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

Sysco Corporation

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

     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

     592,548,417 shares of common stock were outstanding as of January 23, 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			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			34
Item 4.		Controls and Procedures			34
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			35
Item 1A.		Risk Factors			35
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3.		Defaults Upon Senior Securities			35
Item 4.		Submission of Matters to a Vote of Security Holders			35
Item 5.		Other Information			36
Item 6.		Exhibits			36
Signatures					39
EX-10.1
EX-10.2
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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

		December 26, 2009				June 27, 2009				December 27, 2008
		(unaudited)								(unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	647,606			$	1,087,084			$	373,074
Short-term investments			61,860				—				—
Accounts and notes receivable, less allowances of $67,035, $36,078 and $67,400			2,526,044				2,468,511				2,623,509
Inventories			1,790,327				1,650,666				1,862,187
Prepaid expenses and other current assets			63,674				64,418				60,938
Total current assets			5,089,511				5,270,679				4,919,708
Plant and equipment at cost, less depreciation			3,072,721				2,979,200				2,890,641
Other assets
Goodwill			1,551,550				1,510,795				1,384,790
Intangibles, less amortization			118,032				121,089				78,976
Restricted cash			128,683				93,858				93,541
Prepaid pension cost			70,753				26,746				249,840
Other assets			245,716				214,252				193,926
Total other assets			2,114,734				1,966,740				2,001,073
Total assets		$	10,276,966			$	10,216,619			$	9,811,422
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	1,906,745			$	1,856,887			$	1,707,331
Accrued expenses			793,303				797,756				806,055
Accrued income taxes			56,775				323,983				538,790
Deferred taxes			18,482				162,365				234,286
Current maturities of long-term debt			8,438				9,163				6,747
Total current liabilities			2,783,743				3,150,154				3,293,209
Other liabilities
Long-term debt			2,468,690				2,467,486				1,972,612
Deferred taxes			545,863				526,377				539,534
Other long-term liabilities			548,383				622,900				712,055
Total other liabilities			3,562,936				3,616,763				3,224,201
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			788,138				760,352				750,843
Retained earnings			6,844,095				6,539,890				6,281,575
Accumulated other comprehensive loss			(180,095	)			(277,986	)			(197,287	)
Treasury stock at cost, 173,100,605, 175,148,403 and 173,746,062 shares			(4,287,026	)			(4,337,729	)			(4,306,294	)
Total shareholders’ equity			3,930,287				3,449,702				3,294,012
Total liabilities and shareholders’ equity		$	10,276,966			$	10,216,619			$	9,811,422

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

See Notes to Consolidated Financial Statements

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

		26-Week Period Ended								13-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Sales		$	17,949,925			$	19,027,232			$	8,868,499			$	9,149,803
Cost of sales			14,507,679				15,390,563				7,173,612				7,399,690
Gross margin			3,442,246				3,636,669				1,694,887				1,750,113
Operating expenses			2,482,567				2,710,053				1,232,536				1,328,249
Operating income			959,679				926,616				462,351				421,864
Interest expense			65,322				54,810				31,522				28,400
Other income, net			(3,150	)			(8,036	)			(1,138	)			(5,223	)
Earnings before income taxes			897,507				879,842				431,967				398,687
Income taxes			302,953				365,374				163,618				161,033
Net earnings		$	594,554			$	514,468			$	268,349			$	237,654
Net earnings:
Basic earnings per share		$	1.00			$	0.86			$	0.45			$	0.40
Diluted earnings per share		$	1.00				0.86				0.45				0.40
Average shares outstanding			592,110,975				599,903,629				592,651,712				597,549,831
Diluted shares outstanding			592,678,989				601,100,591				593,372,477				598,233,384
Dividends declared per common share		$	0.49			$	0.46			$	0.25			$	0.24

See Notes to Consolidated Financial Statements

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

		26-Week Period Ended								13-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Net earnings		$	594,554			$	514,468			$	268,349			$	237,654
Other comprehensive income (loss):
Foreign currency translation adjustment			83,946				(118,701	)			46,864				(104,574	)
Items presented net of tax:
Amortization of cash flow hedge			214				214				107				107
Amortization of unrecognized prior service cost			1,353				961				677				730
Amortization of unrecognized actuarial losses (gains), net			12,332				5,411				6,166				2,705
Amortization of unrecognized transition obligation			46				46				23				23
Pension liability assumption			—				(16,450	)			—				2,030
Total other comprehensive income (loss)			97,891				(128,519	)			53,837				(98,979	)
Comprehensive income		$	692,445			$	385,949			$	322,186			$	138,675

