Sysco Corporation (SYY) — Fiscal 2023 Third-Quarter 10-Q
Reporting period: 13 weeks ended April 1, 2023; year-to-date comparisons cover the first 39 weeks of fiscal 2023. Dollar amounts are U.S. dollars.
Business context and results
Sysco distributes food and related products to foodservice customers, primarily in North America and Europe. Third-quarter sales growth reflected higher volume, inflation management and market-share gains. Management said industry volumes slowed to slight growth beginning in March.
| Metric | Q3 FY2023 | Change vs. Q3 FY2022 | 39 weeks FY2023 | Change vs. prior year |
|---|---|---|---|---|
| Sales | $18.88 billion | +11.7% | $56.60 billion | +13.9% |
| Gross profit | $3.43 billion | +13.9% | $10.27 billion | +15.7% |
| Operating income | $694 million | +40.0% | $2.07 billion | +31.6% |
| Net earnings | $430 million | +41.6% | $1.04 billion | +22.1% |
| Diluted EPS | $0.84 | +42.4% | $2.03 | +23.0% |
Q3 gross margin was 18.2% versus 17.8%, operating margin 3.7% versus 2.9%, and net margin 2.3% versus 1.8%. Year-to-date margins were 18.1%, 3.7% and 1.8%, respectively, compared with 17.9%, 3.2% and 1.7% a year earlier. Adjusted diluted EPS, a non-GAAP measure, was $0.90 for Q3 (+26.8%) and $2.67 year to date (+26.5%).
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $1.43 billion, compared with $746 million; free cash flow, a non-GAAP measure, was $980 million versus $434 million. Management attributed much of the operating cash-flow improvement to favorable working-capital comparisons and lower estimated tax payments.
- Capital expenditures were $474 million, up $147 million year over year. Cash used for investing was $481 million; acquisitions used $37 million, compared with $1.28 billion in the prior-year period.
- Cash and cash equivalents were $758 million at April 1; approximately 75% was held by international subsidiaries. Current liabilities were $8.98 billion and current assets $10.90 billion.
- Debt carrying value was $11.0 billion, including $723 million of current maturities. Sysco had $108.5 million drawn on its $3.0 billion revolving credit facility and no commercial paper outstanding. Management expects $538.6 million of debt to mature in the next 12 months and believes available liquidity and market access will cover anticipated requirements for more than 12 months.
- Year-to-date Sysco repurchased $378 million of shares and paid $747 million in dividends. Management stated an intention to repurchase $500 million in fiscal 2023; the remaining authorization was approximately $4.1 billion. The quarterly dividend was raised to $0.50 per share for payment in July 2023.
Material changes and unusual items
- Q3 U.S. Foodservice case volume rose 6.1%; U.S. local customer case volume rose 4.2%. Enterprise product-cost inflation was 4.9% in Q3 and 7.6% year to date, with dairy and frozen categories prominent. Management reported consolidated gross-margin expansion of 35 basis points in Q3 and 28 basis points year to date.
- Q3 operating expenses increased 8.7%, slower than sales growth, reflecting volume, inflation, operating pressures and planned transformation investment. The quarter included $60 million of transformation investment.
- Year-to-date results include a $315.4 million non-cash pension settlement charge following transfer of $695 million of pension obligations to an insurer. This materially affected GAAP year-to-date earnings; adjusted figures exclude specified items and should not be treated as GAAP results.
- Sysco received an IRS notice disputing foreign tax credits. The company had previously recorded a $131 million tax benefit and filed suit in Tax Court; if it does not prevail, some or all of that benefit could be reversed. Unrecognized tax benefits and related accrued interest were $32.4 million and $7.4 million, respectively.
- On March 5, Sysco identified a cybersecurity event believed to have begun January 14. The investigation found that company data, including customer, employee and personal data, was extracted. Sysco reported no impact to operational systems or customer service; the investigation and response were ongoing.
Outlook, commentary and risks
Management said Sysco remained on track to grow at 1.35 times the U.S. foodservice industry in fiscal 2023 and reiterated its goal of profitable growth at 1.5 times the market by the end of fiscal 2024. It expects inflation to continue moderating into Q4 FY2023 and expects pension expense in the final 13 weeks of fiscal 2023 to be about $16 million higher than in the comparable prior-year period. These are management expectations, not guarantees.
Key risks include inflation or deflation and the ability to protect margins, competition and customer retention, labor availability and costs, transformation execution, supply interruptions, fuel costs, foreign exchange, indebtedness and capital-market access, acquisitions, pension funding, tax disputes, and technology or cybersecurity incidents. Management reported no significant change in market risks since July 2, 2022. It concluded disclosure controls were effective as of April 1, 2023.
Important facts for investors to verify
- How much reported growth reflects volume, price/inflation, market share and foreign-exchange movements, especially in International operations.
- Whether margin and cash-flow improvements persist as inflation moderates and working-capital conditions change.
- The effect of the pension settlement and other excluded items when reconciling GAAP results to adjusted earnings and EBITDA.
- The outcome and potential financial impact of the IRS foreign-tax-credit dispute and the recorded $131 million benefit.
- The scope, remediation costs and possible regulatory or legal consequences of the cybersecurity data extraction.
- Debt maturities, borrowing costs, capital spending and the pace of share repurchases and dividend growth.