Business context and reporting period
Sysco Corporation distributes food and related products to foodservice customers, including restaurants, healthcare and educational facilities, and lodging businesses. It served approximately 725,000 customer locations through 334 distribution facilities in North America and Europe.
The filing is the annual Form 10-K for fiscal 2023, a 52-week year ended July 1, 2023, compared primarily with fiscal 2022, ended July 2, 2022. Although the request metadata says “2022 Q4,” this filing is not a quarterly report for that period; it includes unaudited quarterly results for fiscal 2023.
Financial performance and position
| Metric | Fiscal 2023 | Fiscal 2022 |
|---|---|---|
| Sales | $76.32 billion | $68.64 billion |
| Gross profit / gross margin | $13.95 billion / 18.28% | $12.32 billion / 17.95% |
| Operating income / operating margin | $3.04 billion / 3.98% | $2.35 billion / 3.42% |
| Net earnings | $1.77 billion | $1.36 billion |
| Diluted EPS | $3.47 | $2.64 |
| Adjusted diluted EPS (non-GAAP) | $4.01 | $3.25 |
| Cash from operating activities | $2.87 billion | $1.79 billion |
| Free cash flow (non-GAAP) | $2.12 billion | $1.18 billion |
- Sales grew 11.2%; management attributed U.S. Foodservice growth to case-volume improvement and inflation. Total-company product-cost inflation was 6.1% for the year. U.S. Foodservice case volume rose 5.2%, including 3.3% growth in local-customer cases.
- Cost of sales was 81.7% of sales versus 82.0% in fiscal 2022. Operating expenses rose 9.4%, slower than sales growth. Management reported improved operating leverage and higher gross margins.
- Adjusted operating income increased 21.7% to $3.21 billion; adjusted EBITDA increased 15.6% to $3.85 billion. These are non-GAAP measures and exclude specified items; they should be considered alongside GAAP results.
- Operating cash flow increased by $1.08 billion year over year. Management cited favorable working-capital comparisons, including receivables and inventory, partly offset by accounts payable and accrued expenses.
- Capital expenditures were $793 million; net capital expenditures were $751 million. Cash dividends paid were $996 million, and share repurchases totaled $500 million.
- Total debt was $10.41 billion, down from $10.65 billion; cash and cash equivalents were $745 million. The company reported about $3.7 billion of cash and available liquidity at year-end, with no commercial paper or revolving-credit borrowings outstanding then. It had $339 million of commercial paper outstanding as of August 8, 2023.
- Fiscal-year effective tax rate was 22.55%. The company expects approximately 24.50% in fiscal 2024.
Material changes versus the prior year
- Net earnings rose 30.3%, operating income rose 29.5%, and diluted EPS rose 31.4%. Adjusted net earnings rose 22.2%, indicating growth remained substantial after the company’s specified adjustments.
- International Foodservice sales rose 15.0% reported, but foreign-currency translation reduced reported sales; constant-currency comparable sales rose 22.6%. Segment operating income increased to $313 million from $100 million.
- SYGMA returned to operating profit of $57 million from a $3 million loss, primarily reflecting customer fee increases. Other-segment operating income rose to $57 million, with recovery in hospitality contributing.
- Operating cash flow and free cash flow improved significantly, while net capital expenditures increased. Acquisitions used $37 million in fiscal 2023 versus $1.28 billion in fiscal 2022.
- Year-end shareholders’ equity increased to $2.01 billion from $1.38 billion. Total debt declined modestly, although long-term debt increased and debt remained substantial.
Outlook, management commentary, risks and unusual items
- Management expects fiscal 2024 sales growth in the mid-single digits, reaching approximately $80 billion, and expects the foodservice market to grow more slowly than in fiscal 2023. It anticipates slightly positive total-company inflation, with U.S. Broadline deflation in the first half and minimal inflation in the second half.
- Management expects fiscal 2024 capital expenditures, net of asset-sale proceeds, to approximate 1% of sales and plans approximately $750 million of share repurchases, potentially more depending on acquisition activity. The company also expects continued investment in its “Recipe for Growth” strategy.
- Fiscal 2023 included a $315 million non-cash pension settlement charge related to transferring $695 million of pension obligations to an insurer, and $122 million of income from assigning remaining vendor-litigation claims. Management does not expect similar transactions in fiscal 2024.
- Principal risks include competitive pressure in a low-margin industry; inflation, deflation, fuel and labor costs; supply constraints; economic weakness and reduced food-away-from-home demand; customer concentration or mix shifts; cybersecurity and privacy exposures; regulatory and food-safety requirements; and acquisition integration. Management cited ongoing integration challenges in France.
- Sysco disclosed a March 2023 cybersecurity event in which a threat actor extracted company data, including information relating to customers and employees. The filing says operations and customer service were not interrupted and no material financial impact had occurred to date.
- The IRS issued a notice of deficiency primarily concerning foreign tax credits. Sysco is challenging related tax regulations in Tax Court; an unfavorable outcome could require reversal of all or part of a previously recorded $131 million tax benefit.
- Management estimated potential multiemployer pension withdrawal liability of up to $142.6 million, based on plan information with valuation dates from 2020 through 2022, and cautioned the current amount could differ materially. The company-sponsored pension plans are also exposed to market and interest-rate changes.
- Goodwill was $4.65 billion. The annual impairment assessment found one reporting unit with only about 6% fair-value headroom; its goodwill was $119 million. The auditor identified goodwill valuation as a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect; no environmental proceedings meeting the company’s stated disclosure threshold were reported. The filing states there were no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether fiscal 2024 volume, pricing and customer mix support the mid-single-digit sales-growth outlook as inflation moderates or turns to deflation.
- How much operating cash flow improvement reflects durable earnings versus working-capital timing, and whether free cash flow can sustain dividends, buybacks, investment and debt service.
- Debt maturities, borrowing costs and liquidity, including the post-year-end commercial paper balance and the effect of higher rates on refinancing.
- The outcome and potential financial exposure of the IRS tax dispute concerning the $131 million benefit.
- Progress in France integration, and whether the goodwill reporting unit with limited headroom remains above its carrying value.
- Any further consequences of the cybersecurity event, including regulatory, litigation, customer or remediation costs.
- Future pension contributions and potential multiemployer withdrawal liability; the company’s estimate relies on dated plan valuations.
- The reconciliation and comparability of management’s non-GAAP adjusted results, including the effect of the unusual pension and litigation-related items.