UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6544

 

Sysco Corporation

(Exact name of registrant as specified in its charter)

Delaware		74-1648137
(State or other jurisdiction of		(IRS employer
incorporation or organization)		identification number)
1390 Enclave Parkway		77077-2099
Houston, Texas		(Zip Code)
(Address of principal executive offices)

     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 o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes þ       No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

     591,839,181 shares of common stock were outstanding as of October 24, 2009.

 

 

TABLE OF CONTENTS

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			31
Item 6. Exhibits			31
Signatures			33
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-15.1
EX-15.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share Data)

		September 26, 2009				June 27, 2009				September 27, 2008
		(unaudited)								(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	851,036			$	1,087,084			$	345,625
Short-term investments			27,438				—				—
Accounts and notes receivable, less allowances of $51,089, $36,078 and $46,493			2,575,293				2,468,511				2,873,502
Inventories			1,747,773				1,650,666				1,933,703
Deferred taxes			91,262				—				101,811
Prepaid expenses and other current assets			69,013				64,418				69,065
Total current assets			5,361,815				5,270,679				5,323,706
Plant and equipment at cost, less depreciation			3,014,341				2,979,200				2,876,081
Other assets
Goodwill			1,529,066				1,510,795				1,421,460
Intangibles, less amortization			116,731				121,089				83,709
Restricted cash			121,755				93,858				93,077
Prepaid pension cost			48,750				26,746				256,017
Other assets			237,247				214,252				231,005
Total other assets			2,053,549				1,966,740				2,085,268
Total assets		$	10,429,705			$	10,216,619			$	10,285,055
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,960,354			$	1,856,887			$	2,051,112
Accrued expenses			767,742				797,756				757,455
Accrued income taxes			345,420				323,983				584,608
Deferred taxes			—				162,365				—
Current maturities of long-term debt			8,743				9,163				5,269
Total current liabilities			3,082,259				3,150,154				3,398,444
Other liabilities
Long-term debt			2,468,783				2,467,486				1,974,053
Deferred taxes			616,142				526,377				717,587
Other long-term liabilities			548,163				622,900				689,745
Total other liabilities			3,633,088				3,616,763				3,381,385
Commitments and contingencies
Shareholders’ equity
Preferred stock, par value $1 per share
Authorized 1,500,000 shares, issued none			—				—				—
Common stock, par value $1 per share
Authorized 2,000,000,000 shares, issued 765,174,900 shares			765,175				765,175				765,175
Paid-in capital			764,902				760,352				727,558
Retained earnings			6,724,058				6,539,890				6,185,935
Accumulated other comprehensive loss			(233,932	)			(277,986	)			(98,308	)
Treasury stock at cost, 173,860,981, 175,148,403 and 164,083,709 shares			(4,305,845	)			(4,337,729	)			(4,075,134	)
Total shareholders’ equity			3,714,358				3,449,702				3,505,226
Total liabilities and shareholders’ equity		$	10,429,705			$	10,216,619			$	10,285,055

Note: The June 27, 2009 balance sheet has been derived from the audited financial statements at that date.

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
(In Thousands, Except for Share and Per Share Data)

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Sales		$	9,081,426			$	9,877,429
Cost of sales			7,334,067				7,990,873
Gross margin			1,747,359				1,886,556
Operating expenses			1,250,031				1,381,804
Operating income			497,328				504,752
Interest expense			33,800				26,410
Other income, net			(2,012	)			(2,813	)
Earnings before income taxes			465,540				481,155
Income taxes			139,335				204,341
Net earnings		$	326,205			$	276,814
Net earnings:
Basic earnings per share		$	0.55			$	0.46
Diluted earnings per share		$	0.55				0.46
Average shares outstanding			591,568,212				602,257,425
Diluted shares outstanding			591,983,474				605,707,175
Dividends declared per common share		$	0.24			$	0.22

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Net earnings		$	326,205			$	276,814
Other comprehensive income:
Foreign currency translation adjustment			37,082				(14,127	)
Items presented net of tax:
Amortization of cash flow hedge			107				107
Amortization of unrecognized prior service cost			676				231
Amortization of unrecognized actuarial losses (gains), net			6,166				2,706
Amortization of unrecognized transition obligation			23				23
Pension liability assumption			—				(18,480	)
Total other comprehensive income (loss)			44,054				(29,540	)
Comprehensive income		$	370,259			$	247,274

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
CONSOLIDATED CASH FLOWS (Unaudited)
(In Thousands)

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Cash flows from operating activities:
Net earnings		$	326,205			$	276,814
Adjustments to reconcile net earnings to cash provided by operating activities:
Share-based compensation expense			12,748				10,833
Depreciation and amortization			93,906				94,351
Deferred tax (benefit) provision			(207,546	)			182,824
Provision for losses on receivables			8,152				11,774
(Gain) on sale of assets			(157	)			(20	)
Additional investment in certain assets and liabilities, net of effect of businesses acquired:
(Increase) in receivables			(100,167	)			(165,659	)
(Increase) in inventories			(86,167	)			(100,650	)
(Increase) in prepaid expenses and other current assets			(4,242	)			(5,171	)
Increase in accounts payable			89,669				6,269
(Decrease) in accrued expenses			(33,896	)			(149,281	)
Increase (decrease) in accrued income taxes			56,113				(34,982	)
(Increase) in other assets			(22,083	)			(26,225	)
(Decrease) in other long-term liabilities and prepaid pension cost, net			(85,596	)			(34,507	)
Excess tax benefits from share-based compensation arrangements			(465	)			(3,000	)
Net cash provided by operating activities			46,474				63,370
Cash flows from investing activities:
Additions to plant and equipment			(109,405	)			(80,046	)
Proceeds from sales of plant and equipment			1,346				1,023
Acquisition of businesses, net of cash acquired			(8,334	)			(13,534	)
Purchases of short-term investments			(27,217	)			—
(Increase) in restricted cash			(27,897	)			(490	)
Net cash used for investing activities			(171,507	)			(93,047	)
Cash flows from financing activities:
Other debt borrowings			2,417				1,153
Other debt repayments			(2,593	)			(1,581	)
Common stock reissued from treasury for share-based compensation awards			21,907				73,535
Treasury stock purchases			—				(118,389	)
Dividends paid			(141,729	)			(132,383	)
Excess tax benefits from share-based compensation arrangements			465				3,000
Net cash used for financing activities			(119,533	)			(174,665	)
Effect of exchange rates on cash			8,518				(1,585	)
Net (decrease) in cash and cash equivalents			(236,048	)			(205,927	)
Cash and cash equivalents at beginning of period			1,087,084				551,552
Cash and cash equivalents at end of period		$	851,036			$	345,625
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	59,509			$	44,446
Income taxes			334,833				42,425

