• 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 %

Broadline Segment
Broadline operating companies distribute a full line of food products and a wide variety of non-food products to both traditional and chain restaurant customers. In the first quarter fiscal 2010, the Broadline operating results represented approximately 81% of Sysco's overall sales and 94% of the aggregated operating income of Sysco's segments, which excludes corporate expenses and consolidated adjustments.
Sales
Sales were 7.2% lower in the first quarter of fiscal 2010 than the comparable period of the prior year. The weak economic environment has applied continued pressure to consumer discretionary spending and overall restaurant traffic counts and has resulted in reduced sales. 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 3.6% during the first quarter of fiscal 2010, as compared to inflation of 5.9% during the first quarter of fiscal 2009. The exchange rates used to translate our foreign sales into U.S. dollars negatively impacted sales by 0.6% 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 0.8% for the first quarter of fiscal 2010. 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.

Operating Income
Operating income decreased 2.7% in the first quarter of fiscal 2010 from the comparable period of the prior year. Gross margin dollars decreased 6.7% while operating expenses decreased 8.6% in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. Effective management of operations in the current economic environment was evidenced by margins declining at a lower rate than our sales decline and by decreasing expenses as compared to the comparable prior year period.
Contributing to the gross margin decline was a decrease of $21,233,000 in the fuel surcharges charged to customers in the first quarter of fiscal 2010 from the comparable period of the prior year due to less usage of these surcharges in the first quarter of fiscal 2010. Expense performance for the first quarter of fiscal 2010 was aided by operating efficiencies, such as reduced pay-related expense due to reduced headcount, and reduced fuel cost. Fuel costs were $16,277,000 lower in the first quarter of fiscal 2010 than in the comparable period of the prior year. We expect fuel surcharges and 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 surcharges and fuel costs in the last half of fiscal 2010 to be more . . .