SYSCO CORPORATION This discussion should be read in conjunction with our consolidated financial statements as ofJuly 2, 2022 , and for the fiscal year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year endedJuly 2, 2022 (our fiscal 2022 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 second quarter of fiscal 2023 results were primarily attributable to sales growth that surpassed second quarter of fiscal 2022 levels by 13.9%. This double-digit sales growth resulted in operating income growth compared to the same period last year, driven by higher volumes, effective management of inflation and market share gains. Our gross profit growth this quarter outpaced operating expense, as we continued to make progress in improving our supply chain productivity. We continued to advance our Recipe For Growth strategy, with advancement in our digital tools, supply chain investments, and sales and merchandising initiatives, both domestically and internationally. Our second quarter net earnings also includes a pension liability transfer, which resulted in a non-cash charge of$315.4 million recorded within Other expense (income), net. See below for a comparison of our fiscal 2023 results to our fiscal 2022 results, both including and excluding Certain Items (as defined below).
Comparisons of results from the second quarter of fiscal 2023 to the second quarter of fiscal 2022 are presented below:
•Sales:
•increased 13.9%, or$2.3 billion , to$18.6 billion ; •Operating income: •increased 44.0%, or$195.7 million , to$640.6 million ; •adjusted operating income increased 37.6%, or$186.4 million , to$682.1 million ; •Net earnings: 27 -------------------------------------------------------------------------------- •decreased 15.7%, or$26.2 million , to$141.2 million ; •adjusted net earnings increased 39.7%, or$116.0 million , to$407.9 million ; •Basic earnings per share: •decreased 15.2%, or$0.05 , to$0.28 per share; •Diluted earnings per share: •decreased 15.2%, or$0.05 , to$0.28 per share; •adjusted diluted earnings per share increased 40.4%, or$0.23 , to$0.80 in fiscal 2023; •EBITDA: •decreased 22.6%, or$146.3 million , to$500.5 million ; and •adjusted EBITDA increased 23.9%, or$160.6 million , to$831.3 million .
Comparisons of results from the first 26 weeks of fiscal 2023 to the first 26 weeks of fiscal 2022 are presented below:
•Sales:
•increased 15.1%, or$4.9 billion , to$37.7 billion ; •Operating income: •increased 27.7%, or$298.4 million , to$1.4 billion ; •adjusted operating income increased 23.0%, or$271.6 million , to$1.5 billion ; •Net earnings: •increased 11.2%, or$61.3 million , to$606.8 million ; •adjusted net earnings increased 24.8%, or$178.7 million , to$900.5 million ; •Basic earnings per share: •increased 12.1%, or$0.13 , to$1.20 per share; •Diluted earnings per share: •increased 12.3%, or$0.13 , to$1.19 per share; and •adjusted diluted earnings per share increased 25.7%, or$0.36 , to$1.76 in fiscal 2023; •EBITDA: •decreased 4.1%, or$59.8 million , to$1.4 billion ; and •adjusted EBITDA increased 14.7%, or$224.7 million , to$1.7 billion . The discussion of our results includes certain non-GAAP financial measures, including EBITDA and adjusted EBITDA, as we believe these metrics provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures to remove the impact of restructuring and transformational project costs consisting of: (1) restructuring charges, (2) expenses associated with our various transformation initiatives and (3) facility closure and severance charges; acquisition-related costs consisting of: (a) intangible amortization expense and (b) acquisition costs and due diligence costs related to our acquisitions; and the reduction of bad debt expense previously recognized in fiscal 2020 due to the impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. Our results for fiscal 2023 were also impacted by adjustments to a product return allowance pertaining to COVID-related personal protection equipment inventory and a pension settlement charge that resulted from the purchase of a nonparticipating single premium group annuity contract that transferred defined benefit plan obligations to an insurer. Our results for fiscal 2022 were also impacted by debt extinguishment costs and an increase in reserves for uncertain tax positions. The fiscal 2023 and fiscal 2022 items discussed above are collectively referred to as "Certain Items." The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies toU.S. dollars. We measure our total Sysco and our International Foodservice Operations results on a constant currency basis.
Trends
Economic and Industry Trends
The food-away-from-home sector experienced growth in the second quarter of
fiscal 2023. Restaurants continued to be resilient; however, industry sources
had projected higher industry growth and such growth has been lower than
projected. Even with slower growth, the food-away-from-home sector is positioned
well to manage through a softer macro-economic environment and to experience
future growth. We experienced a strong start to the year in national sales,
which has driven market share gains overall, as we grew 1.35 times the market
during the first half of the year.
