SYSCO CORP 10-Q

Item 1. Financial Statements Sysco Corporation and its Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except for share data) Oct. 2, 2021 Jul. 3, 2021 (unaudited) ASSETS Current assets Cash and cash equivalents $ 2,067,873 $ 3,007,123 Accounts receivable, less allowances of $126,759 and $117,695 4,309,883 3,781,510 Inventories 4,054,844 3,695,219 Prepaid expenses and other current assets 255,588 240,956 Income tax receivable — 8,759 Total current assets 10,688,188 10,733,567 Plant and equipment at cost, less accumulated depreciation 4,343,263 4,326,063 Other long-term assets Goodwill 4,402,354 3,944,139 Intangibles, less amortization 927,966 746,073 Deferred income taxes 360,193 352,523 Operating lease right-of-use assets, net 750,675 709,163 Other assets 630,227 602,011 Total other long-term assets 7,071,415 6,353,909 Total assets $ 22,102,866 $ 21,413,539 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Notes payable $ 8,909 $ 8,782 Accounts payable 5,238,313 4,884,781 Accrued expenses 1,809,459 1,814,837 Accrued income taxes 83,141 22,644 Current operating lease liabilities 106,927 102,659 Current maturities of long-term debt 491,233 486,141 Total current liabilities 7,737,982 7,319,844 Long-term liabilities Long-term debt 10,645,443 10,588,184 Deferred income taxes 171,653 147,066 Long-term operating lease liabilities 672,465 634,481 Other long-term liabilities 1,167,875 1,136,480 Total long-term liabilities 12,657,436 12,506,211 Noncontrolling interest 34,156 34,588 Shareholders’ equity Preferred stock, par value $1 per share Authorized 1,500,000 shares, issued none — — Common stock, par value $1 per share Authorized 2,000,000,000 shares, issued 765,174,900 shares 765,175 765,175 Paid-in capital 1,655,110 1,619,995 Retained earnings 10,288,291 10,151,706 Accumulated other comprehensive loss ( 1,217,937 ) ( 1,148,764 ) Treasury stock at cost, 252,825,080 and 253,342,595 shares ( 9,817,347 ) ( 9,835,216 ) Total shareholders’ equity 1,673,292 1,552,896 Total liabilities and shareholders’ equity $ 22,102,866 $ 21,413,539 Note: The July 3, 2021 balance sheet has been derived from the audited financial statements at that date. See Notes to Consolidated Financial Statements 1 Sysco Corporation and its Consolidated Subsidiaries CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) (In thousands, except for share and per share data) 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 Sales $ 16,456,546 $ 11,777,379 Cost of sales 13,484,838 9,557,534 Gross profit 2,971,708 2,219,845 Operating expenses 2,340,026 1,800,266 Operating income 631,682 419,579 Interest expense 128,214 146,717 Other (income) expense, net ( 3,252 ) 14,124 Earnings before income taxes 506,720 258,738 Income taxes 128,707 41,838 Net earnings $ 378,013 $ 216,900 Net earnings: Basic earnings per share $ 0.74 $ 0.43 Diluted earnings per share 0.73 0.42 Average shares outstanding 512,516,067 509,127,405 Diluted shares outstanding 515,782,928 510,738,760 See Notes to Consolidated Financial Statements 2 Sysco Corporation and its Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 Net earnings $ 378,013 $ 216,900 Other comprehensive (loss) income: Foreign currency translation adjustment ( 87,194 ) 113,140 Items presented net of tax: Amortization of cash flow hedges 2,155 2,155 Change in net investment hedges 10,165 ( 11,261 ) Change in cash flow hedges ( 429 ) ( 12,967 ) Amortization of prior service cost 74 137 Amortization of actuarial gain 6,367 7,765 Change in marketable securities ( 311 ) ( 474 ) Total other comprehensive (loss) income ( 69,173 ) 98,495 Comprehensive income $ 308,840 $ 315,395 See Notes to Consolidated Financial Statements 3 Sysco Corporation and its Consolidated Subsidiaries CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY (Unaudited) (In thousands, except for share data) Accumulated Other Comprehensive Loss Common Stock Paid-in Capital Retained Earnings Treasury Stock Shares Amount Shares Amounts Totals Balance as of July 3, 2021 765,174,900 $ 765,175 $ 1,619,995 $ 10,151,706 $ ( 1,148,764 ) 253,342,595 $ ( 9,835,216 ) $ 1,552,896 Net earnings 378,013 378,013 Foreign currency translation adjustment ( 87,194 ) ( 87,194 ) Amortization of cash flow hedges, net of tax 2,155 2,155 Change in cash flow hedges, net of tax ( 429 ) ( 429 ) Change in net investment hedges, net of tax 10,165 10,165 Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 6,441 6,441 Change in marketable securities, net of tax ( 311 ) ( 311 ) Dividends declared ($0.47 per common share) ( 241,428 ) ( 241,428 ) Share-based compensation awards 35,115 ( 517,515 ) 17,869 52,984 Balance as of October 2, 2021 765,174,900 $ 765,175 $ 1,655,110 $ 10,288,291 $ ( 1,217,937 ) 252,825,080 $ ( 9,817,347 ) $ 1,673,292 Accumulated Other Comprehensive Loss Common Stock Paid-in Capital Retained Earnings Treasury Stock Shares Amount Shares Amounts Totals Balance as of June 27, 2020 765,174,900 $ 765,175 $ 1,506,901 $ 10,563,008 $ ( 1,710,881 ) 256,915,825 $ ( 9,965,590 ) $ 1,158,613 Net earnings 216,900 216,900 Foreign currency translation adjustment 