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

     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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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

585,084,667 shares of common stock were outstanding as of October 30, 2010.

 

 

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			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 5. Other Information			28
Item 6. Exhibits			29
Signatures			31
EX-10.1
EX-10.2
EX-10.3
EX-10.4
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)

		October 2, 2010				July 3, 2010				September 26, 2009
		(unaudited)								(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	448,374			$	585,443			$	773,770
Short-term investments			—				23,511				27,438
Accounts and notes receivable, less allowances of $49,376, $36,573 and $51,089			2,814,958				2,617,352				2,575,293
Inventories			1,875,242				1,771,539				1,747,773
Deferred income taxes			74,419				—				91,262
Prepaid expenses and other current assets			76,418				70,992				69,013
Prepaid income taxes			—				7,421				—
Total current assets			5,289,411				5,076,258				5,284,549
Plant and equipment at cost, less depreciation			3,277,583				3,203,823				3,014,341
Other assets
Goodwill			1,577,691				1,549,815				1,529,066
Intangibles, less amortization			110,974				106,398				116,731
Restricted cash			129,532				124,488				121,755
Prepaid pension cost			—				—				48,750
Other assets			270,219				252,919				237,247
Total other assets			2,088,416				2,033,620				2,053,549
Total assets		$	10,655,410			$	10,313,701			$	10,352,439
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,998,982			$	1,953,092			$	1,883,088
Accrued expenses			751,640				870,114				767,742
Accrued income taxes			337,001				—				345,420
Deferred income taxes			50,561				178,022				—
Current maturities of long-term debt			7,837				7,970				8,743
Total current liabilities			3,146,021				3,009,198				3,004,993
Other liabilities
Long-term debt			2,486,646				2,472,662				2,468,783
Deferred income taxes			282,836				271,512				616,142
Other long-term liabilities			758,912				732,803				548,163
Total other liabilities			3,528,394				3,476,977				3,633,088
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			825,930				816,833				764,902
Retained earnings			7,286,409				7,134,139				6,724,058
Accumulated other comprehensive loss			(415,765	)			(480,251	)			(233,932	)
Treasury stock at cost,178,993,904, 176,768,795 and 173,860,981 shares			(4,480,754	)			(4,408,370	)			(4,305,845	)
Total shareholders’ equity			3,980,995				3,827,526				3,714,358
Total liabilities and shareholders’ equity		$	10,655,410			$	10,313,701			$	10,352,439

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

		13-Week Period Ended
		October 2, 2010				September 26, 2009
Sales		$	9,751,274			$	9,081,426
Cost of sales			7,919,857				7,334,067
Gross margin			1,831,417				1,747,359
Operating expenses			1,325,177				1,250,031
Operating income			506,240				497,328
Interest expense			31,101				33,800
Other expense (income), net			(1,684	)			(2,012	)
Earnings before income taxes			476,823				465,540
Income taxes			177,754				139,335
Net earnings		$	299,069			$	326,205
Net earnings:
Basic earnings per share		$	0.51			$	0.55
Diluted earnings per share			0.51			$	0.55
Average shares outstanding			588,711,412				591,568,212
Diluted shares outstanding			591,103,346				591,983,474
Dividends declared per common share		$	0.25			$	0.24

See Notes to Consolidated Financial Statements

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

		13-Week Period Ended
		October 2, 2010				September 26, 2009
Net earnings		$	299,069			$	326,205
Other comprehensive income:
Foreign currency translation adjustment			51,465				37,082
Items presented net of tax:
Amortization of cash flow hedge			107				107
Amortization of unrecognized prior service cost			638				676
Amortization of unrecognized actuarial loss, net			12,253				6,166
Amortization of unrecognized transition obligation			23				23
Total other comprehensive income			64,486				44,054
Comprehensive income		$	363,555			$	370,259

