We believe we will continue to experience a difficult economic environment for the remainder of fiscal 2009 and therefore we expect that the sales trend experienced in the third quarter of fiscal 2009 will not improve in the fourth quarter of fiscal 2009, which may place corresponding pressure on our operating earnings. 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. 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 estimate that we serve about 16% of an approximately $231 billion annual market. This market includes i) the foodservice market in the United States and Canada and ii) the hotel amenity and hotel furniture and textile market in the United States, Canada, Europe and Asia. According to industry sources, the foodservice, or food-prepared-away-from-home, market represents approximately one-half of the total dollars spent on food purchases made at the consumer level. This share grew from about 37% in 1972 to about 50% in 1998 and has not changed materially since that time, based on the most recent information available to us. If general economic conditions continue to deteriorate, the share of food purchases related to food-prepared-away-from-home may decline based on reduced consumer spending.
General economic conditions and consumer confidence can affect the frequency of purchases and amounts spent by consumers for food-prepared-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. We intend to continue our efforts to expand our market share and grow earnings by focusing on sales growth, margin management, productivity gains and supply chain management. Strategic Business Initiatives
Sysco maintains strategic focus areas which aim to help us achieve our long-term vision of becoming the global leader of the efficient, multi-temperature food product value chain. The focus areas, which 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 28, 2008, are Sourcing and National Supply Chain, Integrated Delivery, Demand and Organizational Capabilities. These focus areas generally comprise the initiatives that are currently serving as the foundation of our efforts to ensure a sustainable future. Over time, several of these focus areas have been integrated into our operations. During fiscal 2009, as part of the Organizational Capabilities initiative, Sysco has commenced the design of an enterprise-wide project to implement an integrated software system to support the majority of our business processes. The objective of this initiative is to improve the efficiency and effectiveness of our operations.
We will continue to use our strategic business initiatives 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 also continue to explore and identify opportunities to grow our global capabilities and stay abreast of international acquisition opportunities.
As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses. In the early part of the fourth quarter, we announced our acquisition of Pallas Foods Limited (Pallas), a leading foodservice distributor in Ireland. Pallas operates its broadline distribution business from its base in Newcastle West supplemented by eight operating depots throughout Ireland.

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:

                                                        39-Week Period Ended                        13-Week Period Ended
                                                March 28, 2009        March 29, 2008        March 28, 2009        March 29, 2008

Sales                                                  100.0 %               100.0 %               100.0 %               100.0 %
Cost of sales                                           81.0                  81.0                  81.3                  81.0

Gross margin                                            19.0                  19.0                  18.7                  19.0
Operating expenses                                      14.2                  14.3                  14.1                  14.4

Operating income                                         4.8                   4.7                   4.6                   4.6
Interest expense                                         0.3                   0.3                   0.3                   0.3
Other income, net                                          -                  (0.1 )                (0.1 )                (0.1 )

Earnings before income taxes                             4.5                   4.5                   4.4                   4.4
Income taxes                                             1.8                   1.7                   1.8                   1.8

Net earnings                                             2.7 %                 2.8 %                 2.6 %                 2.6 %

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:

                                          39-Week Period      13-Week Period

          Sales                                  (0.1 )%             (4.5 )%
          Cost of sales                          (0.0 )              (4.2 )

          Gross margin                           (0.4 )              (5.6 )
          Operating expenses                     (0.8 )              (6.5 )

          Operating income                        0.8                (3.0 )
          Interest expense                       (1.2 )              (1.8 )
          Other income, net                     (38.1 )             (51.8 )

          Earnings before income taxes            0.4                (3.9 )
          Income taxes                            7.4                (0.5 )

          Net earnings                           (4.1 )%             (6.1 )%


          Basic earnings per share               (2.4 )%             (5.0 )%
          Diluted earnings per share             (1.6 )              (5.0 )

          Average shares outstanding             (1.8 )              (2.2 )
          Diluted shares outstanding             (2.4 )              (2.5 )