113,140 113,140 Amortization of cash flow hedges, net of tax 2,155 2,155 Change in cash flow hedges, net of tax ( 12,967 ) ( 12,967 ) Change in net investment hedges, net of tax ( 11,261 ) ( 11,261 ) Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax 7,902 7,902 Change in marketable securities, net of tax ( 474 ) ( 474 ) Adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), net of tax ( 2,068 ) ( 2,068 ) Dividends declared ($0.45 per common share) ( 231,242 ) ( 231,242 ) Share-based compensation awards 27,380 ( 840,053 ) 31,933 59,313 Balance as of September 26, 2020 765,174,900 $ 765,175 $ 1,534,281 $ 10,546,598 $ ( 1,612,386 ) 256,075,772 $ ( 9,933,657 ) $ 1,300,011 See Notes to Consolidated Financial Statements 4 Sysco Corporation and its Consolidated Subsidiaries CONSOLIDATED CASH FLOWS (Unaudited) (In thousands) 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 Cash flows from operating activities: Net earnings $ 378,013 $ 216,900 Adjustments to reconcile net earnings to cash provided by operating activities: Share-based compensation expense 29,313 25,834 Depreciation and amortization 186,466 180,520 Operating lease asset amortization 28,221 27,379 Amortization of debt issuance and other debt-related costs 5,577 6,554 Deferred income taxes ( 30,452 ) ( 53,579 ) Provision for losses on receivables 2,097 ( 77,790 ) Loss on sale of business — 12,043 Other non-cash items ( 201 ) ( 6,641 ) Additional changes in certain assets and liabilities, net of effect of businesses acquired: Increase in receivables ( 478,671 ) ( 111,261 ) Increase in inventories ( 294,517 ) ( 23,320 ) (Increase) decrease in prepaid expenses and other current assets ( 12,528 ) 5,577 Increase in accounts payable 329,523 577,013 (Decrease) increase in accrued expenses ( 103,483 ) 56,042 Decrease in operating lease liabilities ( 34,146 ) ( 31,167 ) Increase in accrued income taxes 69,256 98,712 (Increase) decrease in other assets ( 9,345 ) 7,187 Increase in other long-term liabilities 45,689 20,911 Net cash provided by operating activities 110,812 930,914 Cash flows from investing activities: Additions to plant and equipment ( 85,019 ) ( 75,539 ) Proceeds from sales of plant and equipment 5,627 7,064 Acquisition of businesses, net of cash acquired ( 714,010 ) — Purchase of marketable securities ( 9,925 ) ( 26,557 ) Proceeds from sales of marketable securities 8,700 12,166 Other investing activities 6,022 — Net cash used for investing activities ( 788,605 ) ( 82,866 ) Cash flows from financing activities: Bank and commercial paper borrowings, net — 3,110 Other debt borrowings 3 6,159 Other debt repayments ( 10,051 ) ( 762,858 ) Proceeds from stock option exercises 17,881 31,933 Dividends paid ( 240,561 ) ( 228,714 ) Other financing activities ( 5,003 ) ( 457 ) Net cash used for financing activities ( 237,731 ) ( 950,827 ) Effect of exchange rates on cash, cash equivalents and restricted cash ( 9,355 ) 17,095 Net decrease in cash, cash equivalents and restricted cash ( 924,879 ) ( 85,684 ) Cash, cash equivalents and restricted cash at beginning of period 3,037,100 6,095,570 Cash, cash equivalents and restricted cash at end of period $ 2,112,221 $ 6,009,886 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 225,031 $ 104,879 Income taxes, net of refunds 76,712 6,851 See Notes to Consolidated Financial Statements 5 Sysco Corporation and its Consolidated Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions. 1. BASIS OF PRESENTATION The consolidated financial statements have been prepared by the company, without audit. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income (loss), changes in consolidated shareholders’ equity and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, except as otherwise disclosed, necessary to present fairly the financial position, results of operations, comprehensive income (loss), cash flows and changes in shareholders’ equity for all periods presented have been made. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 3, 2021. Certain footnote disclosures included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to applicable rules and regulations for interim financial statements. Supplemental Cash Flow Information The following table sets forth the company’s reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statement of cash flows: Oct. 2, 2021 Sep. 26, 2020 (In thousands) Cash and cash equivalents $ 2,067,873 $ 5,985,532 Restricted cash (1) 44,348 24,354 Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows $ 2,112,221 $ 6,009,886 (1) Restricted cash primarily represents cash and cash equivalents of Sysco’s wholly owned captive insurance subsidiary, restricted for use to secure the insurer’s obligations for workers’ compensation, general liability and auto liability programs. Restricted cash is located within other assets in each consolidated balance sheet. 