SYSCO CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended
September 30, 2023
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number:
1-6544
________________
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(
281
)
584-1390
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
þ
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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☑ | Accelerated Filer | ☐ | ||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company |
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| (Do not check if a smaller reporting company) | Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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1
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | Page No. | |||||||
| PART II – OTHER INFORMATION | ||||||||
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
| Sep. 30, 2023 | Jul. 1, 2023 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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Accounts receivable, less allowances of $
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| Inventories |
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| Prepaid expenses and other current assets |
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| Income tax receivable |
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| Total current assets |
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| Plant and equipment at cost, less accumulated depreciation |
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| Other long-term assets | |||||||||||
| Goodwill |
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| Intangibles, less amortization |
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| Deferred income taxes |
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| Operating lease right-of-use assets, net |
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| Other assets |
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| Total other long-term assets |
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| Total assets | $ |
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$ |
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ |
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$ |
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| Accrued expenses |
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| Accrued income taxes |
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| Current operating lease liabilities |
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| Current maturities of long-term debt |
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| Total current liabilities |
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| Long-term liabilities | |||||||||||
| Long-term debt |
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| Deferred income taxes |
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| Long-term operating lease liabilities |
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| Other long-term liabilities |
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| Total long-term liabilities |
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| Noncontrolling interest |
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| Shareholders’ equity | |||||||||||
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Preferred stock, par value $
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Common stock, par value $
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| Paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss |
(
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(
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Treasury stock at cost,
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(
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(
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| Total shareholders’ equity |
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| Total liabilities and shareholders’ equity | $ |
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$ |
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Note: The July 1, 2023 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 | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Sales | $ |
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$ |
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| Cost of sales |
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| Gross profit |
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| Operating expenses |
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| Operating income |
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| Interest expense |
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Other expense (income), net
(1)
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| Earnings before income taxes |
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| Income taxes |
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| Net earnings | $ |
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$ |
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| Net earnings: | |||||||||||
| Basic earnings per share | $ |
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$ |
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| Diluted earnings per share |
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| Average shares outstanding |
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| Diluted shares outstanding |
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(1)
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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 | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Net earnings | $ |
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$ |
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| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustment |
(
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(
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| Items presented net of tax: | |||||||||||
| Amortization of cash flow hedges |
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| Change in net investment hedges |
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| Change in cash flow hedges |
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(
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| Changes in excluded components of fair value hedge |
(
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| Amortization of prior service cost |
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| Amortization of actuarial loss |
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| Net actuarial gain arising in current year |
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| Change in marketable securities |
(
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(
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| Total other comprehensive loss |
(
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(
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| Comprehensive income | $ |
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$ |
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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)
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Accumulated
Other Comprehensive Loss |
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| Common Stock |
Paid-in
Capital |
Retained
Earnings |
Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amounts | Totals | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net earnings |
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| Foreign currency translation adjustment |
(
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(
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| Amortization of cash flow hedges, net of tax |
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| Change in cash flow hedges, net of tax |
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| Changes in excluded components of fair value hedge, net of tax |
(
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(
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| Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax |
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| Net actuarial gain arising in current year, net of tax |
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| Change in marketable securities, net of tax |
(
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(
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Dividends declared ($
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(
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(
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| Treasury stock purchases |
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(
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(
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| Share-based compensation awards |
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(
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| Balance as of September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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Accumulated
Other Comprehensive Loss |
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| Common Stock |
Paid-in
Capital |
Retained
Earnings |
Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amounts | Totals | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 2, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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| Net earnings |
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| Foreign currency translation adjustment |
(
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(
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| Amortization of cash flow hedges, net of tax |
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| Change in cash flow hedges, net of tax |
(
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(
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| Change in net investment hedges, net of tax |
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| Reclassification of pension and other postretirement benefit plans amounts to net earnings, net of tax |
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| Change in marketable securities, net of tax |
(
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(
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Dividends declared ($
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(
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(
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| Treasury stock purchases |
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(
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(
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| Share-based compensation awards |
(
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(
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| Balance as of October 1, 2022 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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See Notes to Consolidated Financial Statements
4
Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In thousands)
| 13-Week Period Ended | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ |
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$ |
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| Adjustments to reconcile net earnings to cash provided by operating activities: | |||||||||||
| Share-based compensation expense |
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| Depreciation and amortization |
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| Operating lease asset amortization |
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| Amortization of debt issuance and other debt-related costs |
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| Deferred income taxes |
(
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(
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| Provision for losses on receivables |
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| Other non-cash items |
(
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| Additional changes in certain assets and liabilities, net of effect of businesses acquired: | |||||||||||
| Increase in receivables |
(
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(
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| Increase in inventories |
(
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(
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| Increase in prepaid expenses and other current assets |
(
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(
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| (Decrease) increase in accounts payable |
(
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| Decrease in accrued expenses |
(
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(
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| Decrease in operating lease liabilities |
(
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(
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| Increase in accrued income taxes |
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| Decrease in other assets |
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| Decrease in other long-term liabilities |
(
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(
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | |||||||||||
| Additions to plant and equipment |
(
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(
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| Proceeds from sales of plant and equipment |
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| Acquisition of businesses, net of cash acquired |
(
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(
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| Purchase of marketable securities |
(
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(
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| Proceeds from sales of marketable securities |
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| Other investing activities |
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| Net cash used for investing activities |
(
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(
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| Cash flows from financing activities: | |||||||||||
| Bank and commercial paper borrowings, net |
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| Other debt borrowings including senior notes |
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| Other debt repayments including senior notes |
(
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(
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| Debt issuance costs |
(
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| Proceeds from stock option exercises |
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| Stock repurchases |
(
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(
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| Dividends paid |
(
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(
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| Other financing activities |
(
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(
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| Net cash provided by (used for) financing activities |
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(
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| Effect of exchange rates on cash, cash equivalents and restricted cash |
(
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(
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| Net decrease in cash, cash equivalents and restricted cash |
(
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(
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| Cash, cash equivalents and restricted cash at beginning of period |
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| Cash, cash equivalents and restricted cash at end of period | $ |
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$ |
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| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ |
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$ |
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| Income taxes, net of refunds |
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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, 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, 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 1, 2023. 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:
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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Restricted cash
(1)
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| Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows | $ |
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$ |
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(1)
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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.
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The following table sets forth the company’s non-cash investing and financing activities:
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Non-cash investing and financing activities: | |||||||||||
| Plant and equipment acquired through financing programs | $ |
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$ |
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| Assets obtained in exchange for finance lease obligations |
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6
2.
NEW ACCOUNTING STANDARDS
Liabilities – Supplier Financing Programs
In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-04, Liabilities—Supplier Finance Programs, Subtopic 405-50, that requires entities to disclose in the annual financial statements the key terms of the supplier finance program they use in connection with the purchase of goods and services, along with information about their obligations under such programs, including a roll forward of those obligations. Additionally, the guidance requires disclosure of the outstanding amount of the obligations as of the end of each interim period. The guidance does not affect the recognition, measurement, or financial statement presentation of supplier finance program obligations.
The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2022, which is the first quarter of fiscal 2024 for Sysco, except for the roll forward requirement, which is effective annually for fiscal years beginning after December 15, 2023, which is fiscal year 2025 for Sysco. Early adoption is permitted. The guidance requires retrospective application to all periods in which a balance sheet is presented, except for the roll forward requirement, which will be applied prospectively.
Sysco completed its assessment of the disclosures required under ASU 2022-04 and adopted the standard, with the exception of the roll forward requirement, in the first quarter of fiscal 2024 on a retrospective basis. The company has agreements with third parties to provide supplier finance programs which facilitate participating suppliers’ ability to finance payment obligations from the company with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the company prior to their scheduled due dates at a discounted price to participating financial institutions. Obligations of the company that have been confirmed as valid require payment by Sysco upon the due date of the obligation.
The company’s outstanding payment obligations that suppliers financed to participating financial institutions, which are included in accounts payable on the consolidated balance sheets, are as follows:
| Sep. 30, 2023 | Jul. 1, 2023 | Oct. 1, 2022 | Jul. 2, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Financed payment obligations | $ |
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$ |
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$ |
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$ |
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3.
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 $
5.1
billion and $
4.7
billion as of September 30, 2023 and July 1, 2023, 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 on a straight-line basis. As of September 30, 2023, Sysco’s contract assets were not significant. Sysco has no significant commissions paid that are directly attributable to obtaining a particular contract.
7
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 Sep. 30, 2023 | ||||||||||||||||||||||||||||||||
| US Foodservice Operations | International Foodservice Operations | SYGMA | Other | Total | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Principal Product Categories | ||||||||||||||||||||||||||||||||
| Canned and dry products | $ |
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$ |
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$ |
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$ |
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$ |
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| Fresh and frozen meats |
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| Frozen fruits, vegetables, bakery and other |
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| Dairy products |
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| Poultry |
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| Fresh produce |
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| Paper and disposables |
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| Seafood |
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| Beverage products |
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Other
(1)
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| Total Sales | $ |
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$ |
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$ |
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$ |
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$ |
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(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.
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| 13-Week Period Ended Oct. 1, 2022 | ||||||||||||||||||||||||||||||||
| US Foodservice Operations | International Foodservice Operations | SYGMA | Other | Total | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Principal Product Categories | ||||||||||||||||||||||||||||||||
| Canned and dry products | $ |
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$ |
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$ |
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$ |
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$ |
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| Fresh and frozen meats |
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| Frozen fruits, vegetables, bakery and other |
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| Poultry |
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| Dairy products |
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| Fresh produce |
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| Paper and disposables |
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|
|||||||||||||||||||||||||||
| Seafood |
|
|
|
|
|
|||||||||||||||||||||||||||
| Beverage products |
|
|
|
|
|
|||||||||||||||||||||||||||
|
Other
(1)
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||
|
(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.
|
||||
8
4.
ACQUISITIONS
During the first 13 weeks of fiscal 2024, the company paid cash of $
219.3
million for the acquisition of BIX Produce Company.
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 September 30, 2023, aggregate contingent consideration outstanding was $
57.2
million, of which $
55.6
million was recorded as earnout liabilities. Earnout liabilities are all measured using unobservable inputs that are considered a Level 3 fair value measurement.
5.
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 6, “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 7, “Derivative Financial Instruments.”
The following tables present the company’s assets measured at fair value on a recurring basis as of September 30, 2023 and July 1, 2023:
| Assets Measured at Fair Value as of Sep. 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Other assets
(1)
|
|
|
|
|
|||||||||||||||||||
| Total assets at fair value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
(1)
|
Represents restricted cash balance recorded within other assets in the consolidated balance sheet. | ||||
| Assets Measured at Fair Value as of Jul. 1, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Other assets
(1)
|
|
|
|
|
|||||||||||||||||||
| Total assets at fair value | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
(1)
|
Represents restricted cash balance recorded within other assets in the consolidated balance sheet. | ||||
9
6.
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 12 months within prepaid expenses and other current assets and includes fixed income securities maturing in more than 12 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 13 weeks of fiscal 2024.