See Notes to Consolidated Financial Statements

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

		26-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008
Cash flows from operating activities:
Net earnings		$	594,554			$	514,468
Adjustments to reconcile net earnings to cash provided by operating activities:
Share-based compensation expense			39,913				35,129
Depreciation and amortization			189,428				190,609
Deferred taxes			(172,756	)			337,453
Provision for losses on receivables			19,815				30,652
Other non-cash items			536				(112	)
Additional investment in certain assets and liabilities, net of effect of businesses acquired:
(Increase) decrease in receivables			(53,597	)			26,769
(Increase) in inventories			(121,626	)			(57,859	)
Decrease in prepaid expenses and other current assets			1,307				2,144
Increase (decrease) in accounts payable			27,688				(301,018	)
(Decrease) in accrued expenses			(16,974	)			(149,811	)
(Decrease) in accrued income taxes			(236,099	)			(68,877	)
(Increase) decrease in other assets			(30,372	)			2,087
(Decrease) increase in other long-term liabilities and prepaid pension cost, net			(97,343	)			2,889
Excess tax benefits from share-based compensation arrangements			(475	)			(2,774	)
Net cash provided by operating activities			143,999				561,749
Cash flows from investing activities:
Additions to plant and equipment			(247,575	)			(178,596	)
Proceeds from sales of plant and equipment			2,422				2,077
Acquisition of businesses, net of cash acquired			(9,161	)			(16,277	)
Purchases of short-term investments			(60,162	)			—
(Increase) in restricted cash			(34,825	)			(954	)
Net cash used for investing activities			(349,301	)			(193,750	)
Cash flows from financing activities:
Other debt borrowings			4,580				9,316
Other debt repayments			(5,601	)			(5,610	)
Common stock reissued from treasury for share-based compensation awards			36,914				85,628
Treasury stock purchases			—				(358,751	)
Dividends paid			(283,766	)			(264,687	)
Excess tax benefits from share-based compensation arrangements			475				2,774
Net cash used for financing activities			(247,398	)			(531,330	)
Effect of exchange rates on cash			13,222				(15,147	)
Net (decrease) in cash and cash equivalents			(439,478	)			(178,478	)
Cash and cash equivalents at beginning of period			1,087,084				551,552
Cash and cash equivalents at end of period		$	647,606			$	373,074
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	67,670			$	55,577
Income taxes			759,704				73,830

See Notes to Consolidated Financial Statements

Sysco Corporation and its Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

     Unless this Form 10-Q indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “Sysco,” or “the company” as used in this Form 10-Q refer to Sysco Corporation together with its consolidated subsidiaries and divisions.

1. BASIS OF PRESENTATION

     The consolidated financial statements have been prepared by the company, without audit, with the exception of the June 27, 2009 consolidated balance sheet which was taken from the audited financial statements included in the company’s Fiscal 2009 Annual Report on Form 10-K. The financial statements include consolidated balance sheets, consolidated results of operations, consolidated statements of comprehensive income and consolidated cash flows. In the opinion of management, all adjustments, which consist of normal recurring adjustments, necessary to present fairly the financial position, results of operations, comprehensive income and cash flows for all periods presented have been made.

     These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the company’s Fiscal 2009 Annual Report on Form 10-K.

     Sysco has evaluated subsequent events through the date these financial statements were issued, February 2, 2010.

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

2. CHANGES IN ACCOUNTING

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

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

Interim Disclosures about Fair Value of Financial Instruments

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

Measuring Liabilities at Fair Value

     In August 2009, the FASB issued Accounting Standards Update 2009-05, “Measuring Liabilities at Fair Value”. This update provides additional guidance, including illustrative examples, clarifying the measurement of liabilities at fair value. This update is effective for the first reporting period beginning after its issuance. The company adopted the provisions of this update in the second quarter of fiscal 2010. The adoption of this update did not have a material impact on the company’s consolidated financial statements.

3. NEW ACCOUNTING STANDARDS

Improving Disclosures About Fair Value Measurements

     In January 2010, the FASB issued Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements.” This update requires some new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, “Fair Value Measurements and Disclosures.” The majority of the provisions of this update, including those applicable to Sysco, are effective for interim and annual reporting periods beginning after December 15, 2009. Early application of the provisions of this update is permitted. The company will adopt the applicable provisions of this update in the third quarter of fiscal 2010 and is currently evaluating the impact the adoption of these provisions will have on its consolidated financial statement disclosures.