2. REVENUE The company recognizes revenues when its performance obligations are satisfied in an amount that reflects the consideration Sysco expects to be entitled to receive in exchange for those goods and services. Customer receivables, which are included in accounts receivable, less allowances in the consolidated balance sheet, were $ 4.0 billion and $ 3.5 billion as of October 2, 2021 and July 3, 2021, respectively. Sysco has certain customer contracts in which upfront monies are paid to its customers. These payments have become industry practice and are not related to financing of the customer’s business. They are not associated with any distinct good or service to be received from the customer and, therefore, are treated as a reduction of transaction prices. All upfront payments are capitalized in other assets and amortized over the life of the contract or the expected life of the relationship with the customer. As of October 2, 2021, Sysco’s contract assets were not significant. Sysco has no significant commissions paid that are directly attributable to obtaining a particular contract. 6 The following tables present our sales disaggregated by reportable segment and sales mix for the company’s principal product categories for the periods presented: 13-Week Period Ended Oct. 2, 2021 US Foodservice Operations International Foodservice Operations SYGMA Other Total (In thousands) Principal Product Categories Fresh and frozen meats $ 2,444,461 $ 417,171 $ 474,656 $ — $ 3,336,288 Canned and dry products 2,076,779 581,895 137,597 — 2,796,271 Frozen fruits, vegetables, bakery and other 1,501,293 518,255 273,148 — 2,292,696 Poultry 1,351,200 241,202 229,357 — 1,821,759 Dairy products 1,101,423 305,112 140,224 — 1,546,759 Fresh produce 986,998 218,963 66,563 — 1,272,524 Paper and disposables 911,350 119,740 188,243 15,499 1,234,832 Seafood 693,013 121,465 33,224 — 847,702 Beverage products 256,385 117,220 137,515 22,089 533,209 Other (1) 280,061 254,224 23,506 216,715 774,506 Total Sales $ 11,602,963 $ 2,895,247 $ 1,704,033 $ 254,303 $ 16,456,546 (1) Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment, and other janitorial products, medical supplies and smallwares. 13-Week Period Ended Sep. 26, 2020 US Foodservice Operations International Foodservice Operations SYGMA Other Total (In thousands) Principal Product Categories Fresh and frozen meats $ 1,491,000 $ 314,172 $ 428,919 $ — $ 2,234,091 Canned and dry products 1,391,218 391,578 29,573 — 1,812,369 Frozen fruits, vegetables, bakery and other 1,048,833 426,565 256,787 — 1,732,185 Poultry 830,775 179,026 216,635 — 1,226,436 Dairy products 819,493 232,956 147,029 — 1,199,478 Fresh produce 767,097 170,538 64,982 — 1,002,617 Paper and disposables 677,321 90,709 179,174 11,638 958,842 Seafood 481,717 88,567 25,096 — 595,380 Beverage products 179,652 77,466 148,591 11,210 416,919 Other (1) 234,427 192,116 27,362 145,157 599,062 Total Sales $ 7,921,533 $ 2,163,693 $ 1,524,148 $ 168,005 $ 11,777,379 (1) Other sales relate to non-food products, including textiles and amenities for our hotel supply business, equipment and subscription sales for our former Sysco Labs business, and other janitorial products, medical supplies and smallwares. 3. ACQUISITIONS During the first quarter of fiscal 2022, the company paid cash of $ 714.0 million for acquisitions. Certain acquisitions involve contingent consideration that may include earnout agreements that are typically payable over periods of up to three years in the event that certain operating results are achieved. As of October 2, 2021, aggregate contingent consideration outstanding was $ 79.7 million, of which $ 78.1 million was recorded as earnout liabilities. Earnout liabilities are all measured using unobservable inputs that are considered a Level 3 measurement. 7 Greco and Sons On August 12, 2021, Sysco consummated its acquisition of Greco and Sons (Greco), a leading independent Italian specialty distributor in the United States, operating out of 10 distribution centers and servicing 22 geographies nationwide. Greco imports and distributes a full line of food and non-food products and manufactures specialty meat products. The acquisition also includes Bellissimo Foods Company, which distributes a broad selection of Italian and Mediterranean ingredients, including a proprietary branded line of products that are sold exclusively through the Bellissimo Foods Company distribution network, serving independent pizza and Italian restaurants. The purpose of the acquisition is to strengthen Sysco’s business within the Italian foodservice sector. The assets, liabilities and operating results of Greco are reflected in the company’s consolidated financial statements in accordance with ASC Topic No. 805, Business Combinations, commencing from the acquisition date. In certain circumstances, the purchase price allocations may be based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision until Sysco receives final information and other analysis during the measurement period. These include items such as finalizing valuation of acquired tangible and intangible assets and related tax attributes. The purchase price was allocated based on the company’s preliminary estimated fair value of the assets acquired and liabilities assumed, as follows: Preliminary Purchase Price