The following table presents the company’s available-for-sale marketable securities as of September 30, 2023 and July 1, 2023:
| Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Government bonds |
|
|
(
|
|
|
|
|||||||||||||||||||||||||||||
| Total marketable securities | $ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Jul. 1, 2023 | |||||||||||||||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Government bonds |
|
|
(
|
|
|
|
|||||||||||||||||||||||||||||
| Total marketable securities | $ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
As of September 30, 2023, 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.
| Sep. 30, 2023 | |||||
| (In thousands) | |||||
| Due in one year or less | $ |
|
|||
| Due after one year through five years |
|
||||
| Due after five years through ten years |
|
||||
| Total | $ |
|
|||
There were no significant realized gains or losses in marketable securities in the first 13 weeks of fiscal 2024.
7.
DERIVATIVE FINANCIAL INSTRUMENTS
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
Sysco’s operations in Europe have inventory purchases denominated in currencies other than their functional currency, such as the euro, U.S. dollar, British pound sterling, 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.
Additionally, Sysco has cross-currency swaps designated as fair value hedges for the purpose of hedging foreign currency risk associated with changes in spot rates on foreign denominated intercompany loans. Sysco has elected to exclude the changes in fair value of the forward points from the assessments of hedge effectiveness. Gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged, including the earnings impact of the excluded components. Unrealized gains or losses on components excluded from hedge effectiveness are recorded as a component of accumulated other comprehensive income and recognized into earnings over the life of the hedged instrument. Except for the excluded components, changes in the fair value of the derivative instrument designated as a fair value hedge are offset against changes in fair value of the hedged assets or liabilities through earnings.
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.
11
None of the company’s hedging instruments contain credit-risk-related contingent features.
Details of outstanding hedging instruments as of September 30, 2023 are presented below:
| Maturity Date of the Hedging Instrument | Currency / Unit of Measure | Notional Value | ||||||||||||
| (In millions) | ||||||||||||||
| Hedging of foreign currency risk | ||||||||||||||
| Various (October 2023) | Swedish Krona |
|
||||||||||||
| Various (October 2023 to April 2024) | British Pound Sterling |
|
||||||||||||
| May 2024 | Mexican Peso |
|
||||||||||||
| April 2025 | Canadian Dollar |
|
||||||||||||
| Hedging of fuel risk | ||||||||||||||
| Various (October 2023 to December 2025) | Gallons |
|
||||||||||||
The location and the fair value of derivative instruments designated as hedges in the consolidated balance sheet as of September 30, 2023 and July 1, 2023 are as follows:
| Derivative Fair Value | |||||||||||||||||
| Balance Sheet location | Sep. 30, 2023 | Jul. 1, 2023 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Fair Value Hedges: | |||||||||||||||||
| Cross currency swaps | Other current liabilities | $ |
|
$ |
|
||||||||||||
| Cross currency swaps | Other long-term liabilities |
|
|
||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||
| Fuel swaps | Other current assets |
|
|
||||||||||||||
| Foreign currency forwards | Other current assets |
|
|
||||||||||||||
| Fuel swaps | Other assets |
|
|
||||||||||||||
| Fuel swaps | Other current liabilities |
|
|
||||||||||||||
| Foreign currency forwards | Other current liabilities |
|
|
||||||||||||||
| Fuel swaps | Other long-term liabilities |
|
|
||||||||||||||
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:
| 13-Week Period Ended | ||||||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | |||||||||||||
| (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 | $ |
|
$ |
|
||||||||||
| Gain or (loss) on fair value hedging relationships: | ||||||||||||||
| Interest rate swaps: | ||||||||||||||
| Hedged items | $ |
|
$ |
|
||||||||||
| Derivatives designated as hedging instruments |
|
(
|
||||||||||||
| Cross currency swaps: | ||||||||||||||
| Hedged items | $ |
|
$ |
|
||||||||||
| Derivatives designated as hedging instruments |
(
|
|
||||||||||||
The gains and 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:
12
| 13-Week Period Ended | ||||||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Interest expense | $ |
|
$ |
(
|
||||||||||
| Decrease in fair value of debt |
|
(
|
||||||||||||
| Foreign currency gain (loss) |
(
|
|
||||||||||||
| Hedged items | $ |
|
$ |
|
||||||||||
The location and effect of cash flow, net investment, and excluded components of fair value hedges on the consolidated statements of comprehensive income for the 13-week periods ended September 30, 2023 and October 1, 2022, presented on a pretax basis, are as follows:
| 13-Week Period Ended Sep. 30, 2023 | |||||||||||||||||
| 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 | $ |
|
Operating expense | $ |
|
||||||||||||
| Foreign currency contracts |
(
|
Cost of sales / Other income |
|
||||||||||||||
| Total | $ |
|
$ |
|
|||||||||||||
| Derivatives in net investment hedging relationships: | |||||||||||||||||
| Foreign denominated debt | $ |
|
N/A | $ |
|
||||||||||||
| Derivatives in fair value hedging relationships: | |||||||||||||||||
| Change in excluded component of fair value hedge | $ |
(
|
Other expense (income) | $ |
|
||||||||||||
| 13-Week Period Ended Oct. 1, 2022 | |||||||||||||||||
| 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 | $ |
(
|
Operating expense | $ |
|
||||||||||||
| Foreign currency contracts |
|
Cost of sales / Other income |
|
||||||||||||||
| Total | $ |
(
|
$ |
|
|||||||||||||
| Derivatives in net investment hedging relationships: | |||||||||||||||||
| Foreign denominated debt | $ |
|
N/A | $ |
|
||||||||||||
13
8.
DEBT
Sysco has a long-term revolving credit facility that includes aggregate commitments of the lenders thereunder of $
3.0
billion, with an option to increase such commitments to $
4.0
billion. As of September 30, 2023, there were $
116.5
million in borrowings outstanding under this facility.
Sysco has a U.S commercial paper program allowing the company to issue short-term unsecured notes in an aggregate amount not to exceed $
3.0
billion. Any outstanding amounts are classified within long-term debt, as the program is supported by the long-term revolving credit facility. As of September 30, 2023, there were $
300.0
million in commercial paper issuances outstanding under this program.
The total carrying value of our debt was $
10.9
billion as of September 30, 2023 and $
10.4
billion as of July 1, 2023. The increase in the carrying value of our debt from the prior year was due to new financing leases in support of equipment and borrowings under our long-term revolving credit facility and commercial paper program.
On October 17, 2023, Sysco entered into a new commercial paper dealer agreement with Barclays Bank of Ireland for a commercial paper program with borrowings not to exceed €
250
million.
Information regarding the guarantors of our registered debt securities is contained in the section captioned
Guarantor Summarized Financial Information
in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Form 10-Q.
9.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| 13-Week Period Ended | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
|
(In thousands, except for share
and per share data) |
|||||||||||
| Numerator: | |||||||||||
| Net earnings | $ |
|
$ |
|
|||||||
| Denominator: | |||||||||||
| Weighted-average basic shares outstanding |
|
|
|||||||||
| Dilutive effect of share-based awards |
|
|
|||||||||
| Weighted-average diluted shares outstanding |
|
|
|||||||||
| Basic earnings per share | $ |
|
$ |
|
|||||||
| Diluted earnings per share | $ |
|
$ |
|
|||||||
10.
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 $
429.2
million and $
236.3
million for the first quarter of fiscal 2024 and fiscal 2023, respectively.
14
| 13-Week Period Ended Sep. 30, 2023 | |||||||||||||||||||||||
|
Location of
Expense (Income) Recognized in Net Earnings |
Before Tax
Amount |
Tax |
Net of Tax
Amount |
||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Pension and other postretirement benefit plans: | |||||||||||||||||||||||
|
Other comprehensive income before
reclassification adjustments: |
|||||||||||||||||||||||
| Net actuarial gain, arising in the current year | Other expense, net | $ |
|
$ |
|
$ |
|
||||||||||||||||
| Total other comprehensive income before reclassification adjustments |
|
|
|
||||||||||||||||||||
| Reclassification adjustments: | |||||||||||||||||||||||
| Amortization of prior service cost | Other expense, net |
|
|
|
|||||||||||||||||||
| Amortization of actuarial loss, net | Other expense, net |
|
|
|
|||||||||||||||||||
| Total reclassification adjustments |
|
|
|
||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||
| Foreign currency translation adjustment | N/A |
(
|
|
(
|
|||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||
|
Change in marketable securities
(1)
|
N/A |
(
|
(
|
(
|
|||||||||||||||||||
| Hedging instruments: | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassification adjustments: | |||||||||||||||||||||||
|
Change in excluded component of fair value
hedge |
Other expense, net |
(
|
(
|
(
|
|||||||||||||||||||
| Change in cash flow hedges |
Operating expenses
(2)
|
|
|
|
|||||||||||||||||||
| Total other comprehensive income (loss) before reclassification adjustments |
|
|
|
||||||||||||||||||||
| Reclassification adjustments: | |||||||||||||||||||||||
| Amortization of cash flow hedges | Interest expense |
|
|
|
|||||||||||||||||||
| Total other comprehensive income (loss) | $ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||
|
(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 2024.
|
||||
|
(2)
|
Amount partially impacts operating expense for fuel swaps accounted for as cash flow hedges.
|
||||
15
| 13-Week Period Ended Oct. 1, 2022 | |||||||||||||||||||||||
|
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 | $ |
|
$ |
|
$ |
|
||||||||||||||||
| Amortization of actuarial loss, net | Other expense, net |
|
|
|
|||||||||||||||||||
| Total reclassification adjustments |
|
|
|
||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||
| Foreign currency translation adjustment | N/A |
(
|
|
(
|
|||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||
|
Change in marketable securities
(1)
|
N/A |
(
|
(
|
(
|
|||||||||||||||||||
| Hedging instruments: | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassification adjustments: | |||||||||||||||||||||||
| Change in cash flow hedges |
Operating expenses
(2)
|
(
|
(
|
(
|
|||||||||||||||||||
| Change in net investment hedges | N/A |
|
|
|
|||||||||||||||||||
| Total other comprehensive income before reclassification adjustments |
(
|
(
|
(
|
||||||||||||||||||||
| Reclassification adjustments: | |||||||||||||||||||||||
| Amortization of cash flow hedges | Interest expense |
|
|
|
|||||||||||||||||||
| Total other comprehensive income (loss) | $ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||
|
(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
2023
.
|
||||
|
(2)
|
Amount partially impacts operating expense for fuel swaps accounted for as 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 Sep. 30, 2023 | |||||||||||||||||||||||||||||
|
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. 1, 2023 | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
| Net actuarial loss arising in the current year |
|
— | — | — |
|
||||||||||||||||||||||||
| Equity adjustment from foreign currency translation | — |
(
|
— | — |
(
|
||||||||||||||||||||||||
| Amortization of cash flow hedges | — | — |
|
— |
|
||||||||||||||||||||||||
| Change in excluded component of fair value hedge | — | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Change in cash flow hedge | — | — |
|
— |
|
||||||||||||||||||||||||
| Amortization of unrecognized prior service cost |
|
— | — | — |
|
||||||||||||||||||||||||
| Amortization of unrecognized net actuarial losses |
|
— | — | — |
|
||||||||||||||||||||||||
| Change in marketable securities | — | — | — |
(
|
(
|
||||||||||||||||||||||||
| Balance as of Sep. 30, 2023 | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
| 13-Week Period Ended Oct. 1, 2022 | |||||||||||||||||||||||||||||
|
Pension and Other Postretirement Benefit Plans,
net of tax |
Foreign Currency Translation |
Hedging,
net of tax |
Marketable Securities | Total | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Balance as of Jul. 2, 2022 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
| Equity adjustment from foreign currency translation | — |
(
|
— | — |
(
|
||||||||||||||||||||||||
| Amortization of cash flow hedges | — | — |
|
— |
|
||||||||||||||||||||||||
| Change in net investment hedges | — | — |
|
— |
|
||||||||||||||||||||||||
| Change in cash flow hedge | — | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Amortization of unrecognized prior service cost |
|
— | — | — |
|
||||||||||||||||||||||||
| Amortization of unrecognized net actuarial losses |
|
— | — | — |
|
||||||||||||||||||||||||
| Change in marketable securities | — | — | — |
(
|
(
|
||||||||||||||||||||||||
| Balance as of Oct. 1, 2022 | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
11.