4. FAIR VALUE MEASUREMENTS

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

•		Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
•		Level 2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability; and
•		Level 3 — Unobservable inputs for the asset or liability, which include management’s own assumption about the assumptions market participants would use in pricing the asset or liability, including assumptions about risk.

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

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

•		Time deposits, certificates of deposit and commercial paper included in cash equivalents are valued at amortized cost, which approximates fair value.
•		Commercial paper included in short-term investments is valued using broker quotes that utilize observable market inputs.
•		Money market funds are valued at the closing price reported by the fund sponsor on an actively traded exchange.
•		The interest rate swap agreements are valued using a swap valuation model that utilizes observable market inputs.

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

		Assets and Liabilities Measured at Fair Value as of December 26, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	357,800,000			$	102,846,000			$	—			$	460,646,000
Short-term investments			—				61,860,000				—				61,860,000
Restricted cash			128,683,000				—				—				128,683,000
Interest rate swap agreements			—				534,000				—				534,000
Total assets at fair value		$	486,483,000			$	165,240,000			$	—			$	651,723,000
Liabilities:
Other long-term liabilities
Interest rate swap agreement		$	—			$	1,109,000			$	—			$	1,109,000
		Assets Measured at Fair Value as of June 27, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	721,710,000			$	117,844,000			$	—			$	839,554,000
Restricted cash			93,858,000				—				—				93,858,000
Total assets at fair value		$	815,568,000			$	117,844,000			$	—			$	933,412,000
		Assets Measured at Fair Value as of December 27, 2008
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents
Cash equivalents		$	—			$	207,729,000			$	—			$	207,729,000
Restricted cash			93,541,000				—				—				93,541,000
Total assets at fair value		$	93,541,000			$	207,729,000			$	—			$	301,270,000

     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 $2,603,952,000 and $2,548,861,000 as of December 26, 2009 and June 27, 2009, respectively. The carrying value of total debt was $2,477,128,000 and $2,476,649,000 as of December 26, 2009 and June 27, 2009, respectively.

5. DERIVATIVE FINANCIAL INSTRUMENTS

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

     In September 2009, the company entered into an interest rate swap agreement that effectively converted $200,000,000 of fixed rate debt maturing in fiscal 2014 to floating rate debt. In October 2009, the company entered into an interest rate swap agreement that effectively converted $250,000,000 of fixed rate debt maturing in fiscal 2013 to floating rate debt. Both transactions were entered into with the goal of reducing overall borrowing cost. 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 December 26, 2009 are as follows:

Asset Derivatives

Liability Derivatives

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Interest rate swap agreements

Other assets

$

534,000

Other long-term liabilities

$

1,109,000

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

Amount of (Gain) or Loss

Recognized in Income

Location of (Gain)

26-Week

13-Week

or Loss Recognized

Period Ended

Period Ended

in Income

Dec. 26, 2009

Dec. 26, 2009

Fair Value Hedge Relationships:

Interest rate swap agreements

Interest expense

$

(1,454,000

)

$

(1,679,000

)

Hedged items — debt

Interest expense

(104,000

)

(12,000

)

     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 26-week period and the 13-week periods ended December 26, 2009. The interest rate swaps do not contain a credit-risk-related contingent feature.

6. DEBT

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

     As of December 26, 2009, the company’s Irish Subsidiary, Pallas Foods Limited, had a €20,000,000 (Euro) committed facility for unsecured borrowings for working capital expiring March 31, 2010, which consisted of a €12,000,000 (Euro) overdraft and a €8,000,000 (Euro) revolver. There were no borrowings outstanding under either portion of this facility as of December 26, 2009. In January 2010, the €8,000,000 (Euro) revolver portion of the facility was discontinued, leaving the €12,000,000 (Euro) overdraft line portion of the facility with the same expiration date of March 31, 2010.

     Sysco and one of its subsidiaries, Sysco International, Co., have a revolving credit facility supporting the company’s U.S. and Canadian commercial paper programs. The facility in the amount of $1,000,000,000 expires on November 4, 2012, but is subject to extension.

     As of December 26, 2009, there were no commercial paper issuances outstanding. During the 26-week period ended December 26, 2009, aggregate commercial paper issuances and short-term bank borrowings ranged from zero to approximately $1,820,000.