See Notes to Consolidated Financial Statements

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

		13-Week Period Ended
		October 2, 2010				September 26, 2009
Cash flows from operating activities:
Net earnings		$	299,069			$	326,205
Adjustments to reconcile net earnings to cash provided by operating activities:
Share-based compensation expense			10,148				12,748
Depreciation and amortization			101,714				93,906
Deferred income taxes			(198,900	)			(207,546	)
Provision for losses on receivables			5,670				8,152
Other non-cash items			1,973				(157	)
Additional investment in certain assets and liabilities, net of effect of businesses acquired:
(Increase) in receivables			(178,499	)			(100,167	)
(Increase) in inventories			(85,649	)			(86,167	)
(Increase) in prepaid expenses and other current assets			(4,958	)			(4,242	)
Increase in accounts payable			25,468				84,798
(Decrease) in accrued expenses			(124,601	)			(33,895	)
Increase in accrued income taxes			342,129				56,113
(Increase) in other assets			(13,539	)			(22,083	)
Increase (decrease) in other long-term liabilities and prepaid pension cost, net			47,034				(85,596	)
Excess tax benefits from share-based compensation arrangements			(277	)			(465	)
Net cash provided by operating activities			226,782				41,604
Cash flows from investing activities:
Additions to plant and equipment			(142,924	)			(109,405	)
Proceeds from sales of plant and equipment			354				1,346
Acquisition of businesses, net of cash acquired			(23,891	)			(8,334	)
Purchases of short-term investments			—				(27,217	)
Maturities of short-term investments			24,075				—
(Increase) in restricted cash			(5,044	)			(27,897	)
Net cash used for investing activities			(147,430	)			(171,507	)
Cash flows from financing activities:
Other debt borrowings			626				2,417
Other debt repayments			(2,273	)			(2,593	)
Common stock reissued from treasury for share-based compensation awards			40,834				21,907
Treasury stock purchases			(116,699	)			—
Dividends paid			(146,868	)			(141,729	)
Excess tax benefits from share-based compensation arrangements			277				465
Net cash used for financing activities			(224,103	)			(119,533	)
Effect of exchange rates on cash			7,682				4,555
Net (decrease) in cash and cash equivalents			(137,069	)			(244,881	)
Cash and cash equivalents at beginning of period			585,443				1,018,651
Cash and cash equivalents at end of period		$	448,374			$	773,770
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	54,302			$	59,509
Income taxes			35,180				334,833

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries

     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 July 3, 2010 consolidated balance sheet which was taken from the audited financial statements included in the company’s Fiscal 2010 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.

     Prior year amounts within the consolidated balance sheets and consolidated cash flows have been reclassified to conform to the current year presentation as it relates to the presentation of cash and accounts payable within these statements. The impact of these reclassifications was immaterial to the prior year period.

     These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company’s Fiscal 2010 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. 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, high-quality money market funds 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 each period presented below where short-term investments were held, 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. These are included within cash equivalents as a Level 2 measurement in the tables below.
•		Commercial paper included in short-term investments is valued using broker quotes that utilize observable market inputs. These are included as a Level 2 measurement in the tables below.
•		Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. These are included within cash equivalents and restricted cash as Level 1 measurements in the tables below.

•

The interest rate swap agreements, discussed further in Note 3, “Derivative Financial Instruments,” are valued using a swap valuation model that utilizes an income approach using observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. These are included as a Level 2 measurement in the tables below.

     The following tables present the company’s assets and liabilities measured at fair value on a recurring basis as of October 2, 2010, July 3, 2010 and September 26, 2009:

		Assets Measured at Fair Value as of October 2, 2010
		Level 1				Level 2				Level 3				Total
						(In thousands)
Assets:
Cash and cash equivalents
Cash equivalents		$	35,280			$	251,269			$	—			$	286,549
Restricted cash			129,532				—				—				129,532
Other assets
Interest rate swap agreements			—				17,484				—				17,484
Total assets at fair value		$	164,812			$	268,753			$	—			$	433,565

		Assets Measured at Fair Value as of July 3, 2010
		Level 1				Level 2				Level 3				Total
						(In thousands)
Assets:
Cash and cash equivalents
Cash equivalents		$	225,400			$	199,047			$	—			$	424,447
Short-term investments			—				23,511				—				23,511
Restricted cash			124,488				—				—				124,488
Other assets
Interest rate swap agreements			—				11,045				—				11,045
Total assets at fair value		$	349,888			$	233,603			$	—			$	583,491

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

     The carrying values of accounts receivable and accounts payable approximated their respective fair values due to the short-term maturities of these instruments. The fair value of Sysco’s total 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 debt approximated $2,853.9 million, $2,774.9 million and $2,654.5 million as of October 2, 2010, July 3, 2010 and

September 26, 2009, respectively. The carrying value of total debt was $2,494.5 million, $2,480.6 million and $2,477.5 million as of October 2, 2010, July 3, 2010 and September 26, 2009, respectively.