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 13 weeks of fiscal 2024, options to purchase
770,442
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 13 weeks of fiscal 2024 was $
19.33
.
17
In the first 13 weeks of fiscal 2024, employees were granted
495,045
performance share units (PSUs). 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 vesting period. The weighted average grant-date fair value per PSU granted during the first 13 weeks of fiscal 2024 was $
75.10
. The PSUs will convert into shares of Sysco’s 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 13 weeks of fiscal 2024, employees were granted
339,386
restricted stock units. The weighted average grant-date fair value per restricted stock unit granted during the first 13 weeks of fiscal 2024 was $
72.28
.
Employee Stock Purchase Plan
Plan participants purchased
360,130
shares of common stock under the ESPP during the first 13 weeks of fiscal 2024. The weighted average fair value per employee stock purchase right issued pursuant to the ESPP was $
9.91
during the first 13 weeks of fiscal 2024. 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 $
24.2
million and $
27.2
million for the first 13 weeks of fiscal 2024 and fiscal 2023, respectively.
As of September 30, 2023, there was $
165.3
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
2.07
years.
12.
INCOME TAXES
Effective Tax Rate
For the first quarter of fiscal 2024, the company’s effective tax rate of
24.03
% is higher than the company’s statutory tax rate as a result of state income taxes, and partially offset by a foreign income tax benefit. For the first quarter of fiscal 2023, the company’s effective tax rate of
21.74
% was higher than the company’s statutory tax rate as a result of state income taxes, partially offset by a foreign income tax benefit and equity-based compensation excess tax benefits.
Uncertain Tax Positions
As of September 30, 2023, the gross amount of unrecognized tax benefit and related accrued interest was $
32.4
million and $
8.7
million, respectively. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions of the company will increase or decrease in the next 12 months. At this time, an estimate of the range of the reasonably possible change cannot be made.
During the third quarter of fiscal 2023, Sysco received a Statutory Notice of Deficiency from the Internal Revenue Service, mainly related to foreign tax credits generated in fiscal 2018 from repatriated earnings primarily from our Canadian operations. In the fourth quarter of fiscal 2023, the company filed suit in the U.S. Tax Court challenging the validity of certain tax regulations related to the one-time transition tax on unrepatriated foreign earnings, which was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). The lawsuit seeks to have the court invalidate these regulations, which would affirm the company’s position regarding its foreign tax credits. Sysco has previously recorded a benefit of $
131.0
million attributable to its interpretation of the TCJA and the Internal Revenue Code. If the company is ultimately unsuccessful in defending its position, it may be required to reverse all, or some portion, of the benefit previously recorded.
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 United States (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
18
13.
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 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.
14.
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 (a) our U.S. Broadline operations, which distribute a full line of food products, including custom-cut meat, seafood, produce, specialty Italian, specialty imports and a wide variety of non-food products and (b) our U.S. Specialty operations, which include our FreshPoint fresh produce distribution business, our Specialty Meats and Seafood Group specialty protein operations, our growing Italian Specialty platform anchored by Greco & Sons, our Asian specialty distribution company and a number of other small specialty businesses that are not material to our operations;
•
International Foodservice Operations
– includes operations outside of the U.S., 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 export operations that distribute to international customers. Our European operations primarily consist of operations in the United Kingdom, 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.
19
The following tables set forth certain financial information for Sysco’s reportable business segments:
| 13-Week Period Ended | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Sales: | (In thousands) | ||||||||||
| U.S. Foodservice Operations | $ |
|
$ |
|
|||||||
| International Foodservice Operations |
|
|
|||||||||
| SYGMA |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
| 13-Week Period Ended | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Operating income (loss): | (In thousands) | ||||||||||
| U.S. Foodservice Operations | $ |
|
$ |
|
|||||||
| International Foodservice Operations |
|
|
|||||||||
| SYGMA |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total segments |
|
|
|||||||||
| Global Support Center |
(
|
(
|
|||||||||
| Total operating income |
|
|
|||||||||
| Interest expense |
|
|
|||||||||
| Other expense, net |
|
|
|||||||||
| Earnings before income taxes | $ |
|
$ |
|
|||||||
20
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with our consolidated financial statements as of July 1, 2023, 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 ended July 1, 2023 (our fiscal 2023 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 improved results for the first quarter of fiscal 2024 demonstrate the favorable impact of our Recipe for Growth Strategy on our business, as we experienced earnings growth in excess of sales growth, compared to the first quarter of fiscal 2023. The increase in earnings was the result of volume growth, effective margin management and productivity improvements. Our gross profit growth this quarter outpaced operating expense, due to effective management of product cost deflation in the U.S., improvements in supply chain productivity and cost-out actions. See below for a comparison of our fiscal 2024 results to our fiscal 2023 results, both including and excluding Certain Items (as defined below).
Comparisons of results from the first quarter of fiscal 2024 to the first quarter of fiscal 2023 are presented below:
•
Sales:
◦
increased 2.6%, or $493.6 million, to $19.6 billion;
•
Operating income:
◦
increased 9.1%, or $66.8 million, to $803.6 million;
◦
adjusted operating income increased 10.6%, or $81.6 million, to $854.3 million;
•
Net earnings:
◦
increased 8.1%, or $37.8 million, to $503.4 million;
◦
adjusted net earnings increased 9.9%, or $49.0 million, to $541.6 million;
•
Basic earnings per share:
◦
increased 8.7%, or $0.08, to $1.00 per share;
•
Diluted earnings per share:
◦
increased 8.8%, or $0.08, to $0.99 per share;
◦
adjusted diluted earnings per share increased 10.3%, or $0.10, to $1.07;
•
EBITDA:
◦
increased 10.5%, or $95.0 million, to $1.0 billion; and
◦
adjusted EBITDA increased 11.7%, or $107.5 million, to $1.0 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 EBITDA and free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove (1) restructuring charges; (2) expenses associated with our various transformation initiatives; (3) severance charges; and (4) acquisition-related costs consisting of: (a) intangible amortization expense and (b) acquisition costs and due diligence costs related to our acquisitions. Our results for fiscal 2023 were also impacted by adjustments to a product return allowance pertaining to COVID-related personal protection equipment inventory 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.
The fiscal 2024 and fiscal 2023 items discussed above are collectively referred to as “Certain Items.” The results of our operations can be impacted by changes in exchange rates applicable to converting from local currencies to U.S. dollars. We measure our results on a constant currency basis.
Trends
Economic and Industry Trends
Sysco continues to outperform the foodservice market due to the success of the Recipe for Growth strategy. The food-away-from-home sector is a healthy long-term market. Sysco is diversified and well positioned as a market leader in food service. The foodservice market is expected to grow at a slower rate in fiscal 2024 as compared to fiscal 2023, due to current macroeconomic conditions.
21
Sales and Gross Profit Trends
Our sales and gross profit performance are influenced by multiple factors, including price, volume, inflation, customer mix and product mix. The most significant factor affecting performance in the first quarter of fiscal 2024 was volume growth, as we experienced a 1.6% improvement in U.S. Foodservice case volume and a 0.1% decrease in local case volume within our U.S. segment in each case as compared to the first quarter of fiscal 2023. This volume reflects our broadline and specialty businesses, except for our specialty meats business, which measures its volume in pounds.
We experienced inflation at a rate of 1.7% in the first quarter of fiscal 2024, at the total enterprise level, primarily driven by inflation in the frozen and canned and dry categories. We continue to be successful in managing our inflation, resulting in an increase in gross profit dollars. Gross margin increased 35 basis points in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, primarily driven by higher volumes, the effective management of inflation, and our strategic sourcing efforts. We expect total enterprise level inflation to continue to be slightly positive in fiscal 2024.
Operating Expense Trends
Total operating expenses increased 3.3% during the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, driven by increased volumes. We continued to improve our supply chain efficiency, while investing in associate retention and best-in-class training, primarily for transportation and warehouse colleagues. These efficiency efforts are expected to continue to improve in fiscal 2024. We believe the advancements we are making in our physical capabilities, and the investments we are making in improved training, will provide higher service levels to our customers and strengthen Sysco’s ability to profitably win market share.
Interest Expense Trends
Interest expense for fiscal 2024 is expected to increase by approximately $50 million, as compared to fiscal 2023, due to higher debt associated with our planned acquisition of Edward Don & Company.
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.
In the first quarter of fiscal 2024, we acquired BIX Produce Company, a leading produce specialty distributor based in Minnesota. This acquisition is expected to provide a strategic opportunity for specialty produce operations to expand its geographic footprint in an area of the country where it does not currently have operations. This company’s results are included within U.S. Foodservice Operations and were not material to our results for the first quarter of fiscal 2024.
In the second quarter of fiscal 2024, we announced our planned acquisition of Edward Don & Company, one of the largest kitchen equipment and supplies distributors, based out of Chicago. Edward Don & Company has a robust supply chain that is expected to enable cost effective distribution of restaurant equipment and supplies. This acquisition will further demonstrate our Recipe for Growth strategy of focusing on building strategic specialty platforms that help us better support restaurant and hospitality customers.
The results of these acquisitions are not expected to be material to the consolidated results of the company for fiscal 2024.
Strategy
Our purpose is “Connecting the World to Share Food and Care for One Another.” Purpose driven companies are believed to perform better, and we believe our purpose will assist 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, including promoting our specialty programs for produce, protein and Italian products and our customer growth initiatives. Our strategic initiative to enable omni-channel inventory fulfillment is operating in our first test region, and we have made progress in expanding to deliveries six days a week.
22
From these actions as a part of our Recipe for Growth, the benefits of our developing capabilities are apparent in the new customers we are winning and in the progress we are making toward increasing market share. We expect that, as our Recipe for Growth matures, the impact on our top-line growth will continue to accelerate.