7. EMPLOYEE BENEFIT PLANS

     The components of net company-sponsored benefit cost for the 26-week period presented are as follows:

		Pension Benefits								Other Postretirement Plans
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Service cost		$	33,326,000			$	40,387,000			$	164,000			$	245,000
Interest cost			59,797,000				56,606,000				281,000				312,000
Expected return on plan assets			(52,430,000	)			(63,711,000	)			—				—
Amortization of prior service cost			2,104,000				1,494,000				93,000				65,000
Recognized net actuarial loss (gain)			20,262,000				8,863,000				(245,000	)			(79,000	)
Amortization of transition obligation			—				—				76,000				76,000
Net periodic benefit cost		$	63,059,000			$	43,639,000			$	369,000			$	619,000

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

		Pension Benefits								Other Postretirement Plans
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Service cost		$	16,663,000			$	20,256,000			$	82,000			$	123,000
Interest cost			29,898,000				28,555,000				141,000				156,000
Expected return on plan assets			(26,215,000	)			(31,856,000	)			—				—
Amortization of prior service cost			1,053,000				1,151,000				46,000				33,000
Recognized net actuarial loss (gain)			10,130,000				4,431,000				(122,000	)			(40,000	)
Amortization of transition obligation			—				—				38,000				38,000
Net periodic benefit cost		$	31,529,000			$	22,537,000			$	185,000			$	310,000

     Sysco’s contributions to its company-sponsored defined benefit plans were $77,690,000 and $87,394,000 during the 26-week periods ended December 26, 2009 and December 27, 2008, respectively.

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

8. EARNINGS PER SHARE

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

		26-Week Period Ended								13-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Numerator:
Net earnings		$	594,554,000			$	514,568,000			$	268,349,000			$	237,654,000
Denumerator:
Weighted-average basic shares outstanding			592,110,975				599,903,629				592,651,712				597,549,831
Dilutive effect of share-based awards			568,014				1,196,962				720,765				683,553
Weighted-average diluted shares outstanding			592,678,989				601,100,591				593,372,477				598,233,384
Basic earnings per share:		$	1.00			$	0.86			$	0.45			$	0.40
Diluted earnings per share:		$	1.00			$	0.86			$	0.45			$	0.40

     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 65,900,000 and 61,300,000 for the first 26 weeks of fiscal 2010 and 2009, respectively. The number of options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was approximately 66,300,000 and 63,000,000 for the second quarter of fiscal 2010 and 2009, respectively.

9. SHARE-BASED COMPENSATION

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

Stock Incentive Plans

     Sysco’s 2007 Stock Incentive Plan was amended in November 2009 to increase the total number of shares authorized for issuance under the plan from 30,000,000 to 55,000,000 shares. The number of shares available for issuance as options or stock appreciation rights was increased from 25,000,000 to 55,000,000 shares. The number of shares available for issuance as restricted stock, restricted stock units or other types of stock-based awards was increased from 5,000,000 to 10,000,000 shares. The amendment also removed the provision that allowed for issuance of restricted stock, restricted stock units and other types of stock-based awards in excess of the 5,000,000 share limitation if the aggregate number of shares available for issuance under the plan was reduced by four shares for each share issued in excess of the limitation.

     In the first 26 weeks of fiscal 2010, options to purchase 8,494,200 shares were granted to employees from the 2007 Stock Incentive Plan. The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. The weighted average grant-date fair value per share of options granted during the first 26 weeks of fiscal 2010 was $4.53.

     In the first 26 weeks of fiscal 2010, 652,300 restricted stock units were granted to employees from the 2007 Stock Incentive Plan. The majority of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends during the vesting period. The weighted average grant-date fair value per share of restricted stock units granted during the first 26 weeks of fiscal 2010 was $27.24.

     In the first 26 weeks of fiscal 2010, 58,310 shares of restricted stock were granted to non-employee directors from the 2005 Non-Employee Directors Stock Plan. The fair value of the restricted stock awards is based on the company’s stock price as of the date of grant. The weighted average grant-date fair value per share of restricted stock granted during the first 26 weeks of fiscal 2010 was $27.44.

     Sysco’s 2009 Non-Employee Directors Stock Plan was adopted in November 2009 and provides for the issuance of up to 750,000 shares of Sysco common stock for share-based awards to non-employee directors. The authorized shares may be granted as restricted stock, restricted stock units, elected shares or additional shares. This plan will replace the 2005 Non-Employee Directors Stock Plan once all remaining shares in the 2005 Plan have been issued.