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--------------------------------------------------------------------------------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 second quarter of fiscal 2023 was volume growth, as we experienced a 5.2% improvement in total case volume and a 3.2% improvement in local case volume within ourU.S. Foodservice segment, in each instance as compared to the second quarter of fiscal 2022. This volume reflects our broadline and specialty businesses except for our specialty meats business which measures its volume in pounds. This growth enabled us to gain market share during the second quarter of fiscal 2023 and we expect to continue seeing momentum on our rate of sales growth for the full year. Product cost inflation has also been a driver of our sales and gross profit performance. We experienced inflation at a rate of 8.3% and 9.0% in the second quarter and first 26 weeks of fiscal 2023, respectively, at the total enterprise level, primarily driven by inflation in the dairy, fresh produce and frozen food categories. We continue to be successful in managing our inflation, resulting in an increase in gross profit dollars. Gross margin increased 29 and 24 basis points in the second quarter and first 26 weeks of fiscal 2023, respectively, as compared to the same prior year periods, primarily driven by higher volumes, the effective management of inflation and progress with our partnership growth management initiatives.
Operating Expense Trends
Total operating expenses increased 10.7% and 14.1% during the second quarter and first 26 weeks of fiscal 2023, respectively, as compared to the second quarter and first 26 weeks of fiscal 2022, driven by increased volumes, cost inflation, continued operational cost pressures from the operating environment and our planned investments to drive our transformation initiatives under our Recipe For Growth strategy. This quarter included: transformation investments of$55 million ; new-colleague related productivity costs of$22 million ; and expenditures related to the labor dispute we resolved in the second quarter of fiscal 2023. We continued to invest in associate retention and best-in-class training, primarily for transportation and warehouse colleagues. OurSysco Driver Academy is contributing to improved retention and productivity, and we expect to see this trend improve as the percentage of drivers trained from within Sysco continues to grow. We believe the advancements we are making in our physical capabilities, and the investments we are making in improved training, will provide improved service levels to our customers and strengthen Sysco's ability to profitably win market share.
Pension Settlement Charge
The Sysco Corporation Retirement Plan (the Plan) executed a commitment agreement to purchase a nonparticipating single premium group annuity contract that transferred$695.0 million of the Plan's defined benefit pension obligations related to certain pension benefits. As a result of the transaction, we recognized a one-time, non-cash pre-tax pension settlement charge of$315.4 million in the second quarter of fiscal 2023. This charge has been treated as a Certain Item. The amount of on-going expense for the Plan has been remeasured for the remainder of the fiscal year. Pension expense is elevated over fiscal 2022 due to increased interest rates and lower asset returns; the majority of the increase is included within Other expense, income net in the consolidated results of operations. We expect pension expense within this line item to increase by approximately$35 million for the last 26 weeks of fiscal 2023, as compared to the same time period in fiscal 2022.
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 and second quarters of fiscal 2023, we acquired a total of three smallU.S. -based independent Italian food distributors as part of our plan to meaningfully scale our growing Italian platform.
The results of these acquisitions were not material to the consolidated results of the company for the second quarter of fiscal 2023.
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
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inventory fulfillment is operating in our first test region, and we have made
progress in expanding to deliveries six days a week. 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
towards increasing market share. We expect that, as our Recipe for Growth
matures, the impact on our top-line growth will continue to accelerate. We are
committed to profitably growing 1.5 times the market by the end of fiscal 2024,
the third year of our three-year strategic plan.
Results of Operations
The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
13-Week Period Ended 26-Week Period Ended
Dec. 31, 2022 Jan. 1, 2022 Dec. 31, 2022 Jan. 1, 2022
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 82.0 82.3 81.9 82.1
Gross profit 18.0 17.7 18.1 17.9
Operating expenses 14.6 15.0 14.5 14.6
Operating income 3.4 2.7 3.6 3.3
Interest expense 0.7 1.5 0.7 1.1
Other expense (income), net 1.7 (0.1) 0.8 -
Earnings before income taxes 1.0 1.3 2.1 2.2
Income taxes 0.2 0.3 0.5 0.5
Net earnings 0.8 % 1.0 % 1.6 % 1.7 %
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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 26-Week Period Ended
Dec. 31, 2022 Dec. 31, 2022
Sales 13.9 % 15.1 %
Cost of sales 13.5 14.7
Gross profit 15.9 16.6
Operating expenses 10.7 14.1
Operating income 44.0 27.7
Interest expense (45.6) (31.0)
Other expense (income), net (1) (2) (3,192.2) (2,579.9)
Earnings before income taxes (16.1) 7.5
Income taxes (17.6) (4.2)
Net earnings (15.7) % 11.2 %
Basic earnings per share (15.2) % 12.1 %
Diluted earnings per share (15.2) 12.3
Average shares outstanding (0.7) (0.8)
Diluted shares outstanding (0.9) (1.0)
(1) Other expense (income), net was expense of
in the second quarter of fiscal 2023 and fiscal 2022, respectively.
(2) Other expense (income), net was expense of
in the first 26 weeks of fiscal 2023 and fiscal 2022, respectively.The following tables represent our results by reportable segments:
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