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 | |||||||||||
| Sep. 30, 2023 | Oct. 1, 2022 | ||||||||||
| Sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 81.4 | 81.8 | |||||||||
| Gross profit | 18.6 | 18.2 | |||||||||
| Operating expenses | 14.5 | 14.4 | |||||||||
| Operating income | 4.1 | 3.8 | |||||||||
| Interest expense | 0.7 | 0.6 | |||||||||
| Other expense (income), net | — | 0.1 | |||||||||
| Earnings before income taxes | 3.4 | 3.1 | |||||||||
| Income taxes | 0.8 | 0.7 | |||||||||
| Net earnings | 2.6 | % | 2.4 | % | |||||||
23
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 | |||||
| Sep. 30, 2023 | |||||
| Sales | 2.6 | % | |||
| Cost of sales | 2.1 | ||||
| Gross profit | 4.6 | ||||
| Operating expenses | 3.3 | ||||
| Operating income | 9.1 | ||||
| Interest expense | 8.2 | ||||
|
Other expense (income), net
(1)
|
(62.6) | ||||
| Earnings before income taxes | 11.4 | ||||
| Income taxes | 23.1 | ||||
| Net earnings | 8.1 | % | |||
| Basic earnings per share | 8.7 | % | |||
| Diluted earnings per share | 8.8 | ||||
| Average shares outstanding | (0.5) | ||||
| Diluted shares outstanding | (0.6) | ||||
|
(1)
|
Other expense (income), net was expense of $6.6 million and $17.7 million in the first quarter of fiscal 2024 and fiscal 2023, respectively.
|
||||
The following tables represent our results by reportable segments:
| 13-Week Period Ended Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||
| U.S. Foodservice Operations | International Foodservice Operations | SYGMA | Other | Global Support Center |
Consolidated
Totals |
||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Sales | $ | 13,723,799 | $ | 3,683,210 | $ | 1,906,014 | $ | 307,431 | $ | — | $ | 19,620,454 | |||||||||||||||||||||||
| Sales increase (decrease) | 0.9 | % | 12.2 | % | (1.4) | % | 0.1 | % | 2.6 | % | |||||||||||||||||||||||||
| Percentage of total | 69.9 | % | 18.8 | % | 9.7 | % | 1.6 | % | 100.0 | % | |||||||||||||||||||||||||
| Operating income (loss) | $ | 940,971 | $ | 93,483 | $ | 12,767 | $ | 11,823 | $ | (255,462) | $ | 803,582 | |||||||||||||||||||||||
| Operating income (loss) increase (decrease) | 3.9 | % | 7.5 | % | NM | 2.5 | % | (6.5) | % | 9.1 | % | ||||||||||||||||||||||||
| Percentage of total segments | 88.9 | % | 8.8 | % | 1.2 | % | 1.1 | % | 100.0 | % | |||||||||||||||||||||||||
| Operating income as a percentage of sales | 6.9 | % | 2.5 | % | 0.7 | % | 3.8 | % | 4.1 | % | |||||||||||||||||||||||||
| 13-Week Period Ended Oct. 1, 2022 | |||||||||||||||||||||||||||||||||||
| U.S. Foodservice Operations | International Foodservice Operations | SYGMA | Other | Global Support Center |
Consolidated
Totals |
||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Sales | $ | 13,602,482 | $ | 3,283,735 | $ | 1,933,457 | $ | 307,156 | $ | — | $ | 19,126,830 | |||||||||||||||||||||||
| Percentage of total | 71.1 | % | 17.2 | % | 10.1 | % | 1.6 | % | 100.0 | % | |||||||||||||||||||||||||
| Operating income (loss) | $ | 905,712 | $ | 86,980 | $ | 5,696 | $ | 11,538 | $ | (273,125) | $ | 736,801 | |||||||||||||||||||||||
| Percentage of total segments | 89.7 | % | 8.6 | % | 0.6 | % | 1.1 | % | 100.0 | % | |||||||||||||||||||||||||
| Operating income as a percentage of sales | 6.7 | % | 2.6 | % | 0.3 | % | 3.8 | % | 3.9 | % | |||||||||||||||||||||||||
Results of U.S. Foodservice Operations
The following tables set forth a summary of the components of operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
24
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Sales | $ | 13,723,799 | $ | 13,602,482 | $ | 121,317 | 0.9 | % | |||||||||||||||
| Gross profit | 2,684,775 | 2,612,343 | 72,432 | 2.8 | |||||||||||||||||||
| Operating expenses | 1,743,804 | 1,706,631 | 37,173 | 2.2 | |||||||||||||||||||
| Operating income | $ | 940,971 | $ | 905,712 | $ | 35,259 | 3.9 | % | |||||||||||||||
| Gross profit | $ | 2,684,775 | $ | 2,612,343 | $ | 72,432 | 2.8 | % | |||||||||||||||
| Adjusted operating expenses (Non-GAAP) | 1,731,201 | 1,696,686 | 34,515 | 2.0 | |||||||||||||||||||
| Adjusted operating income (Non-GAAP) | $ | 953,574 | $ | 915,657 | $ | 37,917 | 4.1 | % | |||||||||||||||
Sales
The following table sets forth the percentage and dollar value increase or decrease in the major factors impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change:
| Increase (Decrease) | |||||||||||
| 13-Week Period | |||||||||||
| (Dollars in millions) | |||||||||||
| Cause of change | Percentage | Dollars | |||||||||
|
Case volume
(1)
|
1.6 | % | $ | 206.5 | |||||||
| Deflation | (0.4) | (49.1) | |||||||||
|
Other
(2)
|
(0.3) | (36.1) | |||||||||
| Total change in sales | 0.9 | % | $ | 121.3 | |||||||
| (1) |
Case volumes increased 1.6% compared to the first quarter of fiscal 2023. This volume increase resulted in a 1.6% increase in the dollar value of sales compared to the first quarter of fiscal 2023.
|
||||
|
(2)
|
Case volume reflects our broadline and specialty businesses, with the exception of our specialty meats business, which measures its volume in pounds. Any impact in volumes from these specialty meats operations is included within “Other.”
|
||||
The sales growth in our U.S. Foodservice Operations was fueled by market share gains. Case volumes from our U.S. Foodservice Operations increased 1.6% in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023. This included a 0.1% decrease in local customer case volume in the first quarter of fiscal 2024.
Operating Income
The increase in operating income for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was driven by gross profit dollar growth, partially offset by an increase in operating expenses.
Gross profit dollar growth in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was driven primarily by higher volumes, improvements in supply chain productivity and our strategic sourcing efforts. The estimated change in product costs, an internal measure of inflation or deflation, decreased in the first quarter of fiscal 2024. Gross margin, which is gross profit as a percentage of sales, was 19.6% in the first quarter of fiscal 2024 for our U.S. Foodservice Operations, which was an increase of 36 basis points compared to gross margin of 19.2% in the first quarter of fiscal 2023.
The increase in operating expenses for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was primarily driven by increased volumes.
25
Results of International Foodservice Operations
The following table sets forth a summary of the components of operating income and adjusted operating income expressed as a percentage increase or decrease over the comparable period in the prior year:
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | % Change | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Sales | $ | 3,683,210 | $ | 3,283,735 | $ | 399,475 | 12.2 | % | |||||||||||||||
| Gross profit | 732,039 | 649,265 | 82,774 | 12.7 | |||||||||||||||||||
| Operating expenses | 638,556 | 562,285 | 76,271 | 13.6 | |||||||||||||||||||
| Operating income | $ | 93,483 | $ | 86,980 | $ | 6,503 | 7.5 | % | |||||||||||||||
| Gross profit | $ | 732,039 | $ | 649,265 | $ | 82,774 | 12.7 | % | |||||||||||||||
| Adjusted operating expenses (Non-GAAP) | 615,856 | 542,364 | 73,492 | 13.6 | |||||||||||||||||||
| Adjusted operating income (Non-GAAP) | $ | 116,183 | $ | 106,901 | $ | 9,282 | 8.7 | % | |||||||||||||||
| Sales on a constant currency basis (Non-GAAP) | $ | 3,577,707 | $ | 3,283,735 | $ | 293,972 | 9.0 | % | |||||||||||||||
| Gross profit on a constant currency basis (Non-GAAP) | 705,328 | 649,265 | 56,063 | 8.6 | |||||||||||||||||||
| Adjusted operating expenses on a constant currency basis (Non-GAAP) | 590,439 | 542,364 | 48,075 | 8.9 | |||||||||||||||||||
| Adjusted operating income on a constant currency basis (Non-GAAP) | $ | 114,889 | $ | 106,901 | $ | 7,988 | 7.5 | % | |||||||||||||||
Sales
The following tables set forth the percentage and dollar value increase or decrease in the major components impacting sales as compared to the corresponding prior year period in order to demonstrate the cause and magnitude of change.
| Increase (Decrease) | |||||||||||
| 13-Week Period | |||||||||||
| (Dollars in millions) | |||||||||||
| Cause of change | Percentage | Dollars | |||||||||
| Inflation | 7.6 | % | $ | 248.8 | |||||||
| Foreign currency | 3.2 | 105.5 | |||||||||
|
Other
(1)
|
1.4 | 45.2 | |||||||||
| Total change in sales | 12.2 | % | $ | 399.5 | |||||||
|
(1)
|
The impact of volumes as a component of sales growth from international operations are included within “Other.” Volume in our foreign operations includes volume metrics that differ from country to country and cannot be aggregated on a consistent, comparable basis.
|
||||
Sales for the first quarter of fiscal 2024 were higher, as compared to the first quarter of fiscal 2023, due to inflation, a positive impact of foreign currency translation, and an improvement in volume primarily attributable to our Recipe for Growth initiatives.
Operating Income
The increase in operating income for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was due to the continuing increase in sales volumes, along with specific efforts to optimize our gross profit while addressing our increased operating expenses.
The increase in gross profit dollars in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was attributable to the increase in sales volume and the management of inflation, along with specific efforts to optimize our gross profit dollars.
26
The increase in operating expenses for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, was primarily due to increased volume.
Results of SYGMA and Other Segment
For SYGMA, sales were 1.4% lower in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, primarily due to the planned exit of business that did not meet our disciplined profit thresholds. Operating income increased by $7.1 million in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, due to decreases in operating expenses.
For the operations that are grouped within Other, operating income increased $0.3 million in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023. The operations in this group mainly consist of our hospitality business, Guest Worldwide.
Global Support Center Expenses
Our Global Support Center generally includes all expenses of the corporate office and Sysco’s shared service operations. These expenses in the first quarter of fiscal 2024 decreased $10.0 million, or 3.8%, as compared to the first quarter of fiscal 2023, primarily due to decreases in insurance expenses and fuel hedging program costs, offset by increases in costs associated with business technology transformation initiatives, payroll-related costs, and depreciation expenses.
Included in Global Support Center expenses are Certain Items that totaled $15.4 million in the first quarter of fiscal 2024, as compared to $6.1 million in the first quarter of fiscal 2023. Certain Items impacting the first quarter of fiscal 2024 were primarily expenses associated with our business technology transformation initiatives and expenses associated with acquisitions. Certain Items impacting the first quarter of fiscal 2023 were primarily expenses associated with our business technology transformation initiatives.