Employees’ Stock Purchase Plan

     Plan participants purchased 1,025,706 shares of Sysco common stock under the Sysco Employees’ Stock Purchase Plan during the first 26 weeks of fiscal 2010.

     The weighted average fair value per share of employee stock purchase rights issued pursuant to the Employees’ Stock Purchase Plan was $3.54 during the first 26 weeks of fiscal 2010. 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 $39,913,000 and $35,129,000 for the first 26 weeks of fiscal 2010 and fiscal 2009, respectively.

     As of December 26, 2009, there was $86,110,000 of total unrecognized compensation cost related to share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 3.16 years.

10. INCOME TAXES

Internal Revenue Service Settlement

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

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

     Of the amounts to be paid in fiscal 2010 included in the table above, $422,000,000 was paid in the first 26 weeks of fiscal 2010 and the remaining payments will be paid in equal installments with Sysco’s remaining quarterly tax payments. Amounts to be paid in fiscal 2011 and 2012 will be paid with Sysco’s quarterly tax payments. The company believes it has access to sufficient cash on hand, cash flow from operations and current access to capital to make payments on all of the amounts noted above. The company had previously accrued interest for a portion of the exposure pertaining to the IRS proposed adjustments and as a result of the settlement with the IRS, Sysco recorded an income tax benefit of approximately $29,000,000 in the first quarter of fiscal 2010.

     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. Additionally, beginning in fiscal 2010, the company is not deferring taxes for federal purposes according to its agreement with the IRS.

Uncertain Tax Benefits

     As of December 26, 2009, the gross amount of unrecognized tax benefits was $86,740,000 and the gross amount of accrued interest liabilities was $36,483,000. Accrued interest decreased from the amount accrued as of June 27, 2009 of $146,998,000 due to the settlement with the IRS. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco prevails on positions that were being challenged upon audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various states and the allocation of income and expense between tax jurisdictions. At this time, an estimate of the range of the reasonably possible change cannot be made.

Effective Tax Rates

     The effective tax rate of 33.75% for the first 26 weeks of fiscal 2010 was favorably impacted by three items. First, as discussed above, the company recorded an income tax benefit of approximately $29,000,000 resulting from the one-time reversal of previously accrued interest related to the settlement with the IRS. Second, the carrying values of the company’s corporate-owned life insurance (COLI) policies are adjusted to their cash surrender values. The gain of $26,341,000 recorded to adjust the carrying value of COLI policies to their cash surrender values in the first 26 weeks 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 41.53% for the first 26 weeks of fiscal 2009 was unfavorably impacted by two items. First, a loss of $54,604,000 was recorded to adjust the carrying value of COLI policies to their cash surrender values in the first 26 weeks of fiscal 2009. Second, the company recorded a tax adjustment of approximately $11,000,000 to accrue for a previously unidentified tax contingency arising from a tax audit. The effective tax rate for the first 26 weeks of fiscal 2009 was favorably impacted by a decrease in a tax provision for a foreign tax liability of approximately $6,600,000 resulting from changes in exchange rates.

     The effective tax rate of 37.88% for the second quarter of fiscal 2010 was favorably impacted by the gain of $5,189,000 recorded to adjust the carrying value of COLI policies to their cash surrender values in the second quarter of fiscal 2010.

     The effective tax rate of 40.39% for the second quarter of fiscal 2009 was unfavorably impacted by the loss of $31,696,000 recorded to adjust the carrying value of COLI policies to their cash surrender values in the second quarter of fiscal 2009. The effective tax rate for the second quarter of fiscal 2009 was favorably impacted by a decrease in a tax provision for a foreign tax liability of approximately $5,700,000 resulting from changes in exchange rates.

Other

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

11. ACQUISITIONS

     During the first 26 weeks of fiscal 2010, in the aggregate, the company paid cash of $9,161,000 primarily for contingent consideration related to operations acquired in previous fiscal years and for acquisitions made during fiscal 2010. The fiscal 2010 acquisitions were immaterial to the consolidated financial statements.

     Certain acquisitions involve contingent consideration typically payable over periods up to four years only in the event that certain operating results are attained or certain outstanding contingencies are resolved. As of December 26, 2009, aggregate contingent consideration amounts outstanding relating to acquisitions completed prior to fiscal 2010 included $73,383,000 in cash which, if earned, could result in the recording of additional goodwill.