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries

NOTES TO 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, with the exception of the June 27, 2009 consolidated balance sheet which was taken from the audited financial statements included in the company’s Fiscal 2009 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows 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 the company’s Fiscal 2009 Annual Report on Form 10-K.

        A review of the financial information herein has been made by Ernst & Young LLP, independent auditors, in accordance with established professional standards and procedures for such a review. A report from Ernst & Young LLP concerning their review is included as Exhibit 15.1 to this Form 10-Q.

2. CHANGES IN ACCOUNTING

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

     In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. EITF 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”, which was subsequently codified within Accounting Standards Codification (ASC) 260, “Earnings Per Share.” This standard addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. This standard is effective for Sysco beginning in fiscal 2010 and interim periods within that year. All prior-period earnings per share data presented in filings subsequent to adoption must be adjusted retrospectively to conform with the provisions of this standard. Early application of this standard was not permitted. The adoption of this standard did not have a material impact on the company’s consolidated financial statements.

Interim Disclosures about Fair Value of Financial Instruments

     In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which was subsequently codified within ASC 825, “Financial Instruments.” This standard amended previous guidance to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies. Prior disclosure requirements only applied to annual financial statements. This standard is effective for interim reporting periods ending after June 15, 2009, which is the first quarter of fiscal 2010 for Sysco. The company has included the required disclosures for this standard in Note 4, “Fair Value Measurements”.

3. NEW ACCOUNTING STANDARDS

Measuring Liabilities at Fair Value

     In August 2009, the FASB issued Accounting Standards Update 2009-05, “Measuring Liabilities at Fair Value”. This update provides additional guidance, including illustrative examples, clarifying the measurement of liabilities at fair value. This update is effective for the first reporting period beginning after its issuance. The company will adopt the provisions of this update in the second quarter of fiscal 2010 and is currently evaluating the impact the adoption of these provisions will have on its consolidated financial statements.

4. FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price). The accounting guidance includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The three levels of the fair value hierarchy are as follows:

•

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;

•

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and

•

Level 3 – Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

     Sysco’s policy is to invest in only high-quality investments. Cash equivalents primarily include time deposits, certificates of deposit, commercial paper and all highly liquid instruments with original maturities of three months or less. Short-term investments consist of commercial paper with original maturities of greater than three months but less than one year. These investments are considered available-for-sale and are recorded at fair value. As of September 26, 2009, the difference between the fair value of the short term investments and the original cost was not material. Restricted cash consists of investments in high-quality money market funds.

     The following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

•

Time deposits, certificates of deposit and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value.

•

Commercial paper included in short-term investments is valued using broker quotes that utilize observable market inputs.

•

Money market funds are valued at the closing price reported on the exchange market.

•

The interest rate swap agreement is valued using a swap valuation model that utilizes observable market inputs.

     The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of September 26, 2009, June 27, 2009 and September 27, 2008:

		Assets and Liabilities Measured at Fair Value as of September 26, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	511,913,000			$	124,057,000			$	—			$	635,970,000
Short-term investments			—				27,438,000				—				27,438,000
Restricted cash			121,755,000				—				—				121,755,000
Total assets at fair value		$	633,668,000			$	151,495,000			$	—			$	785,163,000
Liabilities:
Other long-term liabilities
Interest rate swap agreement		$	—			$	446,000			$	—			$	446,000

		Assets Measured at Fair Value as of June 27, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	721,710,000			$	117,844,000			$	—			$	839,554,000
Restricted cash			93,858,000				—				—				93,858,000
Total assets at fair value		$	815,568,000			$	117,844,000			$	—			$	933,412,000
		Assets Measured at Fair Value as of September 27, 2008
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	—			$	144,108,000			$	—			$	144,108,000
Restricted cash			93,077,000				—				—				93,077,000
Total assets at fair value		$	93,077,000			$	144,108,000			$	—			$	237,185,000

     The fair value of Sysco’s total long-term debt is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the company for debt of the same remaining maturities. The fair value of total long-term debt approximated $2,654,547,000 and $2,548,861,000 as of September 26, 2009 and June 27, 2009, respectively. The carrying value of total long-term debt was $2,477,526,000 and $2,476,649,000 as of September 26, 2009 and June 27, 2009, respectively.

5. DERIVATIVE FINANCIAL INSTRUMENTS

     Sysco manages its debt portfolio by targeting an overall desired position of fixed and floating rates and may employ interest rate swaps from time to time to achieve this goal. The company does not use derivative financial instruments for trading or speculative purposes.

     During the first quarter of fiscal 2010, the company entered into an interest rate swap agreement that effectively converted $200,000,000 of fixed rate debt maturing in fiscal 2014 to floating rate debt with the goal of reducing overall borrowing cost. This transaction was designated as a fair value hedge since the swap hedges against the change in fair value of fixed rate debt resulting from changes in interest rates.

     The location and the fair value of derivative instruments in the consolidated balance sheet as of September 26, 2009 are as follows:

Asset Derivatives

Liability Derivatives

Balance Sheet

Fair

Balance Sheet

Fair

Location

Value

Location

Value

Interest rate swap agreement

N/A

N/A

Other long-term liabilities

$

446,000

     The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week period ended September 26, 2009 presented on a pre-tax basis are as follows:

		Location of (Gain)				Amount of (Gain) or
		or Loss Recognized				Loss Recognized in
		in Income				Income
Fair Value Hedge Relationships:
Interest rate swap agreement		Interest expense				$	225,000
Hedged item — debt		Interest expense					(92,000	)

     Hedge ineffectiveness represents the difference between the change in the fair value of the derivative instrument and the change in fair value of the fixed-rate debt attributable to changes in the benchmark interest rate. Hedge ineffectiveness is recorded directly in earnings within Interest expense and was immaterial for the 13-week period ended September 26, 2009. The interest rate swap does not contain a credit-risk-related contingent feature.