Interest Expense
Interest expense increased $10.2 million for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023. The increase was primarily due to increased interest rates on borrowings and an increase in commercial paper borrowing activity.
Other income and expense
Other expense, net decreased $11.1 million for the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, due to an increase in interest income earned and a decrease in pension and postretirement non-service costs.
Net Earnings
Net earnings increased 8.1% in the first quarter of fiscal 2024, as compared to the first quarter of fiscal 2023, primarily due to the items noted above for operating income and other expense, as well as items impacting our income taxes that are discussed in Note 12, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. Adjusted net earnings, excluding Certain Items, increased 9.9% in the first quarter of fiscal 2024, primarily due to an increase in sales volume.
Earnings Per Share
Basic earnings per share in the first quarter of fiscal 2024 were $1.00, an 8.7% increase from the comparable prior year amount of $0.92 per share. Diluted earnings per share in the first quarter of fiscal 2024 were $0.99, an 8.8% increase from the comparable prior year period amount of $0.91 per share. Adjusted diluted earnings per share, excluding Certain Items, in the first quarter of fiscal 2024 were $1.07, a 10.3% increase from the comparable prior year amount of $0.97 per share.
27
Non-GAAP Reconciliations
|
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 EBITDA and free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove (1) restructuring charges; (2) expenses associated with our various transformation initiatives; (3) severance charges; and (4) acquisition-related costs consisting of: (a) intangible amortization expense and (b) acquisition costs and due diligence costs related to our acquisitions. Our results for fiscal 2023 were also impacted by adjustments to a product return allowance pertaining to COVID-related personal protection equipment inventory 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.
|
||
| The results of our operations can be impacted due to changes in exchange rates applicable in converting local currencies to U.S. dollars. We measure our results on a constant currency basis. Constant currency operating results are calculated by translating current-period local currency operating results with the currency exchange rates used to translate the financial statements in the comparable prior-year period to determine what the current-period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. | ||
| Management believes that adjusting its operating expenses, operating income, net earnings and diluted earnings per share to remove these Certain Items and presenting its results on a constant currency basis provides an important perspective with respect to our underlying business trends and results. It provides meaningful supplemental information to both management and investors that (1) is indicative of the performance of the company’s underlying operations and (2) facilitates comparisons on a year-over-year basis. | ||
| Sysco has a history of growth through acquisitions and excludes from its non-GAAP financial measures the impact of acquisition-related intangible amortization, acquisition costs and due-diligence costs for those acquisitions. We believe this approach significantly enhances the comparability of Sysco’s results for fiscal year 2024 and fiscal year 2023. | ||
| Set forth on the following page is a reconciliation of sales, operating expenses, operating income, other (income) expense, net earnings and diluted earnings per share to adjusted results for these measures for the periods presented. Individual components of diluted earnings per share may not be equal to the total presented when added due to rounding. Adjusted diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. | ||
28
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | %/bps Change | ||||||||||||||||||||
| Sales (GAAP) | $ | 19,620,454 | $ | 19,126,830 | $ | 493,624 | 2.6 | % | |||||||||||||||
|
Impact of currency fluctuations
(1)
|
(104,066) | — | (104,066) | (0.6) | |||||||||||||||||||
| Comparable sales using a constant currency basis (Non-GAAP) | $ | 19,516,388 | $ | 19,126,830 | $ | 389,558 | 2.0 | % | |||||||||||||||
| Cost of sales (GAAP) | $ | 15,972,682 | $ | 15,637,975 | $ | 334,707 | 2.1 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | 2,571 | (2,571) | NM | |||||||||||||||||||
| Cost of sales adjusted for Certain Items (Non-GAAP) | $ | 15,972,682 | $ | 15,640,546 | $ | 332,136 | 2.1 | % | |||||||||||||||
| Gross profit (GAAP) | $ | 3,647,772 | $ | 3,488,855 | $ | 158,917 | 4.6 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | (2,571) | 2,571 | NM | |||||||||||||||||||
| Gross profit adjusted for Certain Items (Non-GAAP) | 3,647,772 | 3,486,284 | 161,488 | 4.6 | |||||||||||||||||||
|
Impact of currency fluctuations
(1)
|
(26,184) | — | (26,184) | (0.7) | |||||||||||||||||||
| Comparable gross profit adjusted for Certain Items using a constant currency basis (Non-GAAP) | $ | 3,621,588 | $ | 3,486,284 | $ | 135,304 | 3.9 | % | |||||||||||||||
| Gross margin (GAAP) | 18.59 | % | 18.24 | % | 35 bps | ||||||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | (0.01) | 1 bps | ||||||||||||||||||||
| Gross margin adjusted for Certain Items (Non-GAAP) | 18.59 | 18.23 | 36 bps | ||||||||||||||||||||
|
Impact of currency fluctuations
(1)
|
(0.03) | — | -3 bps | ||||||||||||||||||||
| Comparable gross margin adjusted for Certain Items using a constant currency basis (Non-GAAP) | 18.56 | % | 18.23 | % | 33 bps | ||||||||||||||||||
| Operating expenses (GAAP) | $ | 2,844,190 | $ | 2,752,054 | $ | 92,136 | 3.3 | % | |||||||||||||||
|
Impact of restructuring and transformational project costs
(3)
|
(19,675) | (11,645) | (8,030) | (69.0) | |||||||||||||||||||
|
Impact of acquisition-related costs
(4)
|
(31,038) | (29,454) | (1,584) | (5.4) | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(5)
|
— | 2,592 | (2,592) | NM | |||||||||||||||||||
| Operating expenses adjusted for Certain Items (Non-GAAP) | 2,793,477 | 2,713,547 | 79,930 | 2.9 | |||||||||||||||||||
|
Impact of currency fluctuations
(1)
|
(25,838) | — | (25,838) | (0.9) | |||||||||||||||||||
| Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP) | $ | 2,767,639 | $ | 2,713,547 | $ | 54,092 | 2.0 | % | |||||||||||||||
| Operating expense as a percentage of sales (GAAP) | 14.50 | % | 14.39 | % | 11 bps | ||||||||||||||||||
| Impact of certain item adjustments | (0.26) | (0.20) | -6 bps | ||||||||||||||||||||
| Adjusted operating expense as a percentage of sales (Non-GAAP) | 14.24 | % | 14.19 | % | 5 bps | ||||||||||||||||||
| Operating income (GAAP) | $ | 803,582 | $ | 736,801 | $ | 66,781 | 9.1 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | (2,571) | 2,571 | NM | |||||||||||||||||||
|
Impact of restructuring and transformational project costs
(3)
|
19,675 | 11,645 | 8,030 | 69.0 | |||||||||||||||||||
|
Impact of acquisition-related costs
(4)
|
31,038 | 29,454 | 1,584 | 5.4 | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(5)
|
— | (2,592) | 2,592 | NM | |||||||||||||||||||
| Operating income adjusted for Certain Items (Non-GAAP) | 854,295 | 772,737 | 81,558 | 10.6 | |||||||||||||||||||
|
Impact of currency fluctuations
(1)
|
(346) | — | (346) | (0.1) | |||||||||||||||||||
| Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP) | $ | 853,949 | $ | 772,737 | $ | 81,212 | 10.5 | % | |||||||||||||||
| Operating margin (GAAP) | 4.10 | % | 3.85 | % | 25 bps | ||||||||||||||||||
| Operating margin adjusted for Certain Items (Non-GAAP) | 4.35 | % | 4.04 | % | 31 bps | ||||||||||||||||||
29
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | %/bps Change | ||||||||||||||||||||
| Operating margin adjusted for Certain Items using a constant currency basis (Non-GAAP) | 4.38 | % | 4.04 | % | 34 bps | ||||||||||||||||||
| Net earnings (GAAP) | $ | 503,392 | $ | 465,568 | $ | 37,824 | 8.1 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | (2,571) | 2,571 | NM | |||||||||||||||||||
|
Impact of restructuring and transformational project costs
(3)
|
19,675 | 11,645 | 8,030 | 69.0 | |||||||||||||||||||
|
Impact of acquisition-related costs
(4)
|
31,038 | 29,454 | 1,584 | 5.4 | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(5)
|
— | (2,592) | 2,592 | NM | |||||||||||||||||||
|
Tax impact of inventory valuation adjustment
(6)
|
— | 637 | (637) | NM | |||||||||||||||||||
|
Tax impact of restructuring and transformational project costs
(6)
|
(4,847) | (2,884) | (1,963) | (68.1) | |||||||||||||||||||
|
Tax impact of acquisition-related costs
(6)
|
(7,646) | (7,295) | (351) | (4.8) | |||||||||||||||||||
|
Tax impact of bad debt reserves adjustments
(6)
|
— | 642 | (642) | NM | |||||||||||||||||||
| Net earnings adjusted for Certain Items (Non-GAAP) | $ | 541,612 | $ | 492,604 | $ | 49,008 | 9.9 | % | |||||||||||||||
| Diluted earnings per share (GAAP) | $ | 0.99 | $ | 0.91 | $ | 0.08 | 8.8 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(2)
|
— | (0.01) | 0.01 | NM | |||||||||||||||||||
|
Impact of restructuring and transformational project costs
(3)
|
0.04 | 0.02 | 0.02 | 100.0 | |||||||||||||||||||
|
Impact of acquisition-related costs
(4)
|
0.06 | 0.06 | — | — | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(5)
|
— | (0.01) | 0.01 | NM | |||||||||||||||||||
|
Tax impact of restructuring and transformational project costs
(6)
|
(0.01) | (0.01) | — | — | |||||||||||||||||||
|
Tax impact of acquisition-related costs
(6)
|
(0.02) | (0.01) | (0.01) | (100.0) | |||||||||||||||||||
|
Diluted earnings per share adjusted for Certain Items (Non-GAAP)
(7)
|
$ | 1.07 | $ | 0.97 | $ | 0.10 | 10.3 | % | |||||||||||||||
30
|
(1)
|
Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on the current year results.
|
||||
|
(2)
|
Fiscal 2023 represents an adjustment to a product return allowance, related to COVID-related personal protection equipment inventory. | ||||
|
(3)
|
Fiscal 2024 includes $6 million related to restructuring and severance charges and $14 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy. Fiscal 2023 includes $4 million related to restructuring and severance charges and $8 million related to various transformation initiative costs, primarily consisting of changes to our business technology strategy.
|
||||
|
(4)
|
Fiscal 2024 includes $28 million of intangible amortization expense and $3 million in acquisition and due diligence costs. Fiscal 2023 includes $26 million of intangible amortization expense and $4 million in acquisition and due diligence costs.
|
||||
|
(5)
|
Fiscal 2023 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. | ||||
|
(6)
|
The tax impact of adjustments for Certain Items are calculated by multiplying the pretax impact of each Certain Item by the statutory rates in effect for each jurisdiction where the Certain Item was incurred.
