This discussion should be read in conjunction with our consolidated financial statements as ofJuly 3, 2021 , and for the fiscal year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year endedJuly 3, 2021 (our fiscal 2021 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.
Highlights
Our third quarter of fiscal 2022 results were strong, reflecting sequential sales growth improvements and accelerating market share gains. Our share gains in theU.S. and International segments continued to accelerate and demonstrated the impact of our Recipe for Growth strategy on our business. Additionally, our teams made significant improvements in operating expense leverage, with lower business recovery costs, good progress in our operations productivity performance efforts and continued re-investments to drive profitable growth. See below for a comparison of our fiscal 2022 results to our fiscal 2021 results, both including and excluding Certain Items (as defined below).
Comparisons of results from the third quarter of fiscal 2022 to the third quarter of fiscal 2021 are presented below:
•Sales:
•increased 42.9%, or$5.1 billion , to$16.9 billion ; •Operating income: •increased 110.1%, or$259.8 million , to$495.7 million ; •adjusted operating income increased 124.6%, or$319.2 million , to$575.4 million ; •Net earnings: •increased 241.1%, or$214.4 million , to$303.3 million ; •adjusted net earnings increased 216.1%, or$248.1 million , to$362.9 million ; •Basic earnings per share: 27 -------------------------------------------------------------------------------- •increased 252.9%, or$0.43 , to$0.60 per share; •Diluted earnings per share: •increased 247.1%, or$0.42 , to$0.59 per share; •adjusted diluted earnings per share increased 222.7%, or$0.49 , to$0.71 in fiscal 2022; •EBITDA: •increased 65.2%, or$277.6 million , to$703.3 million ; and •adjusted EBITDA increased 72.8%, or$318.4 million , to$755.8 million .
Comparisons of results from the first 39 weeks of fiscal 2022 to the first 39 weeks of fiscal 2021 are presented below:
•Sales:
•increased 41.3%, or$14.5 billion , to$49.7 billion ; •Operating income: •increased 81.2%, or$704.8 million , to$1.6 billion ; •adjusted operating income increased 105.4%, or$901.2 million , to$1.8 billion ; •Net earnings: •increased 127.5%, or$475.7 million , to$848.8 million ; •adjusted net earnings increased 189.9%, or$710.6 million , to$1.1 billion ; •Basic earnings per share: •increased 127.4%, or$0.93 , to$1.66 per share; •Diluted earnings per share: •increased 126.0%, or$0.92 , to$1.65 per share; and •adjusted diluted earnings per share increased 189.0%, or$1.38 , to$2.11 in fiscal 2022; •EBITDA: •increased 52.5%, or$747.5 million , to$2.2 billion ; and •adjusted EBITDA increased 65.9%, or$905.4 million , to$2.3 billion . The discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove the impact of restructuring and transformational project costs consisting of: (1) restructuring charges, (2) expenses associated with our various transformation initiatives and (3) facility closure and severance charges; acquisition-related costs consisting of: (1) intangible amortization expense and (2) acquisition costs and due diligence costs related to our acquisitions; and the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Our results for the first 39 weeks of fiscal 2022 were also impacted by (1) a write-down of COVID-related personal protection equipment inventory due to the reduction in the net realizable value of inventory (2) debt extinguishment costs and (3) the increase in reserves for uncertain tax positions. Our results for the first 39 weeks of fiscal 2021 were also impacted by losses on the sale of businesses. The fiscal 2022 and fiscal 2021 items discussed above are collectively referred to as "Certain Items." The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies toU.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis.
Trends
Economic and Industry Trends
The food-away-from-home sector continues to experience an overall recovery as compared to fiscal 2021. Our third quarter began with disruptions from the Omicron variant of COVID-19, which negatively impacted consumer demand and our customers due to the reintroduction of significant restrictions on their businesses. These conditions persisted through February; however, we experienced a strong market rebound beginning in late February and during March, as the impact of this variant lessened and restrictions eased.