6. DEBT

     As of September 26, 2009, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $88,000,000, of which none was outstanding.

     The company’s Irish Subsidiary, Pallas Foods Limited, has a €20,000,000 (Euro) committed facility for unsecured borrowings for working capital, which expires March 31, 2010. There were no borrowings outstanding under this facility as of September 26, 2009.

     As of September 26, 2009, there were no commercial paper issuances outstanding. During the 13-week period ended September 26, 2009, there were no commercial paper issuances or short-term bank borrowings.

7. EMPLOYEE BENEFIT PLANS

     The components of net company-sponsored benefit cost for the 13-week periods presented are as follows:

		Pension Benefits								Other Postretirement Plans
		September 26, 2009				September 27, 2008				September 26, 2009				September 27, 2008
Service cost		$	16,663,000			$	20,131,000			$	82,000			$	122,000
Interest cost			29,899,000				28,051,000				140,000				156,000
Expected return on plan assets			(26,215,000	)			(31,855,000	)			—				—
Amortization of prior service cost			1,051,000				343,000				47,000				32,000
Recognized net actuarial loss (gain)			10,132,000				4,432,000				(123,000	)			(39,000	)
Amortization of transition obligation			—				—				38,000				38,000
Net periodic benefit cost		$	31,530,000			$	21,102,000			$	184,000			$	309,000

     Sysco’s contributions to its company-sponsored defined benefit plans were $38,808,000 and $83,881,000 during the 13-week periods ended September 26, 2009 and September 27, 2008, respectively.

     Sysco’s minimum required contribution to its company-sponsored qualified pension plan (Retirement Plan) for the calendar 2009 plan year is estimated at $95,000,000 to meet ERISA minimum funding requirements. The company will be required to pay quarterly contributions for the calendar 2010 plan year, the first installment of which must be made in fiscal 2010. The company anticipates it will make $140,000,000 of contributions to the Retirement Plan in fiscal 2010. The company’s contributions to the Supplemental Executive Retirement Plan (SERP) and other post-retirement plans are made in the amounts needed to fund current year benefit payments. The estimated fiscal 2010 contributions to fund benefit payments for the SERP and other post-retirement plans are $19,445,000 and $372,000, respectively.

8. EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share:

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Numerator:
Net earnings		$	326,205,000			$	276,814,000
Denominator:
Weighted-average basic shares outstanding			591,568,212				602,257,425
Dilutive effect of employee and director stock options			415,262				3,449,750
Weighted-average diluted shares outstanding			591,983,474				605,707,175
Basic earnings per share:		$	0.55			$	0.46
Diluted earnings per share:		$	0.55			$	0.46

     The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 66,000,000 and 35,000,000 for the first quarter of fiscal 2010 and 2009, respectively.

9. SHARE-BASED COMPENSATION

     Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock incentive plans, the Employees’ Stock Purchase Plan, and various non-employee director plans. Sysco also previously provided share-based compensation under its Management Incentive Plans.

Stock Incentive Plans

     There were no share-based award grants to employees or non-employee directors during the first quarter of fiscal 2010.

Employees’ Stock Purchase Plan

     Plan participants purchased 540,517 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first quarter of fiscal 2010.

     The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $3.37 during the first quarter of fiscal 2010. The fair value of the stock purchase rights was calculated as the difference between the stock price 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 $12,748,000 for the first quarter of fiscal 2010.

     As of September 26, 2009, there was $53,986,000 of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.92 years.

10. INCOME TAXES

Internal Revenue Service Settlement

     Sysco’s affiliate, Baugh Supply Chain Cooperative (BSCC), is a cooperative taxed under subchapter T of the United States Internal Revenue Code the operation of which has resulted in a deferral of tax payments. The IRS, in connection with its audits of the company’s 2003 through 2006 federal income tax returns, proposed adjustments that would have accelerated amounts that the company had previously deferred and would have resulted in the payment of interest on those deferred amounts. Sysco reached a settlement with the Internal Revenue Service (IRS) on August 21, 2009 to cease paying U.S. federal taxes related to BSCC on a deferred basis, pay the amounts currently recorded within deferred taxes related to BSCC over a three year period and make a one-time payment of $41,000,000, of which approximately $39,000,000 is non-deductible. The settlement addresses the BSCC deferred tax issue as it relates to the IRS audit of the company’s 2003 through 2006 federal income tax returns, and settles the matter for all subsequent periods, including the 2007 and 2008 federal income tax returns already under audit. As a result of the settlement, the company will pay the amounts owed in the following schedule:

Amounts paid annually:
Fiscal 2010		$	528,000,000
Fiscal 2011			212,000,000
Fiscal 2012			212,000,000

     Of the amounts to be paid in fiscal 2010 included in the table above, $316,000,000 was paid in the first quarter of fiscal 2010 and the remaining payments will be paid in equal quarterly installments beginning in the second quarter of fiscal 2010. Amounts to be paid in fiscal 2011 and 2012 will be paid with Sysco’s quarterly tax payments. The company believes it has access to sufficient cash on hand, cash flow from operations and current access to capital to make payments on all of the amounts noted above. The company had previously accrued interest for a portion of the exposure pertaining to the IRS proposed adjustments and as a result of the settlement with the IRS, Sysco recorded an income tax benefit of approximately $29,000,000 in the first quarter of fiscal 2010.

Uncertain Tax Benefits

     As of September 26, 2009, the gross amount of unrecognized tax benefits was $92,287,000 and the gross amount of accrued interest liabilities was $37,121,000. Accrued interest decreased from the amount accrued as of June 27, 2009 of $146,998,000 due to the settlement with the IRS. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.