|
||||
|
(7)
|
Individual components of diluted earnings per share may not equal the total presented when added due to rounding. Total diluted earnings per share is calculated using adjusted net earnings divided by diluted shares outstanding. | ||||
| NM represents that the percentage change is not meaningful. | |||||
31
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | %/bps Change | ||||||||||||||||||||
| U.S. FOODSERVICE OPERATIONS | |||||||||||||||||||||||
| Operating expenses (GAAP) | $ | 1,743,804 | $ | 1,706,631 | $ | 37,173 | 2.2 | % | |||||||||||||||
| Impact of restructuring and transformational project costs | (55) | 48 | (103) | NM | |||||||||||||||||||
|
Impact of acquisition-related costs
(1)
|
(12,548) | (12,585) | 37 | 0.3 | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(2)
|
— | 2,592 | (2,592) | NM | |||||||||||||||||||
| Operating expenses adjusted for Certain Items (Non-GAAP) | $ | 1,731,201 | $ | 1,696,686 | $ | 34,515 | 2.0 | % | |||||||||||||||
| Operating income (GAAP) | $ | 940,971 | $ | 905,712 | $ | 35,259 | 3.9 | % | |||||||||||||||
| Impact of restructuring and transformational project costs | 55 | (48) | 103 | NM | |||||||||||||||||||
|
Impact of acquisition-related costs
(1)
|
12,548 | 12,585 | (37) | (0.3) | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(2)
|
— | (2,592) | 2,592 | NM | |||||||||||||||||||
| Operating income adjusted for Certain Items (Non-GAAP) | $ | 953,574 | $ | 915,657 | $ | 37,917 | 4.1 | % | |||||||||||||||
| INTERNATIONAL FOODSERVICE OPERATIONS | |||||||||||||||||||||||
| Sales (GAAP) | $ | 3,683,210 | $ | 3,283,735 | $ | 399,475 | 12.2 | % | |||||||||||||||
|
Impact of currency fluctuations
(3)
|
(105,503) | — | (105,503) | (3.2) | |||||||||||||||||||
| Comparable sales using a constant currency basis (Non-GAAP) | $ | 3,577,707 | $ | 3,283,735 | $ | 293,972 | 9.0 | % | |||||||||||||||
| Gross profit (GAAP) | $ | 732,039 | $ | 649,265 | $ | 82,774 | 12.7 | % | |||||||||||||||
|
Impact of currency fluctuations
(3)
|
(26,711) | — | (26,711) | (4.1) | |||||||||||||||||||
| Comparable gross profit using a constant currency basis (Non-GAAP) | $ | 705,328 | $ | 649,265 | $ | 56,063 | 8.6 | % | |||||||||||||||
| Gross margin (GAAP) | 19.88 | % | 19.77 | % | 11 bps | ||||||||||||||||||
|
Impact of currency fluctuations
(3)
|
(0.17) | — | -17 bps | ||||||||||||||||||||
| Comparable gross margin using a constant currency basis (Non-GAAP) | 19.71 | % | 19.77 | % | -6 bps | ||||||||||||||||||
| Operating expenses (GAAP) | $ | 638,556 | $ | 562,285 | $ | 76,271 | 13.6 | % | |||||||||||||||
|
Impact of restructuring and transformational project costs
(4)
|
(5,803) | (3,907) | (1,896) | (48.5) | |||||||||||||||||||
|
Impact of acquisition-related costs
(5)
|
(16,897) | (16,014) | (883) | (5.5) | |||||||||||||||||||
| Operating expenses adjusted for Certain Items (Non-GAAP) | 615,856 | 542,364 | 73,492 | 13.6 | |||||||||||||||||||
|
Impact of currency fluctuations
(3)
|
(25,417) | — | (25,417) | (4.7) | |||||||||||||||||||
| Comparable operating expenses adjusted for Certain Items using a constant currency basis (Non-GAAP) | $ | 590,439 | $ | 542,364 | $ | 48,075 | 8.9 | % | |||||||||||||||
| Operating income (GAAP) | $ | 93,483 | $ | 86,980 | $ | 6,503 | 7.5 | % | |||||||||||||||
|
Impact of restructuring and transformational project costs
(4)
|
5,803 | 3,907 | 1,896 | 48.5 | |||||||||||||||||||
|
Impact of acquisition-related costs
(5)
|
16,897 | 16,014 | 883 | 5.5 | |||||||||||||||||||
| Operating income adjusted for Certain Items (Non-GAAP) | 116,183 | 106,901 | 9,282 | 8.7 | |||||||||||||||||||
|
Impact of currency fluctuations
(3)
|
(1,294) | — | (1,294) | (1.2) | |||||||||||||||||||
| Comparable operating income adjusted for Certain Items using a constant currency basis (Non-GAAP) | $ | 114,889 | $ | 106,901 | $ | 7,988 | 7.5 | % | |||||||||||||||
| SYGMA | |||||||||||||||||||||||
| Operating expenses (GAAP) | $ | 140,043 | $ | 148,197 | $ | (8,154) | (5.5) | % | |||||||||||||||
| Operating income (GAAP) | 12,767 | 5,696 | 7,071 | NM | |||||||||||||||||||
| OTHER | |||||||||||||||||||||||
| Operating expenses (GAAP) | $ | 66,152 | $ | 69,300 | $ | (3,148) | (4.5) | % | |||||||||||||||
| Operating income (GAAP) | 11,823 | 11,538 | 285 | 2.5 | |||||||||||||||||||
32
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | %/bps Change | ||||||||||||||||||||
| GLOBAL SUPPORT CENTER | |||||||||||||||||||||||
| Gross profit (loss) (GAAP) | $ | 173 | $ | (7,484) | $ | 7,657 | NM | ||||||||||||||||
|
Impact of inventory valuation adjustment
(6)
|
— | (2,571) | 2,571 | NM | |||||||||||||||||||
| Gross profit (loss) adjusted for Certain Items (Non-GAAP) | $ | 173 | $ | (10,055) | $ | 10,228 | NM | ||||||||||||||||
| Operating expenses (GAAP) | $ | 255,635 | $ | 265,641 | $ | (10,006) | (3.8) | % | |||||||||||||||
|
Impact of restructuring and transformational project costs
(7)
|
(13,817) | (7,786) | (6,031) | (77.5) | |||||||||||||||||||
|
Impact of acquisition-related costs
(8)
|
(1,593) | (855) | (738) | (86.3) | |||||||||||||||||||
| Operating expenses adjusted for Certain Items (Non-GAAP) | $ | 240,225 | $ | 257,000 | $ | (16,775) | (6.5) | % | |||||||||||||||
| Operating loss (GAAP) | $ | (255,462) | $ | (273,125) | $ | 17,663 | 6.5 | % | |||||||||||||||
|
Impact of inventory valuation adjustment
(6)
|
— | (2,571) | 2,571 | NM | |||||||||||||||||||
|
Impact of restructuring and transformational project costs
(7)
|
13,817 | 7,786 | 6,031 | 77.5 | |||||||||||||||||||
|
Impact of acquisition-related costs
(8)
|
1,593 | 855 | 738 | 86.3 | |||||||||||||||||||
| Operating loss adjusted for Certain Items (Non-GAAP) | $ | (240,052) | $ | (267,055) | $ | 27,003 | 10.1 | % | |||||||||||||||
|
(1)
|
Fiscal 2024 and fiscal 2023 include intangible amortization expense and acquisition costs.
|
||||
|
(2)
|
Fiscal 2023 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020.
|
||||
|
(3)
|
Represents a constant currency adjustment, which eliminates the impact of foreign currency fluctuations on current year results. | ||||
|
(4)
|
Includes restructuring costs primarily in Europe. | ||||
|
(5)
|
Represents intangible amortization expense.
|
||||
|
(6)
|
Fiscal 2023 represents an adjustment to a product return allowance, related to COVID-related personal protection equipment inventory.
|
||||
|
(7)
|
Includes various transformation initiative costs, primarily consisting of changes to our business technology strategy. | ||||
|
(8)
|
Represents due diligence costs. | ||||
| NM represents that the percentage change is not meaningful. | |||||
33
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA should not be used as a substitute for the most comparable GAAP measure in assessing Sysco’s overall financial performance for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Performance Indicators” contained in our fiscal 2023 Form 10-K for discussions regarding this non-GAAP performance metric. Set forth below is a reconciliation of actual net earnings to EBITDA and to adjusted EBITDA results for the periods presented (dollars in thousands):
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | Change in Dollars | % Change | ||||||||||||||||||||
| Net earnings (GAAP) | $ | 503,392 | $ | 465,568 | $ | 37,824 | 8.1 | % | |||||||||||||||
| Interest (GAAP) | 134,334 | 124,150 | 10,184 | 8.2 | |||||||||||||||||||
| Income taxes (GAAP) | 159,216 | 129,334 | 29,882 | 23.1 | |||||||||||||||||||
| Depreciation and amortization (GAAP) | 206,007 | 188,924 | 17,083 | 9.0 | |||||||||||||||||||
| EBITDA (Non-GAAP) | $ | 1,002,949 | $ | 907,976 | $ | 94,973 | 10.5 | % | |||||||||||||||
| Certain Item adjustments: | |||||||||||||||||||||||
|
Impact of inventory valuation adjustment
(1)
|
$ | — | $ | (2,571) | $ | 2,571 | NM | ||||||||||||||||
|
Impact of restructuring and transformational project costs
(2)
|
18,833 | 10,509 | 8,324 | 79.2 | |||||||||||||||||||
|
Impact of acquisition-related costs
(3)
|
2,629 | 3,546 | (917) | (25.9) | |||||||||||||||||||
|
Impact of bad debt reserve adjustments
(4)
|
— | (2,592) | 2,592 | NM | |||||||||||||||||||
|
EBITDA adjusted for Certain Items (Non-GAAP)
(5)
|
$ | 1,024,411 | $ | 916,868 | $ | 107,543 | 11.7 | % | |||||||||||||||
|
(1)
|
Fiscal 2023 represents an adjustment to a product return allowance, related to COVID-related personal protection equipment inventory. | ||||
|
(2)
|
Fiscal 2024 and fiscal 2023 include charges related to restructuring and severance, as well as various transformation initiative costs, primarily consisting of changes to our business technology strategy, excluding charges related to accelerated depreciation.
|
||||
|
(3)
|
Fiscal 2024 and fiscal 2023 include acquisition and due diligence costs. | ||||
|
(4)
|
Fiscal 2023 represents the reduction of bad debt charges previously taken on pre-pandemic trade receivable balances in fiscal 2020. | ||||
|
(5)
|
In arriving at adjusted EBITDA, Sysco does not adjust out interest income of $12 million and $3 million or non-cash stock compensation expense of $24 million and $27 million in fiscal 2024 and fiscal 2023, respectively.
|
||||
| NM represents that the percentage change is not meaningful. | |||||
Liquidity and Capital Resources
Highlights
We produced negative free cash flow, impacted by higher capital expenditures, timing and historical seasonality, and investments towards our Recipe for Growth strategy. In the table that follows, free cash flow for each period presented is reconciled to net cash provided by operating activities and comparisons of the significant cash flows from the first 13 weeks of fiscal 2024 to the first 13 weeks of fiscal 2023 are provided.