3. DERIVATIVE FINANCIAL INSTRUMENTS

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

     In September 2009, the company entered into an interest rate swap agreement that effectively converted $200.0 million of fixed rate debt maturing in fiscal 2014 to floating rate debt. In October 2009, the company entered into an interest rate swap agreement that effectively converted $250.0 million of fixed rate debt maturing in fiscal 2013 to floating rate debt. Both transactions were entered into with the goal of reducing overall borrowing cost and increasing floating interest rate exposure. These transactions were designated as fair value hedges since the swaps hedge against the changes 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 October 2, 2010, July 3, 2010 and September 26, 2009 are as follows:

Asset Derivatives

Liability Derivatives

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

(In thousands)

Interest rate swap agreements

October 2, 2010

Other assets

$

17,484

N/A

N/A

July 3, 2010

Other assets

11,045

N/A

N/A

September 26, 2009

N/A

N/A

Other long-term liabilities

$

446

     The location and effect of derivative instruments and related hedged items on the consolidated results of operations for the 13-week periods ended October 2, 2010 and September 26, 2009 presented on a pre-tax basis are as follows:

Location of (Gain)

or Loss Recognized

Amount of (Gain) or Loss

in Income

Recognized in Income

13-Week Period Ended

October 2, 2010

September 26, 2009

(In thousands)

Fair Value Hedge Relationships:

Interest rate swap agreements

Interest expense

(500

)

$

133

     Hedge ineffectiveness represents the difference between the changes in the fair value of the derivative instruments and the changes 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 periods ended October 2, 2010 and September 26, 2009. The interest rate swaps do not contain credit-risk-related contingent features.

4. DEBT

     As of October 2, 2010, Sysco had uncommitted bank lines of credit which provided for unsecured borrowings for working capital of up to $95.0 million, of which none was outstanding.

     Sysco and one of its subsidiaries, Sysco International, ULC, have a revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs. The facility in the amount of $1,000.0 million expires on November 4, 2012, but is subject to extension.

     As of October 2, 2010, there were no commercial paper issuances outstanding. During the 13-week period ended October 2, 2010, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $60.0 million.

5. EMPLOYEE BENEFIT PLANS

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

		Pension Benefits								Other Postretirement Plans
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
		(In thousands)
Service cost		$	24,861			$	16,663			$	99			$	82
Interest cost			33,744				29,899				131				140
Expected return on plan assets			(32,980	)			(26,215	)			—				—
Amortization of prior service cost			989				1,051				47				47
Recognized net actuarial loss (gain)			19,988				10,132				(97	)			(123	)
Amortization of transition obligation			—				—				38				38
Net periodic benefit cost		$	46,602			$	31,530			$	218			$	184

     Sysco’s contributions to its company-sponsored defined benefit plans were $5.0 million and $38.8 million during the 13-week periods ended October 2, 2010 and September 26, 2009, respectively.

     The company made contributions of $140.0 million to its company-sponsored qualified pension plan (Retirement Plan) in fiscal 2010 that would normally have been made in fiscal 2011. Additional contributions to the Retirement Plan are not currently anticipated in fiscal 2011. 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 2011 contributions to fund benefit payments for the SERP and other post-retirement plans are $22.2 million and $0.3 million, respectively.

6. EARNINGS PER SHARE

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

		13-Week Period Ended
		October 2, 2010				September 26, 2009
		(In thousands, except for share and per share data)
Numerator:
Net earnings		$	299,069			$	326,205
Denominator:
Weighted-average basic shares outstanding			588,711,412				591,568,212
Dilutive effect of share-based awards			2,391,934				415,262
Weighted-average diluted shares outstanding			591,103,346				591,983,474
Basic earnings per share:		$	0.51			$	0.55
Diluted earnings per share:		$	0.51			$	0.55

     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 47,800,000 and 66,000,000 for the first quarter of fiscal 2011 and 2010, respectively.

7. 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 2011.

Employees’ Stock Purchase Plan

     Plan participants purchased 411,629 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first quarter of fiscal 2011.

     The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $4.29 during the first quarter of fiscal 2011. The fair value of the stock purchase rights is estimated 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 $10.1 million and $12.7 million for the first quarter of fiscal 2011 and fiscal 2010, respectively.

     As of October 2, 2010, there was $57.1 million of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.68 years.

8. INCOME TAXES

Internal Revenue Service Settlement

     In the first quarter of fiscal 2010, Sysco reached a settlement with the Internal Revenue Service (IRS) in connection with its audits of the company’s 2003 through 2006 federal income tax returns. As a result of the settlement, Sysco agreed to cease paying U.S. federal taxes related to its affiliate Baugh Supply Chain Cooperative (BSCC) on a deferred basis and pay the amounts that were recorded within deferred taxes related to BSCC over a three-year period as follows:

Amounts paid annually:		(In thousands)
Fiscal 2010		$	528,000
Fiscal 2011			212,000
Fiscal 2012			212,000

     As noted in the table above, $528.0 million was paid related to the settlement in fiscal 2010, of which $316.0 million was paid in the first quarter of fiscal 2010. Amounts to be paid in fiscal 2011 and 2012 will be paid in connection with Sysco’s quarterly tax payments, two of which fall in the second quarter, one in the third quarter and one in the fourth quarter. 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 $29.0 million in the first quarter of fiscal 2010.