Effective Tax Rates

     The effective tax rate of 29.93% for the first quarter of fiscal 2010 was favorably impacted by three items. First, as discussed above, the company recorded an income tax benefit of approximately $29,000,000 resulting from the one-time reversal of previously accrued interest related to the settlement with the IRS. Second, the carrying values of the company’s corporate-owned life insurance policies are adjusted to their cash surrender values. The gain of $21,152,000 recorded to adjust the carrying value of corporate-owned life insurance to their cash surrender values in the first quarter of fiscal 2010 is non-taxable for income tax purposes and had the impact of decreasing the effective tax rate for the period. Third, the company recorded a tax benefit of approximately $5,000,000 for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.

     The effective tax rate of 42.47% for the first quarter of fiscal 2009 was unfavorably impacted by two items. First, the company recorded a tax adjustment of approximately $11,000,000 to accrue for a previously unidentified tax contingency arising from a tax audit. Second, the loss of $22,908,000 recorded to adjust the carrying value of corporate-owned life insurance to their cash surrender values in the first quarter of fiscal 2009 was non-deductible for income tax purposes and had the impact of increasing the effective tax rate for the period.

Other

     The determination of the company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The company’s provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, as well as foreign, jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

11. ACQUISITIONS

     During the first quarter of fiscal 2010, in the aggregate, the company paid cash of $8,334,000 for acquisitions made during fiscal 2010 and for contingent consideration related to operations acquired in previous fiscal years. The fiscal 2010 acquisitions were immaterial to the consolidated financial statements.

     Certain acquisitions involve contingent consideration typically payable over periods up to four years only in the event that certain operating results are attained or certain outstanding contingencies are resolved. As of September 26, 2009, aggregate contingent consideration amounts outstanding relating to acquisitions completed prior to fiscal 2010 included $73,361,000 in cash which, if earned, could result in the recording of additional goodwill.

12. COMMITMENTS AND CONTINGENCIES

     Sysco is engaged in various legal proceedings which have arisen but have not been fully adjudicated. These proceedings, in the opinion of management, will not have a material adverse effect upon the consolidated financial position or results of operations of the company when ultimately concluded.

Multi-Employer Pension Plans

     Sysco contributes to several multi-employer defined benefit pension plans based on obligations arising under collective bargaining agreements covering union-represented employees. Sysco does not directly manage these multi-employer plans, which are generally managed by boards of trustees, half of whom are appointed by the unions and the other half by other employers contributing to the plan. Based upon the information available from plan administrators, management believes that several of these multi-employer plans are underfunded. In addition, pension related legislation requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, Sysco expects its contributions to these plans to increase in the future.

     Under current law regarding multi-employer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multi-employer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multi-employer plan’s unfunded vested liabilities. Based on the information available from plan administrators, Sysco estimates its share of withdrawal liability on most of the multi-employer plans in which it participates could have been as much as $107,000,000 as of September 26, 2009 based on a voluntary withdrawal. However, because the company is not provided the information by the plan administrators on a timely basis and the company expects that many multi-employer pension plans’ assets have declined due to calendar 2008 stock market performance, management believes its current share of the withdrawal liability could be greater. In addition, if a multi-employer defined benefit plan fails to satisfy certain minimum funding requirements, the IRS may impose a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency for those employers contributing to the fund. As of September 26, 2009, Sysco had approximately $17,000,000 in liabilities recorded in total related to certain multi-employer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred, all of which are expected to be paid during fiscal 2010.

Fuel Commitments

     From time to time, Sysco may enter into forward purchase commitments for a portion of its projected diesel fuel requirements. As of September 26, 2009, outstanding forward diesel fuel purchase commitments totaled approximately $42,000,000 at a fixed price through June 2010.

13. BUSINESS SEGMENT INFORMATION

     The company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise. Broadline operating companies distribute a full line of food products and a wide variety of non-food products to their customers. SYGMA operating companies distribute a full line of food products and a wide variety of non-food products to certain chain restaurant customer locations. “Other” financial information is attributable to the company’s other operating segments, including the company’s specialty produce, custom-cut meat and lodging industry segments and a company that distributes to international customers.

     The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Intersegment sales represent specialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include certain centrally incurred costs for shared services that are charged to our segments. These centrally incurred costs are charged based upon the relative level of service used by each operating company consistent with how Sysco’s management views the performance of its operating segments. Management evaluates the performance of each of our operating segments based on its respective operating income results, which include the allocation of certain centrally incurred costs.

     Included in corporate expenses, among other items, are:

•

Gains and losses recognized to adjust corporate-owned life insurance policies to their cash surrender values;

•

Share-based compensation expense related to stock option grants, restricted stock grants, issuances of stock pursuant to the Employees’ Stock Purchase Plan and restricted stock grants to non-employee directors; and

•

Corporate-level depreciation and amortization expense.

     The following table sets forth certain financial information for Sysco’s business segments:

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Sales (in thousands):
Broadline		$	7,308,706			$	7,872,567
SYGMA			1,150,861				1,228,235
Other			742,877				895,740
Intersegment sales			(121,018	)			(119,113	)
Total		$	9,081,426			$	9,877,429

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Operating income (in thousands):
Broadline		$	509,024			$	523,410
SYGMA			5,838				4,621
Other			25,814				28,764
Total segments			540,676				556,795
Corporate expenses			(43,348	)			(52,043	)
Total operating income			497,328				504,752
Interest expense			33,800				26,410
Other income, net			(2,012	)			(2,813	)
Earnings before income taxes		$	465,540			$	481,155

		September 26, 2009				June 27, 2009				September 27, 2008
Assets (in thousands):
Broadline		$	6,043,482			$	5,706,431			$	6,235,158
SYGMA			347,854				366,539				402,809
Other			904,950				914,764				1,005,817
Total segments			7,296,286				6,987,734				7,643,784
Corporate			3,133,419				3,228,885				2,641,271
Total		$	10,429,705			$	10,216,619			$	10,285,055

14. SUPPLEMENTAL GUARANTOR INFORMATION

     Sysco International, Co. is an unlimited liability company organized under the laws of the Province of Nova Scotia, Canada and is a wholly-owned subsidiary of Sysco. In May 2002, Sysco International, Co. issued, in a private offering, $200,000,000 of 6.10% notes due in 2012. These notes are fully and unconditionally guaranteed by Sysco.