12. COMMITMENTS AND CONTINGENCIES

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

Multi-Employer Pension Plans

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

     Under current law regarding multi-employer defined benefit plans, a plan’s termination, Sysco’s voluntary withdrawal, or the mass withdrawal of all contributing employers from any underfunded multi-employer defined benefit plan would require Sysco to make payments to the plan for Sysco’s proportionate share of the multi-employer plan’s unfunded vested liabilities. Based on the information available from plan administrators, which has valuation dates ranging from December 31, 2007 to June 30, 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 $174,000,000 as of December 26, 2009 based on a voluntary withdrawal. 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 improved during calendar year 2009; 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 December 26, 2009, Sysco had approximately $17,000,000 in liabilities recorded in total related to certain multi-employer defined benefit plans for which Sysco’s voluntary withdrawal had already occurred, all of which are expected to be paid during fiscal 2010.

Fuel Commitments

     From time to time, Sysco may enter into forward purchase commitments for a portion of its projected diesel fuel requirements. As of December 26, 2009, outstanding forward diesel fuel purchase commitments totaled approximately $66,000,000 at a fixed price through December 2010.

13. BUSINESS SEGMENT INFORMATION

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

     The accounting policies for the segments are the same as those disclosed by Sysco for its consolidated financial statements. Intersegment sales represent specialty produce and meat company products distributed by the Broadline and SYGMA operating companies. The segment results include certain centrally incurred costs for shared services that are charged to our segments. These centrally incurred costs are charged based upon the relative level of service used by each operating

company consistent with how Sysco’s management views the performance of its operating segments. Management evaluates the performance of each of our operating segments based on its respective operating income results, which include the allocation of certain centrally incurred costs.

     Included in corporate expenses, among other items, are:

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

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

		26-Week Period Ended								13-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Sales (in thousands):
Broadline		$	14,393,429			$	15,077,939			$	7,084,723			$	7,205,372
SYGMA			2,308,174				2,460,809				1,157,313				1,232,574
Other			1,495,543				1,726,797				752,666				831,057
Intersegment sales			(247,221	)			(238,313	)			(126,203	)			(119,200	)
Total		$	17,949,925			$	19,027,232			$	8,868,499			$	9,149,803

		26-Week Period Ended								13-Week Period Ended
		Dec. 26, 2009				Dec. 27, 2008				Dec. 26, 2009				Dec. 27, 2008
Operating income (in thousands):
Broadline		$	1,009,924			$	995,124			$	500,900			$	471,714
SYGMA			17,857				14,342				12,019				9,721
Other			55,799				60,455				29,985				31,691
Total segments			1,083,580				1,069,921				542,904				513,126
Corporate expenses			(123,901	)			(143,305	)			(80,553	)			(91,262	)
Total operating income			959,679				926,616				462,351				421,864
Interest expense			65,322				54,810				31,522				28,400
Other income, net			(3,150	)			(8,036	)			(1,138	)			(5,223	)
Earnings before income taxes		$	897,507			$	879,842			$	431,967			$	398,687

		Dec. 26, 2009				June 27, 2009				Dec. 27, 2008
Assets (in thousands):
Broadline		$	6,046,959			$	5,706,431			$	5,869,963
SYGMA			384,735				366,539				400,900
Other			922,233				914,764				963,867
Total segments			7,353,927				6,987,734				7,234,730
Corporate			2,923,039				3,228,885				2,576,692
Total		$	10,276,966			$	10,216,619			$	9,811,422

14. SUPPLEMENTAL GUARANTOR INFORMATION

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

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

		Condensed Consolidating Balance Sheet
		December 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Current assets		$	499,453			$	10			$	4,590,048			$	—			$	5,089,511
Investment in subsidiaries			14,134,945				458,012				137,741				(14,730,698	)			—
Plant and equipment, net			301,018				—				2,771,703				—				3,072,721
Other assets			482,452				761				1,631,521				—				2,114,734
Total assets		$	15,417,868			$	458,783			$	9,131,013			$	(14,730,698	)		$	10,276,966
Current liabilities		$	416,043			$	929			$	2,366,771			$	—			$	2,783,743
Intercompany payables (receivables)			8,590,840				79,443				(8,670,283	)			—				—
Long-term debt			2,219,095				199,847				49,748				—				2,468,690
Other liabilities			425,110				—				669,136				—				1,094,246
Shareholders’ equity			3,766,780				178,564				14,715,641				(14,730,698	)			3,930,287
Total liabilities and shareholders’ equity		$	15,417,868			$	458,783			$	9,131,013			$	(14,730,698	)		$	10,276,966

