain Items (Non-GAAP) $ (191,886) $ (203,808) $ 11,922 5.8 % (1) Includes charges related to restructuring and business transformation projects. (2) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. (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) Represents intangible amortization expense from the Brakes Acquisition. (6) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy. NM represents that the percentage change is not meaningful. 46 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 Change in Dollars % Change U.S. FOODSERVICE OPERATIONS Operating expenses (GAAP) $ 3,174,704 $ 4,126,576 $ (951,872) (23.1) % Impact of restructuring and transformational project costs (1) (4,010) (9,208) 5,198 (56.5) Impact of bad debt reserve adjustments (2) 123,225 (107,230) 230,455 (214.9) Operating expenses adjusted for Certain Items (Non-GAAP) $ 3,293,919 $ 4,010,138 $ (716,219) (17.9) % Operating income (GAAP) $ 1,619,162 $ 1,962,595 $ (343,433) (17.5) % Impact of restructuring and transformational project costs (1) 4,010 9,208 (5,198) (56.5) Impact of bad debt reserve adjustments (2) (123,225) 107,230 (230,455) (214.9) Operating income adjusted for Certain Items (Non-GAAP) $ 1,499,947 $ 2,079,033 $ (579,086) (27.9) % INTERNATIONAL FOODSERVICE OPERATIONS Sales (GAAP) $ 5,854,608 $ 8,311,081 $ (2,456,473) (29.6) % Impact of currency fluctuations (3) (197,380) — (197,380) 2.4 Comparable sales using a constant currency basis (Non-GAAP) $ 5,657,228 $ 8,311,081 $ (2,653,853) (31.9) % Gross Profit (GAAP) $ 1,149,438 $ 1,692,153 $ (542,715) (32.1) % Impact of currency fluctuations (3) (43,631) — (43,631) 2.6 Comparable gross profit using a constant currency basis (Non-GAAP) $ 1,105,807 $ 1,692,153 $ (586,346) (34.7) % Gross Margin (GAAP) 19.63 % 20.36 % -73 bps Impact of currency fluctuations (3) 0.09 — 9 bps Comparable gross margin using a constant currency basis (Non-GAAP) 19.55 % 20.36 % -81 bps Operating expenses (GAAP) $ 1,351,411 $ 1,686,258 $ (334,847) (19.9) % Impact of restructuring and transformational project costs (4) (52,033) (74,302) 22,269 (30.0) Impact of acquisition-related intangible amortization (5) (54,714) (51,543) (3,171) 6.2 Impact of bad debt reserve adjustments (2) 33,583 (46,269) 79,852 (172.6) Operating expenses adjusted for Certain Items (Non-GAAP) 1,278,247 1,514,144 (235,897) (15.6) Impact of currency fluctuations (3) (56,263) — (56,263) 3.7 Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP) $ 1,221,984 $ 1,514,144 $ (292,160) (19.3) % Operating (loss) income (GAAP) $ (201,973) $ 5,895 $ (207,868) NM Impact of restructuring and transformational project costs (4) 52,033 74,302 (22,269) (30.0) % Impact of acquisition-related intangible amortization (5) 54,714 51,543 3,171 6.2 Impact of bad debt reserve adjustments (2) (33,583) 46,269 (79,852) (172.6) Operating (loss) income adjusted for Certain Items (Non-GAAP) (128,809) 178,009 (306,818) (172.4) Impact of currency fluctuations (3) 12,632 — 12,632 (7.1) Comparable operating (loss) income adjusted for Certain Items using a constant currency basis (Non-GAAP) $ (116,177) $ 178,009 $ (294,186) (165.3) % SYGMA 47 Operating expenses (GAAP) $ 358,361 $ 341,316 $ 17,045 5.0 % Impact of restructuring and transformational project costs (1) (7) (3,662) 3,655 (99.8) Operating expenses adjusted for Certain Items (Non-GAAP) $ 358,354 $ 337,654 $ 20,700 6.1 % Operating income (GAAP) $ 35,957 $ 27,732 $ 8,225 29.7 % Impact of restructuring and transformational project costs (1) 7 3,662 (3,655) (99.8) Operating income adjusted for Certain Items (Non-GAAP) $ 35,964 $ 31,394 $ 4,570 14.6 % OTHER Operating expenses (GAAP) $ 109,247 $ 193,762 $ (84,515) (43.6) % Impact of bad debt reserve adjustments (2) 5,564 — 5,564 NM Impact of goodwill impairment — (11,660) 11,660 NM Operating expenses adjusted for Certain Items (Non-GAAP) $ 114,811 $ 182,102 $ (67,291) (37.0) % Operating income (GAAP) $ 4,861 $ 486 $ 4,375 NM Impact of bad debt reserve adjustments (2) (5,564) — (5,564) NM Impact of goodwill impairment — 11,660 (11,660) NM Operating (loss) income adjusted for Certain Items (Non-GAAP) $ (703) $ 12,146 $ (12,849) (105.8) % CORPORATE Gross Profit $ (10,759) $ (8,611) $ (2,148) (24.9) % Operating expenses (GAAP) $ 579,690 $ 707,012 $ (127,322) (18.0) Impact of restructuring and transformational project costs (6) (39,028) (103,850) 64,822 (62.4) Impact of goodwill impairment — (57,065) 57,065 NM Operating expenses adjusted for Certain Items (Non-GAAP) $ 540,662 $ 546,097 $ (5,435) (1.0) % Operating loss (GAAP) $ (590,449) $ (715,623) $ 125,174 17.5 % Impact of restructuring and transformational project costs (6) 39,028 103,850 (64,822) (62.4) Impact of goodwill impairment — 57,065 (57,065) NM Operating loss adjusted for Certain Items (Non-GAAP) $ (551,421) $ (554,708) $ 3,287 0.6 % (1) Includes charges related to restructuring and business transformation projects. (2) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. (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) Represents intangible amortization expense from the Brakes Acquisition. (6) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy. NM represents that the percentage change is not meaningful. 