Allocation (In millions) Accounts receivable, net $ 69 Inventories 79 Plant and equipment 24 Other assets 151 Goodwill and other intangibles (1) 717 Total assets 1,040 Accounts payable ( 73 ) Accrued expenses ( 17 ) Deferred tax liabilities ( 35 ) Other liabilities ( 154 ) Total consideration $ 761 (1) The excess purchase price of $ 717.1 million was assigned to goodwill and intangibles, a portion of which is deductible for income tax purposes. Goodwill of $ 491.4 million has been assigned to the U.S. Foodservice Operations reportable segment. Intangible assets include customer relationships of $ 116.0 million with a weighted average life of 8 years and trade names of $ 109.7 million with a weighted average life of 15 years. Amortization expense is being recognized on a straight-line basis and for the first quarter of fiscal 2022 was $ 3.0 million. The quarter ended October 2, 2021 includes the results of operations of Greco for the period from August 12, 2021 to October 2, 2021. The results were not material to the consolidated results of the company for the first quarter of fiscal 2022. 8 4. FAIR VALUE MEASUREMENTS Sysco’s policy is to invest in only high-quality investments. The fair value of the company’s cash deposits and money market funds included in cash equivalents are valued using inputs that are considered a Level 1 measurement. Other cash equivalents, such as time deposits and highly liquid instruments with original maturities of three months or less, are valued using inputs that are considered a Level 2 measurement. The fair value of the company’s marketable securities are all measured using inputs that are considered a Level 2 measurement, as they rely on quoted prices in markets that are not actively traded or observable inputs over the full term of the asset. The location and the fair value of the company’s marketable securities in the consolidated balance sheet are disclosed in Note 5, “Marketable Securities.” The fair value of the company’s derivative instruments are all measured using inputs that are considered a Level 2 measurement, as they are not actively traded and are valued using pricing models that use observable market quotations. The location and the fair value of derivative assets and liabilities designated as hedges in the consolidated balance sheet are disclosed in Note 6, “Derivative Financial Instruments.” The following tables present the company’s assets measured at fair value on a recurring basis as of October 2, 2021 and July 3, 2021: Assets Measured at Fair Value as of Oct. 2, 2021 Level 1 Level 2 Level 3 Total (In thousands) Assets: Cash equivalents Cash and cash equivalents $ 1,610,164 $ 400,003 $ — $ 2,010,167 Other assets (1) 44,348 — — 44,348 Total assets at fair value $ 1,654,512 $ 400,003 $ — $ 2,054,515 (1) Represents restricted cash balance recorded within other assets in the consolidated balance sheet. Assets Measured at Fair Value as of Jul. 3, 2021 Level 1 Level 2 Level 3 Total (In thousands) Assets: Cash equivalents Cash and cash equivalents $ 2,805,961 $ 3 $ — $ 2,805,964 Other assets (1) 29,977 — — 29,977 Total assets at fair value $ 2,835,938 $ 3 $ — $ 2,835,941 (1) Represents restricted cash balance recorded within other assets in the consolidated balance sheet. The carrying values of accounts receivable and accounts payable approximated their respective fair values due to their short-term maturities. The fair value of Sysco’s total debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for new debt with the same maturities as existing debt, and is considered a Level 2 measurement. The fair value of total debt was approximately $ 13.3 billion, while the carrying value was $ 11.1 billion as of both October 2, 2021 and July 3, 2021. 9 5. MARKETABLE SECURITIES Sysco invests a portion of the assets held by its wholly owned captive insurance subsidiary in a restricted investment portfolio of marketable fixed income securities, which have been classified and accounted for as available-for-sale. The company includes fixed income securities maturing in less than twelve months within prepaid expenses and other current assets and includes fixed income securities maturing in more than twelve months within other assets in the accompanying consolidated balance sheets. The company records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period. Unrealized gains and any portion of a security’s unrealized loss attributable to non-credit losses are recorded in accumulated other comprehensive loss. There were no significant credit losses recognized in the first quarter of fiscal 2022. The following table presents the company’s available-for-sale marketable securities as of October 2, 2021 and July 3, 2021: Oct. 2, 2021 Amortized Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-Term Marketable Securities Long-Term Marketable Securities (In thousands) Fixed income securities: Corporate bonds $ 94,706 $ 2,311 $ ( 509 ) $ 96,508 $ 6,024 $ 90,484 Government bonds 30,283 3,402 ( 5 ) 33,680 — 33,680 Total marketable securities $ 124,989 $ 5,713 $ ( 514 ) $ 130,188 $ 6,024 $ 124,164 Jul. 3, 2021 Amortized Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-Term Marketable Securities Long-Term Marketable Securities (In thousands) Fixed income securities: Corporate bonds $ 92,547 $ 2,491 $ ( 456 ) $ 94,582 $ 11,570 $ 83,012 Government bonds 31,552 3,556 — 35,108 — 35,108 Total marketable securities $ 124,099 $ 6,047 $ ( 456 ) $ 129,690 $ 11,570 $ 118,120 As of October 2, 2021, the balance of available-for-sale securities by contractual maturity is shown in the following table. Within the table, maturities of fixed income securities have been allocated based upon timing of estimated cash flows. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Oct. 2, 2021 (In thousands) Due in one year or less $ 6,024 Due after one year through five years 81,779 Due after five years through ten years 42,385 Total $ 130,188 There were no significant realized gains or losses in marketable securities in the first quarter of fiscal 2022. 6. DERIVATIVE FINANCIAL INSTRUMENTS Sysco uses derivative financial instruments to enact hedging strategies for risk mitigation purposes; however, the company does not use derivative financial instruments for trading or speculative purposes. Hedging strategies are used to manage interest rate risk, foreign currency risk and fuel price risk. 10 Hedging of interest rate risk Sysco manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. Hedging of foreign currency risk The company uses euro-bond denominated debt to hedge the foreign currency exposure of our net investment in certain foreign operations. Additionally, Sysco’s operations in Europe have inventory purchases denominated in currencies other than their functional currency, such as the euro, U.S. dollar, Polish zloty and Danish krone. These inventory purchases give rise to foreign currency exposure between the functional currency of each entity and these currencies. The company enters into foreign currency forward swap contracts to sell the applicable entity’s functional currency and buy currencies matching the inventory purchase, which operate as cash flow hedges of the company’s foreign currency-denominated inventory purchases. Hedging of fuel price risk Sysco uses fuel commodity swap contracts to hedge against the risk of the change in the price of diesel on anticipated future purchases. These swaps have been designated as cash flow hedges. None of the company’s hedging instruments contain credit-risk-related contingent features. Details of outstanding hedging instruments as of October 2, 2021 are presented below: Maturity Date of the Hedging Instrument Currency / Unit of Measure Notional Value (In millions) Hedging of interest rate risk June 2023 Euro 500 March 2025 U.S. Dollar 500 Hedging of foreign currency risk Various (October 2021) Swedish Krona 54 Various (October 2021 to June 2022) British Pound Sterling 26 June 2023 Euro 500 Hedging of fuel risk Various (October 2021 to June 2022) Gallons 30 The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of October 2, 2021 and July 3, 2021 are as follows: Derivative Fair Value Balance Sheet location Oct. 2, 2021 Jul. 3, 2021 (In thousands) Fair Value Hedges: Interest rate swaps Other assets $ 39,124 $ 43,217 Cash Flow Hedges: Fuel swaps Other current assets $ 16,199 $ 16,732 Foreign currency forwards Other current assets 70 42 Foreign currency forwards Other current liabilities 69 46 Gains or losses recognized in the consolidated results of operations for cash flow hedging relationships are not significant for each of the periods presented. The location and amount of gains or losses recognized in the consolidated results of operations for fair value hedging relationships for each of the periods, presented on a pretax basis, are as follows: 11 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 (In thousands) Total amounts of income and expense line items presented in the consolidated results of operations in which the effects of fair value hedges are recorded $ 128,214 $ 146,717 Gain or (loss) on fair value hedging relationships: Interest rate swaps: Hedged items $ ( 2,433 ) $ ( 9,998 ) Derivatives designated as hedging instruments ( 8,390 ) 3,457 The losses on the fair value hedging relationships associated with the hedged items as disclosed in the table above consist of the following components for each of the periods presented: 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 (In thousands) Interest expense $ ( 6,526 ) $ ( 14,834 ) Decrease in fair value of debt ( 4,093 ) ( 4,836 ) Hedged items $ ( 2,433 ) $ ( 9,998 ) The location and effect of cash flow and net investment hedge accounting on the consolidated statements of comprehensive income for the 13-week periods ended October 2, 2021 and September 26, 2020, presented on a pretax basis, are as follows: 12 13-Week Period Ended Oct. 2, 2021 Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (In thousands) (In thousands) Derivatives in cash flow hedging relationships: Fuel swaps $ ( 485 ) Operating expense $ 7,972 Foreign currency contracts ( 78 ) Cost of sales / Other income — Total $ ( 563 ) $ 7,972 Derivatives