     Sysco’s deferred taxes were impacted by the timing of these installment payments. Sysco reclassified amounts due within one year from deferred taxes to accrued income taxes at the beginning of fiscal 2010 and at the beginning of fiscal 2011.

Uncertain Tax Positions

     As of October 2, 2010, the gross amount of unrecognized tax benefits was $84.1 million and the gross amount of accrued interest liabilities was $28.3 million. 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 numerous 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 37.28% for the first quarter of fiscal 2011 was favorably impacted by the adjustment of the carrying values of the company’s corporate-owned life insurance (COLI) policies to their cash surrender values. The gain of $13.5 million recorded in the first quarter of fiscal 2011 is non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $5.2 million.

     The effective tax rate of 29.93% for the first quarter of fiscal 2010 was favorably impacted by three items. First, the company recorded an income tax benefit of approximately $29.0 million resulting from the one-time reversal of previously accrued interest related to the settlement with the IRS. Second, the gain of $21.2 million recorded to adjust the carrying value of COLI policies to their cash surrender values in the first quarter of fiscal 2010 was non-taxable for income tax purposes and had the impact of decreasing income tax expense for the period by $8.1 million. Third, the company recorded a tax benefit of approximately $5.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.

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.

9. ACQUISITIONS

     During the first quarter of fiscal 2011, in the aggregate, the company paid cash of $23.9 million for an acquisition made during fiscal 2011 and for contingent consideration related to operations acquired in previous fiscal years. Acquisitions in the first quarter of fiscal 2011 were immaterial to the consolidated financial statements.

     Certain acquisitions involve contingent consideration typically payable over periods up to five years only in the event that certain operating results are attained or certain outstanding contingencies are resolved. As of October 2, 2010, aggregate contingent consideration amounts outstanding relating to acquisitions was $52.7 million, of which $50.7 million could result in the recording of additional goodwill.

10. 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. Generally, Sysco does not have the greatest share of liability among the participants in any of these plans. Based on the information available from plan administrators, which has valuation dates ranging from January 31, 2008 to December 31, 2009, Sysco estimates its share of withdrawal liability on most of the multi-employer plans in which it participates could have been as much as $190.0 million as of October 2, 2010, based on a voluntary withdrawal. The majority of the plans we participate in have a valuation date of calendar year-end. As such, the majority of the estimated withdrawal liability results from plans for which the valuation date was December 31, 2008; therefore, the company’s estimated liability reflects the asset losses incurred by the financial markets as of that date. In general, the financial markets have improved since December 31, 2008; therefore, management believes Sysco’s current share of the withdrawal liability could differ from this estimate. 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 October 2, 2010, Sysco had approximately $6.3 million in liabilities recorded related to certain multi-employer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred.

Fuel Commitments

     From time to time, Sysco may enter into forward purchase commitments for a portion of its projected diesel fuel requirements. As of October 2, 2010, outstanding forward diesel fuel purchase commitments totaled approximately $80.0 million at a fixed price through October 2011.

11. 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. The Broadline reportable segment is an aggregation of the company’s United States, Canadian and European Broadline segments. 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 recorded to adjust COLI policies to their cash surrender values;
	•		Share-based compensation expense;
	•		Expenses related to the company’s business transformation project; and
	•		Corporate-level depreciation and amortization expense.

     The following tables set forth certain financial information for Sysco’s business segments:

		13-Week Period Ended
		October 2, 2010				September 26, 2009
Sales (in thousands):
Broadline		$	7,791,274			$	7,308,706
SYGMA			1,319,496				1,150,861
Other			786,925				742,877
Intersegment sales			(146,421	)			(121,018	)
Total		$	9,751,274			$	9,081,426

		13-Week Period Ended
		October 2, 2010				September 26, 2009
Operating income (in thousands):
Broadline		$	535,757			$	509,024
SYGMA			14,570				5,838
Other			26,875				25,814
Total segments			577,202				540,676
Corporate expenses			(70,962	)			(43,348	)
Total operating income			506,240				497,328
Interest expense			31,101				33,800
Other expense (income), net			(1,684	)			(2,012	)
Earnings before income taxes		$	476,823			$	465,540