Sales and Gross Profit Trends
28 -------------------------------------------------------------------------------- Our sales and gross profit performance can be influenced by multiple factors, including price, volume, inflation, customer mix and product mix. The most significant factor affecting performance in the third quarter of fiscal 2022 was volume growth, as we experienced strong results from both independent and chain customers, driven by a 14.1% improvement in local case volume and an 18.8% improvement in total case volume within ourU.S. Broadline operations, in each instance as compared to the third quarter of fiscal 2021. This growth enabled us to gain market share during the third quarter of fiscal 2022. We have two customer business segments that remain impacted by the COVID-19 pandemic, namely "Business and Industry" (which includes, for example, office cafeterias) and "Travel and Hospitality." We anticipate that both of these segments will make progress in their recovery in future quarters, which will contribute to our continued volume growth. We are on track to exceed our stated goal of achieving growth at a rate of 1.2 times the industry in fiscal 2022, and we believe that our Recipe for Growth strategy will enable us to accelerate over the next three years and grow at 1.5 times the pace of the industry by the end of fiscal 2024. Product cost inflation has also been a driver of our sales and gross profit performance. We experienced inflation at a rate of 15.8% and 14.4% in the third quarter and first 39 weeks of fiscal 2022, respectively, in ourU.S. Broadline operations, primarily driven by inflation in the poultry, produce and dairy categories. We have been successful in managing our inflation, resulting in an increase in gross profit dollars. Gross margin decreased 12 and 45 basis points in the third quarter and the first 39 weeks of fiscal 2022, respectively, as compared to the same prior year periods, largely due to the impact of product cost inflation. We are concerned about the long-term effect of elevated inflation, and we are taking actions to address it. We are actively working to improve our cost of goods sold to Sysco, so that we can pass along value to our customers. We are also pursuing Sysco brand penetration, as we believe that Sysco products can save our customers money. Lastly, we are working with our customers to help them with their menu design and locate product alternatives to avoid highly inflationary items and sub-categories.
Operating Expense Trends
Total operating expenses increased 33.4% and 31.0% during the third quarter and first 39 weeks of fiscal 2022, respectively, as compared to the third quarter and first 39 weeks of fiscal 2021, driven by the variable costs associated with significantly increased volumes, our transformation initiatives under our Recipe for Growth strategy, investments in business recovery costs and expenses due to lower productivity resulting from high turnover in our teams. Our operating results in the third quarter and first 39 weeks of fiscal 2022 included$48 million and$116 million , respectively, of operating expense investments for our Recipe for Growth strategy. We are making these necessary investments to ensure that we can serve our customers to enable us to continue increasing market share, profitably, at the national and local level. We have made a purposeful response to the COVID-generated labor and safety environment in which we are operating, with$35 million and$165 million in business recovery operating investments such as recruiting costs, hiring marketing, vaccination promotion, contract labor and sign-on and retention bonuses during the third quarter and first 39 weeks of fiscal 2022, respectively. We continued to improve our staffing levels in the third quarter of fiscal 2022, primarily for transportation and warehouse staff. Incremental training and overtime costs were approximately$30 million in the third quarter of fiscal 2022, which is lower than the approximately$40 million for these same costs in the second quarter of fiscal 2022. These efforts, along with productivity improvements from prior quarters, are lowering our business recovery costs, and we expect these expenses to continue to decline in the fourth quarter of fiscal 2022. Even with those significant business recovery and transformation operating expense investments, offset by the continued benefit of our cost-savings efforts, we leveraged our adjusted operating expense structure.
Income Tax Trends
Our provision for income taxes primarily reflects a combination of income earned and taxed in the variousU.S. federal and state, as well as foreign, jurisdictions. Tax law changes, increases or decreases in book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Our effective tax rate has been influenced by discrete events, such as tax law changes and excess tax benefits attributable to equity compensation exercises as discussed in Note 12, "Income Taxes," in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q.
Comparisons to Fiscal 2019
In assessing our financial performance through the business recovery, Sysco's management compared our results in fiscal 2022 against our corresponding fiscal 2019 results.
Comparisons of results from the third quarter of fiscal 2022 to the third quarter of fiscal 2019 are presented below:
•Sales:
29 -------------------------------------------------------------------------------- •increased 15.3%, or$2.2 billion , as compared to fiscal 2019; •Operating income: •decreased 6.4%, or$33.9 million , as compared to fiscal 2019; •adjusted operating income decreased 7.2%, or$44.8 million , as compared to fiscal 2019; •EBITDA: •decreased 0.9%, or$6.3 million , as compared to fiscal 2019; •adjusted EBITDA decreased 2.7%, or$21.1 million , as compared to fiscal 2019; •Diluted earnings per share: •decreased 30.6%, or$0.26 , as compared to fiscal 2019; and •adjusted diluted earnings per share decreased 10.1%, or$0.08 , as compared to fiscal 2019.
Comparisons of results from the first 39 weeks of fiscal 2022 to the first 39 weeks of fiscal 2019 are presented below:
•Sales:
•increased 11.3%, or$5.0 billion , as compared to fiscal 2019; •Operating income: •decreased 2.3%, or$37.3 million , as compared to fiscal 2019; •adjusted operating income decreased 8.3%, or$159.0 million , as compared to fiscal 2019; •EBITDA: •increased 0.04%, or$0.9 million , as compared to fiscal 2019; •adjusted EBITDA decreased 4.5%, or$107.3 million , as compared to fiscal 2019; •Diluted earnings per share: •decreased 24.0%, or$0.52 , as compared to fiscal 2019; and •adjusted diluted earnings per share decreased 13.9%, or$0.34 , as compared to fiscal 2019.