34
| 13-Week Period Ended Sep. 30, 2023 | 13-Week Period Ended Oct. 1, 2022 | ||||||||||
| Source of cash (use of cash) | (In thousands) | ||||||||||
| Net cash provided by operating activities (GAAP) | $ | 87,152 | $ | 158,606 | |||||||
| Additions to plant and equipment | (171,364) | (167,260) | |||||||||
| Proceeds from sales of plant and equipment | 11,012 | 22,448 | |||||||||
|
Free Cash Flow (Non-GAAP)
(1)
|
$ | (73,200) | $ | 13,794 | |||||||
| Acquisition of businesses, net of cash acquired | $ | (219,264) | $ | (32,651) | |||||||
| Debt borrowings (repayments), net | 407,229 | 137,959 | |||||||||
| Stock repurchases | (99,974) | (267,727) | |||||||||
| Dividends paid | (252,880) | (249,294) | |||||||||
|
(1)
|
Free cash flow should not be used as a substitute for the most comparable GAAP measure in assessing the company’s liquidity for the periods presented. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Performance Indicators” contained in our fiscal 2023 Form 10-K for discussions regarding this non-GAAP performance metric.
|
||||
Sources and Uses of Cash
Sysco generates cash in the U.S. and internationally. As of September 30, 2023, we had $569.1 million in cash and cash equivalents, approximately 92% of which was held by our international subsidiaries. Sysco’s strategic objectives are funded primarily by cash from operations and external borrowings. Traditionally, our operations have produced significant cash flow and, due to our strong financial position, we believe that we will continue to be able to effectively access capital markets, as needed. Cash is generally allocated to working capital requirements, investments compatible with our overall growth strategy (organic and inorganic), debt management, and shareholder return. Remaining cash balances are invested in high-quality, short-term instruments.
We believe our cash flow from operations, the availability of liquidity under our commercial paper program and our revolving credit facility, and our ability to access capital from financial markets will be sufficient to meet our anticipated cash requirements for more than the next 12 months, while maintaining sufficient liquidity for normal operating purposes.
Cash Flows
Operating Activities
We generated $87.2 million in cash flows from operations in the first 13 weeks of fiscal 2024, compared to cash flows from operations of $158.6 million in the first 13 weeks of fiscal 2023. In the first 13 weeks of fiscal 2024, these amounts included year-over-year unfavorable comparisons on working capital of $85.8 million due to an unfavorable comparison on accounts payable, partially offset by a favorable comparison on accounts receivable and inventory. Accrued expenses also had an unfavorable comparison, primarily from accrued payroll in the first 13 weeks of fiscal 2024 in comparison to the first 13 weeks of fiscal 2023. Income taxes negatively impacted cash flows from operations, as estimated payments made in the first 13 weeks of fiscal 2024 increased compared to the first 13 weeks of fiscal 2023.
Investing Activities
Our capital expenditures in the first 13 weeks of fiscal 2024 consisted primarily of investments in buildings and building improvements, technology equipment, warehouse equipment, and fleet. Our capital expenditures in the first 13 weeks of fiscal 2024 were $4.1 million higher than in the first 13 weeks of fiscal 2023, as we made investments to advance our Recipe for Growth strategy.
During the first 13 weeks of fiscal 2024, we paid $219.3 million, net of cash acquired, for acquisitions compared to $32.7 million in acquisitions made in the first 13 weeks of fiscal 2023.
35
Financing Activities
Equity Transactions
Proceeds from exercises of share-based compensation awards were $17.4 million in the first 13 weeks of fiscal 2024, as compared to $24.6 million in the first 13 weeks of fiscal 2023. The level of option exercises, and thus proceeds, will vary from period to period and is largely dependent on movements in our stock price and the time remaining before option grants expire.
In May 2021, our Board of Directors approved a share repurchase program to authorize the repurchase of up to $5.0 billion of the company’s common stock, which will remain available until fully utilized. We repurchased 1,382,947 shares for $100.0 million during the first 13 weeks of fiscal 2024, and intend to repurchase $750.0 million in fiscal 2024. As of September 30, 2023, we had a remaining authorization of approximately $3.9 billion. We repurchased 319,375 additional shares for $20.4 million under our authorization through October 13, 2023.
Dividends paid in the first 13 weeks of fiscal 2024 were $252.9 million, or $0.50 per share, as compared to $249.3 million, or $0.49 per share, in the first 13 weeks of fiscal 2023. In August 2023, we declared our regular quarterly dividend for the first quarter of fiscal 2024 of $0.50 per share, which was paid in October 2023.
Debt Activity and Borrowing Availability
Our debt activity, including issuances and repayments, if any, and our borrowing availability are described in Note 8, “Debt,” in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q. Our outstanding borrowings as of September 30, 2023 are disclosed within that note.
Guarantor Summarized Financial Information
On January 19, 2011, the wholly owned U.S. Broadline subsidiaries of Sysco Corporation, which distribute a full line of food products and a wide variety of non-food products, at that time entered into full and unconditional guarantees of all outstanding senior notes and debentures of Sysco Corporation. All subsequent issuances of senior notes and debentures in the U.S. and borrowings under the company’s $3.0 billion long-term revolving credit facility have also been guaranteed by these subsidiaries. As of September 30, 2023, Sysco had a total of $9.5 billion in senior notes, debentures and borrowings under the long-term revolving credit facility that were guaranteed by these subsidiary guarantors. Our remaining consolidated subsidiaries (non-guarantor subsidiaries) are not obligated under the senior notes indenture, debentures indenture or our long-term revolving credit facility. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” contained in our fiscal 2023 Form 10-K for additional information regarding the terms of the guarantees.
Basis of Preparation of the Summarized Financial Information
The summarized financial information of Sysco Corporation (issuer), and certain wholly owned U.S. Broadline subsidiaries (guarantors) (together, the obligor group) is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. Investments in and equity in the earnings of our non-guarantor subsidiaries, which are not members of the obligor group, have been excluded from the summarized financial information. The obligor group’s amounts due to, amounts due from and transactions with non-guarantor subsidiaries have been presented in separate line items, if they are material to the obligor financials.
The following tables include summarized financial information of the obligor group for the periods presented.
36
| Combined Parent and Guarantor Subsidiaries Summarized Balance Sheet | Sep. 30, 2023 | Jul. 1, 2023 | ||||||||||||
| (In thousands) | ||||||||||||||
| ASSETS | ||||||||||||||
| Receivables due from non-obligor subsidiaries | $ | 272,246 | $ | 321,476 | ||||||||||
| Current assets | 5,723,242 | 5,149,509 | ||||||||||||
| Total current assets | $ | 5,995,488 | $ | 5,470,985 | ||||||||||
| Notes receivable from non-obligor subsidiaries | $ | 109,020 | $ | 108,380 | ||||||||||
| Other noncurrent assets | 4,356,920 | 4,254,145 | ||||||||||||
| Total noncurrent assets | $ | 4,465,940 | $ | 4,362,525 | ||||||||||
| LIABILITIES | ||||||||||||||
| Payables due to non-obligor subsidiaries | $ | 139,794 | $ | 71,175 | ||||||||||
| Other current liabilities | 2,210,744 | 2,305,435 | ||||||||||||
| Total current liabilities | $ | 2,350,538 | $ | 2,376,610 | ||||||||||
| Notes payable to non-obligor subsidiaries | $ | 239,892 | $ | 240,874 | ||||||||||
| Long-term debt | 10,148,155 | 9,793,541 | ||||||||||||
| Other noncurrent liabilities | 1,213,561 | 1,121,884 | ||||||||||||
| Total noncurrent liabilities | $ | 11,601,608 | $ | 11,156,299 | ||||||||||
| Combined Parent and Guarantor Subsidiaries Summarized Results of Operations | 13-Week Period Ended Sep. 30, 2023 | |||||||
| (In thousands) | ||||||||
| Sales | $ | 12,311,637 | ||||||
| Gross profit | 2,262,288 | |||||||
| Operating income | 663,645 | |||||||
| Interest expense from non-obligor subsidiaries | 2,698 | |||||||
| Net earnings | 387,862 | |||||||
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that are most important to the portrayal of our financial position and results of operations. These policies require our most subjective or complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. We have reviewed with the Audit Committee of the Board of Directors the development and selection of the critical accounting policies and estimates and this related disclosure. Our most critical accounting policies and estimates pertain to goodwill and intangible assets, income taxes, company-sponsored pension plans and inventory valuation, which are described in Item 7 of our fiscal 2023 Form 10-K.
Forward-Looking Statements
Certain statements made herein that look forward in time or express management’s expectations or beliefs with respect to the occurrence of future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” “projected,” “continues,” “continuously,” variations of such terms, and similar terms and phrases denoting anticipated or expected occurrences or results. Examples of forward-looking statements include, but are not limited to, statements about:
•
our expectations of an improving market over the course of fiscal 2024;
•
our expectations regarding the ability of our supply chain and facilities to remain in place and operational;
37
•
our plans regarding our transformation initiatives and the expected effects from such initiatives, including the Sysco Driver Academy;
•
statements regarding uncollectible accounts, including that if collections continue to improve, additional reductions in bad debt expense could occur;
•
our expectations that our Recipe for Growth strategy will allow us to better serve our customers and differentiate Sysco from our competition;
•
our expectations regarding our fiscal 2024 sales and our rate of sales growth in fiscal 2024 and the three years of our long-range plan;
•
our expectations regarding the impact of inflation on sales, gross margin rates and gross profit dollars;
•
our expectations regarding gross margins in fiscal 2024;
•
our plans regarding cost savings, including our target for cost savings through fiscal 2024 and the impact of costs savings on the company;
•
our belief that our purpose will allow us to grow substantially faster than the foodservice distribution industry and deliver profitable growth through our Recipe for Growth transformation, and statements regarding our plans with respect to our strategic pillars that support this growth transformation;
•
our expectations regarding the use and investment of remaining cash generated from operations;
•
the effect, impact, potential duration or other implications of the COVID-19 pandemic and any expectations we may have with respect thereto, including our ability to withstand and recover from the crisis;
•
the expected long-term rate of return on plan assets of the U.S. Retirement Plan;
•
the sufficiency of our available liquidity to sustain our operations for multiple years;
•
estimates regarding the outcome of legal proceedings;
•
the impact of seasonal trends on our free cash flow;
•
estimates regarding our capital expenditures and the sources of financing for our capital expenditures;
•
our expectations regarding the impact of potential acquisitions and sales of assets on our liquidity, borrowing capacity, leverage ratios and capital availability;
•
our expectations regarding real sales growth in the U.S. foodservice market and trends in produce markets;
•
our expectations regarding the calculation of adjusted return on invested capital, adjusted operating income, adjusted net earnings and adjusted diluted earnings per share;
•
our expectations regarding the impact of future Certain Items on our projected future non-GAAP and GAAP results;
•
our expectations regarding our effective tax rate in fiscal 2024;
•
the sufficiency of our mechanisms for managing working capital and competitive pressures, and our beliefs regarding the impact of these mechanisms;
•
our ability to meet future cash requirements, including the ability to access financial markets effectively, including issuances of debt securities, and maintain sufficient liquidity;
•
our expectations regarding the payment of dividends, and the growth of our dividend, in the future;
•
our expectations regarding future activity under our share repurchase program;
•
future compliance with the covenants under our revolving credit facility;
•
our ability to effectively access the commercial paper market and long-term capital markets; and
•
our intention to repay our long-term debt with cash on hand, cash flow from operations, issuances of commercial paper, issuances of senior notes, or a combination thereof.