		October 2, 2010				July 3, 2010				September 26, 2009
Assets (in thousands):
Broadline		$	6,533,318			$	6,218,985			$	5,966,216
SYGMA			385,487				392,883				347,854
Other			949,072				937,605				904,950
Total segments			7,867,877				7,549,473				7,219,020
Corporate			2,787,533				2,764,228				3,133,419
Total		$	10,655,410			$	10,313,701			$	10,352,439

12. SUPPLEMENTAL GUARANTOR INFORMATION

     Sysco International, ULC is an unlimited liability company organized under the laws of the Province of British Columbia, Canada and is a wholly-owned subsidiary of Sysco. In May 2002, Sysco International, Co. issued, in a private offering, $200.0 million 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
		October 2, 2010
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	219,678			$	21			$	5,069,712			$	—			$	5,289,411
Investment in subsidiaries			15,352,365				493,563				130,477				(15,976,405	)			—
Plant and equipment, net			471,947				—				2,805,636				—				3,277,583
Other assets			386,531				543				1,701,342				—				2,088,416
Total assets		$	16,430,521			$	494,127			$	9,707,167			$	(15,976,405	)		$	10,655,410
Current liabilities		$	369,160			$	4,165			$	2,772,696			$	—			$	3,146,021
Intercompany payables (receivables)			9,514,740				84,075				(9,598,815	)			—				—
Long-term debt			2,233,383				199,897				53,366				—				2,486,646
Other liabilities			513,242				—				528,506				—				1,041,748
Shareholders’ equity			3,799,996				205,990				15,951,414				(15,976,405	)			3,980,995
Total liabilities and shareholders’ equity		$	16,430,521			$	494,127			$	9,707,167			$	(15,976,405	)		$	10,655,410

		Condensed Consolidating Balance Sheet
		July 3, 2010
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	417,336			$	33			$	4,658,889			$	—			$	5,076,258
Investment in subsidiaries			14,979,871				465,641				142,925				(15,588,437	)			—
Plant and equipment, net			425,279				—				2,778,544				—				3,203,823
Other assets			362,658				597				1,670,365				—				2,033,620
Total assets		$	16,185,144			$	466,271			$	9,250,723			$	(15,588,437	)		$	10,313,701
Current liabilities		$	444,274			$	1,114			$	2,563,810			$	—			$	3,009,198
Intercompany payables (receivables)			9,405,317				73,124				(9,478,441	)			—				—
Long-term debt			2,225,781				199,881				47,000				—				2,472,662
Other liabilities			411,781				—				592,534				—				1,004,315
Shareholders’ equity			3,697,991				192,152				15,525,820				(15,588,437	)			3,827,526
Total liabilities and shareholders’ equity		$	16,185,144			$	466,271			$	9,250,723			$	(15,588,437	)		$	10,313,701

		Condensed Consolidating Balance Sheet
		September 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Current assets		$	678,541			$	24			$	4,605,984			$	—			$	5,284,549
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			$	9,122,913			$	(14,317,203	)		$	10,352,439
Current liabilities		$	363,660			$	4,056			$	2,637,277			$	—			$	3,004,993
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			$	9,122,913			$	(14,317,203	)		$	10,352,439

		Condensed Consolidating Results of Operations
		For the 13-Week Period Ended October 2, 2010
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
		(In thousands)
Sales		$	—			$	—			$	9,751,274			$	—			$	9,751,274
Cost of sales			—				—				7,919,857				—				7,919,857
Gross margin			—				—				1,831,417				—				1,831,417
Operating expenses			67,695				33				1,257,449				—				1,325,177
Operating income (loss)			(67,695	)			(33	)			573,968				—				506,240
Interest expense (income)			130,989				2,576				(102,464	)			—				31,101
Other expense (income), net			(83	)			—				(1,601	)			—				(1,684	)
Earnings (losses) before income taxes			(198,601	)			(2,609	)			678,033				—				476,823
Income tax (benefit) provision			(74,036	)			(973	)			252,763				—				177,754
Equity in earnings of subsidiaries			423,634				15,474				—				(439,108	)			—
Net earnings		$	299,069			$	13,838			$	425,270			$	(439,108	)		$	299,069