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

		Condensed Consolidating Balance Sheet
		December 27, 2008
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Current assets		$	319,989			$	—			$	4,599,719			$	—			$	4,919,708
Investment in subsidiaries			14,950,323				370,726				180,621				(15,501,670	)			—
Plant and equipment, net			249,677				—				2,640,964				—				2,890,641
Other assets			575,876				914				1,424,283				—				2,001,073
Total assets		$	16,095,865			$	371,640			$	8,845,587			$	(15,501,670	)		$	9,811,422
Current liabilities		$	423,587			$	556			$	2,869,066			$	—			$	3,293,209
Intercompany payables (receivables)			10,202,526				42,659				(10,245,185	)			—				—
Long-term debt			1,728,390				199,784				44,438				—				1,972,612
Other liabilities			492,665				—				758,924				—				1,251,589
Shareholders’ equity			3,248,697				128,641				15,418,344				(15,501,670	)			3,294,012
Total liabilities and shareholders’ equity		$	16,095,865			$	371,640			$	8,845,587			$	(15,501,670	)		$	9,811,422

		Condensed Consolidating Results of Operations
		For the 26-Week Period Ended December 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Sales		$	—			$	—			$	17,949,925			$	—			$	17,949,925
Cost of sales			—				—				14,507,679				—				14,507,679
Gross margin			—				—				3,442,246				—				3,442,246
Operating expenses			122,810				69				2,359,688				—				2,482,567
Operating income			(122,810	)			(69	)			1,082,558				—				959,679
Interest expense (income)			241,130				5,068				(180,876	)			—				65,322
Other income, net			(360	)			—				(2,790	)			—				(3,150	)
Earnings (losses) before income taxes			(363,580	)			(5,137	)			1,266,224				—				897,507
Income tax (benefit) provision			(122,726	)			(1,734	)			427,413				—				302,953
Equity in earnings of subsidiaries			835,408				27,193				—				(862,601	)			—
Net earnings		$	594,554			$	23,790			$	838,811			$	(862,601	)		$	594,554

		Condensed Consolidating Results of Operations
		For the 26-Week Period Ended December 27, 2008
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Sales		$	—			$	—			$	19,027,232			$	—			$	19,027,232
Cost of sales			—				—				15,390,563				—				15,390,563
Gross margin			—				—				3,636,669				—				3,636,669
Operating expenses			140,605				59				2,569,389				—				2,710,053
Operating income			(140,605	)			(59	)			1,067,280				—				926,616
Interest expense (income)			250,124				5,814				(201,128	)			—				54,810
Other income, net			(2,092	)			—				(5,944	)			—				(8,036	)
Earnings (losses) before income taxes			(388,637	)			(5,873	)			1,274,352				—				879,842
Income tax (benefit) provision			(161,390	)			(2,439	)			529,203				—				365,374
Equity in earnings of subsidiaries			741,715				27,413				—				(769,128	)			—
Net earnings		$	514,468			$	23,979			$	745,149			$	(769,128	)		$	514,468

		Condensed Consolidating Results of Operations
		For the 13-Week Period Ended December 26, 2009
										Other
						Sysco				Non-Guarantor								Consolidated
		Sysco				International				Subsidiaries				Eliminations				Totals
										(In thousands)
Sales		$	—			$	—			$	8,868,499			$	—			$	8,868,499
Cost of sales			—				—				7,173,612				—				7,173,612
Gross margin			—				—				1,694,887				—				1,694,887
Operating expenses			77,748				35				1,154,753				—				1,232,536
Operating income			(77,748	)			(35	)			540,134				—				462,351
Interest expense (income)			120,566				2,578				(91,622	)			—				31,522
Other income, net			(6	)			—				(1,132	)			—				(1,138	)
Earnings (losses) before income taxes			(198,308	)			(2,613	)			632,888				—				431,967
Income tax (benefit) provision			(73,262	)			(979	)			237,859				—				163,618
Equity in earnings of subsidiaries			393,395				14,000				—				(407,395	)			—
Net earnings		$	268,349			$	12,366			$	395,029			$	(407,395	)		$	268,349