48 Adjusted EBITDA EBITDA and adjusted EBITDA should not be used as a substitute for the most comparable GAAP measure in assessing Sysco’s overall financial performance for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. See “Key Performance Indicators” for further discussion regarding this non-GAAP financial measure. Set forth below is a reconciliation of actual net earnings (loss) to EBITDA and to adjusted EBITDA results for the periods presented (dollars in thousands): 13-Week Period Ended Mar. 27, 2021 13-Week Period Ended Mar. 28, 2020 Change in Dollars % Change Net earnings (loss) (GAAP) $ 88,927 $ (3,297) $ 92,224 NM Interest (GAAP) 145,773 83,854 61,919 73.8 % Income taxes (GAAP) 13,925 (25,483) 39,408 (154.6) Depreciation and amortization (GAAP) 177,139 186,172 (9,033) (4.9) EBITDA (Non-GAAP) $ 425,764 $ 241,246 $ 184,518 76.5 % Certain Item adjustments: Impact of restructuring and transformational project costs (1) 34,301 74,656 (40,355) (54.1) Impact of bad debt reserve adjustments (2) (33,473) 153,499 (186,972) (121.8) Impact of goodwill impairment — 68,725 (68,725) NM Impact of loss on sale of businesses 10,790 — 10,790 NM EBITDA adjusted for Certain Items (Non-GAAP) $ 437,382 $ 538,126 $ (100,744) (18.7) % (1) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation. (2) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 Change in Dollars % Change Net earnings (GAAP) $ 373,116 $ 833,894 $ (460,778) (55.3) % Interest (GAAP) 438,988 243,951 195,037 79.9 Income taxes (GAAP) 69,594 195,735 (126,141) (64.4) Depreciation and amortization (GAAP) 542,471 558,588 (16,117) (2.9) EBITDA (Non-GAAP) $ 1,424,169 $ 1,832,168 $ (407,999) (22.3) % Certain Item adjustments: Impact of restructuring and transformational project costs (1) 89,253 174,066 (84,813) (48.7) Impact of bad debt reserve adjustments (2) (162,372) 153,499 (315,871) (205.8) Impact of goodwill impairment — 68,725 (68,725) NM Impact of loss on sale of businesses 22,834 — 22,834 NM EBITDA adjusted for Certain Items (Non-GAAP) $ 1,373,884 $ 2,228,458 $ (854,574) (38.3) % 49 (1) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation. (2) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. 13-Week Period Ended 39-Week Period Ended Sep. 26, 2020 Dec. 26, 2020 Mar. 27, 2021 Mar. 27, 2021 Net earnings (GAAP) $ 216,900 $ 67,289 $ 88,927 $ 373,116 Interest (GAAP) 146,717 146,498 145,773 438,988 Income taxes (GAAP) 41,838 13,831 13,925 69,594 Depreciation and amortization (GAAP) 180,521 184,811 177,139 542,471 EBITDA (Non-GAAP) $ 585,976 $ 412,429 $ 425,764 $ 1,424,169 Certain Item adjustments: Impact of restructuring and transformational project costs (1) 25,278 29,674 34,301 89,253 Impact of bad debt reserve adjustments (2) (98,628) (30,271) (33,473) (162,372) Impact of loss on sale of businesses 12,044 — 10,790 22,834 EBITDA adjusted for certain items (Non-GAAP) $ 524,670 $ 411,832 $ 437,382 $ 1,373,884 (1) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation. (2) Fiscal 2021 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. 13-Week Period Ended 52-Week Period Ended Sep. 28, 2019 Dec. 28, 2019 Mar. 28, 2020 June 27, 2020 June 27, 2020 Net earnings (loss) (GAAP) $ 453,781 $ 383,410 $ (3,297) $ (618,419) $ 215,475 Interest (GAAP) 83,335 76,762 83,854 164,269 408,220 Income taxes (GAAP) 128,090 93,128 (25,483) (117,826) 77,909 Depreciation and amortization (GAAP) 187,405 185,011 186,172 247,177 805,765 EBITDA (Non-GAAP) $ 852,611 $ 738,311 $ 241,246 $ (324,799) $ 1,507,369 Certain Item adjustments : Impact of restructuring and transformational project costs (1) 45,546 53,864 74,656 116,218 290,284 Impact of bad debt reserve adjustments (2) — — 153,499 169,903 323,402 Impact of goodwill impairment — — 68,725 134,481 203,206 Impact of loss on assets held for sale — — — 46,968 46,968 EBITDA adjusted for certain items (Non-GAAP) $ 898,157 $ 792,175 $ 538,126 $ 142,771 $ 2,371,229 (1) Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation. (2) Fiscal 2020 represents excess bad debt charges recognized on the increase in past due receivables arising from the COVID-19 pandemic. 