		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 (loss)			(45,062	)			(34	)			542,424				—				497,328
Interest expense (income)			120,564				2,490				(89,254	)			—				33,800
Other expense (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 Cash Flows
		For the 13-Week Period Ended October 2, 2010
										Other
						Sysco				Non-Guarantor				Consolidated
		Sysco				International				Subsidiaries				Totals
		(In thousands)
Net cash provided by (used for):
Operating activities		$	(83,996	)		$	16,971			$	293,807			$	226,782
Investing activities			(59,502	)			—				(87,928	)			(147,430	)
Financing activities			(222,242	)			—				(1,861	)			(224,103	)
Effect of exchange rates on cash			—				—				7,682				7,682
Intercompany activity			162,988				(16,971	)			(146,017	)			—
Net increase in cash			(202,752	)			—				65,683				(137,069	)
Cash at the beginning of the period			373,523				—				211,920				585,443
Cash at the end of the period		$	170,771			$	—			$	277,603			$	448,374

		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			$	119,483			$	41,604
Investing activities			(49,771	)			—				(121,736	)			(171,507	)
Financing activities			(120,591	)			—				1,058				(119,533	)
Effect of exchange rates on cash			—				—				4,555				4,555
Intercompany activity			(356	)			(14,579	)			14,935				—
Net (decrease) increase in cash			(263,176	)			—				18,295				(244,881	)
Cash at the beginning of the period			899,195				—				119,456				1,018,651
Cash at the end of the period		$	636,019			$	—			$	137,751			$	773,770

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion should be read in conjunction with our consolidated financial statements as of July 3, 2010, 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 July 3, 2010.

Highlights

     A slow economic recovery in the United States and Canada combined with lower consumer confidence contributed to a challenging environment in the first quarter of fiscal 2011. However, we were able to increase sales and improve productivity to achieve growth in operating income in the first quarter of fiscal 2011. We also recorded gains on corporate-owned life insurance (COLI) policies, which positively impacted net earnings and earnings per share.

•		Sales increased 7.4% in the first quarter of fiscal 2011 from the comparable prior year period to $9.8 billion primarily due to improving case volumes and increased prices due to inflation. Inflation, as measured by changes in our product costs, was an estimated 3.3% during the first quarter of fiscal 2011. Sales from acquisitions within the last 12 months favorably impacted sales by 0.6%, and the exchange rates used to translate our foreign sales into U.S. dollars positively impacted sales by 0.5%.
•		Operating income increased to $506.2 million, a 1.8% increase over the comparable prior year period, primarily driven by the increase in sales and improved productivity. Gross margin dollars increased 4.8% in the first quarter of fiscal 2011 from the first quarter of fiscal 2010 but declined as a percentage of sales primarily due to strategic pricing initiatives and impact of significant inflation in certain product categories. Operating expenses increased 6.0% primarily due to increased pay-related expense related to increased sales, an increase in net company-sponsored pension costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values.
•		Net earnings decreased to $299.1 million, an 8.3% decrease from the comparable prior year period, primarily due to an increase in the effective tax rate. The effective tax rate for the first quarter of fiscal 2011 was 37.28%, compared to an effective tax rate of 29.93% for the first quarter of fiscal 2010. The difference between the tax rates for the two periods resulted largely from the one-time reversal of interest accruals for tax contingencies related to our settlement with the Internal Revenue Service (IRS) in the first quarter of fiscal 2010 and greater non-taxable gains recorded on COLI policies in the first quarter of fiscal 2010.
•		Basic and diluted earnings per share in the first quarter of fiscal 2011 were both $0.51, a decrease of 7.3% from the comparable prior year period primarily due to the factors discussed above. Both basic and diluted earnings per share were favorably impacted by $0.02 per share in the first quarter of fiscal 2011 due to the gains recorded on the adjustment of the carrying value of COLI policies to their cash surrender values. This compares to a $0.09 per share favorable impact to earnings per share in the first quarter of fiscal 2010 from the one-time reversal of a previously accrued liability related to the settlement of an outstanding tax matter with the IRS of $0.05 per share and the gains recorded on the adjustment of the carrying value of COLI policies to their cash surrender values of $0.04 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, Canada and Ireland 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 $210 billion annual market as measured at the at the end of fiscal 2010. According to industry sources, the foodservice, or food-away-from-home, market represents approximately half of the total dollars spent on food purchases made at the consumer level in the United States.

     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, have contributed to a decline in the foodservice

market and a slow rate of recovery is anticipated. Historically, we have grown at a faster rate than the overall industry and have grown our market share in this fragmented industry.

Strategy

     We continue to invest in our core business to expand our market share and grow earnings. 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. These strategies include: growing our sales, our Business Transformation Project, achieving productivity gains and lowering procurement costs. 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 July 3, 2010.

     Our primary focus is on growing and optimizing our core foodservice distribution business in North America; however, we will continue to explore and identify opportunities to grow in new international markets and in other areas of business that complement our core foodservice distribution service. As a part of our ongoing strategic analysis, we regularly evaluate business opportunities, including potential acquisitions and sales of assets and businesses.

