Sysco Corporation (SYY) — Q1 FY2023 Form 10-Q
Reporting period: 13 weeks ended October 1, 2022; comparable period ended October 2, 2021. Amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Sysco distributes food and related products to foodservice customers, primarily in North America and Europe. Management reported record quarterly sales and attributed growth to higher volumes, inflation management and market-share gains.
| Metric | Q1 FY2023 | Year-over-year comparison |
|---|---|---|
| Sales | $19.13 billion | Up 16.2%; up 18.2% on a constant-currency basis |
| Gross profit / margin | $3.49 billion / 18.24% | Gross profit up 17.4%; margin up 18 basis points |
| Operating income / margin | $734.3 million / 3.84% | Up 16.3%; GAAP margin essentially unchanged |
| Net earnings | $465.6 million | Up 23.2% |
| Diluted EPS | $0.91 | Up 24.7%; adjusted diluted EPS was $0.97, up 16.9% |
| Operating cash flow | $158.6 million | Compared with $110.8 million |
| Free cash flow (non-GAAP) | $13.8 million | Compared with $31.4 million |
Adjusted operating income was $770.3 million, up 12.4%; adjusted operating margin declined to 4.03% from 4.16%. Adjusted net earnings were $492.6 million, up 14.6%. Adjusted measures and free cash flow are non-GAAP and should be considered alongside GAAP results.
Material changes and operating drivers
- Company-wide product-cost inflation was 9.7%; U.S. Foodservice Operations reported 12.0% product-cost inflation. Management said effective inflation management and volume growth supported higher gross profit dollars.
- U.S. Foodservice case volume increased 7.3%, including 5.4% growth in local customer case volume. International sales rose 13.4% as reported, but 24.3% on a constant-currency basis; currency translation was a significant offset.
- Operating expenses increased 17.7%, faster than sales, reflecting volume-related costs, inflation, operational pressures and strategic investments. Management cited $63.4 million in transformation investments and $41.1 million in new-associate-related productivity costs.
- International Foodservice operating income increased to $87.2 million from $36.7 million; SYGMA returned to operating income of $5.5 million from a $2.4 million loss.
Liquidity, debt and capital allocation
At October 1, 2022, cash and cash equivalents were $437.7 million, with approximately 85% held by international subsidiaries. Total debt carrying value was approximately $10.8 billion, including $555.8 million of current maturities; $97 million of commercial paper was outstanding. No borrowings were outstanding under the $3.0 billion revolving credit facility. Sysco said cash flows, borrowing facilities and capital-market access should meet anticipated needs for more than 12 months.
Operating cash flow was positive, but working-capital changes reduced year-over-year cash flow comparisons by $127.7 million. Capital expenditures were $167.3 million, up $82.2 million year over year. Sysco repurchased approximately 3.1 million shares for $267.7 million and paid $249.3 million in dividends ($0.49 per share).
Outlook, risks and unusual items
- Management said it was not seeing recession concerns negatively affect results, while continuing to monitor macroeconomic conditions. It said the company was on track to meet its stated growth objective and aimed to grow at 1.5 times the industry by fiscal 2024. The filing does not provide a specific numeric full-year earnings or sales forecast.
- In October, the retirement plan completed a transaction transferring approximately $700 million of pension obligations covering about 10,000 participants to an insurer. Sysco expects a one-time, non-cash pre-tax settlement charge of approximately $250 million to $300 million in Q2 FY2023; the final amount depends on actuarial and other assumptions.
- Risks highlighted include prolonged inflation or deflation, labor availability and costs, competitive and margin pressures, supply-chain disruption, execution and costs of transformation initiatives, foreign-exchange movements, cybersecurity and technology disruptions, and pension funding requirements. Management said there were no material changes to previously reported risk factors.
- Unrecognized tax benefits and related accrued interest were $32.4 million and $6.6 million, respectively; the company could not estimate the reasonably possible change over the next 12 months. Management did not expect pending legal proceedings, individually or in aggregate, to materially adversely affect financial position or results.
Important facts for investors to verify
- How much future sales and profit growth is supported by case-volume gains versus price inflation and currency effects.
- Whether operating-expense growth moderates and margins stabilize as transformation, training and retention investments continue.
- Cash conversion and working-capital trends, given lower free cash flow, elevated capital spending, share repurchases and dividends.
- The final Q2 pension settlement charge, its accounting treatment and the ongoing pension expense after the annuity transaction.
- Debt maturities, commercial-paper usage and liquidity; the filing identifies approximately $482.3 million of debt maturing within the next 12 months.