     The following condensed consolidating financial statements present separately the financial position, results of operations and cash flows of the parent guarantor (Sysco), the subsidiary issuer (Sysco International) and all other non-guarantor subsidiaries of Sysco (Other Non-Guarantor Subsidiaries) on a combined basis with eliminating entries.

		Condensed Consolidating Balance Sheet
		September 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Current assets		$	678,541			$	24			$	4,683,250			$	—			$	5,361,815
Investment in subsidiaries			13,735,447				432,460				149,296				(14,317,203	)			—
Plant and equipment, net			277,217				—				2,737,124				—				3,014,341
Other assets			422,235				805				1,630,509				—				2,053,549
Total assets		$	15,113,440			$	433,289			$	9,200,179			$	(14,317,203	)		$	10,429,705
Current liabilities		$	363,660			$	4,056			$	2,714,543			$	—			$	3,082,259
Intercompany payables (receivables)			8,527,393				69,303				(8,596,696	)			—				—
Long-term debt			2,219,338				199,832				49,613				—				2,468,783
Other liabilities			405,335				—				758,970				—				1,164,305
Shareholders’ equity			3,597,714				160,098				14,273,749				(14,317,203	)			3,714,358
Total liabilities and shareholders’ equity		$	15,113,440			$	433,289			$	9,200,179			$	(14,317,203	)		$	10,429,705

		Condensed Consolidating Balance Sheet
		June 27, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Current assets		$	937,335			$	36			$	4,333,308			$	—			$	5,270,679
Investment in subsidiaries			13,293,437				403,363				165,197				(13,861,997	)			—
Plant and equipment, net			264,657				—				2,714,543				—				2,979,200
Other assets			421,371				830				1,544,539				—				1,966,740
Total assets		$	14,916,800			$	404,229			$	8,757,587			$	(13,861,997	)		$	10,216,619
Current liabilities		$	380,195			$	954			$	2,769,005			$	—			$	3,150,154
Intercompany payables (receivables)			8,533,159				54,785				(8,587,944	)			—				—
Long-term debt			2,219,655				199,816				48,015				—				2,467,486
Other liabilities			413,651				—				735,626				—				1,149,277
Shareholders’ equity			3,370,140				148,674				13,792,885				(13,861,997	)			3,449,702
Total liabilities and shareholders’ equity		$	14,916,800			$	404,229			$	8,757,587			$	(13,861,997	)		$	10,216,619

		Condensed Consolidating Balance Sheet
		September 27, 2008
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Current assets		$	259,666			$	—			$	5,064,040			$	—			$	5,323,706
Investment in subsidiaries			14,578,721				403,790				130,665				(15,113,176	)		$	—
Plant and equipment, net			208,990				—				2,667,091				—			$	2,876,081
Other assets			589,947				1,159				1,494,162				—			$	2,085,268
Total assets		$	15,637,324			$	404,949			$	9,355,958			$	(15,113,176	)		$	10,285,055
Current liabilities		$	333,212			$	4,051			$	3,061,181			$	—			$	3,398,444
Intercompany payables (receivables)			9,721,387				91,528				(9,812,915	)			—			$	—
Long-term debt			1,728,784				199,768				45,501				—			$	1,974,053
Other liabilities			498,603				—				908,729				—			$	1,407,332
Shareholders’ equity			3,355,338				109,602				15,153,462				(15,113,176	)		$	3,505,226
Total liabilities and shareholders’ equity		$	15,637,324			$	404,949			$	9,355,958			$	(15,113,176	)		$	10,285,055

		Condensed Consolidating Results of Operations
		For the 13-Week Period Ended September 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Sales		$	—			$	—			$	9,081,426			$	—			$	9,081,426
Cost of sales			—				—				7,334,067				—				7,334,067
Gross margin			—				—				1,747,359				—				1,747,359
Operating expenses			45,062				34				1,204,935				—				1,250,031
Operating income			(45,062	)			(34	)			542,424				—				497,328
Interest expense (income)			120,564				2,490				(89,254	)			—				33,800
Other income, net			(354	)			—				(1,658	)			—				(2,012	)
Earnings (losses) before income taxes			(165,272	)			(2,524	)			633,336				—				465,540
Income tax (benefit) provision			(49,465	)			(755	)			189,555				—				139,335
Equity in earnings of subsidiaries			442,012				13,193				—				(455,205	)			—
Net earnings		$	326,205			$	11,424			$	443,781			$	(455,205	)		$	326,205

		Condensed Consolidating Results of Operations
		For the 13-Week Period Ended September 27, 2008
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Sales		$	—			$	—			$	9,877,429			$	—			$	9,877,429
Cost of sales			—				—				7,990,873				—				7,990,873
Gross margin			—				—				1,886,556				—				1,886,556
Operating expenses			49,815				33				1,331,956				—				1,381,804
Operating income			(49,815	)			(33	)			554,600				—				504,752
Interest expense (income)			124,320				2,520				(100,430	)			—				26,410
Other income, net			(1,362	)			—				(1,451	)			—				(2,813	)
Earnings (losses) before income taxes			(172,773	)			(2,553	)			656,481				—				481,155
Income tax (benefit) provision			(73,375	)			(1,084	)			278,800				—				204,341
Equity in earnings of subsidiaries			376,212				12,509				—				(388,721	)			—
Net earnings		$	276,814			$	11,040			$	377,681			$	(388,721	)		$	276,814

		Condensed Consolidating Cash Flows
		For the 13-Week Period Ended September 26, 2009
										Other
						Sysco				Non-Guarantor				Consolidated
		Sysco				International				Subsidiaries				Totals
						(In thousands)
Net cash provided by (used for):
Operating activities		$	(92,458	)		$	14,579			$	124,353			$	46,474
Investing activities			(49,771	)			—				(121,736	)			(171,507	)
Financing activities			(120,591	)			—				1,058				(119,533	)
Effect of exchange rate on cash			—				—				8,518				8,518
Intercompany activity			(356	)			(14,579	)			14,935				—
Net (decrease) increase in cash			(263,176	)			—				27,128				(236,048	)
Cash at the beginning of the period			899,195				—				187,889				1,087,084
Cash at the end of the period		$	636,019			$	—			$	215,017			$	851,036

		Condensed Consolidating Cash Flows
		For the 13-Week Period Ended September 27, 2008
										Other
						Sysco				Non-Guarantor				Consolidated
		Sysco				International				Subsidiaries				Totals
						(In thousands)
Net cash provided by (used for):
Operating activities		$	(122,380	)		$	14,208			$	171,542			$	63,370
Investing activities			(13,777	)			—				(79,270	)			(93,047	)
Financing activities			(173,853	)			16				(828	)			(174,665	)
Effect of exchange rate on cash			—				—				(1,585	)			(1,585	)
Intercompany activity			55,714				(14,224	)			(41,490	)			—
Net (decrease) increase in cash			(254,296	)			—				48,369				(205,927	)
Cash at the beginning of the period			486,646				—				64,906				551,552
Cash at the end of the period		$	232,350			$	—			$	113,275			$	345,625

15. SUBSEQUENT EVENT

     Sysco has evaluated subsequent events through the date these financial statements were issued, November 3, 2009. In October 2009, the company entered into an interest rate swap agreement that effectively converted $250,000,000 of fixed rate debt maturing in fiscal 2013 to floating rate debt with the goal of reducing overall borrowing cost. This transaction was designated as a fair value hedge since the swap hedges against the change in fair value of fixed rate debt resulting from changes in interest rates.

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 June 27, 2009, and 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 June 27, 2009.

Highlights

     Weak economic conditions in the United States and Canada combined with lower consumer confidence contributed to a difficult business environment in the first quarter of fiscal 2010. These factors negatively impacted financial results in the first quarter of fiscal 2010. We also settled an outstanding tax matter with the Internal Revenue Service (IRS) and recognized gains on corporate-owned life insurance, both of which positively impacted net earnings and earnings per share.

•		Sales decreased 8.1% in the first quarter of fiscal 2010 from the comparable prior year period primarily due to weak economic conditions and the resulting impact on consumer spending and deflation. Deflation, as measured by changes in product costs, was an estimated 3.4% during the first quarter of fiscal 2010.
•		Operating income decreased to $497,328,000, or 5.5% of sales, a 1.5% decrease from the comparable prior year period. Operating income for the first quarter of fiscal 2010 was negatively impacted primarily by the decline in sales. Operating expenses declined 9.5% primarily through operating efficiencies, such as reduced payroll expense related to reduced headcount, lower incentive compensation and gains recorded on the adjustment of the carrying value of corporate-owned life insurance policies to their cash surrender values. Our operating companies have continued to manage their businesses effectively in a difficult environment, which is demonstrated by the fact that the decrease in operating income, excluding the gains on the insurance policies, was less than the decrease in sales.
•		Net earnings increased to $326,205,000, or 17.8% from the comparable prior year period primarily due to a decrease in the effective tax rate. The effective tax rate for the first quarter of fiscal 2010 was favorably impacted by the one-time reversal of interest accruals for tax contingencies related to a settlement with the IRS, the non-taxable gains recorded on corporate-owned life insurance and the reversal of valuation allowances on state net operating loss carryforwards.
•		Basic and diluted earnings per share in the first quarter of fiscal 2010 were both $0.55, an increase of 19.6% over the comparable prior year period. Both basic and diluted earnings per share were favorably impacted by $0.09 per share due to the one-time reversal of interest accruals for tax contingencies and the gains recorded on the adjustment of the carrying value of corporate-owned life insurance policies to their cash surrender values.

Overview

     Sysco distributes food and related products to restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Our primary operations are located throughout the United States and Canada and include broadline companies, specialty produce companies, custom-cut meat operations, hotel supply operations, SYGMA (our chain restaurant distribution subsidiary) and a company that distributes to international customers.

     We consider our primary market to be the foodservice market in the United States and Canada and estimate that we serve about 17% of this approximately $215 billion annual market. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 48% of the total dollars spent on food purchases made at the consumer level in the United States. This share grew from about 37% in 1972 to nearly 50% in 1998 and did not change materially until 2008 when it declined to the current level of 48%.

     General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-away-from-home and, in turn, can impact our customers and our sales. We believe the current general economic conditions, including pressure on consumer disposable income, are contributing to a decline in the foodservice market. Historically, we have grown at a faster rate than the overall industry and have grown our market share in this fragmented industry.

Strategy

     We intend to continue to expand our market share and grow earnings through strategies which include growing our sales, lowering procurement costs, achieving productivity gains and enhancing our technology platform. These strategies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 27, 2009.

     We will continue to use our strategies to leverage our market leadership position to continuously improve how we buy, handle and market products for our customers. Our primary focus is on growing and optimizing the core foodservice distribution business in North America; however, we will continue to explore and identify opportunities to grow our global capabilities in other markets. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses.

ERP Project

     We previously announced that we had commenced the design of an enterprise-wide project to implement an integrated software system to support a majority of our business processes and further streamline our operations. These systems are commonly referred to as Enterprise Resource Planning (ERP) systems. We have largely completed the design phase of this project and anticipate making more specific decisions by the end of calendar 2009 with respect to the design of the system and the timing of its implementation. In the interim, we are beginning the preliminary stages of the configuration phase to provide more detailed and specific information upon which to base our decisions.

     ERP implementations are complex and time-consuming projects that involve substantial investments in system software and implementation activities over a multi-year timeframe. As is the case in most ERP implementations, we expect that the implementation of our ERP system will require transformation of business processes in order to realize the full benefits of the project. Although we expect the investment in the ERP project to provide meaningful benefits to the company over the long-term, it is likely that the costs will exceed the benefits during the early stages of implementation. We will communicate specific information regarding the impact of the project on our fiscal 2010 earnings and liquidity in December after final decisions regarding the implementation and timing of the project are made.