Sales
Sales were 0.1% less in the first 39 weeks and 4.5% less in the third quarter of fiscal 2009 than the comparable periods of the prior year. Non-comparable acquisitions did not have a material impact on the overall sales comparisons for the first 39 weeks of fiscal 2009 or the third quarter of fiscal 2009.
Product cost inflation and the resulting increase in selling prices had a significant impact on sales levels in the first 39 weeks of fiscal 2009. Estimated product cost increases, an internal measure of inflation, were estimated as 6.2% during the first 39 weeks of fiscal 2009 and 3.3% during the third quarter of fiscal 2009, as compared to 6.0% during the first 39 weeks of fiscal 2008 and 6.2% during the third quarter of fiscal 2008.
The sales trend declined throughout fiscal 2008 and into fiscal 2009 from a positive 8.5% in the first quarter of fiscal 2008 to a negative 4.5% in the third quarter of fiscal 2009. We believe the deteriorating 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. We believe we will continue to experience a difficult economic environment for the remainder of fiscal 2009 and therefore we expect that the sales trend experienced in the third quarter of fiscal 2009 will not improve in the fourth quarter of fiscal 2009.
We believe that our continued focus on the use of business reviews and business development activities, 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, as well as in-bound freight. Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities.
Operating income increased 0.8% in the first 39 weeks of fiscal 2009 over the first 39 weeks of fiscal 2008, increasing slightly to 4.8% of sales. This slight increase in operating income was primarily due to decreased operating expenses. Gross margin dollars decreased 0.4% in the first 39 weeks of fiscal 2009 over the first 39 weeks of fiscal 2008, while operating expenses decreased 0.8% in the first 39 weeks of fiscal 2009.
Operating income decreased 3.0% in the third quarter of fiscal 2009 from the third quarter of fiscal 2008, remaining the same at 4.6% of sales. Operating income declined primarily due to a decline in sales offset by decreased operating expenses. Gross margin dollars decreased 5.6% in the third quarter of fiscal 2009 from the third quarter of fiscal 2008, while operating expenses decreased 6.5% in the third quarter of fiscal 2009.
Beginning in the fourth quarter of fiscal 2007, Sysco began experiencing high levels of product cost increases in numerous product categories. These increases persisted throughout fiscal 2008 at levels approximating 6.0% and rose even higher to 7.6% in the first 26 weeks of fiscal 2009. The level of product cost increases moderated during the third quarter of fiscal 2009, with estimated product cost increases of 3.3% for the quarter and 6.2% for the first 39 weeks. Generally, Sysco attempts to pass increased costs to its customers; however, because of contractual and competitive reasons, we are not able to pass along all of the product cost increases immediately. Prolonged periods of high inflation, such as those we have recently experienced, have a negative impact on our customers, as high food costs and fuel costs can reduce consumer spending in the food-prepared-away-from home market. As a result, these factors may negatively impact our sales, gross margins and earnings. It is uncertain if product cost increases will continue to moderate or if product costs will begin to decrease. We may also be negatively impacted by periods of prolonged 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.
We believe the operating expense performance for the first 39 weeks of fiscal 2009 was aided by operating efficiencies and reduced payroll expense related to reduced headcount and lower incentive compensation. The positive impact of these expense reductions was partially offset by the combined effect of increased losses on the adjustment of the carrying value of corporate-owned life insurance policies to their cash surrender values and an increase in the provision for losses on receivables. In addition, fuel costs increased during the first 39 weeks of fiscal 2009. Operating expenses in the third quarter of fiscal 2009 declined 6.5% primarily through operating efficiencies and reduced payroll expense related to reduced headcount and lower incentive compensation. The positive impact of these expense reductions was partially offset by an increase in the provision for losses on receivables.
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 decline in the financial markets resulted in losses for these policies of $63,284,000 and $8,680,000 in the first 39 weeks and the third quarter of fiscal 2009, respectively. These losses compared to the recognition of losses of $9,293,000 and $14,316,000 in the first 39 weeks and the third quarter of fiscal 2008, respectively. 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.