50 Liquidity and Capital Resources Highlights Below are comparisons of the cash flows from the first 39 weeks of fiscal 2021 to the first 39 weeks of fiscal 2020: • Cash flows from operations were $1.5 billion in fiscal 2021, compared to $1.1 billion in fiscal 2020; • Net capital expenditures totaled $231.9 million in fiscal 2021, compared to $590.6 million in fiscal 2020; • Free cash flow was $1.2 billion in fiscal 2021, compared to free cash flow of $487.8 million in fiscal 2020 (see below under the heading “Free Cash Flow” for an explanation of this non-GAAP financial measure); • There were $411.2 million of bank and commercial paper repayments, net, including $417.3 million of commercial paper repayments and $6.1 million of net bank borrowings in fiscal 2021, compared to $20.9 million of commercial paper issuances and net bank borrowings in fiscal 2020; • Dividends paid were $689.3 million in fiscal 2021, compared to $628.1 million in fiscal 2020; and • There were no stock repurchases in fiscal 2021. Cash paid for stock repurchases was $844.7 million in fiscal 2020. We redeemed senior notes in the amount of $750.0 million in fiscal 2021 using cash on hand. 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. 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. In March 2021, we continued to reduce our debt levels, and have paid down $1.1 billion of debt, including $700 million of borrowings against our long-term revolving credit facility and £300.0 million of borrowings against our U.K. commercial paper program. As of March 27, 2021, there were no borrowings outstanding under our long-term revolving credit facility and £300.0 million in aggregate principal amount of notes outstanding under the U.K. commercial paper program. In April 2021, we repaid £200 million under this commercial paper program, and the remaining £100.0 million of notes under the program will mature on May 7, 2021. As of April 24, 2021, the company had approximately $7.2 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 51 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 March 27, 2021, we had $4.9 billion in cash and cash equivalents, approximately 12% of which was held by our international subsidiaries and generated from our earnings from 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 March 27, 2021, the Captive held $126.0 million of fixed income marketable securities and $29.3 million of restricted cash and restricted cash equivalents in a restricted investment portfolio in order to meet solvency requirements. We purchased $44.7 million in marketable securities in the first 39 weeks of fiscal 2021 and received $30.8 million in proceeds from the sale of marketable securities in that period. 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 $1.5 billion in cash flows from operations in the first 39 weeks of fiscal 2021, compared to cash flows of $1.1 billion in the first 39 weeks of fiscal 2020. These amounts include year-over-year favorable comparisons on working capital and accrued income taxes, partially offset by lower operating results. Changes in working capital had a positive impact of $1.1 billion on cash flow from operations period-over-period. There were favorable comparisons on accounts payable and inventories, partially offset by an unfavorable comparison on accounts receivable. Accounts payable has increased, as we continue our business recovery efforts and investments in inventory. In the third quarter of fiscal 2021, we have invested heavily in inventory, and we ended the quarter with inventory on-hand and inventory on-order in a combined amount that exceeds our pre-COVID-19 levels. This positions us to be able to ship product on time and in full during the upcoming period of volume recovery. The unfavorable comparison in cash flows from accounts receivables is primarily due to our customers beginning to purchase more in the third quarter of fiscal 2021, coupled with significantly lower sales in the latter half of March 2020 resulting from the COVID-19 pandemic. In the first 39 weeks of fiscal 2021, we recorded a net credit to the provision for losses on receivables totaling $137.7 million, which reflects a benefit on the reduction of our allowance for pre-pandemic receivable balances, as we have made excellent progress on obtaining timely payments from our customers. 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. Income taxes positively impacted cash flow from operations, as third quarter federal estimated payments were deferred until the fourth quarter of fiscal 2021 as a result of a February winter storm and a $50 million federal income tax refund from fiscal 2019 received in the third quarter of fiscal 2021. Tax payments in the first 39 weeks of fiscal 2021 were lower than in the first 39 weeks of fiscal 2020 due to relief provided in connection with the impact of the winter storm in the current year and the federal refund received. 52 Investing Activities Our capital expenditures in the first 39 weeks of fiscal 2021 primarily consisted of technology equipment, warehouse equipment, and buildings and building improvements. Our capital expenditures in the first 39 weeks of fiscal 2021 were lower by $352.7 million, as compared to the first 39 weeks of fiscal 2020, primarily because we eliminated 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 39 weeks of fiscal 2020, we paid $142.8 million, net of cash acquired, for acquisitions. Free Cash Flow Our free cash flow for the first 39 weeks of fiscal 2021 increased by $760.1 million, to $1.2 billion, as compared to the first 39 weeks of fiscal 2020, principally as a result of an increase in cash flows from operations and year-over-year decreased capital expenditures. 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. 39-Week Period Ended Mar. 27, 2021 39-Week Period Ended Mar. 28, 2020 (In thousands) Net cash provided by operating activities (GAAP) $ 1,479,784 $ 1,078,469 Additions to plant and equipment (251,167) (603,865) Proceeds from sales of plant and equipment 19,308 13,245 Free Cash Flow (Non-GAAP) $ 1,247,925 $ 487,849 We expect that the fourth quarter of fiscal 2021 will require a significant investment in working capital, as we continue to invest in inventory and as the payables that provided us with benefit in the third quarter of fiscal 2021 come due in the fourth quarter. As a result, we expect cash flows from operating activities and free cash flow for the fourth quarter of fiscal 2021 to be approximately flat. Financing Activities Equity Transactions Proceeds from exercises of share-based compensation awards were $112.2 million in the first 39 weeks of fiscal 2021, as compared to $186.5 million in the first 39 weeks 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 March 27, 2021, we had a remaining authorization of approximately $2.1 billion. Dividends paid in the first 39 weeks of fiscal 2021 were $689.3 million, or $1.35 per share, as compared to $628.1 million, or $1.23 per share, in the first 39 weeks of fiscal 2020. In February 2021, we declared our regular quarterly dividend for the third quarter of fiscal 2021 of $0.45 per share, which was paid in April 2021. 53 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 March 27, 2021, and repayment activity since the close of the third quarter of fiscal 2021, are disclosed within that note. Updated amounts through April 16, 2021, include: • £200.0 million outstanding under our U.K. commercial paper program; • No outstanding borrowings under our U.S. commercial paper program; and • No outstanding borrowings under the credit facility supporting our commercial paper program. During the first 39 weeks of fiscal 2021 and fiscal 2020, our aggregate commercial paper issuances and short-term bank borrowings had weighted average interest rates of 0.99% and 2.01%, respectively. In the 12 months subsequent to March 27, 2021, our remaining £300.0 million under the 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 April 24, 2021, the company had approximately $7.2 billion in cash and available liquidity. 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 March 27, 2021, Sysco had a total of $11.8 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. 54 Combined Parent and Guarantor Subsidiaries Summarized Balance Sheet Mar. 27, 2021 Jun. 27, 2020 (In thousands) ASSETS Receivables due from non-obligor subsidiaries $ 95,909 $ 133,195 Current assets 8,014,301 8,644,084 Total current assets $ 8,110,210 $ 8,777,279 Notes receivable from non-obligor subsidiaries $ 83,237 $ 671,500 Other noncurrent assets 3,829,511 4,036,312 Total noncurrent assets $ 3,912,748 $ 4,707,812 LIABILITIES Payables due to non-obligor subsidiaries $ 60,157 $ 48,923 Other current liabilities 2,092,572 2,200,422 Total current liabilities $ 2,152,729 $ 2,249,345 Notes payable to non-obligor subsidiaries $ 174,721 $ 233,158 Long-term debt 11,294,864 12,478,453 Other noncurrent liabilities 1,293,973 1,356,781 Total noncurrent liabilities $ 12,763,558 $ 14,068,392 Combined Parent and Guarantor Subsidiaries Summarized Results of Operations 39-Week Period Ended Mar. 27, 2021 (In thousands) Sales $ 22,330,517 Gross profit 4,235,396 Operating income 1,138,838 Interest expense from non-obligor subsidiaries 41,594 Net earnings 603,804 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; 55 • the expected extent and duration of lockdowns in Europe, Canada and Latin America during fiscal 2021 and fiscal 2022, and their effect on our fourth quarter of fiscal 2021 results for our International Foodservice Operations segment; • our expectations regarding continued cost-saving opportunities to help fuel our future growth agenda; • our expectations regarding our business and the economic recovery generally as the COVID-19 pandemic subsides, including beliefs regarding future customer activity and the timing of the recovery; • our belief that consumers are ready to eat at restaurants once restrictions are reduced; • our expectations regarding the impact of the COVID-19 pandemic on our mix of earnings by jurisdiction; • our expectations regarding the recovery of our