Results of Operations

     The following table sets forth the components of the Results of Operations expressed as a percentage of sales for the periods indicated:

		13-Week Period Ended
		September 26, 2009				September 27, 2008
Sales			100.0	%			100.0	%
Cost of sales			80.8				80.9
Gross margin			19.2				19.1
Operating expenses			13.7				14.0
Operating income			5.5				5.1
Interest expense			0.4				0.3
Other income, net			(0.0	)			(0.0	)
Earnings before income taxes			5.1				4.8
Income taxes			1.5				2.0
Net earnings			3.6	%			2.8	%

     The following table sets forth the change in the components of the Results of Operations expressed as a percentage increase or decrease over the comparable period in the prior year:

		13-Week Period
Sales			(8.1	)%
Cost of sales			(8.2	)
Gross margin			(7.4	)
Operating expenses			(9.5	)
Operating income			(1.5	)
Interest expense			28.0
Other income, net			(28.5	)
Earnings before income taxes			(3.2	)
Income taxes			(31.8	)
Net earnings			17.8	%
Basic earnings per share			19.6	%
Diluted earnings per share			19.6
Average shares outstanding			(1.8	)
Diluted shares outstanding			(2.3	)

Sales

     Sales were 8.1% lower in the first quarter of fiscal 2010 than the comparable period of the prior year. Product cost deflation and the resulting decrease in selling prices had a significant impact on sales levels in the first quarter of fiscal 2010. Estimated changes in product costs, an internal measure of deflation or inflation, were estimated as deflation of 3.4% during the first quarter of fiscal 2010, as compared to inflation of 8.3% during the first quarter of fiscal 2009. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.5% compared to the first quarter of fiscal 2009. Sales from acquisitions that occurred within the last 12 months offset the rate of sales decline by 0.6% for the first quarter of fiscal 2010.

     Our sequential quarterly sales trend has demonstrated a continuing decline throughout fiscal 2008, fiscal 2009 and into fiscal 2010 from a positive 8.5% in the first quarter of fiscal 2008 to a negative 8.1% in the first quarter of fiscal 2010. We believe the weak economic conditions, which are placing pressure on consumer disposable income, are contributing to a decline in volume in the foodservice market and, in turn, have contributed to a reduction in our sales. A weak economic environment and continued deflation will make it challenging to grow sales in fiscal 2010; however, if underlying economic conditions improve during fiscal 2010, we believe our trend of sequential quarterly sales decline may improve as well. In the early part of the second quarter of fiscal 2010, the rate of sales volume decline for our Broadline segment has slowed from the rate experienced in the first quarter.

     We believe that our continued focus on the use of business reviews and business development activities, commitment to quality, investment in customer contact personnel and the efforts of our marketing associates and sales support personnel are key drivers to strengthening customer relationships and growing sales with new and existing customers. We also believe these activities help our customers in this difficult economic environment.

Operating Income

     Cost of sales primarily includes product costs, net of vendor consideration and in-bound freight. Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities.

     Operating income decreased 1.5% in the first quarter of fiscal 2010 from the first quarter of fiscal 2009, and as a percentage of sales increased to 5.5%. This increase in operating income as a percentage of sales was primarily due to decreased operating expenses. Gross margin dollars decreased 7.4% in the first quarter of fiscal 2010 over the first quarter of fiscal 2009, while operating expenses decreased 9.5% in the first quarter of fiscal 2010.

     Gross margin dollars declined primarily due to lower sales, which reflected product cost deflation in the first quarter of fiscal 2010 as compared to product cost inflation in the first quarter fiscal 2009. We may be negatively impacted by prolonged periods of product cost deflation because we make a significant portion of our sales at prices that are based on the cost of products we sell plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of product cost deflation, even though our gross profit percentage may remain relatively constant. Gross margin dollars were also impacted by lower fuel surcharges. Fuel surcharges were approximately $29,000,000 lower in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. We expect fuel surcharge revenue to be up to $25,000,000 lower in the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009; however, assuming that fuel prices do not greatly rise above recent levels during the remaining portion of fiscal 2010, we expect fuel surcharges in the last half of fiscal 2010 to be more closely comparable to those in the corresponding period in the prior year.

     Our operating expenses for the first quarter of fiscal 2010 were lower than in the comparable prior year period due to operating efficiencies, such as reduced payroll expense related to reduced headcount, and lower incentive compensation. In addition, we recorded gains on the adjustment of the carrying value of corporate-owned life insurance policies to their cash surrender values and had lower fuel costs. Partially offsetting these expense reductions was an increase in pension expense.

     Pay-related expense decreased by $70,004,000 in the first quarter of fiscal 2010 from the comparable prior year period. The reduction was primarily due to reduced headcount, as well as lower incentive compensation. Headcount declines occurred due to both productivity improvements and workforce reductions commensurate with lower sales.

     We adjust the carrying values of our corporate-owned life insurance policies to their cash surrender values on an ongoing basis. The cash surrender values of these policies are largely based on the values of underlying investments, which include publicly traded securities. As a result, the cash surrender values of these policies will fluctuate with changes in the market value of such securities. The changes in the financial markets resulted in gains for these policies of $21,152,000 in the first quarter of fiscal 2010 compared to losses of $22,908,000 in the first quarter of fiscal 2009. The performance of the financial markets will continue to influence the cash surrender values of our corporate-owned life insurance policies, which could cause volatility in operating income, net earnings and earnings per share.

     Sysco’s fuel costs decreased by $26,570,000 in the first quarter of fiscal 2010 from the first quarter of fiscal 2009 primarily due to decreased diesel prices. Sysco’s costs per gallon decreased 28.2% in the first quarter of fiscal 2010 over the first quarter of fiscal 2009. Sysco’s activities to manage fuel costs include reducing miles driven by our trucks through improved routing techniques, improving fleet utilization by adjusting idling time and maximum speeds and using fuel surcharges.