Business Transformation Project

     We have substantially completed the design phase of our Business Transformation Project and we are currently building and testing the underlying Enterprise Resource Planning system and processes. Our pilot implementation is anticipated to begin with our first operating company location and the shared services center in the second half of fiscal 2011. Implementation is anticipated to occur across the majority of our Broadline and SYGMA operating companies by the end of fiscal 2013. Although we expect the investment in the business transformation project to provide meaningful benefits to the company over the long-term, the costs will exceed the benefits during the early stages of implementation, including fiscal 2011.

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
		October 2, 2010				September 26, 2009
Sales			100.0	%			100.0	%
Cost of sales			81.2				80.8
Gross margin			18.8				19.2
Operating expenses			13.6				13.7
Operating income			5.2				5.5
Interest expense			0.3				0.4
Other expense (income), net			(0.0	)			(0.0	)
Earnings before income taxes			4.9				5.1
Income taxes			1.8				1.5
Net earnings			3.1	%			3.6	%

     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:

		13-Week Period
Sales			7.4	%
Cost of sales			8.0
Gross margin			4.8
Operating expenses			6.0
Operating income			1.8
Interest expense			(8.0	)
Other expense (income), net			(16.3	)
Earnings before income taxes			2.4
Income taxes			27.6
Net earnings			(8.3	)%
Basic earnings per share			(7.3	)%
Diluted earnings per share			(7.3	)
Average shares outstanding			(0.5	)
Diluted shares outstanding			(0.1	)

Sales

     Sales were 7.4% higher in the first quarter of fiscal 2011 than the comparable period of the prior year. Improving case volumes combined with product cost inflation, and the resulting increase in selling prices, had an impact on sales in the first quarter of fiscal 2011. Changes in product costs, an internal measure of inflation or deflation, were estimated as inflation of 3.3% during the first quarter of fiscal 2011, as compared to deflation of 3.4% during the first quarter of fiscal 2010. Sales from acquisitions within the last 12 months favorably impacted sales by 0.6% for the first quarter of fiscal 2011. The exchange rates used to translate our foreign sales into U.S. dollars positively impacted sales by 0.5% in the first quarter of fiscal 2011 compared to the first quarter fiscal 2010.

     Our sequential quarterly sales trend declined each quarter from fiscal 2008 to the second quarter of fiscal 2010. Our sales trend turned positive in the third quarter of fiscal 2010 and continued in the first quarter of fiscal 2011. We believe the slow economic recovery continues to place pressure on consumer disposable income and has constricted growth in the foodservice market. While economic conditions are showing signs of improvement, we believe consumer disposable income will remain under pressure, which could affect sales.

     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 challenging economic environment.

Operating Income

     Cost of sales primarily includes our product costs, net of vendor consideration, and includes in-bound freight. Operating expenses include the costs of facilities, product handling, delivery, selling and general and administrative activities. Fuel surcharges are reflected within sales and gross margins; fuel costs are reflected within operating expenses.

     Operating income increased 1.8% in the first quarter of fiscal 2011 from the first quarter of fiscal 2010 to $506.2 million, and as a percentage of sales, declined to 5.2% of sales. This increase in operating income was primarily due to increased sales and improved productivity. Gross margin dollars increased 4.8% in the first quarter of fiscal 2011 from the first quarter of fiscal 2010, while operating expenses increased 6.0% in the first quarter of fiscal 2011. Productivity improvements occurred within our warehouse and delivery functions by increasing cases handled per employee and cases delivered on each truck route.

     Gross margin dollars increased in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010 primarily due to increased sales. Gross margin, as a percentage of sales, was 18.78% in the first quarter of fiscal 2011, a decline of 46 from the gross margin percentage of 19.24% in the first quarter of fiscal 2010. This decline in gross margin percentage was primarily the result of three factors. First, certain ongoing strategic pricing initiatives largely lowered our prices to our customers in order to increase sales volumes in specific product categories. This contributed to the reduction of gross margin as a percentage of sales. Second, while Sysco’s overall level of product cost inflation for the period was a modest 3.3%, we experienced higher levels of inflation in the dairy, meat and seafood product categories ranging from 8% to 11%. While we are generally able to pass through modest levels of inflation to our customers on a timely basis, we were unable to fully pass on these higher levels of inflation in these product categories on a timely basis without negatively impacting our customers’ business. Prolonged periods of high inflation, either overall or in certain product categories, can have a negative impact on our customers, as high food costs can reduce consumer spending in the food-away-from-home market, and may negatively impact our sales, gross margins and earnings. Third, to a lesser extent, case volumes increased at a greater rate within our SYGMA segment which generally receives lower pricing for higher volume.