The provision for losses on receivables increased by $35,683,000 in the first 39 weeks of fiscal 2009 and $21,118,000 in the third quarter over the comparable prior year periods. The current economic conditions and related decrease in consumer demand combined with tightening credit markets have impacted the liquidity of some of our customers, resulting in an increase in delinquent payments on accounts receivable. The increase in our provision for losses on receivables is related to customer accounts across our customer base without concentration in any specific location. We continue to monitor our customer account balances and our credit policies and believe continued strong credit practices will be necessary to avoid significant increases in our provision for losses on receivables. However, if the difficult economic environment persists, we expect to continue to experience increases in our provision for losses on receivables.
Payroll expense decreased by $144,051,000 in the first 39 weeks and $90,276,000 in the third quarter of fiscal 2009 from the comparable prior year periods. The reduction was due to a combination of reduced headcount and lower incentive compensation. The criteria for paying annual bonuses to our corporate officers and certain portions of operating company management bonuses are tied to overall company performance. Based on results of the first 39 weeks of fiscal 2009, it is not likely that the criteria for payment of such bonuses for fiscal 2009 will be met; therefore, the provision for current year management incentive bonuses was lower in the first 39 weeks and third quarter of fiscal 2009, respectively, than in the comparable prior year periods when the company met the criteria for paying annual bonuses.
Sysco's fuel costs increased by $51,898,000 in the first 39 weeks of fiscal 2009 over the comparable prior year period, primarily due to increased contracted diesel prices. Sysco's fuel costs were comparable for the third quarter of fiscal 2009 and the third quarter of fiscal 2008. Sysco's costs per gallon increased 30.3% in the first 39 weeks of fiscal 2009 over the comparable prior year period. Sysco's activities to manage increased 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. Fuel surcharges were approximately $31,400,000 higher in the first 39 weeks and $8,600,000 lower in the third quarter of fiscal 2009 over the comparable periods of the prior year due to greater usage of these surcharges in the first half of fiscal 2009. Fuel surcharges are reflected within sales and gross margins.
We periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements to lessen the volatility of our fuel costs due to changes in the price of diesel. In the first 39 weeks and third quarter of fiscal 2009, our forward purchase commitments resulted in an estimated $50,000,000 and $22,000,000, respectively, of additional fuel costs as the fixed price contracts were higher than market prices for the contracted volumes. In the first 39 weeks of fiscal 2008, our forward purchase commitments resulted in an estimated $10,000,000 of avoided fuel costs as the fixed price contracts were lower than market prices for the contracted volumes. Our forward purchase commitments did not have an impact on fuel costs for the third quarter of fiscal 2008, as the contracts in place during that quarter were generally near market prices.
As of March 28, 2009, we have forward diesel fuel commitments totaling approximately $101,000,000 through December 2009. In April 2009, we entered additional forward purchase commitments totaling approximately $13,000,000 at a fixed price through March 2010. Together, these contracts will lock in the price of approximately 70% of our fuel purchase needs for the remainder of fiscal 2009 and approximately 40% of our fuel purchase needs for the first 39 weeks of fiscal 2010. Our commitments through August 2009 were entered into at prevailing rates from mid-July through mid-August 2008. As a result, these contracts are at fixed prices greater than both the prices incurred during same periods in the previous fiscal years and current market prices. The remainder of our outstanding contracts were entered into at the prevailing rates in March and April 2009 and thus the fixed price on these contracts reflects the lower current market price for diesel.
Fuel costs for the fourth quarter of fiscal 2009, exclusive of any amounts recovered through fuel surcharges, are expected to slightly decrease as compared to the same period in fiscal 2008. Our estimate is based upon the prevailing market prices for diesel in mid-April 2009, the cost committed to in our forward fuel purchase agreements currently in place for the fourth quarter, which are at fixed prices in excess of current market prices, and estimates of fuel consumption. Actual fuel costs could vary from our estimates if any of these assumptions change, in particular if future fuel prices vary significantly from our current estimates. We continue to evaluate all opportunities to offset our increases in fuel expense, including the use of fuel surcharges and overall expense management. However, consistent with the lower current market price for diesel, we expect fuel surcharges to be lower in the fourth quarter of fiscal 2009 as compared to the comparable prior year period.
Net company-sponsored pension costs in the first 39 weeks and third quarter of fiscal 2009 were $16,799,000 and $6,078,000 higher, respectively, than in the comparable prior year periods, due primarily to the recognition of actuarial losses from lower returns on assets of the qualified pension plan during fiscal 2008, partially offset by a decrease in expense due to amendments to our Supplemental Executive Retirement Plan.

Share-based compensation expense in the first 39 weeks of fiscal 2009 and third quarter of fiscal 2009 was $14,410,000 and $6,421,000 lower, respectively, than in the comparable prior year periods. This decrease was due primarily to two factors. First, option grants in prior years were at greater levels than in recent years, resulting in reduced compensation expense being recognized in fiscal 2009. Secondly, the Management Incentive Plan annual bonus awards have been modified, beginning with fiscal 2009, to exclude the previous stock award component. As a result, the share-based compensation expense related to the stock award component of the incentive bonuses recorded in previous years was not incurred in the first quarter of fiscal 2009, and overall share-based based compensation expense was reduced as compared to the comparable prior year period. Beginning in fiscal 2010, we expect to replace the stock award component of the incentive bonuses with annual discretionary restricted stock grants subject to time-based vesting.
In the second quarter of fiscal 2009, we recorded a provision of $9,585,000 for a withdrawal liability from a multi-employer pension plan from which union members elected to withdraw. In the first quarter of fiscal 2008, we recorded a provision of $9,410,000 related to additional amounts that we expected to be required to contribute to an underfunded multi-employer pension plan. Net Earnings
Net earnings declined 4.1% in the first 39 weeks 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. Net earnings declined 6.1% in the third quarter of fiscal 2009 from the comparable period of the prior year due primarily to the factors discussed above, as well as the impact of changes in income taxes discussed below.
The effective tax rate was 41.2% in the first 39 weeks of fiscal 2009 and 38.5% in the first 39 weeks of fiscal 2008. The effective tax rate for the first 39 weeks of fiscal 2009 was negatively impacted by two items. First, the loss of $63,284,000 recorded to adjust the carrying value of corporate-owned life insurance to their cash surrender values in the first 39 weeks of fiscal 2009 was non-deductible for income tax purposes and had the impact of increasing the effective tax rate for the period. Second, the company recorded a tax adjustment to accrue for a previously unidentified tax contingency arising from a recent tax audit and an additional provision for state tax contingencies. These contingencies are unrelated to the ongoing appeals process with the Internal Revenue Service (IRS) related to the taxability of the cooperative structure as discussed below in "Liquidity and Capital Resources, Other Considerations." The effective tax rate for the first 39 weeks of fiscal 2009 was positively impacted by a decrease in our tax provision for a foreign tax liability resulting from changes in exchange rates.
The effective tax rate for the first 39 weeks of fiscal 2008 was positively impacted by the recognition of a tax benefit of approximately $7,700,000 resulting from a net operating tax loss deferred tax asset which arose due to an enacted state tax law and $7,300,000 related to the reversal of valuation allowances previously recorded on certain Canadian net operating loss deferred tax assets. The effective tax rate for the first 39 weeks of fiscal 2008 was . . .