     We periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements. In the first quarter of fiscal 2010, our forward fuel purchase commitments resulted in an estimated $11,000,000 of additional fuel costs as the fixed price contracts were higher than market prices for the contracted volumes for the first two months of the quarter. As of September 26, 2009, we had forward diesel fuel commitments totaling approximately $42,000,000 through June 2010. These contracts will lock in the price of approximately 30% to 35% of our fuel purchase needs for the remainder of fiscal 2010. These outstanding contracts were entered into at the prevailing rates in March, April and July 2009 and thus the fixed price on these contracts is slightly lower than the current market price for diesel. We expect fuel costs to be significantly lower in the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009; however, assuming that fuel prices do not greatly rise above recent levels during the remaining portion of fiscal 2010, we expect fuel costs in the last half of fiscal 2010 to be more closely comparable to those in the corresponding period in the prior year.

     Net company-sponsored pension costs in the first quarter of fiscal 2010 were $10,428,000 higher than in the comparable prior year period, due primarily to lower returns on assets of our company-sponsored qualified pension plan (Retirement Plan) during fiscal 2009, partially offset by a increase in the discount rate used to calculate our projected benefit obligation and related pension expense for fiscal 2010.

Net Earnings

     Net earnings increased 17.8% in the first quarter of fiscal 2010 from the comparable period of the prior year due primarily to the impact of changes in income taxes discussed below, as well as the factors discussed above.

     The effective tax rate of 29.93% for the first quarter of fiscal 2010 was favorably impacted by three items. First, the company recorded a one-time income tax benefit of approximately $29,000,000 resulting from the reversal of previously accrued interest related to a settlement with the IRS (see “Other Considerations” for additional discussion). Second, the

carrying values of the company’s corporate-owned life insurance policies are adjusted to their cash surrender values. The gain of $21,152,000 recorded to adjust the carrying value of corporate-owned life insurance to their cash surrender values in the first quarter of fiscal 2010 is non-taxable for income tax purposes and had the impact of decreasing the effective tax rate for the period. Third, the company recorded a tax benefit of approximately $5,000,000 for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.

     The effective tax rate of 42.47% for the first quarter of fiscal 2009 was unfavorably impacted by two items. First, the company recorded a tax adjustment of approximately $11,000,000 to accrue for a previously unidentified tax contingency arising from a tax audit. Second, the losses of $22,908,000 recorded to adjust the carrying value of corporate-owned life insurance to their cash surrender values in the first quarter of fiscal 2009 was non-deductible for income tax purposes and had the impact of increasing the effective tax rate for the period.

Earnings Per Share

     Basic earnings per share and diluted earnings per share increased 19.6% in the first quarter of fiscal 2010 over the comparable period of the prior year. These increases were primarily the result of factors discussed above, partially offset by a net reduction in shares outstanding. Both basic and diluted earnings per share were favorably impacted by $0.09 per share due to the one-time reversal on interest accruals for tax contingencies and the gains recorded on the adjustment of the carrying value of corporate-owned life insurance policies to their cash surrender values. The net reduction in average shares outstanding was primarily due to share repurchases. The net reduction in diluted shares outstanding was primarily due to share repurchases and an increase in the number of anti-dilutive options excluded from the diluted shares calculation.

Segment Results

     We have aggregated our operating companies into a number of segments, of which only Broadline and SYGMA are reportable segments as defined in the accounting literature related to disclosures about segments of an enterprise. The accounting policies for the segments are the same as those disclosed by Sysco for our consolidated financial statements. Intersegment sales generally represent specialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include certain centrally incurred costs for shared services that are charged to our segments. These centrally incurred costs are charged based upon the relative level of service used by each operating company consistent with how management views the performance of its operating segments.

     Management evaluates the performance of each of our operating segments based on its respective operating income results, which include the allocation of certain centrally incurred costs. While a segment’s operating income may be impacted in the short term by increases or decreases in margins, expenses, or a combination thereof, over the long term each business segment is expected to increase its operating income at a greater rate than sales growth. This is consistent with our long-term goal of leveraging earnings growth at a greater rate than sales growth.

     Included in corporate expenses, among other items, are:

	•		Gains and losses recognized to adjust corporate-owned life insurance policies to their cash surrender values;
	•		Share-based compensation expense related to stock option grants, restricted stock grants, issuances of stock pursuant to the Employees’ Stock Purchase Plan and restricted stock grants to non-employee directors; and
	•		Corporate-level depreciation and amortization expense.

     The following table sets forth the operating income of each of our reportable segments and the other segment expressed as a percentage of each segment’s sales for each period reported and should be read in conjunction with Business Segment Information in Note 13:

		Operating Income as a
		Percentage of Sales
		13-Week Period
		September 26, 2009				September 27, 2008
Broadline			7.0	%			6.7	%
SYGMA			0.5				0.4
Other			3.5				3.2

     The following table sets forth the change in the selected financial data of each of our reportable segments and the other segment expressed as a percentage increase or decrease over the comparable period in the prior year and should be read in conjunction with Business Segment Information in Note 13:

		13-Week Period
						Operating
		Sales				Income
Broadline			(7.2	)%			(2.7	)%
SYGMA			(6.3	)			26.3
Other			(17.1	)			(10.3	)

     The following table sets forth sales and operating income of each of our reportable segments, the other segment, and intersegment sales, expressed as a percentage of aggregate segment sales, including intersegment sales, and operating income, respectively. For purposes of this statistical table, operating income of our segments excludes corporate expenses and consolidated adjustments of $43,348,000 in the first quarter of fiscal 2010 and $52,043,000 in the first quarter of fiscal 2009 that are not charged to our segments. This information should be read in conjunction with Business Segment Information in Note 13:

		13-Week Period Ended
		September 26, 2009								September 27, 2008
						Segment Operating								Segment Operating
		Sales				Income				Sales				Income
Broadline			80.5	%			94.1	%			79.7	%			94.0	%
SYGMA			12.6				1.1				12.4				0.8
Other			8.2				4.8				9.1				5.2
Intersegment sales			(1.3	)			—				(1.2	)			—
Total			100.0	%			100.0	%			100.0	%			100.0	%