     Operating expenses for the first quarter fiscal 2011 were higher than in the comparable prior year period primarily due to increased pay-related expense related to increased sales, an increase in net company-sponsored pension costs and an unfavorable year-over-year comparison on the amounts recorded to adjust the carrying value of COLI policies to their cash surrender values.

     Pay-related expense, excluding labor costs associated with our Business Transformation Project, increased by $44.4 million in the first quarter of fiscal 2011 from the comparable prior year period primarily due to our increased sales, including both sales incentive compensation and delivery personnel costs. Portions of our pay-related expense are variable in nature and are expected to increase when sales increase.

     Net company-sponsored pension costs in the first quarter of fiscal 2011 were $15.1 million higher than in the comparable prior year period, due primarily to a decrease in discount rates used to calculate our projected benefit obligation and related pension expense, partially offset by reduced amortization of our net actuarial loss resulting from actuarial gains from higher returns on assets of Sysco’s Retirement Plan during fiscal 2010. Net company-sponsored pension costs for each fiscal year are determined as of the previous fiscal year end’s plan measurement date and therefore the rate of increase for each quarter is known at that time.

     We adjust the carrying values of our COLI policies to their cash surrender values on an ongoing basis. The cash surrender values of these policies are partially based on the values of underlying investments, which include equity 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 $13.5 million in the first quarter of fiscal 2011. These gains compared to the recognition of gains of $21.2 million in the first quarter of fiscal 2010. The performance of the financial markets will continue to influence the cash surrender values of our COLI policies, which could cause volatility in operating income, net earnings and earnings per share.

Net Earnings

     Net earnings decreased 8.3% in the first quarter of fiscal 2011 from the comparable period of the prior year due primarily to the impact of changes in income taxes, as well as the factors discussed above. The difference between the tax rates for the two periods, as discussed below, resulted largely from the one-time reversal of interest accruals for tax contingencies related to our settlement with the IRS in the first quarter of fiscal 2010 and greater non-taxable gains recorded on COLI policies in the first quarter of fiscal 2010.

     The effective tax rate of 37.28% for the first quarter of fiscal 2011 was favorably impacted by the adjustment of the carrying values of our COLI policies to their cash surrender values. The gain of $13.5 million recorded in the first quarter of fiscal 2011 is non-taxable for income tax purposes, and had the impact of decreasing income tax expense for the period by $5.2 million.

     The effective tax rate of 29.93% for the first quarter of fiscal 2010 was favorably impacted by three items. First, we recorded an income tax benefit of approximately $29.0 million resulting from the one-time reversal of previously accrued interest related to the settlement with the IRS (see “Other Considerations” for additional discussion). Second, the gain of $21.2 million recorded to adjust the carrying value of COLI policies to their cash surrender values in the first quarter of fiscal 2010 was non-taxable for income tax purposes and had the impact of decreasing income tax expense for the period by $8.1 million.

Third, we recorded a tax benefit of approximately $5.0 million for the reversal of valuation allowances previously recorded on state net operating loss carryforwards.

Earnings Per Share

     Basic and diluted earnings per share decreased 7.3% in the first quarter of fiscal 2011 from the comparable period of the prior year. The decrease was primarily the result of factors discussed above, as well as a small net reduction in shares outstanding. The net reduction in both average and diluted shares outstanding was primarily due to share repurchases.

     Both basic and diluted earnings per share were favorably impacted by $0.02 per share in the first quarter of fiscal 2011 due to the gains recorded on the adjustment of the carrying value of COLI policies to their cash surrender values. This compares to a $0.09 per share favorable impact to earnings per share in the first quarter of fiscal 2010 from the one-time reversal on interest accruals for the tax contingencies related to IRS settlement of $0.05 per share and the gain recorded on the adjustment of the COLI policies to their cash surrender values of $0.04 per share.

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 recorded to adjust COLI policies to their cash surrender values;
	•		Share-based compensation expense;
	•		Expenses related to our Business Transformation Project; 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 Note 11, “Business Segment Information”:

		Operating Income as a
		Percentage of Sales
		13-Week Period
		October 2, 2010				September 26, 2009
Broadline			6.9	%			7.0	%
SYGMA			1.1				0.5
Other			3.4				3.5

     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 Note 11, “Business Segment Information”:

		13-Week Period
						Operating
		Sales				Income
Broadline			6.6	%			5.3	%
SYGMA			14.7				149.6
Other			5.9				4.1