travel, hospitality and Food Service Management sector; • our expectations that we will have hired over 6,000 new associates by the end of fiscal 2021, and the expected impact on operating expenses in the short term; • our expectations regarding the impact of a substantial new customer contract signed by our Guest Worldwide business; • our expectations regarding our results for the fourth quarter of fiscal 2021; • the possibility that actual uncollectible amounts will differ from historical results; • 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; • 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 expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability; • our expectations that our divestitures in the first and third quarters of fiscal 2021 will facilitate our efforts to prioritize our focus and investments on our core business; • our belief in our strong financial position; • our expectations regarding the calculation of adjusted return on invested capital, adjusted operating income, adjusted net earnings and adjusted diluted earnings per share; • our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results; • our expectations regarding our effective tax rate for the remainder of fiscal 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 and their effectiveness in preventing a significant unfavorable impact on our cash flows from operations; • our expectations that the fourth quarter of fiscal 2021 will require a significant investment in working capital; • our expectations regarding cash flows from operating activities and free cash flow for the fourth quarter of fiscal 2021; • 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 U.K. commercial paper program and long-term debt with a combination of cash flow from operations and cash on hand. 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; 56 • the risk that if sales from our locally managed customers do not grow at the same rate as sales from regional and national customers, or if we are unable to continue to accelerate local case growth, our gross margins may decline; • the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit; • periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability generally; • the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges; • risks related to unfavorable conditions in North America and Europe and the impact on our results of operations and financial condition; • the risks related to our efforts to meet our long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected; the risk that the actual costs of any initiatives may be greater or less than currently expected; and the risk of adverse effects to us if past and future undertakings and the associated changes to our business do not prove to be cost effective or do not result in the level of cost savings and other benefits that we anticipated; • the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs; • the risk that the actual costs of any business initiatives may be greater or less than currently expected; • the risk that competition in our industry and the impact of GPOs may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability; • the risk that our relationships with long-term customers may be materially diminished or terminated; • the risk that changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations; • the risk that changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results; • the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs; • the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control; • the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products; • risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers; • the risk that we may not realize anticipated benefits from our operating cost reduction efforts; • difficulties in successfully expanding into international markets and complimentary lines of business; • the potential impact of product liability claims; • the risk that we fail to comply with requirements imposed by applicable law or government regulations; • risks related to our ability to effectively finance and integrate acquired businesses; • risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity; • our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position; • the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending; • the risk that divestiture of one or more of our businesses may not provide the anticipated effects on our operations; • the risk that the U.K.’s exit from the European Union (EU) on January 31, 2020, commonly referred to as Brexit, may adversely impact our operations in the U.K., including those of the Brakes Group; • the risk that future labor disruptions or disputes could disrupt the integration of Brake France 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; 57 • 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.