Key items impacting the comparability of Sysco's results in the third quarter of fiscal 2022 to the third quarter of fiscal 2019 included the one-time and short-term expenses associated with the business recovery and the operating expense investments towards our Recipe for Growth strategy.
Mergers and Acquisitions
We continue to focus on mergers and acquisitions as a part of our growth strategy, where we plan to reinforce our existing businesses, while cultivating new channels, new segments and new capabilities. We have completed the following acquisitions thus far in fiscal 2022: •In the first quarter of fiscal 2022, we acquiredGreco and Sons , a leading independent specialty Italian distributor inthe United States . •In the first quarter of fiscal 2022, we acquired a specialty food distributor in theUnited Kingdom . •In the second quarter of fiscal 2022, we acquired Paragon Foodservice, a regional broadline fresh produce distributor in westernPennsylvania . The acquisition will operate as part of Sysco'sU.S. specialty produce business. •In the third quarter of fiscal 2022, we acquired The Coastal Companies, a leading fresh produce distributor and value-added processer on theEast Coast .
Strategy
Our purpose is "Connecting the World to Share Food and Care for One Another," which we believe will allow us to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our "Recipe for Growth" transformation. This growth transformation is supported by strategic pillars that we believe will allow us to better serve our customers, including our digital, products and solutions, supply chain, customer teams, and future horizons strategies. Our various business transformation initiatives remain on track, such as the centralized pricing tool project, which is substantially complete forU.S. local customers, and which enables Sysco to strategically manage the high levels of inflation that we are currently experiencing. Other initiatives, such as our personalization engine, continue to expand, while the sales transformation is helping our sales teams continue to win new business. Additionally, we are continuing to improve the efficiency of our organization, such as regionalizing the leadership structure of ourU.S. Broadline and specialty business, as we reduce our structural expenses to fund our capital investments. In the third quarter of fiscal 2022, we converted ourU.S. broadline operations from an industry traditional five-day work week to a full six-day delivery model, which provides a better schedule for our associates, increases efficiency in our operations, increases weekly throughput without the need for additional 30 -------------------------------------------------------------------------------- trucks or building expansions and increases our ability to deliver to our customers on time. From these actions as a part of our Recipe for Growth, we can see the benefits of our developing capabilities in the new customers we are winning and in the progress we are making towards increasing market share. We expect that, as our Recipe for Growth matures, the impact on our top-line growth will continue to accelerate. We are committed to profitably growing 1.2 times the market for fiscal 2022 and 1.5 times the market by the end of fiscal 2024, the third year of our three-year strategic plan.
Results of Operations
The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
13-Week Period Ended 39-Week Period Ended Apr. 2, 2022 Mar. 27, 2021 Apr. 2, 2022 Mar. 27, 2021 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 82.2 82.0 82.1 81.7 Gross profit 17.8 18.0 17.9 18.3 Operating expenses 14.9 16.0 14.7 15.8 Operating income 2.9 2.0 3.2 2.5 Interest expense 0.7 1.2 1.0 1.2 Other (income) expense, net (0.1) (0.1) - - Earnings before income taxes 2.3 0.9 2.2 1.3 Income taxes 0.5 0.1 0.5 0.2 Net earnings 1.8 % 0.8 % 1.7 % 1.1 %
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 Apr. 2, 2022 Apr. 2, 2022 Sales 42.9 % 41.3 % Cost of sales 43.2 42.1 Gross profit 42.0 37.8 Operating expenses 33.4 31.0 Operating income 110.1 81.2 Interest expense (14.9) 12.8 Other (income) expense, net (1) (2) 8.4 95.9 Earnings before income taxes 274.8 149.6 Income taxes 490.0 268.0 Net earnings 241.1 % 127.5 % Basic earnings per share 252.9 % 127.4 % Diluted earnings per share 247.1 126.0 Average shares outstanding (0.5) 0.1 Diluted shares outstanding (0.5) 0.3 (1)Other (income) expense, net was income of$13.8 million and income of$12.7 million in the third quarter of fiscal 2022 and fiscal 2021, respectively. (2)Other (income) expense, net was income of$27.7 million and income of$14.1 million in the first 39 weeks of fiscal 2022 and fiscal 2021, respectively. 31 --------------------------------------------------------------------------------
The following tables represent our results by reportable segments:
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