in net investment hedging relationships: Foreign denominated debt $ 13,553 N/A $ — Total $ 13,553 $ — 13-Week Period Ended Sep. 26, 2020 Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (In thousands) (In thousands) Derivatives in cash flow hedging relationships: Fuel swaps $ 2,891 Operating expense $ ( 8,652 ) Foreign currency contracts ( 19,732 ) Cost of sales / Other income ( 2,692 ) Total $ ( 16,841 ) $ ( 11,344 ) Derivatives in net investment hedging relationships: Foreign denominated debt $ ( 36,550 ) N/A $ — Total $ ( 36,550 ) $ — The location and carrying amount of hedged liabilities in the consolidated balance sheet as of October 2, 2021 are as follows: Oct. 2, 2021 Carrying Amount of Hedged Assets (Liabilities) Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities) (In thousands) Balance sheet location: Long-term debt $ ( 1,065,690 ) $ ( 39,124 ) The location and carrying amount of hedged liabilities in the consolidated balance sheet as of July 3, 2021 are as follows: 13 Jul. 3, 2021 Carrying Amount of Hedged Assets (Liabilities) Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of Hedged Assets (Liabilities) (In thousands) Balance sheet location: Long-term debt $ ( 1,065,364 ) $ ( 43,217 ) 7. DEBT The company has a $ 2.0 billion long-term revolving credit facility that expires on June 28, 2024, subject to extension. As of October 2, 2021, there were no borrowings outstanding under this facility. During the first quarter of fiscal 2022, Sysco amended its revolving credit facility to (a) eliminate the covenant that had restricted (i) increases to the company’s regular quarterly dividend and (ii) share repurchases, in each case, until the earlier of September 2022 or the date on which Sysco has achieved a certain ratio of consolidated EBITDA to consolidated interest expense, and (b) adjust the covenant requiring Sysco to maintain a certain ratio of consolidated EBITDA to consolidated interest expense. Sysco has a U.S. commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $ 2.0 billion. Any outstanding amounts are classified within long-term debt, as the program is supported by the long-term revolving credit facility. As of October 2, 2021, there were no commercial paper issuances outstanding under this program. During the first 13 weeks of fiscal 2022, there were no borrowing activities under our commercial paper programs, long-term revolving credit facility or short-term bank notes. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 (In thousands, except for share and per share data) Numerator: Net earnings $ 378,013 $ 216,900 Denominator: Weighted-average basic shares outstanding 512,516,067 509,127,405 Dilutive effect of share-based awards 3,266,861 1,611,355 Weighted-average diluted shares outstanding 515,782,928 510,738,760 Basic earnings per share $ 0.74 $ 0.43 Diluted earnings per share $ 0.73 $ 0.42 The number of securities that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 1,963,000 and 6,110,000 for the first quarter of fiscal 2022 and fiscal 2021, respectively. 9. OTHER COMPREHENSIVE INCOME Comprehensive income is net earnings plus certain other items that are recorded directly to shareholders’ equity, such as foreign currency translation adjustment, changes in marketable securities, amounts related to certain hedging arrangements and amounts related to pension and other postretirement plans. Comprehensive income was $ 308.8 million and $ 315.4 million for the first quarter of fiscal 2022 and fiscal 2021, respectively. A summary of the components of other comprehensive income (loss) and the related tax effects for each of the periods presented is as follows: 14 13-Week Period Ended Oct. 2, 2021 Location of Expense (Income) Recognized in Net Earnings Before Tax Amount Tax Net of Tax Amount (In thousands) Pension and other postretirement benefit plans: Reclassification adjustments: Amortization of prior service cost Other expense, net $ 99 $ 25 $ 74 Amortization of actuarial loss, net Other expense, net 8,486 2,119 6,367 Total reclassification adjustments 8,585 2,144 6,441 Foreign currency translation: Foreign currency translation adjustment N/A ( 87,194 ) — ( 87,194 ) Marketable securities: Change in marketable securities (1) N/A ( 393 ) ( 82 ) ( 311 ) Hedging instruments: Other comprehensive income (loss) before reclassification adjustments: Change in cash flow hedge Operating expenses (2) ( 563 ) ( 134 ) ( 429 ) Change in net investment hedge N/A 13,553 3,388 10,165 Total other comprehensive income before reclassification adjustments 12,990 3,254 9,736 Reclassification adjustments: Amortization of cash flow hedges Interest expense 2,874 719 2,155 Total other comprehensive loss $ ( 63,138 ) $ 6,035 $ ( 69,173 ) (1) Realized gains or losses on marketa ble securities are presented within other (income) expense, net in the consolidated results of operations; however, there were no significant gains or losses realized in the first quarter of fiscal 2022. (2) Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges. 15 13-Week Period Ended Sep. 26, 2020 Location of Expense (Income) Recognized in Net Earnings Before Tax Amount Tax Net of Tax Amount (In thousands) Pension and other postretirement benefit plans: Reclassification adjustments: Amortization of prior service cost Other expense, net $ 183 $ 46 $ 137 Amortization of actuarial loss, net Other expense, net 10,353 2,588 7,765 Total reclassification adjustments 10,536 2,634 7,902 Foreign currency translation: Foreign currency translation adjustment N/A 113,140 — 113,140 Marketable Securities: Change in marketable securities (1) N/A ( 600 ) ( 126 ) ( 474 ) Hedging instruments: Other comprehensive income (loss) before reclassification adjustments: Change in cash flow hedge (3) Operating expenses (2) ( 16,841 ) ( 3,874 ) ( 12,967 ) Change in net investment hedges N/A ( 20,399 ) ( 9,138 ) ( 11,261 ) Total other comprehensive income before reclassification adjustments ( 37,240 ) ( 13,012 ) ( 24,228 ) Reclassification adjustments: Amortization of cash flow hedges Interest expense 2,874 719 2,155 Total other comprehensive income $ 88,710 $ ( 9,785 ) $ 98,495 (1) Realized gains or losses on marketable securities are presented within other (income) expense, net in the consolidated results of operations; however, there were no significant gains or losses realized in the first quarter of fiscal 2021 . (2) Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges. (3) Change in cash flow hedges includes the termination of some cash flow hedges. 16 The following tables provide a summary of the changes in accumulated other comprehensive (loss) income f or the periods presented: 13-Week Period Ended Oct. 2, 2021 Pension and Other Postretirement Benefit Plans, net of tax Foreign Currency Translation Hedging, net of tax Marketable Securities, net of tax Total (In thousands) Balance as of Jul. 3, 2021 $ ( 1,061,991 ) $ ( 40,092 ) $ ( 51,096 ) $ 4,415 $ ( 1,148,764 ) Equity adjustment from foreign currency translation — ( 87,194 ) — — ( 87,194 ) Amortization of cash flow hedges — — 2,155 — 2,155 Change in net investment hedges — — 10,165 — 10,165 Change in cash flow hedge — — ( 429 ) — ( 429 ) Amortization of unrecognized prior service cost 74 — — — 74 Amortization of unrecognized net actuarial losses 6,367 — — — 6,367 Change in marketable securities — — — ( 311 ) ( 311 ) Balance as of Oct. 2, 2021 $ ( 1,055,550 ) $ ( 127,286 ) $ ( 39,205 ) $ 4,104 $ ( 1,217,937 ) 13-Week Period Ended Sep. 26, 2020 Pension and Other Postretirement Benefit Plans, net of tax Foreign Currency Translation Hedging, net of tax Marketable Securities, net of tax Total (In thousands) Balance as of Jun. 27, 2020 $ ( 1,265,714 ) $ ( 402,384 ) $ ( 49,878 ) $ 7,095 $ ( 1,710,881 ) Equity adjustment from foreign currency translation — 113,140 — — 113,140 Amortization of cash flow hedges — — 2,155 — 2,155 Change in net investment hedges — — ( 11,261 ) — ( 11,261 ) Change in cash flow hedge — — ( 12,967 ) — ( 12,967 ) Amortization of unrecognized prior service cost 137 — — — 137 Amortization of unrecognized net actuarial losses 7,765 — — — 7,765 Change in marketable securities — — — ( 474 ) ( 474 ) Balance as of Sep. 26, 2020 $ ( 1,257,812 ) $ ( 289,244 ) $ ( 71,951 ) $ 6,621 $ ( 1,612,386 ) 10. SHARE-BASED COMPENSATION Sysco provides compensation benefits to employees under several share-based payment arrangements, including various long-term employee stock incentive plans and the 2015 Employee Stock Purchase Plan (ESPP). Stock Incentive Plans In the first quarter of fiscal 2022, options to purchase 1,150,645 shares were granted to employees. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per option granted during the first quarter of fiscal 2022 was $ 17.36 . In the first quarter of fiscal 2022, 412,598 performance share units (PSUs) were granted to employees. Based on the jurisdiction in which the employee resides, some of these PSUs were granted with forfeitable dividend equivalents. The fair value of each PSU award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For PSUs granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the 17 vesting period. The weighted average grant-date fair value per PSU granted during the first quarter of fiscal 2022 was $ 76.81 . The PSUs will convert into shares of Sysco common stock at the end of the three-year performance period based on actual performance targets achieved, as well as the market-based return of Sysco’s common stock relative to that of each company within the S&P 500 index. In the first quarter of fiscal 2022, 172,739 restricted stock units were granted to employees. The weighted average grant-date fair value per restricted stock unit granted during the first quarter of fiscal 2022 was $ 76.63 . Employee Stock Purchase Plan Plan participants purchased 235,197 shares of common stock under the ESPP during the first quarter of fiscal 2022. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $ 11.78 during the first quarter of fiscal 2022. The fair value of each stock purchase right is estimated as the difference between the stock price at the date of issuance and the employee purchase price. All Share-Based Payment Arrangements The total share-based compensation cost that has been recognized in results of operations was $ 29.3 million and $ 25.8 million for the first quarter of fiscal 2022 and fiscal 2021, respectively. As of October 2, 2021, there was $ 154.1 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 1.96 years. 11. INCOME TAXES Effective Tax Rate The effective tax rates for the first quarters of fiscal 2022 and 2021 were 25.40 % and 16.17 %, respectively. As compared to the company’s statutory tax rate, the higher effective tax rate for the first quarter of fiscal 2022 was impacted by the increase in our reserve for uncertain tax positions of $ 12.0 million, partially offset by (1) the favorable impact of corporate owned life insurance policies that total $ 1.9 million, and (2) the favorable impact of excess tax benefits of equity-based compensation that totaled $ 1.4 million. As compared to the company’s statutory tax rate, the lower effective tax rate for the first quarter of fiscal 2021 was impacted by (1) the $ 7.6 million tax benefit attributable to the sale of the stock of Cake Corporation, (2) the impact of changes in tax law in the United Kingdom (U.K.) of $ 5.5 million and, (3) the favorable impact of excess tax benefits of equity-based compensation that totaled $ 2.3 million. Uncertain Tax Positions As of October 2, 2021, the gross amount of unrecognized tax benefit and related accrued interest was $ 32.4 million and $ 3.8 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months. At this time, an estimate of the range of the reasonably possible change cannot be made. Other The determination of the company’s provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects income earned and taxed in the various U.S. federal and state, as well as foreign jurisdictions. Tax law changes, increases or decreases in permanent book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. 12. COMMITMENTS AND CONTINGENCIES Legal Proceedings Sysco is engaged in various legal proceedings that have arisen but have not been fully adjudicated. The likelihood of loss for these legal proceedings, based on definitions within contingency accounting literature, ranges from remote to reasonably possible to probable. When probable and reasonably estimable, the losses have been accrued. Although the final results of legal proceedings cannot be predicted with certainty, based on estimates of the range of potential losses associated 18 with these matters, management does not believe the ultimate resolution of these proceedings, either individually or in the aggregate, will have a material adverse effect upon the consolidated financial position or results of operations of the company. 13. BUSINESS SEGMENT INFORMATION Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located in North America and Europe. Under the accounting provisions related to disclosures about segments of an enterprise, we have aggregated certain operating segments into three reportable segments. “Other” financial information is attributable to our other operating segments that do not meet the quantitative disclosure thresholds. • U.S. Foodservice Operations – primarily includes U.S. Broadline operations, which distribute a full line of food products, including custom-cut meat, seafood, specialty produce, specialty Italian, specialty imports and a wide variety of non-food products; • International Foodservice Operations – includes operations in the Americas (primarily outside of the U.S. and Europe, which distribute a full line of food products and a wide variety of non-food products. The Americas primarily consists of operations in Canada, Bahamas, Mexico, Costa Rica and Panama, as well as our operations that distribute to international customers. Our European operations primarily consist of operations in the U.K., France, Ireland and Sweden; • SYGMA – our U.S. customized distribution operations serving quick-service chain restaurant customer locations; and • Other – primarily our hotel supply operations, Guest Worldwide. The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Our Global Support Center generally includes all expenses of the corporate office and Sysco’s shared service operations. These also include all U.S. share-based compensation costs. The following tables set forth certain financial information for Sysco’s reportable business segments. 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 Sales: (In thousands) U.S. Foodservice Operations $ 11,602,963 $ 7,921,533 International Foodservice Operations 2,895,247 2,163,693 SYGMA 1,704,033 1,524,148 Other 254,303 168,005 Total $ 16,456,546 $ 11,777,379 13-Week Period Ended Oct. 2, 2021 Sep. 26, 2020 Operating income (loss): (In thousands) U.S. Foodservice Operations $ 797,523 $ 588,409 International Foodservice Operations 36,676 ( 537 ) SYGMA ( 2,447 ) 11,692 Other 6,456 ( 5 ) Total segments 838,208 599,559 Global Support Center ( 206,526 ) ( 179,980 ) Total operating income 631,682 419,579 Interest expense 128,214 146,717 Other (income) expense, net ( 3,252 ) 14,124 Earnings before income taxes $ 506,720 $ 258,738 19