38
These statements are based on management’s current expectations and estimates; actual results may differ materially due in part to the risk factors set forth below, those within Part II, Item 1A of this Form 10-Q and those discussed in Item 1A of our fiscal 2023 Form 10-K:
•
the risk that if sales from our locally managed customers do not grow at the same rate as sales from multi-unit customers, our gross margins may decline;
•
periods of significant or prolonged inflation or deflation and their impact on our product costs and profitability generally;
•
the risk that we are unlikely to be able to predict inflation over the long term, and lower inflation is likely to produce lower gross profit;
•
the risk that our efforts to modify truck routing, including our small truck initiative, in order to reduce outbound transportation costs may be unsuccessful;
•
the risk that we may not be able to accelerate and/or identify additional administrative cost savings in order to compensate for any gross profit or supply chain cost leverage challenges;
•
risks related to unfavorable conditions in the Americas and Europe and the impact on our results of operations and financial condition;
•
the risks related to our efforts to implement our transformation initiatives and meet our other long-term strategic objectives, including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove costlier than expected;
•
the impact of unexpected future changes to our business initiatives based on management’s subjective evaluation of our overall business needs;
•
the risk that the actual costs of any business initiatives may be greater or less than currently expected;
•
the risk that competition in our industry and the impact of GPOs may adversely impact our margins and our ability to retain customers and make it difficult for us to maintain our market share, growth rate and profitability;
•
the risk that our relationships with long-term customers may be materially diminished or terminated;
•
the risk that changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations;
•
the impact and effects of public health crises, pandemics and epidemics, such as the outbreak of COVID-19, and the adverse impact thereof on our business, financial condition and results of operations;
•
the risk that changes in applicable tax laws or regulations and the resolution of tax disputes could negatively affect our financial results;
•
the risk that we may not be able to fully compensate for increases in fuel costs, and forward purchase commitments intended to contain fuel costs could result in above market fuel costs;
•
the risk of interruption of supplies and increase in product costs as a result of conditions beyond our control;
•
the potential impact on our reputation and earnings of adverse publicity or lack of confidence in our products;
•
risks related to unfavorable changes to the mix of locally managed customers versus corporate-managed customers;
•
the risk that we may not realize anticipated benefits from our operating cost reduction efforts;
•
difficulties in successfully expanding into international markets and complimentary lines of business;
•
the potential impact of product liability claims;
•
the risk that we fail to comply with requirements imposed by applicable law or government regulations;
39
•
risks related to our ability to effectively finance and integrate acquired businesses;
•
risks related to our access to borrowed funds in order to grow and any default by us under our indebtedness that could have a material adverse impact on cash flow and liquidity;
•
our level of indebtedness and the terms of our indebtedness could adversely affect our business and liquidity position;
•
the risk that the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending;
•
the risk that divestiture of one or more of our businesses may not provide the anticipated effects on our operations;
•
the risk that future labor disruptions or disputes could disrupt the integration of Brakes France and Davigel into Sysco France and our operations in France and the European Union generally;
•
the risk that factors beyond management’s control, including fluctuations in the stock market, as well as management’s future subjective evaluation of the company’s needs, would impact the timing of share repurchases;
•
due to our reliance on technology, any technology disruption or delay in implementing new technology could have a material negative impact on our business;
•
the risk of negative impacts to our business and our relationships with customers from a cybersecurity incident and/or other technology disruptions;
•
the risk that changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt;
•
the potential requirement to pay material amounts under our multiemployer defined benefit pension plans;
•
our funding requirements for our company-sponsored qualified pension plan may increase should financial markets experience future declines;
•
labor issues, including the renegotiation of union contracts and shortage of qualified labor;
•
capital expenditures may vary based on changes in business plans and other factors, including risks related to the implementation of various initiatives, the timing and successful completion of acquisitions, construction schedules and the possibility that other cash requirements could result in delays or cancellations of capital spending;
•
the risk that the anti-takeover benefits provided by our preferred stock may not be viewed as beneficial to stockholders; and
•
the risk that the exclusive forum provisions in our amended and restated bylaws could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
For a more detailed discussion of factors that could cause actual results to differ from those contained in the forward-looking statements, see the risk factors discussion contained in Item 1A of our fiscal 2023 Form 10-K and in Item 1A of Part II of this Form 10-Q.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Our market risks consist of interest rate risk, foreign currency exchange rate risk, fuel price risk and investment risk. For a discussion on our exposure to market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risks” in our fiscal 2023 Form 10-K. There have been no significant changes to our market risks since July 1, 2023.
40
Item 4.
Controls and Procedures
Sysco’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding the required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Sysco’s disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our chief executive officer and chief financial officer concluded that, as of such date, Sysco’s disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
Environmental Matters
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters in which a governmental authority is a party to the proceedings and when such proceedings involve the potential for monetary sanctions that Sysco’s management reasonably believes will exceed a specified threshold. Pursuant to recent SEC amendments to this item, Sysco has chosen a reporting threshold for such proceedings of $1 million. Applying this threshold, there are no material environmental matters to disclose for this period.
From time to time, we may be party to legal proceedings that arise in the ordinary course of our business. We do not believe there are any pending legal proceedings that, individually or in the aggregate, will have a material adverse effect on the company’s financial condition, results of operations or cash flows.
Item 1A.
Risk Factors
For a discussion of our risk factors, see the section entitled “Risk Factors” in our 2023 Annual Report on Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
We made the following share repurchases during the first quarter of fiscal 2024:
| ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||||||||||||||||
| Period |
Total Number of Shares Purchased
(1)
|
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| Month #1 | |||||||||||||||||||||||
| July 2 - July 29 | 292,233 | $ | 74.37 | 292,233 | — | ||||||||||||||||||
| Month #2 | |||||||||||||||||||||||
| July 30 - August 26 | 593,685 | 73.18 | 593,685 | — | |||||||||||||||||||
| Month #3 | |||||||||||||||||||||||
| August 27 - September 30 | 497,029 | 69.96 | 497,029 | — | |||||||||||||||||||
| Totals | 1,382,947 | $ | 72.28 | 1,382,947 | — | ||||||||||||||||||
|
(1)
|
The total number of shares purchased includes no shares tendered by individuals in connection with stock option exercises in Month #1, Month #2 or Month #3.
|
||||
|
(2)
|
See the discussion in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Equity Transactions” for additional information regarding Sysco’s share repurchase program.
|
||||
In May 2021, our Board of Directors approved a share repurchase program to authorize the repurchase of up to $5.0 billion of the company’s common stock, which will remain available until fully utilized.
We repurchased 1,382,947 shares for $100.0 million during fiscal 2024. As of September 30, 2023, we had a remaining authorization of approximately $3.9 billion. We purchased 319,375 additional shares under our authorization through October 13, 2023.
Item 3.
Defaults Upon Senior Securities
None
42
Item 4.
Mine Safety Disclosures
Not applicable
Item 5.
Other Information
Insider Trading Arrangements and Policies
The table below shows the outstanding plans or other arrangements (each, a (Plan)) providing for the purchase and/or sale of Sysco securities by Sysco’s directors and Section 16 officers, including those Plans
adopted
or
terminated
during the quarter ended September 30, 2023:
| Name | Title | Action | Date | Trading Arrangement |
Number of Securities Converted
|
Expiration Date
(4)
|
|||||||||||||||||
|
Rule 10b5-1
(1)
|
Non-Rule 10b5-1
(2)
|
||||||||||||||||||||||
|
|
|
Adopt |
|
X |
|
March 1, 2024 | |||||||||||||||||
|
|
|
Adopt |
|
X |
|
December 31, 2024 | |||||||||||||||||
|
|
Corporate Affairs and Chief Administrative Officer |
Adopt |
|
X |
1,000 shares to be acquired and held upon the exercise of vested stock options
|
December 29, 2023 | |||||||||||||||||
|
|
|
Adopt |
|
X |
|
March 7, 2024 | |||||||||||||||||
|
(1)
|
Intended to satisfy the affirmative defense conditions of SEC Rule 10b5-1(c). | ||||
|
(2)
|
Non-Rule Rule 10b5-1 trading arrangement as defined in Item 408 of Regulation S-K. | ||||
|
(3)
|
The shares reported for Mr. Bertrand include 3,444 shares directly held by Mr. Bertrand’s children and covered under three separate trading plans with identical adoption and expiration dates. | ||||
|
(4)
|
Each Plan terminates on the earlier of: (i) the expiration date listed in the table above; (ii) the first date on which all trades set forth in the Plan have been executed; or (iii) such date the Plan is otherwise terminated according to its terms. | ||||
Item 6.
Exhibits
The exhibits listed on the Exhibit Index below are filed as a part of this Quarterly Report on Form 10-Q.
43
EXHIBIT INDEX
| 3.1 | — | |||||||
| 3.2 | — | |||||||
| 3.3 | — | |||||||
| 3.4 | — | |||||||
| 10.1†# | — | |||||||
| 10.2†# | — | |||||||
| 10.3†# | — | |||||||
| 10.4†# | — | |||||||
| 10.5†# | — | |||||||
| 10.6† | — | |||||||
| 10.7†# | — | |||||||
| 10.8†# | — | |||||||
| 22.1 | — | |||||||
| 31.1# | — | |||||||
| 31.2# | — | |||||||
| 32.1# | — | |||||||
| 32.2# | — | |||||||
| 101.SCH# | — | Inline XBRL Taxonomy Extension Schema Document | ||||||
| 101.CAL# | — | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
| 101.DEF# | — | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||
44
| 101.LAB# | — | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||||||
| 101.PRE# | — | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
| 104 | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||
___________
† Executive Compensation Arrangement pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K
# Filed herewith
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Sysco Corporation | ||||||||
| (Registrant) | ||||||||
| Date: October 31, 2023 | By: | /s/ KEVIN P. HOURICAN | ||||||
| Kevin P. Hourican | ||||||||
| President and Chief Executive Officer | ||||||||
| Date: October 31, 2023 | By: | /s/ KENNY K. CHEUNG | ||||||
| Kenny K. Cheung | ||||||||
| Executive Vice President and | ||||||||
| Chief Financial Officer | ||||||||
| Date: October 31, 2023 | By: | /s/ JENNIFER L. JOHNSON | ||||||
| Jennifer L. Johnson | ||||||||
| Senior Vice President and | ||||||||
| Chief Accounting Officer | ||||||||
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint